Datatec Ltd Sa Unsp/Adr

Good morning and welcome to our FY26 interim first half results. As per our usual format, I'll be providing a summary followed by the CFO's presentation on the financial results and then followed by my operational review of the divisions and finally the concluding slides. Our results summary. Slide 4. We had an exceptionally strong H1 performance. All the group's divisions delivered strong year-over-year increases, with higher profits, better margins and good working capital management. These results translated into a staircase of improvement down the P&L, with strong operational leverage. Gross sales grew by 9%, gross profit close to 12%, adjusted EBITDA by 22% and underlying earnings per share jumped by 43%. The strong profit improvement and enhanced dividend payout ratio from last year led to a significant increase in our interim dividend up from 4.3 to 10 cents US dollars, an increase of 133%. As seen with the reporting of many tech companies, an AI-led generational upgrade to more advanced computing is beginning. It is hard to predict how long this will take or what impact it will have, but if it's like previous technology cycles, it will be evolutionary and take time to mature. The ubiquity of AI will eventually augment all uses of technology and will drive faster networking, distributed data centres, more local computing and increased cyber threats. If we can continue to adapt and operate in the right areas of our industry, then the future is very bright for all our businesses. The profitable progress across our divisions is well anchored and the fundamentals are strong and sustainable. A remarkable transformation in our business mix. Not so many years ago, the vast majority of what we sold was mainly hardware with attached services driving just over 10% of the total sales. Today, that ratio has completely turned around. with over 70% of our total sales or gross invoice income derived from software and services, while the vast majority of that is also recurring. As the businesses grow in a predictable way, so do the margins and profits as the leverage rises. We believe we are very well placed to continue to ride the core technology trends that we have long been associated with. I will hand over now to Ivan to go through the financial section.

Thank you Jens and good morning everyone.

We are very happy to present another set of excellent results with continued strong operational execution. As we indicated in our trading update issued earlier this month, With effect from this financial year, we have changed the definition of underlying earnings per share to further align to our adjusted EBITDA definition and to also align with peer reporting. Underlying earnings per share now exclude IFRS 2 or share based payment charges. The comparatives have accordingly been recalculated. Slide 8, the P&L. Revenues continue to be impacted by an increasing portion of software and services being accounted for on a net basis, including as a result of the accounting policy change in Wescon in the prior year. Revenue from sales arrangements where the company acts as an agent is accounted for on a net basis and the commission or gross profit earned on the transaction is recognised as revenue. Where the company acts as a principal in the transaction, the revenue is recognised on a gross basis. To get a sense of the real growth in the business, we therefore now show gross invoiced income or gross sales, which is not an IFRS term. Gross invoiced income grew by 9.4%, but more importantly, absolute gross profit grew by 11.7%. We had strong operating leverage with adjusted EBITDA growing by 22%. Reported EBITDA grew by 36% and included $15 million of settled tax litigation credits in Westcon, which are excluded from adjusted EBITDA. Finance costs were significantly lower than the prior year due to lower rates and efficient working capital management. Our quality of earnings down the P&L continued to improve. Our PBT increased by 92%, with an increase of 43% in underlying earnings per share, and HEPs more than doubled. Slide 9 shows the segmental income statements. This shows very pleasing improvements in gross profit to EBITDA conversion ratios in both the Logicalis businesses, with a steady state in Wescon. All three divisions had solid operational execution during the period. Slide 10. The geographic mix of our businesses has remained relatively stable year on year, with Europe representing about half of the group. we have once again seen an increased contribution from Asia Pacific. Fundamentally, our business involves selling US technology complemented by local services. Over 90% of our business is outside the US. Slide 11. Software and services continue to grow, driven by growth in annuity business. This analysis is presented on a gross invoiced income basis. Slide 12, the group balance sheet. The balance sheet remains strong. Net debt reduced significantly from the first half last year, driven by tight working capital management, with large reductions, especially in the two logicalis businesses. Equity reduced due to a $73 million debit cash flow hedge reserve in Westconn. This resulted from Wescon's hedge accounting program and is due to the much weaker US dollar prevailing during the first half. Slide 13 shows the divisional balance sheets and all the divisions have healthy balance sheets with strong liquidity. Slide 14, the cash flow statement. Despite the high growth during the period and resulting increased working capital requirements, especially in Wescon, operating cash generation improved over the prior year. Cash interest payments reduced and we saw an increase in cash and cash equivalents compared to the prior year's first half. We have declared an interim dividend of 10 US cents in line with our dividend policy. I will now hand over to Jens to cover the remainder of the presentation.

