TIDMBWO
RNS Number : 0070I
Barloworld Limited
30 March 2020
Barloworld Limited
(Incorporated in the Republic of South Africa)
(Registration number 1918/000095/06)
(Income Tax Registration number 9000/051/71/5)
(Share code: BAW)
(JSE ISIN: ZAE000026639)
(Share code: BAWP)
(JSE ISIN: ZAE000026647)
(Bond issuer code: BIBAW)
(Namibian Stock Exchange share code: BWL)
("Barloworld" or the "Group" or the "Company")
PRE-CLOSE VOLUNTARY OPERATIONAL UPDATE FOR THE FIVE MONTHS
TO
29 FEBRUARY 2020
Summary
-- Challenging trading environment for the first five months,
characterised by continuing low business confidence, volatile
commodity prices and depressed consumer demand;
-- The acquisitions of Wagner Asia and Tongaat Hulett Starch are
in line with the Group's growth strategy, and are expected
to further strengthen and diversify the Group;
-- A Strong balance sheet remains a key strength for the Group
in these times, with a committed funding capacity of R7,2 billion
at 29 February 2020;
-- After considering the acquisitions of Wagner Asia and Tongaat
Hulett Starch and the execution of the recent share buy-back
programme, the Group Net debt-to-EBITDA ratio (excluding IFRS
16) is anticipated to remain below 2.0 times;
-- Management business contingency protocols have been initiated
to manage the effects of COVID-19, with a Barloworld Crisis
Committee set-up and immediate austerity plans implemented;
-- Notwithstanding the tough trading conditions, the Group has
continued to make good progress in its communicated strategy;
and
-- Challenging trading conditions are expected to intensify in
the second six months of the 2020 financial year, but Barloworld
is well positioned to meet these challenges.
Impact of COVID-19
The board and management have been carefully and mindfully
monitoring developments resulting from COVID-19. It has affected
people's lives and disrupted the global economy as activity slowed
dramatically on the back of containment measures. Further negative
knock-on effects in tourism, supply chains, commodities and overall
market confidence are increasing rapidly. A protracted global
economic downturn is expected due to trade and political tensions,
specific economic vulnerabilities, containment measures and lower
confidence that will result in increased pressure on industries
facing structural headwinds and on large employers. Consequently,
commodity prices are expected to remain depressed in the
short-to-medium term influenced by the length of the lockdowns put
in place by various key economies. The COVID-19 crisis and the
consequential volatility in global markets is likely to continue in
the foreseeable future.
During this time, the health and safety of our employees,
customers and communities remains our highest priority. A COVID-19
policy that outlines measures taken by Barloworld to mitigate the
spread of COVID-19 in its operations in various geographies is in
place. The policy includes a new paid special sick leave category
to assist employees who may need additional sick leave due to the
pandemic. It also provides guidance on other practice measures such
as telecommuting/remote working; travel prohibitions and expatriate
evacuation should this be necessary.
A Barloworld Crisis Committee has been set up to investigate and
consider factors that need urgent attention in responding to the
pandemic and assessing its impact on both our people and our
business.
The impact on our businesses remains uncertain at this stage but
we believe that the Group's strong balance sheet and stable, mature
business platform places us in a solid position to weather the
storm. We have reviewed our current banking facilities and modelled
the Group's liquidity position over the next 18 months and the
Group has more than adequate headroom. Given the risk to growth,
however, we have taken steps to implement various austerity
measures aimed at reducing costs to cushion any negative impact on
performance.
The board and management continue to monitor the developments of
COVID-19 and will react swiftly and strategically to mitigate the
risks on our business.
Progress on our strategy
Our vision is to sustainably double the intrinsic value of our
company every four years, enabled by our managing-for-value
operating model.
Our strategy implementation is focused on three important
strategic levers, namely:
1. Fix and optimise the existing business portfolio to achieve
full potential;
2. Implement an active shareholder operating model; and
3. Pursue acquisitive growth in existing, adjacent and new verticals,
focused on adding high growth, cash generative businesses
to our portfolio.
Good progress has been made in all the areas of the strategy.
The Group's strategy and clear set of guardrails (capital light,
high growth, cash generative) remains relevant despite the
ever-changing market conditions.
In line with the Group's strategic lever to Fix businesses, we
continue to take tough decisions in optimising the motor retail
business unit and addressing the underperforming areas in
Logistics. The disposal of SmartMatta and other Logistics units
remain in progress.
