“Our key businesses have delivered sound performances demonstrated by improved gross margins over the reporting period. We have made good progress on cost management projects and achieved both our disposal and closure targets resulting in access to cash and a continued simplification of the business.
Our focus remains on further reducing our debt burden and driving cost efficiencies notwithstanding the challenges brought by COVID-19.”
Stephen van Coller, CEO
SALIENT FEATURES FOR THE PERIOD
- Sound performances from key businesses
- Improved gross profit margins
- Strong and improving cash balances
- Stable core revenue and customer base
- Key financial indicators
- Total revenue – R6,354 million
- Gross profit margin – 24%
- Total normalised EBITDA – R405 million
- Total cash balances of R826 million (R950 million as at 2 April 2020)
- Paid R227m in one off costs & settlements in last 6 months
- Gross operating costs down 31.5%
EOH IS 12 MONTHS INTO AN ANTICIPATED TWO-YEAR TURNAROUND PLAN
- Sold over 40 businesses – value of R1,17bn
- Paid lenders R1,5bn in the last 19 months with clear path to further deleveraging of legacy debt
- Collected R400m in long outstanding debt
- Our Real Estate programme is on track to close a further 24 property leases by 2021, having closed 31 leases to date with savings in excess of R70m pa
- Reduced legal entities from 272 to 185 (reduction of 87 legal entities)
- Completed in depth forensic investigation and managed successfully through a highly visible reputational crisis
- Established robust corporate governance structures across the group
- Significant progress in group wide data cleansing initiative and implementation of transparent financial processes and systems
- Stabilised customer base and avoided government and BUSA blacklistings
- Retained key talent whilst attracting further talent
Total revenue decreased 21.8% (continuing 17.4%) to R6,354 million (continuing R4,544 million) when compared to the prior comparative period, mainly as a result of lower hardware and software sales as well as legacy public sector ERP implementation deals not repeated in the current period. The prior period comparative is also skewed by the inclusion of CCS and other businesses disposed of in discontinued revenue. Encouragingly, managed services amongst our core clients remained relatively flat. The slowdown in the economy also contributed to the decline in revenue with EOH’s legacy issues only having a small impact.
Total gross profit margin improved to 23.6% (continuing 23.5%) from 19.6% (continuing 15.8%) in the previous comparable period. This is mainly due to a reduced contribution from hardware sales as well as improved efficiency in the iOCO businesses.
Total operating expenses decreased 31.5% to R2,284 million (continuing R1,596 million) from R3,335 million (continuing R2,778 million) in the prior period, largely driven by lower provisions and write offs as well as cost efficiencies. The group saw a significant decline in impairment losses from the continuing business from R1,334 million in the prior year to R152 million in the current year. These had been necessary as part of the clean-up of the balance sheet in the prior year.
Total normalised EBITDA for the period is R405 million (HY 2019: R675 million) and continuing EBITDA is R280 million (HY 2019: R435 million) as EBITDA losses from non-core business lines reduced to R270 million from R585 million in the prior comparative period largely as a result of improved management of the 8 poorly contracted legacy public sector contracts. The Nextec business normalised EBITDA was negative during the period.
Headline loss per share from continuing and discontinued operations was 395 cents (HY 2019: 827 cents) while headline loss per share from continuing operations alone was 381 cents (HY 2019: 840 cents).
Historically there was a lack of focus on working capital management with large tranches of cash tied up in debtors. During the prior year more than R400 million was realised from the debtors book and balances at the half year continued to be well managed reducing to R2,994 million from R4,125 million at the prior comparative period and R3,145 million at the full year. Trade payables decreased by R447 million over the six month period to R2,558 million as the group did not actively stretch payables over the half year.
Cash generated from operations after changes in working capital was R31 million (HY 2019: R82 million), but needs to be considered in light of the R227 million of one-off payments over the reporting period. Cash conversion of Total Normalised EBITDA, when removing these one off costs and the impact of non-core businesses, is approximately 65%.
EOH is 12 months into an anticipated two-year turnaround plan. Following the reputational crisis of the last financial year, the group is pleased to see stabilisation in its customer base and core revenues. The management team’s highly visible and transparent actions in establishing robust corporate governance structures across the group and further ensuring accountability for past transgressions has gone a long way to avoiding both government and BUSA blacklistings. This investigation is now complete.
