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Edited Transcript of RLO.J earnings conference call or presentation 19-Jun-20 1:00pm GMT

Half Year 2020 Reunert Ltd Earnings Call

Sandton Jun 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Reunert Ltd earnings conference call or presentation Friday, June 19, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan Ernest Dickson

Reunert Limited - Group CEO & Executive Director

* Nick Alexander Thomson

Reunert Limited - Group CFO & Executive Director

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Presentation

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Alan Ernest Dickson, Reunert Limited - Group CEO & Executive Director [1]

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Good morning, ladies and gentlemen. Welcome to the Reunert Interim Results Presentation for the period ending 31st of March 2020. My name is Alan Dickson, the Group Chief Executive of Reunert. And together with Nick Thomson, our CFO, we'll be representing these results here today.

Due to the logistical challenges associated with COVID, this is a prerecorded webcast with a live Q&A session immediately after the webcast. (Operator Instructions)

The period under review was a particularly challenging period that was further complicated by the implementation of the national COVID-19 lockdown. The forward-looking requirements of IFRS reporting and an abnormal loss that occurred at our Quince subsidiary. To deconstruct this complexity, the presentation today will focus on the following components: Firstly, the interim trading results highlighting the performance of the 3 operating segments of Reunert, which represents the underlying performance of the group. Secondly, the once-off impairments arising from the forward-looking requirements of IFRS. And finally, the abnormal loss that occurred to Quince. Pleasingly, it was once again a period in which our ICT and Applied Electronics segments performed at or above expectations.

The ICT segment had a positive performance with real growth in operating profit on the back of good performances in both the communications and the office automation clusters as strong strategy execution, specifically in expanding our diversified revenue streams, bolstered good sales in our traditional lines of business. The Applied Electronics segment performed in line with expectations as our key export contracts were executed extremely well. And resulted in a record result at Reutech Communications, while Reutech Radar delivered a strong improvement over the prior period.

Unfortunately, the cable operations in the Electrical Engineering segment continued to struggle and faced increasingly difficult conditions. Low levels of electrical infrastructure persisted across our key Southern African markets. The challenge of low demand was amplified by material foreign exchange losses as a result of the rapid weakening of the Zambian kwacha to the U.S. dollar and a significant labor disruption at African Cables. These segmental performances led to the operating profit of the group decreasing by 39%, with a decrease in the year-on-year performances of the cable companies contributing the entire shortfall to the prior year's results. The impact of the national lockdown, which shortened the March trading month, had a moderate impact, resulting in an operating profit reduction of ZAR 25 million due to delayed sales and mark-to-market losses on our export ForEx hedging instruments.

The cash-generating capacity of the group remained intact despite the challenging trading environment. Our cash conversion ratios remain in line with historic norms, albeit off a lower trading result and free cash flow of ZAR 355 million was generated, which represents a 95% of conversion of operating profit into free cash flow. Post the half year trading period, the forward-looking requirements of IFRS required Reunert to account for the future impact of COVID-19 by estimating its impact on our businesses. Whilst recognizing that this assessment is challenging at present, our assumptions were developed after referring to the views of leading economists and incorporated our internal views on the markets that we serve. There were 2 key areas where the impact of COVID-19 is likely to impact our business to the extent that once-off accounting impairments were required. Firstly, it is predicted that an increase in debt defaults are likely to materialize as the economic impact of the lockdown weakens growth prospects. This has led to increased ECL impairments on the Quince book being increased. Secondly, the forecast for gross domestic fixed investment growth is expected to decrease as the government reallocates ZAR 130 billion of the 2020 budget to fighting the pandemic.

The funding for the government's infrastructure is finalized and private business adopts a cautious approach to their capital investments. To this end, impairments of goodwill at AF CAB and PPE at telecoms cables were required. The last item impacting the results emerged as a result of an external whistle-blowing event that raised concerns of activities perpetuated against Quince. A comprehensive independent forensic investigation has been commissioned, led by a leading legal firm. The initial report revealed prima facie evidence that the company, which is at arm's length and in which Reunert has no interest, has defrauded Quince. We have raised the required impairment as a result. We have made the necessary submissions in terms of Section 34 of the PRECCA Act and are fully committed to pursue full legal recourse on this matter.

The trading results, the once-off impairments in terms of the future-looking requirements of IFRS and the abnormal item led to the group posting an attributable earnings of loss of ZAR 277 million for the period. Despite the reduction in profit, our cash flow generation and strong balance sheet support the stability of the group, and we are pleased to declare an interim dividend of ZAR 0.65 per share.

