Remgro Ltd Ord

Good day ladies and gentlemen and welcome to the Remgrove Limited Annual Results presentation. All attendees will be in listen-only mode. There will be an opportunity to ask questions when prompted. If you should need assistance during the call, please signal an operator by pressing star and then zero. Please note that this event is being recorded. I would now like to hand the conference over to Mr. Yanni Durant. Please go ahead sir.

Good morning everybody. Welcome to our final results presentation for the year ended 30 June 2024. Before we go into the details of the results, as has become more regular practice at Remgrove, today's presentation will be a bit longer to give time to actually give more underlying information about our unlisted investments due to the shift in our portfolio from listed to a largely unlisted portfolio. Just to give you an outline of the presentation today on the contents, What will happen, firstly, I will give an overview of the salient features of our results for the year under review, and I'll give you also then a recap of the strategic priorities that we've discussed at previous meetings, and they remain largely consistent with those communicated at our previous presentations. Then I'll also do an assessment of how we actually think we fared against these strategic priorities and how we delivered on them. Then I'll ask Carl Forsler, who has oversight of our investments, to go into more detail especially about things like capital allocation and disinvestments, that you probably will have some questions on that as well. Thirdly, our CFO, Neville Williams, will unpack in more detail our results for this financial year. Then, in keeping with the new format, we will then give some of our underlying investments more exposure, especially Mediclinic, CIVH, RCL Foods. The CEO of Mediclinic, Ronnie, together with Jurgens, will then speak about Mediclinic, the operating context, the results, and the strategic priorities. Thereafter, I will ask Peter Ace, who is the chairperson of CIVH, to do the same for that company. And finally, Paul Krushenk, who is the CEO of RCL, will highlight some of the key results that RCL reported on the 2nd of September. I will then wrap up the presentation by looking at our key areas of the focus going forward, and then we'll open the floor for questions. As you can see in this slide, we talk about a challenging backdrop, but with pockets of improvement. Yes, we should look at the results and the drivers hereof, many of which are situation-specific, but it's always important to consider the broader macroeconomic context in which the business operated over the last 12 months. We have always been transparent in highlighting the macroeconomic challenges of the past year and a half, and the resulting impact on some of our investee companies. Many of these challenges remained for the year under review, in some instances also increased by the volatility experienced in the lead-up to the national elections in May 2024. However, we're starting to see some green shoots on the macroeconomic improvement side. Lower inflation, fewer incidents of load shedding, and the reduction in fuel prices This, together with the establishment of the government of national unity, has seen an improvement in the global investor sentiment towards South Africa. We can see that on the JSE, especially in the pickup in some of the share prices there. Also, you've probably seen all last night with the cut in interest rates on the Fed, and hopefully South Africa will follow that as well. A bit more on the bearish side also, if you look at, I'm a bit worried about some of the geopolitical tensions in the world, especially what's happening in Israel and the Gaza Strip there, with pages getting blown up and walkie-talkies getting blown up, so it's not a great picture to see that and read that in the news. I think if you look especially at the U.S., asset prices are at a near all-time high, so that can be a concern, but hopefully the reduction in the interest rates will actually give a support basis to some of these asset prices. Let's go then to the results for the year under review. I think when you recall when we presented our interim results, I said that those were probably one of the more challenging set that I've delivered in a long time. While the second half of the year has seen some improvements, we are still delivering an unsatisfactory set of results for the year under review. Headline earnings decreased by 20% from just over $7 billion to $5.6 billion, while headline earnings per share decreased by 18.8% from $12.54 to $10.18. The difference of 120 pips in the headline earnings per share measure compared to the headline earnings for the prior year actually just represents the creative impact of shares repurchased during the 2023 financial year and at the beginning of this year under review. We have, however, increased the final dividend by 15%. So if you take it on a full year basis, it's 10% increase in the total dividend. And that is due to better than expected cash earnings at the center and much better improved performance over the second six months of our results. A significant driver of the decline in our headline earnings for the full year relates to effect of non-recurring items as the results of the corporate actions implemented in the recent past. This affected the first-half performance especially and was communicated to the market during our interim results presentation in March. The difficult operating environment, which had a significant impact on PEF's results in particularly, also contributed to the decline in our headline earnings. Overall, when excluding the impact what I've just mentioned, we saw a muted performance