The themes introduced at the full year results in October 2019, are retained as a backdrop for the six month period ended 31 January 2020 and comprise:
- Creating more transparency in the business and financials
- Creating a fit-for-purpose capital structure
- Rebuilding credibility through establishing robust governance
EVOLVING BUSINESS MODEL
The business was initially configured into three key pillars, namely iOCO, NEXTEC and IP, as part of an evolving transition of the business to a sustainable future. Further evolution will ultimately see the group integrated into a single ICT business under the iOCO umbrella. Since 31 January 2019 more than 40 businesses have been sold for a value of R1.17 billion or closed across the group and there has been significant traction on the rationalisation of legal entities.
The future iOCO cluster is currently being and will continue to be managed around five core business lines which will be able to execute end-to-end solutions for all clients across the IT spectrum. These core businesses, effectively make up approximately 56% of current total revenue and over 61% of total gross profit.
Nextec comprises a diverse set of businesses across Consulting and Engineering offerings. We have invested considerable time and focus on this cluster, which remains challenging. Following an extensive review, we have made significant progress in differentiating between businesses which we believe to be a strategic fit for iOCO and those which will potentially be liquidated or sold. Once the review process is complete, the Nextec business, which makes up 31% of the group’s total revenues currently, will no longer form a significant part of the Group. More than 47% of Nextec’s total revenue is currently classified as discontinued.
The IP grouping consists of businesses which have developed proprietary software and solutions for customers. These businesses, which contribute 13% of the group’s total revenues, have historically had higher growth rates and better gross profit margins than the other two groupings. A decision was taken to dispose of these assets as part of a strategy to deleverage the business and all but one, Sybrin, which didn’t qualify for the IFRS definition, are therefore classified as discontinued.
CLEAR PATH TO EXTINGUISHING LEGACY CASH DRAINING ISSUES
The current management team has been building the future business whilst simultaneously dealing with reputational issues. Now that these are firmly behind the group, management can focus on additional legacy issues that remain a cash drain on the business and are confident of substantially resolving these in the next 12 to 18 months. They include:
Included in the iOCO business grouping are eight poorly contracted legacy public sector contracts. These are expected to be substantially resolved by the end of the calendar year. A total of R188 million in negative EBITDA from these legacy contracts was added back to calculate Total Normalised EBITDA. This is significantly lower than R370 million reported in the prior period.
A number of EPC contract businesses, destined to be wound down or sold, as well as onerous contracts provided for, contributed negatively for a total value of R84 million to EBITDA and were also added back to Total Normalised EBITDA.
One off settlement costs
EOH cash settled a total of R227 million in OEM settlements, severance costs and disposal and advisory cost during the six-month period. While advisory costs are expected to continue during the next six-month period, these are largely linked to the disposal of assets and most of the meaningful cost in respect of OEM settlements and the ENS investigation are now behind us. A total of R130 million of these costs were added back when Total Normalised EBITDA was calculated.
Driving additional cost savings from legacy overheads, management cost structures, facilities and procurement has been a key focus area for the 2020 financial year. To date we have seen two senior management structures unwound and two are still being consolidated to accommodate the more focused and integrated business.
We have also seen good progress in our property optimisation programme with 45 building exits planned for the financial year, of which 21 lease exits have already been completed. Efficiencies have been identified in procurement and we are fast-tracking the use of centralised approved service providers. We have seen a reduction in employees to ±8,400 from ±10,500 at the end of the 2019 financial year as a result of the disposals completed over the period, retrenchments as well as normal attrition.
We will continue to look for opportunities where further cost savings can be realised and have already identified a further R100 to R250 million in potential savings to be realised by the end of the 2021 financial year, which should significantly improve the cost structure for the business going forward. This is in addition to short-term liquidity measures implemented as part of the COVID-19 response.
Due to the heavy interest burden of the legacy debt, deleveraging the business through disposals has been a top priority for management.
The deleveraging plan with lenders has been adjusted and extended by making the first target date 31 July 2020 to deleverage by R500 million (previously 31 January 2020). The group had deleveraged by R306 million at 31 January 2020 and by R430 million at the reporting date. During December 2019 lenders gave EOH access to R236 million of disposal proceeds originally destined for deleveraging. A total of R125 million of these proceeds had been returned to lenders for deleveraging at the reporting date.
The revised deleveraging plan marginally increases the amount of the total deleveraging to R1,600 million and extends the date for this to be completed to 28 February 2021 (previously 31 January 2021).