COVID-19 has had a significant impact on economies across the globe. Reunert has responded to the pandemic by increasing our resilience and have increased our debt capacity to ZAR 2.1 billion through early engagement with our key banking partners. We are reviewing our cost basis and reducing them to cater for the potential of weaker economic activity in the future. And finally, we adopted strict cash management throughout the lockdown period. We also have partnered with our key stakeholders, specifically our unions, our employees, our customers and our banks. Through these engagements with our stakeholders, we were able to deliver essential services throughout level 5 and level 4 of the lockdown, whilst prioritizing and ensuring the safety of our employees. We enabled employees who are not able to work to receive remuneration throughout the lockdown period by taking salary reductions across all white collar employees. And we contributed to the solidarity fund by sacrificing 30% of directive fees for the quarter. We rapidly adapted to the requirements of the government regulations and implemented rigorous and sustainable health and safety regimes across the group that enabled us to recommence operations on the first of May. This has resulted in May delivering a 60% return to normal operations, while June is on track to deliver around 98%. To date, our debtor collections remain in line with historic norms, our supply chain has recommenced operations at a rate that supports our company's operations, and we have had effectively no cancellation of orders. Going forward, the key uncertainty we have is the market demand and the extent to which, specifically the South African economy recovers from the COVID lockdown.

I'll now hand over to Nick, who will take us through the detail of the financial results.

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Nick Alexander Thomson, Reunert Limited - Group CFO & Executive Director [2]

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Thank you, Alan. Good morning to our American participants, and good afternoon to all our other participants on this webcast. The first half of the year can be broken down into 2 distinct parts: Pre-COVID-19 and reporting in the throes of the COVID-19 pandemic. Similarly, the statement of profit and loss can also be broken down into these 2 parts. Revenue and operating profit, which was also impacted by COVID events in March are largely comparable with the prior reporting period. Then everything below the operating profit line, which takes its entire shape from the COVID-19 pandemic and the abnormal incurred credit loss. Starting with revenue, there are 3 key external indices that Reunert tracks its performance against. In the Electrical Engineering segment, we track gross domestic fixed investment as a barometer of demand. In calendar Q4 2019, gross domestic fixed investment turned negative to minus 1.2% for the quarter. This trend continued in Q1 2020 as GDFI declined further to minus 4.8%. This reduction at GDFI was mirrored by declines of 0.6% and 0.9% in GDP, meaning South Africa was in a technical recession prior to COVID-19. The decline in GDFI reflected clearly in the low demand for power and telecom cables and in the domestic demand, switchgear. This reduction in demand, together with the labor disruption in African Cables and the lack of available copper cathode at Zamefa due to production issues at a key supplier led to revenue for the segment ending ZAR 1 billion below the revenue of the equivalent period of last year.

In the ICT segment, demand trends, GDP and the various business confidence indexes. Although both metrics declined in the first half of this year, the marginal decline in the segment's revenue was almost entirely attributable to the disposal of Prodoc in 2019. Excluding Prodoc's revenue of ZAR 234 million from the prior year's revenue results and the ICT segment's revenue being flat period-on-period. Applied electronics with its diverse portfolio and preponderance of longer-term contracts, enjoyed a modest increase in revenue despite the export fuze business not having received the next major export contract to Southeast Asia. The last export contract to this region having been concluded at the end of Reunert's quarter 3 2019. Excluding the impact of Fuchs revenue for the segment, revenue increased by 19% period-on-period, reflecting good growth experience at Reutech Communication, our tactical radio business and Reutech Radar.

Moving to EBITDA. The 29% decline in EBITDA was largely the direct result of the reduced revenue in the Electrical Engineering segment for the reasons outlined above. And the significant loss of gross margin and under-recovery of fixed costs due to the labor dispute at the power cable factory. The substantial exchange losses suffered by Zamefa on its U.S. dollar exposures as the Zambian Kwacha weekend resulted in ZAR 82 million foreign exchange loss. This loss is due to the ongoing inability of the Zambian government to settle the bad receivables, which are well past due, and the U.S. dollar-based funding is to finance the shortfall. There was also the loss of 2 weeks' production in March due to the national state of disaster lockdown and the preparation for the various factory closures, which impacted both the Electrical Engineering and the Applied Electronic segments as well as the loss of a week's revenue in the ICT segment due to the lockdown.

The next key number is for depreciation and amortization. Depreciation was up by ZAR 36 million due to the group's adoption of IFRS 16, with effect from the start of the financial year. The standard required capitalization of operating leases on to the balance sheet. The operating lease concerned a predominantly property and network asset related and resulted in the capitalization of ZAR 215 million as a right-of-use asset.

Now looking at reporting under the throes of the pandemic. The major impact of COVID-19 is in those areas of financial reporting, which are based on forward-looking information. Guidance from Sika, the JSE and other regulatory bodies all emphasize but in considering going concern assertion under IRS 1, impairments under IS 36 and expected credit losses under IFRS 9, but the potential impact of the COVID-19 pandemic on both the country's future economic performance and Reunert's future operating performance had to be carefully and thoughtfully considered. The JSE has extended reporting deadlines for reporters to ensure they have the time to consider these matters properly in the framing of the interim and final reporting, reflecting the importance and complexity of this issue.

