KAL Group Limited (KAL) Earnings Call Transcript

Welcome to shareholders, investors and other interested parties joining us for the half year ending 31 March '22 results presentation. This is a pre-recorded results presentation. I would ask you to start sending questions an soon as you're ready, and we will try our best to answer all of them at the end of the results presentation or will follow up with you on any specific matters we are unable to handle appropriately. The presentation of our half year results could take about 45 minutes. I am supported by our financial director Graeme Sim. Today's agenda is on the screen covering strategy milestones, operational updates, financial performance, segmental reviews, certain balance sheet movements and ending with an update on the TFC properties disposal and the PEG acquisition after which questions will be handled. The group structure currently on the screen and shareholding has changed since our previous presentation with the disposal of TFC properties and the acquisition of the remaining 40% minority shareholding in Partridge Holding Supplies which we call Forge. The TFC Ops BEE ownership status is 47.2% on a modified flow through basis, and 40.2% on a direct Black ownership basis, well above the current climate of 25% as required by the liquid petroleum fuel charter although this requirement is expected to increase soon. For those seeing the presentation for the first time, please note that in Kaap Agri Namibia is a 50-50 venture with Pupkewitz in Namibia. This slide depicts all our trading brands used by the different divisions. On the left-hand side, we have all our company owned brands and on the right-hand side, all the non-owned brands being deployed in the business. The convenience retail store and quick service restaurant brands are all linked to retail fuel sites, which are operated by the fuel company TFC Ops. This slide remains relevant to understanding how we differentiate the business in terms of income streams and the trading brands within each one of those income streams and excludes the corporate division. The largest division on the left-hand side is still our Trade division, consisting of 145 business units, up from 136 in the prior year contributing 74.6% to profit from operations and includes the Agrimark brands, New Holland agency business, Forge brands, and Farmsave which was added late last year. The second largest division is TFC, the fuel company, consisting of 48 units of which 44 are retail fuel service stations with one site added since last year contributing a further 11.8% to profit from operations and now operate all major welcome brands in South Africa. It is also within this division that we've completed the sale of the TFC properties disposal consisting of 21 properties owned by TFC on a silent leaseback as highlighted shoulders in previous communications. Our grain services division Agrimark Grain consists of 15 silo and C complexes which focuses on silo grain handling as well as wheat and potato seed processing and training. The last trading division is the manufacturing division consisting of 5 business units, hosting Agriplas, which focuses on the manufacturing of irrigation products as well as TEGO, which focuses on manufacturing of large injection molded products. Our Supply Chain division acts as a support service for the acquisition, distribution and logistics of products for the group. All the above are supported by our corporate and financial service departments with 2 offices and 13 financial services units spread throughout South Africa. In total, there are currently 228 business units in 120 locations in South Africa and Namibia. Having added 2 units in the last 6 months, being a Agrimark story and the new TFC site in the Western Cape. We have added an additional statistic on the top right-hand side. This is a comparison of channel trading profit contribution and give clear insight into the result of our diversification strategy, which we have been following for the last number of years. It is important to note that about 60% to 65% of fuel trading profit contribution is also retail based given the TFC footprint expansion. And therefore our trading profit contribution from retail-based activities is around 54% for the year. This has been a successful transition from a highly Agriplas trading activity business to a more balanced contribution between agri, general retail, convenience retail and fuel retail. It is also important to note that although the agri trading profit contribution has dropped from 45% to 27%, the fact is that Agri trading profit in value has also grown by over 10% on a compound annual growth rate basis over the last 10 years given our market share gains in that channel. We believe that this is a unique retail combination South Africa which will be further enhanced with a pic transaction, which we will discuss later. This slide is your geographical heat map of all the business units. On the left, the whole copper group and on the right-hand side just the TFC business units. The concentrated exposure in the Western Cape is diminishing year on year as a result of footprint expansions in the rest of the country, while exposure in the rest of the country remains low which bodes well for further strategic footprint growth. The group now operates at 107 retail fuel licensed sites in RSA and Namibia, of which TFC operates 44 in South Africa. Whilst the Agrimark footprint has largely been focused on water intensive areas of South Africa, the TFC footprint has focused on clusters in specific provinces in order to achieve economies of scale in terms of management and support services to the network. The TFC network will change significantly post the big transaction. We continue to grow our footprint with most of the business unit growth since 2015 being in Agrimark and TFC divisions, indicated by the blue and