Thank you, Ivan.

Starting with the Westcott International Division, slide 17. All regions had robust sales growth. Demand for cybersecurity continues to climb in a continually increasing threat landscape environment. The strong financial performance and working capital management is delivering good cash upstreaming to the parent. Operational execution remains excellent and the levels of service to customers and employee satisfaction are very high. The company has been certified in 27 countries by the Great Place to Work organisation. Grossed invoiced income or total sales grew by close to 10%. This healthy improvement came with continuing faster growth from recurring revenues which grew by over 17%. The trend of growing recurring sales continues as hardware as a percentage of the total sales is now below 30%. Illustrating this point is the greater proportion of software in the mix. This shows that while gross invoiced income continues to rise, so does the element of net accounting. There was healthy volume growth in all regions reflected by growth invoiced income, while reported revenues remain similar. Asia Pacific and the Middle East and Africa had the highest growth rates. Growth Invoice Income Analysis Both business units grew The ComStore Cisco segment grew by 2%, while other technology sales from mainly cyber security vendors, represented by the Wescom brand, grew by 14%. The main customer base of SMB value-added resellers remains the majority of the business and has been very constant. There was an increase in sales to large global major telco service providers. All technology categories grew in absolute terms, but cyber security continues to grow the fastest and now drives more than half of the token sales. The cyber security category grew by 16% year over year. Software and services now represents over 60% of the mix and hardware less than 30%. This is a significant change to the segment sales mix and a complete reversal from a few years ago. Gross profit. Gross profit grew by 14%, significantly more than the increase in gross invoice income. This was almost entirely due to the release of various tax claim provisions that had been held previously. Adjusted EBITDA. This represents the true underlying trading picture and grew by 7.3%. In the early part of H1, there was a fairly abrupt weakening of the dollar. On a translated basis, this raised the US dollar's stated fixed cost base, especially in Europe, where all the costs are in euros and pounds. The impact of this was offset by good EBITDA growth in Asia Pacific and the Middle East. Europe continues to drive the majority of the total EBITDA. Reported EBITDA was boosted by the unwinding of previously accumulated tax provisions. The company has always taken a conservative approach in this regard and creates a buffer for potential tax claims, if likely. EBITDA increased by $20 million, or almost 30% overall, to $90 million. Working capital management. Overall net working capital days fell slightly since year end but more significantly compared to the prior half year. Payables outstanding and payables days rose driven by the strong top line growth and longer managed creditors arrangements. This flexibility helps drive business opportunities and reduces the working capital. debt cycle. The working capital movements are represented graphically in this monthly chart which shows the last three years of debt cycles. Debt falls at the end of financial quarters and especially at the half and full year end but then rises in between these periods with January being the peak. The plotted average of this over the past three years has been net debt of approximately $260 million. The environment remains robust, with the business locked onto multiple positive themes across all its markets. Many technology areas are being fuelled by accelerated AI demand. Cybersecurity remains one of the fastest growing segments, while a new generation of networks is evolving to provide connectivity to vast hyperscaler communities. While there may be challenges to global trade, from tariff imbalances and supply chain lead times, this appears to be of little consequence to technology demand, which remains very vibrant. Moving on to the Logicalis segment. And firstly, Logicalis International. Slide 30. Good top line and revenue growth. There was a strong order book with good momentum with multi-year contracts. Growth in higher margin recurring sales and much better profitability, cash conversion and reducing debt. Overall, the leverage in the business model is coming through. Growth Invoice Income There was strong growth in Growth Invoice Income as total sales grew by over $100 million or 11%. As a percentage of the total sales value, the recurring element is now over 60% of the total. The increases in grossed invoice income and reported revenues were spread across all regions. Europe and the US are similar in size. However, the US has a greater net accounted software and vendor resold maintenance proportion. This explains the delta to reported revenue. Cloud delivered and hybrid solutions requiring managed services were the fastest growing segments. The segmental analysis at the top line shows all service types combined are now over 70% of the mix and annuity managed services forms approximately half of that. Managed services grew by 17% to become 35% of the total mix, and cloud-derived sales grew 17% to represent close to a quarter