To meet these requirements, all our business units have prepared detailed predictions of their revenue, costs and cash flows to the end of September '21 and annual projections for the 4 years thereafter. Starting point for these projections was economic predictions from various leading economists who are predicting a 10% reduction in GDP for 2020 and a gradual recovery over the next 3 to 4 years, to pre-COVID levels of economic activity, in what is now known as a U-shaped recovery. The resulting forecast from this exercise, reflecting more subdued forecasts for growth, combined with higher cost of capital resulting from the increased risk-free rate of interest in South Africa, reduced inflationary expectations, which impact the terminal values, have resulted in the following impairments: A goodwill impairment of ZAR 61 million at African Cables and other small impairments totaling ZAR 79 million as reflected in the statement of profit and loss.

In addition, all the property, plant and equipment and our telecom cable joint venture was impaired. This resulted in the after-tax share of this impairment of ZAR 55 million being included in the equity accounted loss realized from joint ventures. Bringing the group's share of the loss from equity accounted joint ventures to ZAR 82 million. The statement of profit and loss reflects expected credit losses of ZAR 529 million, which is comprised of 2 elements. Firstly, the abnormal credit loss incurred of ZAR 298 million relating to the fraud, as explained by Alan. Secondly, an increase in expected credit losses of ZAR 231 million, largely in respect to the Quince rental book. To assess the necessary allowance for expected credit losses, given that not much time has passed since the start of the pandemic in South Africa. We have used independent external metrics to input into our ECL model. The 2 main inputs were Moody's expected rate of credit defaults, which was 3.5% pre-COVID-19 and 11.5% at the time of resetting our model in April. This increase drove a substantial increase in PD or probability of defaults. Second key element in the calculation of ECL is expected loss given default or LGD. Therefore, we set loss given default at 63% using Moody's recovery rate for emerging market bonds and the World Bank recovery rate for SA debt of 37% and 36%, respectively. These external indicators with the best indicators available. And in the view of the Board and the audit committee meet IFRS 9 requirements for the use of reasonable and supportable information. These inputs resulted in the expected credit loss of an additional ZAR 231 million being raised. Remeasurement loss. The remeasurement loss of ZAR 22 million arises from the group's decision to dispose of a business and the remeasurement of its assets and liabilities to the expected sale proceeds.

On the balance sheet, the highlights are: firstly, the group remains ungeared on a net basis. Secondly, the group's inventory, rental receivables and trade receivables of ZAR 4.8 billion comfortably exceed the trade payables of ZAR 2.4 billion in a ratio of 2:1. And excluding inventory, the ratio is a comfortable 1.28:1, again, reflecting the strength of the balance sheet. And thirdly, the movements in noncurrent assets are mainly as a result of expected credit losses and impairments that we have been through in the review of the statement of profit and loss.

Turning to the statement of cash flows. The cash flow generated from operations before working capital amounted to ZAR 571 million. Of this, ZAR 74 million was invested into working capital and ZAR 118 million into tax due was settled. This resulted in free cash flow of ZAR 355 million, which is a cash conversion of 95% of reported operating profit. For this period, the percentage of PAT converted into cash is not an appropriate metric due to the level of impairments and expected credit losses are processed through the statement of profit and loss, which impact PAT, but not the cash flow for the period. After free cash flow, ZAR 56 million was expended in expansionary capital and a further ZAR 169 million invested into the Quince book in the first 6 months. This resulted in the final cash generation of ZAR 55 million after all investing in financing activities. The opening cash position of ZAR 616 million was enough to meet the final dividend of 2019 paid in the second quarter of the year of ZAR 620 million.

The net cash generation of ZAR 55 million, combined with a ZAR 21 million ForEx impact on our cash balances resulted in a closing cash position of ZAR 72 million. This net cash position and the ZAR 1.1 billion in uncommitted facilities and the new ZAR 1 billion in committed facilities we've secured since the commencement of the COVID-19 pandemic, means that we both have a strong ungeared balance sheet and substantial credit facilities to meet our future requirements.

With these highlights, I will hand you back to Alan to take you through the segmental performance and to conclude the formal part of our presentations before we take questions.

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Alan Ernest Dickson, Reunert Limited - Group CEO & Executive Director [3]

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The ICT segment continued to perform well, with a real growth and operating profit of 6%, increasing from ZAR 351 million last year to ZAR 371 million in the period under review. In the office automation cluster, good hardware sales resulted in an increase in market share in tight market conditions. The strategic drive to increase complementary revenues continued and a total workspace provider suite of services was expanded to include PC and services. The communications cluster also had a good half, as ECN secured a record number of new voice deals, which offset the minutes consumed per customer, which remains under pressure. ECN's diversified revenues accelerated strongly as a cloud-based virtual PBX and the last-mile broadband connectivity connections continued to expand.