Deleveraging continues to rely on the disposal of assets. The larger disposals of Denis, Information Services, Syntell and Sybrin are progressing well. Although the full impact of COVID-19 on these timelines is not fully visible, these processes remain substantially on track.
While only indirectly associated with the deleveraging, the group, is in the advanced stages of implementing a cash management pooling system, which should ultimately improve the efficiency of cash across the group and reduce the carry cost of holding these cash balances.
ETHICAL LEADERSHIP TEAM WITH BROAD SKILLS ACROSS FINANCE AND IT
We are pleased that the group has continued to attract and retain top talent as we build a diverse, ethical and talented workforce. Ensuring that there is a breadth of skill at EOH will enable the development and implementation of solutions that add value to our clients. In line with this intent, the leadership team has been enhanced by the addition of two new members to the Executive Committee with experience in the ICT sector spanning over 20 years each. We now have a leadership team in place with broad skills across Finance and IT. Furthermore, we have retained employees with strong technological expertise to run the various business units and ensure that we maintain our value proposition through the successful execution of our strategy. We continue to explore the right balance of incentives for the organisation.
The right people are also operating within a significantly improved governance, risk and control environment. A number of digital transformation projects saw the implementation of improved systems and consequently improved integrity and quality of information for both financial and non-financial purposes. While there is more to do here, significant progress has been made and the benefits to decision making and understanding of the complexities of the business are tangible.
Subsequent to the reporting date there has been a global outbreak of COVID-19. On 15 March 2020, the President of the Republic of South Africa announced a national state of disaster and on 23 March 2020 a 21-day National Lockdown was announced to run from midnight on 26 March 2020 to midnight on 16 April 2020. These actions are expected to have a financial impact on the group going forward. The core ICT business is classified as an essential service and will continue operating during the lockdown period.
The Group has a COVID-19 management team in place consisting of all the representatives from the executive committee as well as key operational and support functions. The team monitors the situation on a daily basis and ensures that adequate risk management and mitigation actions are taken, as well as appropriate communication and engagement with clients, staff and other stakeholders.
Being systemic to South Africa’s IT backbone creates significant responsibility for the group during COVID-19 to ensure it remains robust in order to continue providing key services to its 5000 long term clients. These include many banks in South Africa and the rest of Africa, telecommunication companies, Eskom, municipalities and government agencies. For this reason, the Board and management of EOH felt it necessary to take proactive steps to ensure EOH is prudent in these times of uncertainty. The group is also at the forefront of providing cutting-edge medical solutions through companies such as Nuvoteq and TCD.
As a result, EOH has initiated a number of initiatives in this regard. These include:
- The CEO and executive committee taking a salary reduction of 25%;
- A proposed 20% reduction across the board in cash salaries, with the exception of those earning less than approximately R250,000 per annum (in consultation with clients and staff);
- Negotiating rent holidays;
- A review of all fixed-term and consultant contracts;
- Reassessing the retirement policy for those over 65 years of age;
- A review of variable pay elements including reimbursive travel and overtime; and
- A review of discretionary spend on travel, entertainment and events.
The core value proposition is that the iOCO business will be the preferred digital transformation partner for customers due to its end-to-end integration capabilities and highly skilled individuals. The services the group provides are systemic to South Africa’s economy, providing support into telecommunication companies, financial services in South Africa and beyond as well as assisting many
municipalities and core government functions. We are part of the fabric of South African business and we are well positioned to play a pivotal role in the digital future of customers, both in South Africa and beyond. The management team, along with employees, have implemented and proposed a wide range of initiatives to reduce costs dramatically as part of our collective contribution to assisting corporate South Africa through the current crisis. We are in the process of consulting our customers and employees to finalise these initiatives.
The group remains committed to ethical leadership and being a force for good in society through its people.
The EOH Group is the largest technology business in Africa, providing the technology, knowledge, skills and organisational ability critical to Africa’s development and growth. Following the Consulting, Technology and Outsourcing model, the EOH Group provides high-value, end-to-end solutions to its clients in all industry verticals. The Group employs more than 8400 people, delivering technology solutions and knowledge services to over 5 000 large enterprise customers across all major industries. As a leader in driving and supporting digital innovation, the Group offers solutions along a simple. Design-Build-Operate engagement model through its two independent businesses, iOCO and NEXTEC.
EOH Holdings Limited
Incorporated in the Republic of South Africa
Registration number: 1998/014669/06
JSE share code: EOH
ISIN code: ZAE000071072
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