of the grossed invoice income. Gross profit. The gross profit percentage increase was slightly higher than the rise in gross invoice income. resulting in another uptick in gross margins to close to 30%. These best-in-class margins reflect the multi-year transition from what was mainly a product supply business to now a technology and many services provider. Adjusted EBITDA The expanding margin dynamic reflects coupled with controlled operating expenses, drove a big jump in adjusted EBITDA of 36%. We are approaching the high end of the EBITDA margin zone targets we set out a few years ago, and we are now targeting gross profit to adjusted EBITDA conversion of over 30% from the 29% today. Reported EBITDA mirrored adjusted EBITDA rising 37%. All regions had strong growth with the US driving the largest contribution of around 50% of the EBITDA mix. EBITDA margins still have the potential to go higher as previous loss-making or low-profit countries such as the UK and South Africa are performing better now and with much improved profit trajectories. Inventory is structurally lower, driven mainly by less hardware and more software in the mix. Strong sales growth in the period increased accounts payable. Good collections on the debtor's side kept accounts receivable at a constant level. The overall cash generation was strong, leading to a big drop in net debt to $24.9 million. Cybersecurity is becoming an increasingly important area of focus and growth opportunity. The path of networking is increasingly interwoven with cybersecurity, for example. Cisco's recent purchase of Splunk and Palo Alto's acquisition of CyberArk just illustrate how these major technology areas are overlapping. AI will fuel more of this and is also driving a resurgence in enterprise computing, with many more hybrid cloud solutions being adopted. All of this is driving more software and services. Lastly, Logicalis Latin America. Slide 40. Finally, a positive pivot for the business after a few years of poor performance and necessary reorganization. Areas of concern remain, such as Mexico. Overall, the region has done better, with Brazil, the largest market, leading the way and with recent improvements also in Argentina and Chile. Better gross margins, lower operating expenses and improved cash generation resulted in a much better quality of EBITDA and profits. Grossed invoice income. Grossed invoice income was flat year over year. However, within that, the recurring element grew by 20% and is approaching half of the total sales value. This shift has occurred with a growing and more diverse customer base, and with an increase in multi-year managed services contracts. The region of NOLA, northern Latin America, was poor, mainly dragged down by Mexico and Colombia. Tariff uncertainties and execution issues have been more impactful in that region. Brazil and southern Latin America performed much better and combined were almost 90% of the total revenue. The growth in reported revenues came from the increased annuity managed services contracts which are gross reported. Managed annuity services have risen faster than anything else and are a reflection of more longer duration contracts. Overall, hardware and software sales remained pretty similar. There was good growth in the small but growing cloud segment. Gross profit. The quality of gross profit improved mainly from Brazil to $51 million in total. The gross margin percentage ticked up slightly from 22% to 23%. Adjusted EBITDA A very pleasing result down the P&L. Adjusted EBITDA doubled to $12 million, a meaningful bounce back from the past two years' poor performance. The combination of better gross margins and lower operating expenses provided the leverage. Reported EBITDA At a reported level, EBITDA also rose to $12 million. The prior year's base was slightly higher due to the inclusion of positive tax items. Working capital management. The more diversified business model has grown the number of enterprise customers and is less reliant on large telco clients. The result is a better balance of diversified receivables with less lumpy revenue streams. The working capital management was excellent and led to a modest positive net cash position at the half year end close. Overall, a very pleasing set of results. Many things are getting better, but a lot still has to be done. The focus on diversifying the business is starting to work, with better margins, longer term contracts and improving cash flows. Mexico needs to recover and attention is being focused there. We have confidence that the overall execution will continue to improve. Additions to the executive team are having a positive impact. And finally, just moving on to some closing remarks. To summarise, we expect the robustness of the first half to contribute well to the full year. We seasonally have a stronger performance in the second half. The AI momentum underpinning the rebuild and upgrades for technology infrastructure is no longer just focused on hyperscalers, but increasingly moving to enterprises and most businesses. We remain focused on maximizing the value to shareholders and for the benefit of all our stakeholders.

Thank you very much and I'll hand over now to any questions.

We've got our first question from Catherine Thompson from Edison. You mentioned better GP to EBITDA conversion in Logicalis International. Could you summarize the target for each division or group for this metric?