SkyWire's growth continues to accelerate as the sales of their last-mile broadband connectivity solutions grows and their network was expanded into 19 new urban geographies.

The business remains strongly cash generative, and we expect structural strength of the broadband connectivity to remain in the post-COVID business world. The finance book grew in line with the hardware sales and close to ZAR 3.1 billion at the end of the half.

Strategic execution continued well in the segment. Nashua continues to accelerate its complementary products and services that enable its total workspace provider strategy. These revenues are increasing strongly and grew at 20% over the previous half year. Nashua continues to focus on augmenting their service offering as the market evolves and have recently launched a suite of products and service offerings aimed at the B2B remote working environment. This agility bodes well for the post COVID-19 economy where their traditional hardware sales are unlikely to grow at historic rates. Investment into SkyWire's national network is expanding steadily as consumer adoption rates remain high. These high-quality broadband connections form the backbone of our cloud offering and over-the-top services and remain a critical growth driver for this segment. Our fourth cluster is nearing activation. This business, which will be focused on B2B digital transformation and will offer cloud, data, security, managed services and digital consulting services. These offerings will augment our existing ICT businesses, broaden our participation in the enterprise ICT market and provide new offerings into our existing medium and smaller customer base.

The Applied Electronics segment had a good half, supported by strong export performance in the traditional Reutech businesses. Revenue grew by 4% to just over ZAR 1 billion whilst profit decreased by 9% to ZAR 77 million. The operating profit performance was impacted by the COVID-19-induced lockdown as large export orders were unable to be dispatched prior to the lockdown and the rapid depreciation of the rand during the latter part of March resulted in mark-to-market losses on the hedging instruments that we use to protect the cash flows we generate on our export contracts. The operating profit of these was ZAR 25 million and would have been a better representation of the half's performance. The sales have subsequently occurred and will be reflected in the final year numbers.

Reutech Communications, which supplies tactical communication systems had an excellent half and achieved record profit. Reutech Radar also had a strong performance on both mining and defense radars and delivered a significantly improved year-on-year performance.

Fuchs, as expected, had a slower half year than last year as we are between large-scale contracts. Pleasingly, orders in new export geographies were secured, and they delivered a profitable half, albeit not at the levels of the prior year. The remaining Reutech companies all performed in line with the expectations for the half.

Our renewable energy businesses delivered a mixed performance, with Blue Nova delivering a strong profit, bolstered by the reemergence of regular load shedding and the development of new markets in which storage solutions deliver technical and economic value.

Terra Firma Solutions, our Solar Energy business had a slow half as a lack of business confidence resulted in a slower-than-normal conversion of projects. The segment's order books are strong, particularly in the export arena, and have been bolstered by good multiyear orders secured by both Nanoteq and Omnigo. These orders commenced execution in the second half of the year and the segment's order book, both for local and export sales creates a solid base for continued good performance.

Our renewable energy businesses remain well positioned as we increase our investment into our own energy assets. External finance has been secured, and the acceleration of these investments will gain further traction as orders on hand are executed. The economic case for larger-scale storage is also improving and the orders for a locally manufactured grid scale intelligent energy storage system are increasing. To mitigate the risk of some demand uncertainty, the segment has reduced costs across the segment and have increased the utilization of the lower cost supply chain that has been developed over the past few years in Southern Asia.

The challenges in the cables businesses negatively impacted the Electrical Engineering segment, resulting in the segment generating a loss of ZAR 42 million. The key contributions to these negative results were, firstly, the labor interruption at African Cables, where a 7-week strike occurred in the first quarter. This strike was in protest of the large restructure that was completed in the prior year and led to practically no production in the first quarter and a significant reduction in the utilization of the plant, which resulted in a large under recovery in fixed cost and an operating loss for the company for the half. Despite this expected introduction of 0-rated input VAT on copper cathode in Zambia on the 1st of January, the rate at which the Zambian government has settled its debt remains slow and only ZMW 30 million was received by the end of March. This resulted in inflated levels of U.S. dollar-denominated external debt being held by Zamefa. The kwacha devalued rapidly and lost 38% against the U.S. dollar and the company suffered material ForEx losses, which contributed a negative ZAR 82 million to the result.

Finally, low cable infrastructure investment across our key South African markets continues to hamper the power and telecoms plants as suboptimum volumes are manufactured by the factories.

Pleasingly, the circuit breaker company's performance continues solidly. They also experienced lower local volumes, but the efforts in expanding their export activities continues to yield good results as the export businesses delivered a strong performance and resulted in a circuit breaker company delivering an improved performance over the prior year. Circuit breakers export development has resulted in volumes continuing to grow, specifically in the telecommunications and the rail markets. Their investment into new products will continue as it is a critical success factor as they open new OEMs and open new international geographies.

