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Edited Transcript of NVS.J earnings conference call or presentation 12-Nov-19 8:00am GMT

Half Year 2020 Novus Holdings Ltd Earnings Presentation

CAPE TOWN Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Novus Holdings Ltd earnings conference call or presentation Tuesday, November 12, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Harry Todd

Novus Holdings Limited - CFO & Executive Director

* Neil William Birch

Novus Holdings Limited - CEO & Director

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Presentation

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Neil William Birch, Novus Holdings Limited - CEO & Director [1]

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Good morning and welcome to this Novus 2020 Interim Results Presentation. I'm Neil Birch, the Novus CEO, and I'm accompanied today by Harry Todd, our CFO.

Today, what we'll look at doing is a brief executive overview. We'll go to some of the financial and operating review, followed by an outlook and then we would like to try and handle some questions as best we can at the end of the session.

The results for the period are somewhat disappointing and reflect the current operating environment. There are, however, some seasonal influences, which need to be contextualized to better interpret the results.

If we move straight on to the results summary. At a high level, the revenue was at ZAR 2.227 billion, which is some 3% off the prior year. Our operating profit, which took a significant knock, was down to ZAR 146 million as opposed to the ZAR 228 million of the prior year, which showed a 36% decline. That obviously translated to headline earnings decrease of 40.5%. Over the past few years, the earnings in the first half have typically been substantially greater than the second half. But in 2020, we do anticipate a shift in that trend, not to the extent that H2 would exceed H1 but certainly a difference in terms of prior years.

I think to deal with the actual financials, I'll hand over to Harry now, and he can take you through those.

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Harry Todd, Novus Holdings Limited - CFO & Executive Director [2]

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Good morning. Starting with revenue. As Neil said, it declined by 3%, mainly as a result of softer trading conditions in South Africa, heightened competitive activity in the Print segment and a delay in the recognition of contractual work, as Neil alluded to, compared to the same period last year. Revenue in the Packaging and Tissue segments experienced favorable double-digit growth. Gross profit was further impacted by higher-than-inflationary increases on imported paper that proved difficult to recover from many of the print customers, given the highly competitive pricing encountered in the market. Margins in the Packaging and Tissue segments were static and/or increased compared to last year. ForEx rates were volatile, but our forward-buying policy effectively mitigated the impact of any large fluctuations. This led to a decline in GP for H1 or half 1 to 21,4%.

Given the weaker trading conditions and timing delays, overheads and expenses were immediately curtailed by 10%, resulting in a reduction of costs amounting to ZAR 39 million. These were mostly staff-related costs, selling costs and to a lesser extent, the adoption of IFRS 16 relating to the treatment of leases. This overhead reduction was insufficient to counter the reduced revenue and margins in the Print segment and resulted in a drop in operating profit to ZAR 146 million and an operating margin of 6,6%. Impairments amounting to ZAR 12 million were accounted for during the period and related mostly to redundant production equipment.

Not illustrated on this slide but pertinent is the net finance costs, which increased from ZAR 11 million in half 1 last year to ZAR 27 million in this period and can be accounted for in 3 different areas. The increase of ZAR 16 million, 15 -- correction, ZAR 5 million of that was for the increased forward cover costs, ZAR 4 million of that was for IFRS-related interest costs, and ZAR 7 million was due to increased overdraft during the period compared to last year. This led to headline earnings per share, which followed suit to the declining GP and declined by 40% to ZAR 0.294 per share.

We can move to the next slide. Cash flow for the period is best illustrated in this waterfall graph, starting with the opening net cash position of negative ZAR 54 million. As discussed in the income statement, operating profit was down for the period at ZAR 128 million. Noncash-related depreciation was ZAR 84 million for the period.

Given the weaker trading environment, a key management response has been on cash flow preservation and net working capital reduction. This is not clearly evident in this half as we consider this to be the planting season. The cash inflow benefits or reaping season are anticipated in the second half. The main focus will be to continue the reduction of inventories, to collect the seasonal increase in receivables timeously, and to stretch supply payment terms where possible.

Taxation paid has reduced in line with profits. Capital expenditure has been restrained to ZAR 41 million and will be further illustrated on the next slide. The proceeds on the sale of the previously reported Pietermaritzburg property has been received and amounted to ZAR 24 million. ZAR 26 million was received for the proceeds on the sale of the UV Flexible Labels business. The balance of ZAR 12 million is expected by March 2020.

Dividends, based on prior year's HEPS at 2x cover, was paid in September and amounted to ZAR 86 million. This resulted in an unfavorable net cash position of ZAR 199 million at September 2019, and we expect this to be eliminated by March 2020.

If we look at the slide on CapEx. The capital expenditure continued to be throttled during the half as we focused on protecting cash and projects that exceeded minimal hurdle rates. A total of ZAR 41 million was spent mostly on capacity-shaping projects and equipment preservation to suit demand. Thank you.