With regard to optimisation, the improvements to the motor
retail portfolio are driving good results. Avis Fleet remains held
for sale and the Group is considering the construct of an open
process, including the black public to raise the required capital.
The roll-out of the Barloworld Business System (BBS) is improving
efficiencies in the operations.
In terms of growth , the Group has a well-considered and
publicised strategy including that of pursuing inorganic growth
into attractive markets identified based on a clear set of
investment guardrails including industry attractiveness, our
ability to win for existing, adjacent and new business and
acceptable minimum returns. This is based on our desire to create
value balanced against our sustainable development framework. Over
the past three years, we have reviewed and rejected multiple
opportunities that did not meet our strict guardrails and returns
criteria. The consumer goods (including food, beverage and
ingredient processing), business services, education,
pharmaceutical distribution and healthcare have been identified as
potential verticals to develop and grow our portfolio based on the
long term prospects of these sectors. We continue to consider a
healthy pipeline of inorganic growth opportunities in Africa but
will be disciplined and circumspect in the decisions with due
consideration to the challenging macroeconomic environment.
Operational Review for the Five Months to 29 February 2020
The operating environment has continued to be characterised by
low business confidence and constrained consumer demand. The
Group's revenue for the period was down on the comparable period in
the prior year. Operating profit was also down and the Group was
only marginally buffered by favourable exchange rate movements. The
adoption of IFRS16 has impacted the operating margin
positively.
Progress has been made in reducing working capital through the
implementation of targeted sustainable solutions across the
businesses, but these gains are expected to reverse in light of the
current COVID-19 pandemic and its severe impact on trading
conditions. Plans and initiatives are in place to minimise the
impact.
The roll-out of the BBS is progressing well across the Group. We
believe that the BBS will continue to enhance business value and
create a platform for integrating businesses.
Automotive and Logistics
Overall, new vehicle sales volumes declined by 1.8% in the last
five months as a result of a weak local macro-economic environment
and in particular, the reduction of consumer disposable income.
Difficult trading conditions for 2020 are expected to intensify in
the second half of the year and as such mitigating measures aimed
at minimising the impact on performance have been implemented.
The Integrated Division has implemented a shared services
operating model aimed at unlocking economic synergies in revenue
and cost as well as competitive synergies that will enable future
growth. To date good progress has been made and some efficiencies
resulting from several initiatives implemented using the BBS were
realised. We are committed to our vision to become a market leader
in mobility services and solutions, through disruptive and
innovative mobility solutions, that inspire a world of difference
in the lives of our customers, colleagues and shareholders. The
road ahead is expected to be long and challenging, but management
remains committed to realising its targets by 2021. Internal
interim priorities are being adjusted in light of COVID-19. In
South Africa, our operations continue to serve the essential
service industries outlined by government.
Avis Fleet remains classified as held for sale and management is
committed to diluting the Group's shareholding in this business to
50%. Avis Fleet's operating performance was down against the prior
year impacted by a decline in leasing activities and aggressive
pricing in the market. In the current environment, partnering with
our customers in order to increase retention is key.
Automotive (continuing operations)
During the period, the division experienced lower demand across
all businesses driven by reduced market demand and pressure on
pricing. Excluding the impact of the deconsolidation of NMI-DSM
which contributed to revenue for the same period in 2019, revenue
was marginally up. The adoption of IFRS 16 had a positive impact on
the overall operating profit and operating margin, but this was
offset by lower results in the Motor Trading business.
Car Rental
Car Rental revenue for the period was up on the prior year on
the back of rental day growth above the car rental industry trends,
however rental rates were under pressure. Operating profit was
down, mainly driven by pressure on the rate per day albeit this was
partly offset by improved vehicle utilisation . Travel restrictions
combined with a decline in off-airport reservations had a limited
impact on profitability during this period. We expect the impact on
profitability to intensify in the second half of the year.
Motor Trading
Motor Trading revenue, excluding NMI-DSM, was up on the prior
year, despite lower vehicle unit sales. The represented dealer
market was down 2.0% with both premium and volume brands under
pressure. Tough trading conditions, lower volumes and increased
operational and property costs negatively impacted overall results.