for the full year, with a much better performance in the second six months of the year. Neville will provide more detail around these drivers and the headline earnings numbers in his section later on. The 2024 financial year was a challenging period with a continued focus on concluding and integrating a series of transformative corporate actions still impacting our results. While strong contributions were made by some of Rembrandt's investee companies, a lot of work still needs to be done to bear down the operational performance of a number of our key investments. However, There were some improvements. We are pleased with the following positive achievements. There are strong performances from Alturance, Total Energies, Air Products, Siqualu, and RCL, as well as Rainbow. Progress on implementing some of the strategic shifts at RCL, including the separate listing of Rainbow, was also done. Post this milestone, we are excited about the prospects for both of these companies. Measured progress on reducing non-core assets and leverage at the center was done, the details of which will be expanded later in the presentation. There's also some encouraging progress on our new shareholder partnerships in our core assets, laying the foundation for strong future performance. However, we must also acknowledge the negatives. Offsetting this positive momentum was intolerable execution timeframes on corporate actions that dilute operational focus. For example, if we take the Vodacom CABH deal, it's a perfect example. It's not just the regulatory cost involved, but as well as the opportunity cost as well. Nearly three years since we've actually announced a deal, and we still haven't concluded. It's still sitting in front of the tribunal as we speak, but Peter will elaborate on that later. Losses at INBEF, which we need to all work hard to recover, but I'll unpack that further in much more detail to give you a flavor of where we're standing with INEC and Integrations. The endearing tough operating environment for Iceland and Switzerland is also something that bothers us, and intensive and deliberate efforts are underway to improve the operations. As I noted on the previous slide, many of these issues are situation specific, which while disappointing, means that we are able to identify and implement remedial actions. This is where a large portion of our time is focused, and we will remain committed to the portfolio repositioning and optimization, as you can see in what we've done in the past year. Even as the current unsatisfactory performance, especially the first six months, overshadowed continued progress on some of our key strategic initiatives, we are seeing great potential in the portfolio over the longer term. I think the second six months also is already testimony to this. I will now go back and recap on our strategic priorities on the next slide. For the last two result cycles, I talked about our key areas of strategic focus in the medium term. This slide revisits those priorities and outlines what we believe is a candid assessment of our own performance against these priorities. It is important to re-emphasize that the execution of these strategic priorities is not a binary target, but an ongoing journey. Our portfolio optimization efforts, including the execution and embedding of our various transformative corporate actions, has required significant integration work, and we are satisfied with the progress that has been made in this regard, although there were some unforeseen challenges along the way. Good strides have been made in our sustainability journey, with more detailed targets set and greater disclosure, and you will see some of this in our annual report that will be mailed shortly. We are proud of the progress made in our shareholder engagement at the management level as well as at the support level. We've been on two governance roadshows in the past year. This affirms our commitment to making sure that there is sufficient disclosure given of our unlisted assets. We still consider this to be in progress as we have yet to achieve the standard we set ourselves. I've also previously spoken to our focus on driving performance at our investee companies. This is receiving greater attention with a structured approach in place, especially as some of these companies need detailed attention and turnaround plans. A much more active approach in dealing with our investee companies has been followed. Let's pay some attention on embedding some of the transformative corporate actions that are underway in this slide. Firstly, to recap, As previously mentioned, the preceding financial year was characterized by the execution of our various corporate actions. Post-execution, the focus shifted to integration, optimization, and the unlocking of value, depending on the individual needs of the assets. Accordingly, much of our focus has been on meaningfully embedding our newly unlisted assets into the overall portfolio, thereby enabling us to drive performance and generate returns. During our interim results, we spoke in detail on what the post-transaction execution process for Heineken beverages entailed. I will give an update in the next slide on where we are on this. As I sit on the Heineken board, I'll probably be the best place to explain the strategic thinking behind the deal and the way forward. After that, Ronnie will speak about MediClinic's journey and their progress, and Jurgens will touch on the financial performance of the company. He will also give an eye-level update on the outlook for each division for the remainder part of the year. Later on, Paul will talk to the implementation of their strategy at RCL. These three investments remain significant contributors to RemGrow's portfolio and