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Neil William Birch, Novus Holdings Limited - CEO & Director [3]

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If we move now to the various segments and discuss a little more of the detail, this is quite an informative slide up in terms of the Print segment. If we move down some of the issues, we talk about a decline in Print revenue of 6.3%, that's in net terms. And obviously, if one looked at a potential inflationary increase, one would expect that to effectively be higher in real terms.

I think the biggest focus and the biggest concern was the erosion of the gross profit margin, which, as we've said, was impacted by a decrease in volumes and a competitive activity and a high escalation in the cost of paper during the period. I think what is pleasing is that the response in terms of controlling operating expenses was quite quick. And as Harry mentioned, we had a 10% reduction in expenses. And that then shows as a cost of -- a percentage of revenue being down from 17.7% for the Print segment down to 17.1% in the current year. It's a good trend. And in there is a number of direct costs related to sales. So some of that would come back as volumes come back, but there's some permanent removal of fixed overheads.

So as we say, revenue and gross profit margin impacted by competitiveness and obviously pressure in the market, customers needing to get the lowest price possible to cut their costs as they feel the squeeze of the economic pressures. We've mentioned the timing variance on a large project, which normally would have been fully invoiced in the H1 period. Some invoicing has drifted over to the H2 period as some of the work needed to still be completed.

We had above inflationary raw material price increases, and this was in relation to pulp, which moved dramatically at the beginning of the year. Fortunately, that was relatively short lived. But because we have a long supply line of imported paper, it took some time to flush out. So we were unfortunately suffering under quite high imported paper prices in the early part of the trading period. It's been a relatively volatile South African rand-euro rate, but I must say that was relatively well-managed and mitigated by our forward cover program.

If you look at the segmental trends, it tells quite a lot in a short picture or a small picture. Magazines was clearly the most severely impacted in volume terms, and this was a function of multiple issues. Due to the economy, a number of publications closed and ceased publication. The circulation volumes were down in certain areas. And this is probably where we felt competitors chasing for what is effectively a shrinking market, and that was down by 17.6%.

Newspapers, we were quite fortunate that we've actually had some product gains and market gains, which has offset the shrinkage in general circulation, which showed only a 1.4% decline year-on-year. What is interesting to note is that we are still sitting at roughly a 20% dependence on both Newspapers and Magazines combined.

Retail Inserts & Catalogues really reflected the pressure on retailers and the general market looking to reduce expenditure on marketing and therefore, either pushed on the price or actually curtailed certain marketing initiatives.

The Books & Directories shows a substantial decline. The book market has been in a certain amount of turmoil. The normal government review of the educational syllabus has been extended. And that has left a certain amount of uncertainty in the procurement of books. That seems to have resurged to a certain degree in the second half, which is rather late for the season, but there is some recovery. And the curriculum revision will now take place in 2021. Then, of course, the deferred project that we referred to, which is the Department of Basic Education, that also impacts Books & Directories in the particular half, and some of that will come back in the second half.

Down at the bottom, we have this publishing segment, which is new for us, and you'll see that, that contributes a massive 0.3% of our sales. So it's a very, very, very small segment. It's exploratory, and we're rather pleased with the result we have because we're able to get closer to our market, get a better understanding firsthand of what challenges our publishers face. So while we're not looking to really expand that massively, we are benefiting from participation in that market and a greater understanding. So we do expect publishing to grow a little bit more, but it's more of a strategic involvement more than anything else.

If we move on to Packaging and look at the 6 months, the Packaging revenue contribution to the group showed an increase of 6.4%. That was the overall Packaging, including Packaging and Labels. ITB revenue grew up on -- went up on prior year by 15.7%. And total label business revenue was down on prior year by 13.2%. Now that is because we have a missing segment there. We disposed of the UV Flexo Label business. And maybe just a little bit of the rationale behind that.

The UV label business is relatively small. It does have an apparent better margin, but it does have exceptional costs that go along with that. What is of more concern is that the capital requirement to stay current in that business and to move with market trends and to replace equipment is quite high. And in terms of an actual return on capital, it would seem that this was not an ideal market to be pushed in. And obviously, it's a difficult business to get growth in as well. So the decision was then taken to exit this business, and we coincided that with a BEE transaction to assist in some of our empowerment credentials. So with that factored into it, we actually had a relatively good growth considering we removed that slice of revenue of UV Flexo Labels.

The Gravure labels managed to grow nicely in the period. So gross margin remained flat year-on-year, bearing in mind that the removal of the higher-margin section of UV Flexo was accounted for. And generally, other costs were very well contained. So it was very pleasing that we managed to get to a much more stable situation with ITB, which had obviously had a difficult year last year.