Despite lower activity, the aftersales contribution remains strong
and was up on the previous period. The newly acquired BMW Centurion
dealership contributed positively to performance. The impact of
several restrictions resulting from the spread of COVID-19 has been
minimal to date but is expected to increase during the 21-day
lockdown period. In line with the rest of the division, the
situation is being monitored very closely with the necessary
austerity measures implemented to mitigate the impact on the
business.
Logistics
Revenue and operating profit for the division was lower than the
prior year as a result of the non-renewal of low margin contracts,
reduced volumes and the early impact of COVID-19 on global freight
movements.
Initiatives to reduce invested capital yielded good results
during the period. These included a revised funding model for
on-balance sheet vehicles and trailers, as well as certain cost
savings at business unit and head office level.
A decision on the division's long-term positioning in
Barloworld's portfolio will be made at year end based on the
performance against the three year agreed targets, including
achieving a ROIC between 11% and 13% in 2020.
The sale of the Middle East operation has been concluded, while
the sale of Smartmatta is progressing with a number of parties
expressing interest. Further guidance on the transaction will be
given in due course.
Port closures and international and regional supply chain
disruption resulting from COVID-19 restrictions negatively impacted
the business. Logistics supports a number of essential products and
service industries and will continue to operate these logistical
functions during the lock-down period. The financial impact during
and post this period will be material given the considerable fixed
cost base.
Limiting the financial impact of COVID-19 is expected through
the preservation of cash and optimisation of the balance sheet to
balance resources and business activity. These measures include the
reduction of fleet sizes where possible, avoiding and minimising
penalties, mothballing of assets, vehicle disposals without
compromising value and postponement of non-essential capex.
Initiatives to reduce operating costs including a freeze on new
employment, flexible and reduced hours, and proactively managing
working capital requirements to ensure sufficient liquidity. These
measures will be continuously reviewed and adapted appropriately,
ensuring business growth is not compromised.
Equipment southern Africa
Equipment sales were down compared to the prior year, impacted
by lower commodity prices, reduced production output and lower
capital investment in mining. Prior year performance included the
delivery of the balance of the machine package deal to Mota Engil
in Mozambique.
The reduced investment in infrastructure development as a result
of large trade deficits and limited foreign direct investments also
impacted negatively on sales to the construction sector.
The shortage of forex and limited letters of credit continued to
restrict trade in Angola, while currency devaluation in both Angola
and Mozambique had a negative impact on the effective tax rate.
On a more positive note, aftermarket revenue was higher than the
comparative period driven primarily by favourable exchange rate
movements. This segment is a key management focus area and
solutions have been developed to support customers in partnership
with Caterpillar Finance.
Associate income from Bartrac, our Joint Venture in the Katanga
province of the DRC, was down and is expected to continue to slow
down in the medium term due to declining mining activity levels,
largely influenced by one of the key customer operations placed
under care and maintenance. Copper and cobalt prices are key risk
factors. The progress of our key account diversification program is
being impacted by the COVID-19 pandemic.
The total Equipment firm order book at the end of February
amounted to R3,3 billion.
In line with our strategy, we are reducing our invested capital
levels and have made progress in reducing working capital. In our
rental business, we continue to focus on balancing our rental
roll-ins with market demand.
The impact of COVID-19 on the performance of the business during
this period was minimal. However, the recently announced lock-down
in South Africa and several other African countries is expected to
affect demand and the materials supply chain. We are closely
interacting with our key customers to understand the impact in
terms of liquidity and continuity of operations. Close
collaboration with Caterpillar remains key to mitigating supply
chain risks and learning from COVID-19 driven disruptions in other
regions.
In the absence of real triggers for growth in the current
environment, we have initiated austerity measures to control costs
including a moratorium on external appointments, a reduction in
operating costs, deferment of non-essential capex and additional
counter measures to contain invested capital.
Equipment Russia
During the period to the end of February, the Russian business
continued to deliver a solid performance against the backdrop of
challenging geopolitical and competitive dynamics. This result was
driven by a strong performance in the gold sector, which is
expected to continue on the back of firm orders and an increased
machine population; exposure to a diversified portfolio of other
commodities has added some resilience.
Revenue and operating profit for the period improved from the
prior year (in USD terms), predominantly driven by mining sales in
both surface and underground mines. The operating margin was
somewhat higher than the prior year driven by margin improvement
across selected product lines. South Africa's weaker rand had a
positive impact on operating profits. The significant weakening of
the Rouble in February and March on the back of the decline in oil
prices and the COVID-19 crisis has negatively impacted the
performance for the period and is expected to drive a higher
effective tax rate, reducing anticipated returns.