their respective strategies and have continued to be a collaborative effort between us, our partners, and the management teams. This collaborative approach harnesses the power of our partnerships and we remain excited about the potential of all of these three companies. As I mentioned earlier, the CIVH Vodacom transaction is still in process and subject to regulatory approval. Peter will speak to the specifics on the process later in the presentation. Let me then go to on the Heineken and where we're standing on the Heineken beverage transaction and the performance of the company. As previously reported, the underlying performance of Heineken Beverages for the year under way was severely impacted by the highly disruptive period of integration inherent to a merger of this nature and extent. This integration phase is however now largely completed and the business is well positioned to capture new growth opportunities in South Africa and their relevant markets in Africa. The Synergy's extraction is on track and we are starting to see some green shoots on the beer performance as well. If you look at this slide, where we are now in Phase 3, we've completed really Phase 1 and Phase 2, and which is critical in delivering our investment thesis. We need to drive growth and to make sure that we don't score own goals as we have done more in the recent past. This company is poised for growth, and we believe really in the growth going forward, although it's a very competitive environment. If we reassess on the next slide the performance of Heineken over the last 12 months, During the first six months, it was actually severely impacted by low industry growth in general, a constrained consumer environment, load shedding, which has significantly affected the trading hours for the main market outlets. This has driven demand to retail, where there's increased competitor activity because of the volume shift. There has also been a shift from premium to mainstream beer due to affordability issues that impacted Heinbeck's Einbev's portfolio being over-indexed in the premium sector. In addition to this, we also scored some own goals. Einbev also implemented pricing ahead of the industry, resulting in a negative impact on volumes and market share. In addition to the wealth, margins were also negatively affected by non-recurring expenses relating to the integration and supply chain, as well as import that increased the margin contractions. importing beer at a loss is never a good strategy, as I've said, in the first six months. If we look at the first-off performance to December 23 that we discussed previously in our previous results implementation, some of the issues that have been resolved is this once-off expenses were once-off and they didn't occur again. The majority of these expenses I've explained were incurred in the six months ended 31 December 2023, and these operational issues have now been resolved. I think the unresolved issue, and one issue that probably will never be unresolved, is that it's always going to be a challenging competitive environment. If you compete against the big guerrillas in this industry, it will always be competitive. As mentioned, INB's portfolio always still remains over-indexed in the premium beer sector. Management focus on portfolio optimisation is however gaining momentum and good work is currently being performed in this space. If we look at the second half performance to June 24, the non-beer portfolio has really outperformed the market. Both Savannah and Bernini continued their strong momentum, while 5th Street and J.C. Leroux continued to provide strong growth support for the rest of the portfolio. The beer portfolio remains under pressure until the end of June. INBEF has implemented various measures to restore both market share and margins. As I explained during the interim results presentation, the Heineken 650ml returnable bottle was launched in 2024, quarter one, and this provides a much more affordable yet cost-effective consumer proposition. This initiative is critical in securing the presence of the brand in key channels where the brand was previously underrepresented at. Although this comes with a substantial capital requirement, it will vastly improve the profitability of Heinbeff due to margins when compared to non-returnable bottles. Neville will also elaborate in more detail later on in Heinbeff's performance for the six months ended 30 June 2024. In terms of the management team of the company, they have now settled well and is currently gearing up for the upcoming festive peak season. This is obviously a very important part of the year for the business. as the majority of the profits in the liquor industry is traditionally earned in the latter part of the calendar year. This will be the first peak season after the full integration of the business, and it will be all hands on deck. The things look quite promising at this stage. Together with Heineken, we firmly believe that the transaction was and remains a good capital allocation decision. Clearly, we did not plan for some of the challenges that we have seen since the transaction was concluded, But even considering that, the investment features remain as strong as it was at inception. Einbev, with its multi-category portfolio of strong brands for all consumer occasions, combined with a scale to unlock efficiency, present a very strong platform for sustainable future growth. We can already see the benefits of that in the rest of Africa, and hopefully South Africa will follow soon. What I will do now is to hand over to Carl to go into more detail on some of the thinking on capital allocation framework and what progress has been made in delivering against this framework in this financial year.