the red bar graphs. Having grown to a 193 business units of the total of 228. Further to note that with our creation of the fuel company, we migrated 20 retail fuel service stations from the trade division under the Agrimark to the fuel company in 2017 and have since added 24 additional retail fuel service stations, bringing the total TFC retail fuel business units to 48, of which 44 are retail fuel service stations. Undoubtedly, are significant achievement during the first half of financial year '22 has been the market share growth during this abnormally high inflationary period while the overall retail fuel sector fuel liters are down between 5% to 8% depending on which roleplay you speak to. Our group leaders were only down 1.3% coming from commercial and formal volumes which are up while commuter volumes were down and highway volumes being stable and recovering. Secondly, we noted roleplays in the building materials sector. Sales are down while our comparative category sells are up by 7.5% in the first quarter of F'22. And thirdly, a good indicator on the health of our Agri growth is a relatively high percentage of new customers. We have granted credit facilities compared to the prior year with new customers accounting for 30% of the increased credit facilities for Agri customers in value terms. Other milestones and trends we'd like to highlight are real group revenue growth or 6.6% achieved on top of very high inflation of 20.1% with only TFC still COVID affected during the period under review. It is evident that sales volumes are under pressure due to the high inflation being experienced in mining fuel, fertilizer and chemical commodities which are overshadowing the inflationary increases in other categories. The 26.7% group revenue growth has come from Agri at 25% growth, general retail including convenience stable at 6.8% growth and fuel growth inflationary driven growth of 36.3%. It is also notable that inflation has been our friend in terms of stock valuations as pricing pieces occurred in fuel. This growth has been supported by DC value throughput growth of over 13% in the period at a lower cost to serve, and we intend expanding our DC offering by approximately 10% on the same premises, Agrimark Grain services as expected, as increased profitability on the back of again a record wheat harvest and our New Holland agency business has increased profitability once again. Our support service cost to serve is slightly up by 0.1% of GP against the comparative period last year. Although Agri inflation assisted Agri growth profits in the first off, the overall trading profit contribution from retail offerings was still highest at 54%. From a working capital point of view, stock and debtors value growth remained lower than revenue growth, which assisted us in only having to moderately increase net interest-bearing debt by 5.7%. Please note that the proceeds of the sale of TFC properties was only partially received by in the first half. Finally, we are extremely proud that our reoccurring headline earnings per share growth comparing half one F '22 over pre-COVID half one F '20 was 41.8%, a compound annual growth rate for the period of 19.1% showing a high level of resilience extremely challenging times. More detail on the announced big transaction will be handled later in the presentation. This slide is a group quarterly turnover year on year trend graph for the last 6 quarters, the blue graphs being a retail quarterly sales trends, and the green graphs being Agri quarterly sales movements and inflationary trends. Firstly, in terms of retail, the DIY boom of 2021 has come off mainly in cement and DIY categories, and sales growth has been sluggish. It would seem our low growth is still above sector trends either. In terms of TFC, new and non-like-for-like sites have contributed to staying in positive territory from a growth point of view. And inflation, while still subdued in our retail categories, is starting to rise. In terms of Agri, a very strong performance to date with COVID impact relatively low, except for logistics in harbors for exports. There were lower animal feed sales due to drought in prior year not repeating. And we have seen market share gains in fertilizer and packaging materials, while very high inflation has been experienced in those commodities. In general, economic factors still weigh heavily on the training environment. Although some confidence uptick is experienced in some of our sectors we have exposure to, the CPI is increasing especially in all categories. Fuel is now at record high levels and the South African rand seemingly range bound at this stage and very difficult to predict. Land reform uncertainty remains what it is, uncertain. And the sector is getting used to that as a new normal. The first half of the F '22 financial year has been driven by, starting on the right-hand side of the graph, as mentioned, group revenue has grown by 26.7% overall. This has been off the back of inflation of 20.1% and therefore a 6.6% real growth. And given the challenging environment, a stable performance. This was off the back of growth from like-for-like business units of 22.9%, increasing transactions and increasing basket size. The inflation, excluding fuel price impact, was also a high 9.2% for the period. As can be seen on the graph, the 26.7% group revenue growth has been made up of a strong growth contribution from all divisions, albeit highly impacted by inflation. Firstly, from the left, the trade division grew by 22.7%, that coming from Agri growing at 23.7% and retail of 5.7% growth. And TFC, whilst the business unit is still affected by COVID, delivering revenue growth of 31.7%. Grain services growth of 38.1% of the back of record wheat and manufacturing decline in revenue of 8.6%. I'll now hand over to Graeme to take us through the highlights for the year and the financial performance.