The total Russian firm order book as at the end of February
amounted to USD79,1 million.
Similar to southern Africa, close collaboration with Caterpillar
enabled the business to minimise supply chain risks and disruptions
where possible. Travel and work restrictions are expected to
increase the strain on global supply chains and business activity
disruptions. Our operations currently remain open in each region,
parts warehouses and service centres are operating, and we continue
serving customers at their sites. Mitigating measures are in place
to ensure equipment maintenance and repairs are not materially
affected.
Austerity measures in place include a freeze on further
employment, reduction in operating costs and postponement of
non-essential capex. We are also taking proactive measures to
actively control working capital investments. These measures will
be revised and adjusted accordingly by balancing business growth
opportunities with maintaining a healthy balance sheet and ensuring
sufficient liquidity.
Gearing and liquidity
Our current debt covenants (excluding IFRS 16) are as
follows:
- EBITDA to gross interest greater than 3.5 times; and
- Net Debt to EBITDA less than 3.0 times
The Group's gearing levels remain low and well within our
covenants and our Net Debt to Equity (excluding IFRS 16) gearing
target of between 40% and 60%. Furthermore, after considering the
acquisitions of Wagner Asia and Tongaat Hulett Starch and the
execution of the recent share buy-back programme, we retain
significant headroom within these covenants, with Net Debt to
EBITDA of below 2.0 times.
Notwithstanding the strength of the balance sheet there is
increased internal vigilance of our funding position given the
current environment. We have reviewed our current facilities,
including committed and non-committed facilities, as well as the
headroom on the existing medium term note programme and modelled
several operating scenarios including the impact of the announced
corporate activity on the Group's position over the next 18 months
and we are confident in our capital structure.
At 29 February 2020, the Group maintained a very solid cash
balance of R5,1 billion. The Group's net debt position (excluding
IFRS 16) has increased to R4,4 billion in line with operational
cycles. Our headroom on committed facilities for both the local and
off-shore operations remains strong at R7,2 billion. We also have
headroom on non-committed facilities of R3,1 billion and remain in
contact with our various banks to ensure that these remain in
place.
With the strain in the local economy coupled with the impact of
COVID-19, we expect working capital absorption at the end of the
interim period.
Share buyback programme
During the period, the depressed market conditions created an
opportunity to deliver shareholder value through a buyback of the
Group's shares on the open market. Between 5 February 2020 and 16
March 2020 a total of 18 245 058 ordinary shares, amounting to R1,6
billion, were repurchased representing 8.6% of the ordinary shares
in issue at 1 October 2019.
Update on acquisitions
Wagner Asia
Barloworld entered into sale and purchase agreements in respect
of Wagner Asia Equipment Mongolia on 31 January 2020. The
transaction was expected to close on 1 April 2020. However, due to
the current COVID-19 travel restrictions we are unable meet certain
closing undertakings and as such the transaction is expected to be
delayed. The long stop date is 31 October 2020.
Pleasingly the border with China has been re-opened on a limited
basis and miners are recommencing production. The equipment
acquisition is a demonstration of the continuation of the
Barloworld expansion of its footprint in emerging markets and will
provide a strong platform for ongoing growth in the region. The
business is expected to benefit from the recent capital invested
into aftermarket service and repair capability which is expected to
enhance parts and service revenue.
Tongaat Hulett Starch
Barloworld entered into a sale and purchase agreement in respect
of the acquisition of Tongaat Hulett's Starch Division ("THS") on
28 February 2020. The transaction is regulated in terms of Section
112 of the Companies Act 71 of 2008 and remains subject to the
fulfilment and/or waiver of objective conditions precedent as were
set out in the SENS announcement dated the same day. It is
anticipated that the transaction will close in the fourth quarter
of 2020.
THS is a defensive, cash generative business with a blue-chip
client base that includes global multinationals operating across
Africa. This acquisition of THS will create a fully integrated and
scalable food, beverage, and industrial ingredient solution
vertical within Barloworld. THS allows Barloworld to take advantage
of the defensive nature of the consumer food ingredient sector and
will diversify the Group's business mix positively alongside the
capital intensive businesses in the rest of the Group.
Future growth in THS could be achieved through increasing the
geographic distribution and product mix coupled with its
competitive cost position relative to international peers.
