Wrap Text
Pre-close voluntary operational update for the five months to 29 February 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.
Date: 30-03-2020 07:55:00
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