In the cable businesses, proactive steps have been taken to improve labor stability and strong focus on operational efficiency to reduce costs and deliver sustainable results until more positive infrastructure volumes emerge.

In Zambia, the shareholder loan has been restructured and will significantly reduce the risk of further ForEx losses in the second half. It is challenging to provide clear prospects for future performance whilst we remain in the grips of the COVID pandemic. We anticipate that our cable businesses may continue to face short-term volume challenges until the sources of funding for the government's infrastructure investment drivers secured and improved business confidence increases private capital investment.

Pleasingly, the rest of Reunert's higher growth businesses exhibit strong business models and face markets that offer good structural growth and opportunities. These businesses include our renewable energy businesses, which offer a long-term compelling alternative to Eskom and municipal power, specifically in the build, own, operate model that is applicable to both solar and integrated storage solutions. Our strong export markets in Reutech and circuit breakers, where good order book supports our production facilities well into next year.

Our ICT communications cluster, where broadband connectivity benefits from structural growth and investment into telecommunications is likely to accelerate in response to the pandemic. And finally, our natural investment into the total workspace provider strategy and our fourth cluster, both offer strong opportunities in the new world of work that will emerge in the future.

Our companies are currently all back at work, and we have robust systems to protect our employees' health and safety as the pandemic continues to spread. Our balance sheet is strong, cash flow conversion remains consistent with our historic trends, and our borrowing capacity enables agility in response to funding our strategic initiatives and M&A opportunities that are certain to arise. Whilst the second half will be challenging due to the impact of the lockdown of levels 5 and levels 4 during April and May, the group retains its resilience and its ability to emerge strongly as the economy normalizes.

That's all, and I'd like to hand over now to any of the Q&A that you may have. Thank you, and goodbye.

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Questions and Answers

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Alan Ernest Dickson, Reunert Limited - Group CEO & Executive Director [1]

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Good afternoon, ladies and gentlemen, and I appreciate your time this afternoon for attending the Reunert webcast. Nick Thompson and myself, Alan Dickson, are here to answer the questions today. We've got about 5 or 6 questions. So I'll start at the top. And we'll go through them one by one.

The first is from Andrew Randalls from NorthStar Asset Management. The question is, what is the proportion of the 37% revenue decline for electrical engineering that was driven by: one, the strike at African Cables; 2, the African Cables demand reduction; 3, Zamefa; and 4 telecoms cables?

Response to that is that the drop in revenue was effectively split 50-50 between reduction in revenue in African Cables and reduction in revenue at Zamefa. The primary cause of the drop in revenue at African Cables was the strike. And the primary cause of the drop of revenue at Zamefa was the lack of copper supply that we had in the first quarter that Nick referred to in his presentation. So those are the 2 primary causes of it. And I would say, split more or less half-half between those 2 entities and for those 2 reasons. The low demand is fairly consistent and is a continuation of a trend that we saw last year. So it is not so much the revenue wasn't really driven by a further reduction in demand. It's a consistent level of low demand that is putting pressure on those businesses. So that's the question 2 -- or the answer to the first question.

The second question is also from Andrew Randalls of NorthStar Asset Management, in which he asks the question as, what would happen to African Cables and the profitability of African cables, if we closed the medium- and high-voltage cables business down, and removed that part of the cost base?

The -- I haven't done the sums on that specifically. So -- but the medium and high voltage is both sufficient of that business and the margins are slightly better. It's still in that part of the business than they are in the lower-voltage products that it would be negative to the business if we shut down the medium- and high-voltage cable parts of African Cables.

The third question is to -- or it's by (inaudible) from Coronation. He asks the impairment number 4, Quince is large and whether it relates to a single customer?

Quince provides finance to companies who, in turn, service end customers. So a single company could service many end customers. So what we have here, it is a large number, indeed, it's with a single company but that company itself services many end customers.

The fourth question is Andrew Randalls, also again from NorthStar Asset Management, and Nick will be dealing with this answer. And the question is, what is the impairment value for the Telkom JV?

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Nick Alexander Thomson, Reunert Limited - Group CFO & Executive Director [2]

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Good afternoon, everybody. The total property plant and equipment at the Telkom JV was ZAR 136 million. We have a 50% share. So the gross amount of the impairment before tax relief was ZAR 68 million, after-tax relief of ZAR 13 million, the net impairment was ZAR 55 million.

And then the second question after that is, could I give an indication of the split of revenue between -- in Telkom cables between the fiber business and the copper -- legacy copper business?

They're pretty much 50-50 each in terms of their contribution to revenue. So 50% would be the legacy copper business, including UTP, and 50% would be the fiber and duct-related type business.