Incremental efficiencies are expected to be realized once it is
part of the Group, driving increasing market share in the higher
margin modified starch products range.
THS continues to perform in line with expectations and is
regarded as an essential service in terms of the Government's
published COVID-19 regulations. The business will continue to
operate during the lock down period.
Outlook
The COVID-19 outbreak is weighing on general sentiment, with
escalating concerns over its negative impact on global growth and
commodity prices. The environment in the markets in which we
operate is therefore expected to remain weak and volatile in the
short-to-medium term.
Management remains focused on cost containment and driving
operational efficiencies to further improve returns whilst
continuing to pursue the Group's communicated strategy. Management
and the board also continue to evaluate the overall portfolio in
line with changing long-term global trends and will carefully
consider the changes required to ensure long term sustainable value
creation.
We are nevertheless excited about our pending acquisitions and
remain confident in the long-term prospects for the Group.
Shareholders are advised that the financial information
contained in this announcement has not been audited, reviewed or
reported upon by Barloworld's external auditors.
On 27 March 2020 Moody's downgraded the Government of South
Africa's long-term foreign-currency and local-currency issuer
ratings to Ba1 from Baa3 (negative outlook). We are awaiting the
outcome of our credit review process from Moody's which we expect
to take place in the coming days. We will issue a SENS in this
regard as information comes to hand.
Please refer all investor relations queries to:
Zanele Salman - Head of Investor Relations
bawir@barloworld.com
+27 11 445 1000
Sandton
30 March 2020
Sponsor
Nedbank Corporate and Investment Banking, a division of Nedbank
Limited
About Barloworld
Barloworld is a distributor of leading global brands with
corporate offices in Johannesburg (South Africa) and Maidenhead
(United Kingdom), providing integrated rental, fleet management,
product support and logistics solutions. Established in 1902 in
South Africa, we are one of the country's oldest companies.
Inspiring leadership, a reputation for ethical conduct, innovation
and a commitment to giving back have ensured Barloworld's longevity
over the past 117 years. The core divisions of the Group comprise
Equipment (earthmoving equipment and power systems), Automotive
(car rental, motor retail, fleet services, used vehicles and
disposal solutions) and Logistics (logistics management and supply
chain optimisation). The brands we represent on behalf of our
principals include Avis, Audi, BMW, Budget, Caterpillar, Ford,
Mazda, Mercedes-Benz, Toyota, Volkswagen and others.
Forward-looking statements
Certain statements in this document are not reported financial
results or historical information, but forward-looking statements.
These statements are predictions of or indicate future events,
trends, future prospects, objectives, earnings, savings or plans.
Examples of such forward-looking statements include, but are not
limited to, statements regarding volume growth, increases in market
share, exchange rate fluctuations, shareholder return and cost
reductions. Forward-looking statements are sometimes, but not
always, identified by their use of a date in the future or such
words as "believe", "continue", "anticipate", "ongoing", "expect",
"will", "could", "may", "intend", "plan", "could", "may", and
"endeavour". By their nature, forward-looking statements are
inherently predictive, speculative and involve inherent risks and
uncertainties, because they relate to events and depend on
circumstances that may or may not occur in the future.
If one or more of these risks materialise, or should underlying
assumptions prove incorrect, our actual results may differ
materially from those anticipated. There are a number of factors
that could cause actual results and developments to differ
materially from those expressed or implied by these forward-looking
statements. These factors include, but are not limited to: changes
in economic or political conditions and changes to the associated
legal, regulatory and tax environments; lower than expected
performance of existing or new products and the impact thereof on
the Group's future revenue, cost structure and capital expenditure;
the Group's ability to expand its portfolio; skills shortage;
changes in foreign exchange rates and a lack of market liquidity
which holds up the repatriation of earnings; increased competition,
slower than expected customer growth and reduced customer
retention; acquisitions and divestments of Group businesses and
assets and the pursuit of new, unexpected strategic opportunities;
the impact of legal or other proceedings against the Group;
uncontrollable increases to legacy defined benefit liabilities and
higher than expected costs or capital expenditures. When relying on
forward-looking statements to make investment decisions, you should
carefully consider these factors and other uncertainties and
events. Forward-looking statements apply only as of the date on
which they are made, and we do not undertake any obligation to
update or revise any of them, whether as a result of new
information, future events or otherwise.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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