If you go down to the product categories now, you'll see that Labels -- the Gravure labels actually increased by 14.4%. We reflected the Labels -- the UV labels was taken out and the flexible packaging went up by the 7.9%. It's quite important to look at that margin because we really do understand that as being a tight-margin product. That is not necessarily a temporary situation. We would expect to have to continue competing at tight margins. But it is a volume business. And if one executes it efficiently, the drop-down to operating margin is obviously improved. So we do understand that, that is a competitive business, and we feel that it's still worth pursuing, and we are delivering real contribution now to the group. Relatively, the Packaging business is a very small sector of the whole business.

If we move on to Tissue. A bit of a bugbear. But anyway, I think we need to deal with it. We do still have it, and we've continued to work very hard to make it a stable business and obviously dressing it for sale. Revenue increased, contributing 6% almost to group revenue during the period. Gross profit margin improved by 3.4%, which in relative terms is huge. And then the operating loss in Tissue reduced by 62%, which is obviously very meaningful. And of course, what we're saying there is at EBITDA level, we actually were close to breakeven, slightly better than breakeven. So it's not costing us cash anymore.

The operating expenses were reduced quite aggressively. Some of that was due to one-off cost removal, some IFRS 16 impacts. But by and large, those operating expenses were cut quite dramatically to suit the operation. So we're quite pleased that we've managed the margin better in this difficult business. We are, as I say, improving on a monthly basis. But this business is still held for sale. And we have continued to engage heavily with the market to find a suitor. At this stage, Tissue contributes 8.1% -- sorry, 5.9% of the group's turnover and obviously at a effectively 0 contribution.

If we now go to the group and look at the 6 months. We're quite pleased that diversified operations, being Packaging and Tissue, increased their revenue contribution. Gross profit in the group was significantly impacted by the margin pressure felt in the Print segment. And the lost print volumes were partially replaced by lower-margin Packaging revenue. So the overall impact on the group is obviously a margin erosion in percentage terms, but in pure contribution against expenses, we're hoping that Packaging starts to demonstrate a stronger contribution.

Operating overheads declined by 10.5%, and which means that the overheads as a percentage of revenue went down from 16.1% to 14.9%, which we believe is pleasing as well. As I mentioned in the previous commentary on Print, some of those costs are directly related, could be commissions related to sales. And obviously, on the recoupment of sales, it would be some accompanying costs. But most of that expense will not bounce back.

The changes in the seasonal cycle of operations will result in an anticipated better second half earnings. So we look forward to that without making specific commitments, and we know that we're still in a fairly tenuous situation in our economy. So we are doing our best, and that is certainly barring any mishaps, we should be able to deliver on it.

I think something just worth warning, and that was something, I think, we'd become a little bit complacent about was load shedding until we were rudely reminded about it again last week. We are well equipped to cope with delivery during load shedding, but it is always at a premium to costs. So we would hope that we don't get any substantial load shedding ahead, and that then shouldn't affect our earnings that badly.

If we move on to the outlook. Deal first with segment by segment. So what we say is Print will continue to drive operational efficiencies. That's really what it's all about and retaining market share in this challenging environment. It's obviously a need to continually look at our capacity and where necessary, we'll rationalize that capacity going forward. It's unfortunate but we have obviously faced a certain amount of capacity cutback. And with that comes job loss, which is always regretted.

We're anticipating a respite in paper pricing in the second half. As explained earlier, we took some very high pulp-related price increase, which needed to filter out before we could start feeling the drop in prices. But the drop in prices being there balances back to what is more realistic pricing, and that should start coming through in second half. And again, our large project that we talk about with the deferred revenue will manifest in the second half.

We go to Packaging. We're looking forward to Packaging contributing positively to the second half as opposed to what they did last year. It has stabilized after the difficult year last year, and it looks forward to some continued growth and enhanced efficiencies. And Labels is expected to continue to grow with its extended product offering. So they're diversifying slightly in terms of the end-use product but still staying very close to the high-volume Gravure printing.

Tissue, as explained, is obviously, we're committed to still disposing of the business. But by the same token, we're not abandoning the business and continue to run it and enhance profitability, which is showing positive signs.

From a group point of view, overall, we continue to focus on our resources, and we've got to try and look for growth throughout the group. We certainly remain exposed to a fluctuating and weak rand. And obviously, depending on what happens in the next few months, could create certain margin pressures. Net working capital reduction by around ZAR 300 million should start to flow out by -- and it should be all out by the end of March, which then will obviously close us the -- for the year on a positive cash balance.

Our BEE focus remains a high focus, and we believe it to be one of our competitive advantage and obviously something we're committed to in principle because transformation is essential.