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Alan Ernest Dickson, Reunert Limited - Group CEO & Executive Director [3]

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Thanks, Nick. The third question was from David Fraser from Peregrine Capital. His question is, how much is still outstanding relating to the Zambian VAT fund? Second part of that question is, have you prepared or provided for this amount? And if not, why not?

Nick will also deal with that.

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Nick Alexander Thomson, Reunert Limited - Group CFO & Executive Director [4]

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At the end of September last year, we were owed about ZMW 236 million by the Zambian government. We received ZMW 44 million in the period from the 1st of October through to the 31st of March. And together with the increase in VAT plan over that period, the net balance at the end of March was ZMW 214 million. Since then, we've received another ZMW 40 -- nearly ZMW 45 million, and the balance today is ZMW 170 million outstanding. And because we are getting movement in terms of receipts, that's why we haven't impaired the balance. So no, the balance is not impaired, and it's because we are continuing to receive money, albeit slowly from the government.

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Alan Ernest Dickson, Reunert Limited - Group CEO & Executive Director [5]

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Second question is from Peter Cromberge, who's from Mergermarket. The question is, can you clarify how much new debt facilities the company has raised as a liquidity buffer? Second part of that is, which banks are these facilities with and what are the terms of that funding?

And Nick, again, will deal with that.

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Nick Alexander Thomson, Reunert Limited - Group CFO & Executive Director [6]

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So at the end of last year, we had about ZAR 1.1 billion in uncommitted facilities, uncommitted being that we don't pay any commitment fees, and they're available provided there's money in the money market. As a consequence of the COVID pandemic, we've increased our total facilities available to ZAR 2.1 billion, of which ZAR 1.1 billion remains in the uncommitted, and we now have a full ZAR 1 billion in committed facilities. The major banks who are dealing with the committed facilities are Investec and Nedbank. And in the committed facilities, we are dealing with RMB and Standard Bank. And the commercial terms of those, it's 1-year term loans in terms of the committed.

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Alan Ernest Dickson, Reunert Limited - Group CEO & Executive Director [7]

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Then the last question that we have is from Mona Muneer Ahmed at Prescient. It's a 4 part question. So I'm going to answer them one by one. We've got them right at the last minute. So we've had less time to prepare for these ones. So I'm going to ask -- or read out the question and then give the answer straightaway.

So the first was also related and the same as we had a little bit earlier. Was the fraud at Quince a customer?

So I think I have answered that.

He's also asked a more detailed question around some of what has transpired as a result of the mechanisms and how Quince as been defrauded.

As we mentioned, we have had a -- and commissioned a comprehensive independent forensic investigation that is ongoing. So we will be transparent as those findings come out. But at this stage, that investigation is still ongoing. And only once it's complete, are we going to be in a position to give some more detail around the mechanisms to which Quince has been defrauded.

The second question is, our provision for expected credit losses, it seems high. Is this realistic? Or are you just being conservative in your collectability assessment?

So I'm going to start out with it and then Nick's going to talk a little bit around the mechanics that he did cover in his presentation, but just to give you a little bit more around it.

I think the one element that I just wanted to start out with was the complexity of determining what the collectibility will be and recalculating these numbers in the context of a period that is really close to COVID and effectively, we were still in lockdown at the time at which we had to make these calculations. In summary, though, we believe with the calculations that we've done and the data that was available to us, that the provisions that we have risen are appropriate for the predicted metrics that we have used.

So Nick, maybe you can just pick up a little bit on the -- some of the more detail around it that we have used and why the quantum has increased.

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Nick Alexander Thomson, Reunert Limited - Group CFO & Executive Director [8]

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Thank you. And just before I do that, Alan, if you just press refresh because some additional questions have come through. The -- as Alan has said, the biggest difficulty is getting cohesive information in a pandemic environment where the pandemic is still very new. So what we did is, we had a series of conversations with other financial institutions to understand what they were doing and to understand what we should be doing relative to our book. Everybody agrees that this is a black swan or 1 in 100-year type of event. And that previous models are really not appropriate for modeling the potential impact. We then had conversations with leading economists, and we looked at their predictions and then from all of that, we had to assess what would be reliable and appropriate information to use in setting the ECL loss model. And what we settled on was Moody's expected credit losses, which was 3.5% before COVID and got moving up to 11.5% as a consequence of COVID, and that was very much in the line with the information that we were getting from all the financial institutions, which was that they were expecting a fourfold increase in defaults. And then we had to also look at if there is a default, how much of that would we recover. And we settled on sort of quoted information around credit, which is around bonds and similar, where Moody's and the World Bank indicate that South Africa typically collects to ZAR 0.36 to ZAR 0.37 in the rand, if there is a default, which then gives you a loss given default of 63%. And that's what we put into the model, and we did a lot of reasonability checks on it. We just didn't slack numbers into a model and sort of accept the answer. We looked at -- we broke down the Quince book into segments, we looked at the nature of those segments and how they -- whether they were trading through the lockdown or not trading through lockdown. We looked at relative size. And we did a complete reasonability test independently of the model. And then we also asked the OA sales team to look at what they -- whether they had any concerns around the channel that they were selling into. And the numbers that came out of that and the numbers that we had in the loss model were very much all in the same ballpark. And it was sort of -- and I guess the key issue is, it was also very much in line with the type of conversations we were having with the other financial institutions that we spoke to.