Thank you, Yanni, and good morning, everyone. Yanni has mentioned on the strategic priorities that capital allocation is one of our most critical functions in our business, so I hope to shed a bit more light on how we think about the sources and uses of capital and We are, on the left-hand slide, going to unpack the sources of capital almost in the order of how we think about the first port of call to the last port of call, if you like. So it starts with investment income. This absolutely needs to be the engine room of our capital allocation process. This is the regenerative part of our capital base. So we really need to... through growing earnings and growing dividends for that part to be the flywheel that drives the compound returns to our shareholders. You would have heard from Yanni, and you will hear through the rest of the presentation, that we're not entirely pleased with the earnings and dividends that's coming out of parts of our portfolio. That's the area of intense focus for us with our management teams. Neville will also later, when he talks about the results, he'll point to some of the earnings yields and dividend yields And you'll see that some of our bigger investments are not delivering what we're currently expecting. So that's a big area of focus. The second component of our source of capital is divestments. So as much as we think of ourselves as long-term investors, we believe that some velocity in the portfolio is healthy. And we're not only talking about the portfolio assets, which we've always indicated is the component that we would consider sort of dry powder. We even think in the rest of the portfolio some velocity is healthy and we will always consider where there's an opportunity to recycle or have assets or divest of assets that are potentially valuable, more valuable to other people than it is to us. I've got a slide on this later on and I'll go into a bit more detail. The The third component is to use debt or to increase debt. Clearly, we've got a very meaningful amount of gearing capacity at the center, and there's the opportunity to sort of stretch our balance sheet with gearing. We will say that conceptually we believe in optimizing the gearing at the operating company level where it's closest to the cash flows and can be most effectively and efficiently deployed. We do not believe in using aggressive levels of gearing at the top and layering gearing on top of gearing at the NVST companies. Occasionally and typically around M&A situations when there are lumpy cash flows that we need to cover, we will use gearing and then we will obviously prioritize the repayment of that in following years. The last and most expensive source of capital is equity. Again, typically something that we would access for larger lumpy opportunities such as M&A transactions. But we are very mindful that equity is expensive, particularly when your share price is trading at a discount, what we consider the value of the underlying portfolio is. So we will think long and hard before we come to shareholders for equity with our current rating. If we turn then to the uses of capital, And here the order is somewhat more random and sort of depends on the priorities in the year, how we would allocate. But having said that, I will say that the first one, the first component being dividends, is something that we consider a meaningful priority in our sort of waterfall of capital allocation. We don't set our stall to be a high dividend-paying company, but we do believe that a sustainable and remotely predictable dividend is something that's important to our shareholders. and it's something that we prioritize. The second bucket there is investments. It's tempting to say that for an investment firm, the most important use of capital is to make investments. Of course, that's only half true. It's probably even more important to manage those investments and make sure that you generate the returns for your shareholders. So we've got no predefined targets of an amount of capital that we want to deploy every year, We are entirely guided by the quality of the opportunities that we see and the terms at which those are available to us. When we do look at investments, we have a preference, as you know, for unlisted above listed. We look for situations where we've got meaningful influence or control. We like things that can scale or are really at scale. There are certain sectors we understand better than others, and while we might expand those, We will certainly look for sectors where we think we've got value to add. Geographically, we have a strong preference for South Africa, the rest of the continent through our investee companies, and then further afield very selectively and typically with partners. We also have a preference for where we can, organic growth, deploying capital through our investee companies and not paying for other people's goodwill if we can generate it ourselves. But, of course, we are open for all types of growth, organic or inorganic. The third bucket, I've mostly spoken about reducing debt and explained our philosophy there. You will see this year there was a relatively meaningful feature of our capital allocation. And then moving on to the last one there, share repurchases. This is typically a topic of interesting debate with our investors. Also, you'll be happy to hear lots of debate always about it internally. And we will certainly say that we think share repurchases are a very useful tool to amplify returns to shareholders. So we completely get that the math is compelling when you're trading at a sufficiently deep discount to your intrinsic value to repurchase shares. But there's one important caveat to this, and that is that we cannot achieve with repurchases what the portfolio is not achieving organically. So to say that differently – when the portfolio is not delivering the growth and the earnings and dividends that we're expecting, or alternatively when there are uncertainties in the portfolio around corporate actions such as we have with CIBH and the Vodacom transaction, then we will be more cautious and we will preserve capacity to cater for unforeseen adversity. Of course, this is frustrating when these uncertainties take longer to resolve. We understand that it causes a drag on our on our returns, but it is consistent with how we think about the long-term custodianship of our balance sheet. So turning over to how this sort of translated into decisions in the last year. So we allocated roughly 9.4 billion rand of capital in the year. The graph on the left-hand side there shows you that roughly 40% of that 3.8 billion rand came from the underlying portfolio in the form of investment returns. As I mentioned, we think that that