If we review the strategy as published in our SENS and then obviously classified in more defined terms in our integrated annual report, this serves as a bit of a review of that. So in the year, we talked about ensuring optimal capital structure and that operations are suitably sized for their respective markets. What we're doing now is we're refining the specific KPIs per facility on a monthly basis. And obviously, management is then driven by those KPIs. We're optimizing the net working capital by reducing our stockholding, as mentioned by Harry and, of course, collecting the debtors' book. And then, of course, we're making sure that the cash that we do extract in the next few months is not then easily reabsorbed back into operations because that would obviously be negative.

We look to maintain and grow our market shares as -- from a position of strength. Again, as I said, difficult environment, competitive customers looking to reduce their costs wherever they can, looking around the industry for best deal they can get is, obviously, has an impact on us. But that doesn't mean we drop our focus on good customer service. I think that has set us up well to retain customers, albeit at some reduced margins. So we'll continue defending and growing our market share. And we do still see that the book market is worth targeting, in line with general demands and that curriculum review, which will come about in 18 months' time. So we'll be prepared for that and continue to push our capabilities.

Again, driving operational efficiencies, that's really an ongoing process. Where our structures get leaner and leaner, we define people's tasks more accurately, and we continue to mold the organization to make sure we can extract those costs and make sure we're more efficient. We can operate at more competitive levels on a sustainable basis.

We will still be looking to grow the nontraditional printing business revenue contribution. And obviously, we're talking specifically about the Packaging side of the business. So both Labels and the ITB flexibles market. In this instance, we're not looking for any material acquisitions as committed in our previous strategy. However, if there are small bolt-ons that are closely aligned to current activities and are worth pursuing, we'll still continue to look at those, as we did with something like publishing, which was a very, very small set of acquisitions but just gave us a stake in that business. We found that to be quite successful. So we'll continue to extract true value out of the Packaging division, and we've got some work to do to really make that deliver to full capacity. And we look for an improved return on investment there.

And then, of course, last but not least, we'll continue to transform our business, and that relates to our BEE status. We've gained a greater understanding of what goes into the scorecard. It's not purely about ownership or just procurement. There's a whole lot of elements, which obviously management is well attuned to, and we'll continue to focus on specifics. The Board and executive have embarked on a strategy review and should be in a position to publish a new strategy or a strategy update early in the new calendar year.

Just an interesting point, which relates to our previous strategy, we did embark on a share buyback last year. And for those that are not aware, the effective cost of the share was probably a net of about ZAR 4.25 per share. I know that there are people with different opinions whether it's a good idea or a bad idea. I think at the time, it was well priced. Those shares are now effectively out of the market. We've taken 9% of the shares back, which should concentrate earnings. And it was a strategy. It's not something which is on the cards for this year because obviously shareholders voted against that in future.

That effectively is it, folks, for the results presentation. What we'll do is just take a short pause now. And if there's anyone with questions that have been submitted, we will study those and come back to you as appropriate for some answers in, say, 5 minutes' time. Thanks very much.

(Break)

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Questions and Answers

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Neil William Birch, Novus Holdings Limited - CEO & Director [1]

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Okay, folks. We've got 2 questions which we've been sent by one person, and I'll just read the question and then give you the answer. So the question says, "How do you propose to counter lower volumes and thinner margins in the Print segment?" And then added to that, "Is the Packaging and Tissue increase in revenues relative to its -- as it is measured against the declining print market?"

In terms of the tighter margin, we were -- had this unfortunate spike in paper price increases, which we do believe has normalized to a large degree, and that should help to contribute going forward to an extent. However, considering the smaller volumes and the -- or the thinner volumes and remaining competitive, we will continue to rightsize this business as required and to put the structures in place that best suit our competitiveness. So we're continually looking for cost extraction and to be able to survive at a tighter margin as required going forward. So that will be our focus and our continued focus, which has been there for some time now.

In terms of the question relating to the declining print market as a relative move in Packaging, that's absolutely correct. And while we don't have a strategy to go out and acquire more Packaging volumes, it's going to be a slow process to replace growth or lack of growth on the Print side with growth on the Packaging side, and that's just the reality.

The second question says, "Are you looking at impairment of assets, as you have indicated that you are looking at the value of assets?" I think I just need to remind people that we really have a particularly well-capitalized business, very good, modern assets in very good working condition, and we continually look at that. So we certainly will conduct what is -- will be a robust review of values relative to what the assets might be worth and what sort of income they can generate and what profit they can generate. So that will be conducted before the end of this financial year. And whatever accounting treatment is required, we'll pursue that.

Folks, that's the extent of the questions we have. There are not -- no other questions which remain unanswered. And so with that, thank you for your attention and listening in on our presentation. Thanks, and we look forward to sharing, hopefully, some more positive news with you in 6 months' time. Thanks for attending. Cheerio.