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Alan Ernest Dickson, Reunert Limited - Group CEO & Executive Director [9]

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Thanks, Nick. The third question from Muneer is, is the fourth cluster being built organically? Or are there acquisitions coming?

The primary build will be organic, but into that will be acquisitions. So whilst we've been looking for acquisitions for some time, as we've been sharing with you, we've been unable to do that. So we've chosen to try and commence ourselves. So that's the original intention. That's what we're hoping to do in the next couple of months. And into that, on that platform, we will then be acquiring businesses that come into it that fit. But those acquisitions are likely to be slightly smaller.

The fourth question from Muneer is, what is the size of the VAT receivable in Zamefa?

So Nick has already answered that earlier on today on Dave Fraser's question.

There's another question then from Muneer Ahmed from Prescient. Do you expect ICT to deliver real growth for the full year?

Considering what I assume will be a big decrease in demand footprint. Muneer, I think the bigger question there is not so much what happens to print itself, it's really around the impact of the lockdown. So bearing in mind that our businesses did 0 turnover at all in -- effectively at all in May -- sorry, in April and only around about 60% of revenue coming through the books in May. So for all intents and some purposes on the cost base that we have, we've had 0 revenue for about 6 weeks. And that's going to take and have a significant impact on all of our businesses. So to answer the question, I think it would be quite -- it would be very difficult for ICT to deliver real growth in a year in which they've had 6 weeks' worth of lost revenue. So I think it's unlikely for them to do that. Almost irrespective of whether the -- there is a decrease in the demand for footprint.

Peter Cromberge from Mergermarket has asked a question about what is the company's funding capacity for M&A? And what sort of segments or businesses is it interested in, in terms of acquisitions?

So Nick has described already the debt capacity that we have. So there is decent funding store capability for M&A, and we obviously have the ongoing cash generation that we all have within the company, which has stayed more or less in line with what it has been historically. The areas of interest. We're quite bearish and have been for some time in Electrical Engineering. So it would be unlikely that we would be acquiring much or putting much expansion in CapEx into Electrical Engineering. In terms of where the interest is, for us, the biggest interest at the moment is in that fourth cluster in the ICT segment. We believe there's even more so now in fact that there's going to be growth in that area, and there's going to be strong fundamental sports. That is an area we're looking at. The second key area is our Renewable Energy business as we believe that is also an area which offers structural growth over a period of time. Broadband -- last-mile broadband connectivity, another area that we believe there to be structural growth in. So those sort of areas of where we would be looking at from an M&A point of view and where we would be deploying capital.

David Fraser has asked a -- and from Peregrine Capital has asked for an expansion on the fraud at Quince with a number of questions.

I'll go back in this -- as I glance one eye down this, a couple of other questions are asking more detailed questions around the manner in which Quince has been defrauded. And I would just perhaps like to reiterate where we are at the moment, which is that there is a -- there's comprehensive independent investigation -- forensic investigation that is ongoing. It's been driven by a large legal firm. We only have the initial part of that investigation complete, which we required in order to determine the quantum, which has come through the numbers at the half year. And there is still some work to go in terms of the completion of that. So in terms of giving greater detail, we need to complete that investigation first before we can do that. But once complete, we will be transparent in terms of what has transpired and improvements that we need to make sure it doesn't happen again.

(inaudible) from Investec Bank has asked why is the Quince funding strategy being reviewed?

Quince, the interest rates have obviously declined now with the cuts in the interest rates. So by definite and on top of that, our cost of running the book are more or less the same from a fixed cost point of view as they've been historically. So the returns on that Quince book are lower or going to be lower going forward than what they have been traditionally. And it is primarily from that point of view that we are considering whether the returns that we make out of it, but that is the best deployment of our capital at the moment, And it is for that reason that we are reviewing how best to fund Quince, and the strategy around the Quince funding is being reconsidered or evaluated as opposed to reconsidered.

Jovan Jackson from Tantalum Capital has asked a question. Is the interest rate charged by Quince fixed or variable? Example, linked to (inaudible) Prime, are you still looking to grow the book under the current economic circumstances? And what is the average length of the finance contracts?

Nick, will you feel those?

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Nick Alexander Thomson, Reunert Limited - Group CFO & Executive Director [10]

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I'll take those, Alan. The interest rates charged by Quince can either be fixed or variable, depending on the nature of the underlying customer contract. And you can say it's probably in the order of 50% -- just under 50% fixed and 50% variable, probably 60/40 to be specific, 40% fixed and 60% variable.