could be higher, 3.8 billion or 440 billion rand portfolio. We certainly think there's meaningful scope to improve that. The second component comes from investments realized, so that's 36%, 3.4 odd billion rand. The biggest contributor to that was, of course, the placement of our momentum stake just before the year end after the elections. And then also there was a great realization by our invention team of an asset called Dynamic Foods. Lastly, the roughly quarter that's left was 2.2 billion rand of cash resources that we deployed. And if you combine that 2.2 with the assets that we disposed, the 3.4 odd, then almost all of that excess capital, if you like, we utilised to deleverage the balance sheet. So in total, we repaid preference shares of 4.8, sorry, 5.8, 5.4 of that was capital and the remainder was PREF dividends. So if you stand back, as Yanni mentioned, a relatively meaningful degrossing of the balance sheet and hopefully a more sort of streamlined outcome at the end of the year. The other parts that we Allocated capital, too, was dividends of roughly 1.3 billion. There were taxes, meaningful CGT, other taxes, and some costs of around 1.1. And then a very modest allocation to new business this year or to new investments. That was only 300-odd million. And then Yanni mentioned the completion of the share repurchase that we spoke about last year. So that's not a new repurchase, but we completed that 1 billion rand repurchase at the beginning of the year, and that was around 700 million rand. So if you stand back and then say, well, where does that leave the sort of portfolio composition at the end of the year, it's tempting to say, and we showed you the same picture last year, it's tempting to say that not a lot had changed. Last year we had 83% of the value in our core or managed assets, if you like. Now that's down to 81%. Cash, we had 1%. That's now 3%. Portfolio investments was 11%. Now it's 10%. So it feels like not a lot had changed, but it's the direction of some of those moves that are not pleasing. We certainly – it's not the strategy for us to increase or to decrease the contribution of our core portfolio, but that, as I mentioned, had gone down very slightly. And that is mostly because we reduced the INF of two of our meaningful investments by almost 12 billion rand in total. That's many clinics. and Heinbev, so Neville will talk about the valuations later. So clearly, directionally, we would have expected that to go in the different direction, and the reason for that is the blocks that you see there on the slide. We showed you this last year. It's not an exact science, but we've had requests in the past to try and give an indication of how much of our portfolio do we think sits in a sort of mature cash-generating bucket, how much sits in a growth bucket, and then how much in sort of turnaround or recovery. And you can see there the recovery piece increased during the year. It was 27%. This year we sort of have it up at 30%. And the growth bucket has meaningfully reduced from a third to roughly a quarter. So the biggest reason for that is that CABH, which is an asset that we've got high conviction on, we think it's a trophy asset, But in the last year, it didn't show us the growth that we expect from it. So we've moved that into recovery. And Peter will talk a bit later about the initiatives that we have underway there and also the challenges that they experienced. But we are confident that they won't be there for too long. We are also very pleased with the performance of Rainbow and the turnaround by Martinis and the team of that asset and also confident they will help us to chip away at that 30% and hopefully bring down that number very meaningfully in the future. The last slide I have is just to touch on our thinking, again, Yanni mentioned under strategic priorities, the third one there was unlocking value through divestments. You would have heard Yanni in previous years talk about shortening the tail or cutting the tail. So we thought probably a good place to start is just to define it a little bit, you know, how do we think about the tail or what defines our thinking. And the first point I would make is to say that we consider what an asset contributes to our investment thesis. Is it something that generates cash? Does it generate growth? Does it generate scarcity? So if it doesn't, none of those things for us, we would have to question if it really has a part to play. The second point is in a way related to that, but we acknowledge that size does matter. There's a sort of very amplified Pareto effect on our portfolio. If you consider the managed assets, then fewer than 20% of them contribute more than 80% of the value. So, of course, mine space is limited, so we need to make sure that we spend our efforts on the things that can move the needle. So we are mindful of size. Thirdly, important for us that we that we own assets where we think we can make a difference and we can help unlock value or create value. And then lastly, it might be that an asset ticks all those boxes, but the reality is that it's worth more to someone else than it is to us. And then we need to be able to have a dispassionate look at that as a candidate to divest. Of course, having sort of a conceptual framework for how you think about these things is different to either concluding anything. So maybe just to mention the things that drive timing. For listed investments, relatively easy. You just need to align sort of market conditions and liquidity requirements with your own price and value expectations, as we did for momentum during the year. But in the understood space, it's a lot more complicated. Not only do you need to consider the sort of readiness of the asset and the readiness of the buyer universe, but also the regulatory implementation is typically a lot more complicated and it takes more time. Lastly, I will just say that None of this is black and white. I think we can all acknowledge that some big investments would have also started as small investments, so there will always be a place in RemGrow for things that start small and we nurture and hopefully build into something big, and we'll always have time and mind space to dedicate to those opportunities. It's also true that some small investments offer really good return on effort, and ultimately that's an important metric for us. So it's not, again, it's not that there's no place for smaller exposures. And lastly, to remind people that, of course, our communication on divestments can't front-run the execution. So if it sometimes feels like there's not a lot happening, then, yeah, please bear that in mind. So I will stop there and then hand over to Neville to talk about the results.