Yes, I can take that. Obviously we operate in a universe of other publicly traded comparables so this is not necessarily just a benchmarking driven from our own extrapolations. And we think to get to the right balance between growth, EBITDA conversion and absolute EBITDA dollars, that these ratios should be in the low 30s, in the low to mid 30s. They're slightly higher in the distribution business where the operations are less people intensive. And in Logicalis and the broader IT services universe, best-in-class competitors are generally around 30% or mid-30s. And by the way, on that point, gross profit to EBITDA conversion, it's become, it's always been an area of focus, but it's something we report on because obviously the changing top line with the way that we IFRS revenue... The way that we report revenue and with sort of more revenues being net account and net account at your EBITDA margin becomes less and less relevant and it's more...

Sort of the absolute gross profit that you generate, i.e. the dollars you bring in the door, and then how much of that converts into EBITDA, which demonstrates the operating leverage. Yeah, exactly.

We have another follow-up question from Catherine Thompson. Could you give a bit more detail on the Logicalis International multi-year contracts, verticals, geo and type of business?

Well, we have managed service contracts. They're not geographic. They're spread... This trend towards more managed services and Logicalis is not country specific. So it's most probably similar in most regions. There is a slight difference in the amount of software that's sold in some regions versus other regions. And in the US, for example, there's a higher mix of vendor resold maintenance. So you see the difference between gross invoice income or let's call it top line sales and reported revenues that difference is greater in the US than in other markets but other than that there's not any particular sectorial or geo reasons for managed services growth. It's really more the driving factor is customers are increasingly looking towards their IT provider to provide them with both infrastructure and the service of that infrastructure on an ongoing basis of OPEX not versus CAPEX. That's the big driver.

Next question from Ron Cook, Coronation Fund Managers. Do you expect further improvements in the working capital cycle across any of the segments as mix changes? What impact will that have on your free cash flow generation?

So, Ruan, I think the most important thing here is with the move towards more software, you will have less inventory, less physical inventory. So that clearly has some working capital benefits, especially in the Wescon business, which is our most working capital intensive business. That said, as a distribution business and a channel intermediary, Wescon is still a major credit provider in that supply chain, and typically with a distribution business, when the business grows strongly, you typically have sort of large cash outflows as you invest in your working capital. But I would say in general the quality of our working capital management has improved significantly compared to previous years. It's a lot more efficient. And you can also see that from looking at the operating cash flows that we had during the six months period that we're reporting on now, because despite the very strong growth, we still had a very decent operating cash performance. In the logicalis businesses, which are generally less working capital intensive, one would expect that the bulk of your operating profits would essentially convert into cash.

Okay, next question from Mike Steer. Do you expect the increased share of software and services to continue or do we eventually see a hardware refresh cycle?

Yes, good question. Look, there is a hardware refresh. There's two sides to this. There's going to continue to be a relentless rise of more software and services in the reported mix. But the reality of the hardware that's being shipped when measured in hardware processing capacity or other physical metric is going up as well. What's changing is the value that's apportioned to the hardware is going down and the value that's apportioned to the software or the intellectual property is going up. So that's changing our invoice value mix. The hardware, and we're seeing, to be honest, we're seeing a bit of a resurgence in hardware in the numbers that we're reporting. And this is what you hear about all the time in terms of the AI infrastructure boom and so on. That's ongoing, and we think that's going to be a multi-year play from here on in or here on out.

Next question is from Catherine Thompson again. Should we expect your M&A strategy to continue to be focused on small bolt-ons rather than anything more transformative?

Yes, we haven't done much M&A in any of our main divisions in almost the last 10 years actually. And where we do do M&A, we look to... basically augment our fairly mature businesses normally through skills acquisition or there's an area or domain, a technology domain where we think we can advance faster through M&A versus doing it organically. I must also point out that you know since our results in good results in May and continuing with we continue to be inundated with bankers and would-be investors with inbound inquiries selling buying so it can tell you it just tells you the environment at the moment has bounced back quite a bit in terms of M&A activity and of course we think that will most probably continue to you know fuel fuel things going forward

There are currently no other questions.

Great, well thank you very much everyone for attending online here and we look forward to seeing you, talking to you rather, at the full year results in May. Thank you very much.