And then in terms of the average length of the finance contracts, the average life of book is about 37 months. The actual terms are typically anywhere between 2 years and 5 years. But on average, the book is settled in 37 months.

And I think Alan has already dealt with the second part of the question, which is whether or not the book will grow under current economic circumstances.

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Alan Ernest Dickson, Reunert Limited - Group CEO & Executive Director [11]

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Yes. So we have never looked to grow the book. So the book is not -- it's not been a strategy to grow the book. We're not a bank. The growth of the book has come back as -- emerges as a result of the active underlying sales activity that we have, primarily in the office automation cluster. So we have never actively looked to grow the book. The Quince is there to enable the nature of business primarily to grow in the manner that it has. And hence, the book ebbs and flows based on the underlying activity and sales activity that goes. So to the extent that the economic circumstances result in less hardware sales, I'd expect the book to decrease in size. And if they picked up and hardware sales are accelerating, I would expect it to continue to grow.

Muneer Ahmed from Prescient has asked a question. Assuming consistent copper supply, can Zamefa return to higher operating rates with the removal of the IT?

Without a doubt, over the first half of the year, having lost a couple of months or having lower production, particularly in the first quarter as a result of that copper supply, if we have consistent copper supply, which is what is happening at the moment, Zamefa will have much higher operating rates than it had in the first half.

Martin (inaudible) from Woodward International Advisers has asked what have we done to Zamefa that gives you confidence that the ForEx losses going forward are going to be lower?

Nick, do you want to feel this?

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Nick Alexander Thomson, Reunert Limited - Group CFO & Executive Director [12]

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Certainly. What we have is, we have a USD 20 million loan that we have granted to Zamefa. From the perspective of the group, that -- the interest and -- sorry, not the interest, but the gains and losses on that loan are eliminated out. But at the Zamefa's level, they pose a very significant impact on its balance sheet, and we've had to subordinate that loan to restore the company to solvency. So what we've done is, we've converted it from a stand-alone interest-bearing loan to effectively an equity loan, which is being classified as part of that company's equity. So the gains and losses on that loan will reflect in that company's equity. So as the loan value goes up in Kwacha and the equity goes down, when you add the 2 together, they stay the same. And it eliminates completely the gains -- ForEx gains or losses, which go through the separate income statements of Reunert and through Zamefa. So that's in essence what we've done. And then as the government settles the outstanding amount, which it is doing, we've got ZMW 170 million to go, then the dollar indebtedness that we -- net indebtedness that we have relative to the difference between trade debtors and trade creditors and dollar-based bank funding will come back in balance, which will then also allow us to -- which would then reduce quite substantially any form of exchange losses going forward.

So those are the 2 strategies that we're following.

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Alan Ernest Dickson, Reunert Limited - Group CEO & Executive Director [13]

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Thanks, Nick. Andrew Vincent from CGAM has asked a question, is there an insurance claim against the ZAR 300 million fraud?

Nick, again, I think if you could.

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Nick Alexander Thomson, Reunert Limited - Group CFO & Executive Director [14]

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Certainly. We have a policy, which covers us in terms of looking at certainly the cost of investigating into it, but that's not really what the question is about. It's, can we get back the ZAR 300 million fraud? The answer is under certain circumstances, yes. I think the circumstances are subjugated at the moment, but only under certain circumstances. That's why we have not raised an asset against or potential asset against the claim that we may have against the policy because we have to establish the circumstances properly in terms of the forensic investigation. And depending on what we find in that, we either have a claim or not have a claim.

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Alan Ernest Dickson, Reunert Limited - Group CEO & Executive Director [15]

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Thanks, Nick. Meyrick Barker from Kagiso Asset management has asked, is there any risk that the losses arising due to the fraud in Quince could increase?

We believe that our quantification of the loss is sufficient to cover what we will find as the investigation is completed and the forensic investigation concludes. So given still though that the forensic investigation is in process, I guess there's always a risk, but we believe we have done sufficient work that the quantum of the impairment that has been raised against the Quince matter is sufficient.

Andrew Vincent from CGAM has asked, could we expand on the comments of evolving the financing of the Quince book?

We answered that earlier to (inaudible) from Investec Bank, so I think we've dealt with that.

Let me just check that there's no more questions. I think that's it. So there's no more from that. So that addresses all of the questions that we have. If we haven't answered your question in the way you would have liked or you would like some more detail, if I could please request that you e-mail the question to Karen Smith, our Investor Relations Manager, and we will then answer those questions more fully than perhaps we've been able to do here. And equally, if you have other questions, please contact there as well, and we could either set up a telephone call or a subsequent meeting that we can have a one-on-one and answer some more questions that you may have.

So that's everything for now, and that's all we've got. I suggest, I guess, it's back to you.