Thanks, Sean. Looking at the highlights for the period. We believe the group has once again delivered a strong trading performance under continued challenging trading conditions. Revenue grew 26.7% with like-for-like comparable sales increasing by 22.9% and the number of transactions increasing by 7.7% driven by new and non-like-for-like contributions mainly from TFC. EBITDA increased by 13.0% to ZAR 398.3 million. Prior to September 2021, EBITDA was calculated by including interest received, but excluding interest paid. The calculation of EBITDA has been changed to exclude both interest received and interest paid as this is deemed to be a better reflection of the true operational performance of the group and an improvement in disclosure. Comparable EBITDA performance has been updated with this improvement in methodology. Recurring headline earnings has grown 14.6%, with recurring headline earnings per share of ZAR 351.11 growing by 15%. As a reminder, we consider recurring headline earnings per share to be a key benchmark to measure performance and to allow for meaningful year-on-year comparison. Group fuel volumes decreased by 1.3% with TFC volumes decreasing by 4.7%. We are experiencing a slow and continued post-COVID recovery in retail fuel volumes with fuel site convenience and quick service restaurant performance also improving. Market share gains have been made in non-TFC fuel volumes due to our ability to deliver and our product availability. As mentioned, the number of transactions increased by 7.7%, with trade increasing by 4.4% and TFC increasing by 9.6%. An interim dividend of ZAR 0.46 per share has been declared, being 15% up on last year's interim dividend of ZAR 0.40 per share. Regarding segmental performance, you'll see trade and grain services had a strong first 6 months, while retail fuel and convenience showed marginal profit before tax growth and manufacturing ended below last year. The largest segment within the group remains the trade segment and this segment is also the greatest income and earnings contributor. Trade income grew 22.7% with PBT increasing by 19.9%. The retail fuel and convenience segment remains a segment most impacted by COVID due to various lingering travel restrictions and economic conditions resulting in lower footfall. Despite reduced fuel volumes, income grew by 31.7% off the back of high inflation and PBT increased by 1.7%. The increase in gross and net assets reflects the net impact of the disposal of TFC properties. The inflow of the partial proceeds as at 31 March as well as the sale and leaseback IFRS 16 accounting entries relating to the right-of-use asset and lease liability raised. Grain Services delivered strong results, courtesy of a very good wheat harvest at higher wheat prices. The segment grew revenue by 38.1% and operating profit before tax by 9.1%. It must be noted that grain services has seen a heavy weighting of full year profitability in the first 6 months of the year, and this performance will not reoccur in the second 6 months. Manufacturing has been impacted by the curtailment of infrastructure spend due to COVID-related uncertainty and cash flow challenges due to unfavorable weather conditions in Limpopo and Mpumalanga. Manufacturing income reduced by 8.6% with operating profit before tax reducing by ZAR 3.8 billion. The corporate division, which includes the cost of support services as well as other costs not allocated to specific segments, reduced from 0.7% of revenue to 0.5% due to the inclusion of the profit on disposal of TFC properties. Just as a reminder, in the operating segments, gross assets include stock trading, fixed assets and debtors, while net assets reflect the impact of trade creditors and borrowings. With regard to corporate, gross assets include corporate fixed assets, our net assets reflect the impact of group borrowings relating to corporate assets only. This is a graphic representation of the previous slide, showing contributions by segment. The contribution trends have not changed since our year-end results, and it's evident that trade is still the core of the business. Retail fuel and convenience growth has been impacted by COVID. It still contributed 12.8% to group PBT. Grain services contribution was significant for the period and remain strategic in maintaining strong customer relationships and manufacturing remains a smaller segment contributor to group PBT. Looking at the income statement, as mentioned, revenue grew by 26.7%. Gross profit increased by 14.2%. GP has grown at a slower rate than revenue, in particular due to the high inflation experience in fuel prices. Margin growth was generated across retail categories, whilst Agri categories experienced a slight margin decrease mainly related to a change in the mechanization sales mix. Cost control remains a management focus area, especially given increased inflation and trading margin pressures with a large focus on the optimization of salary-related expenditure and associated costs. Operating expenditure grew by 12.7% and 9.1% on a like-for-like basis with distribution center cost to serve as a percentage of GP reducing. EBITDA grew 13%. Recurring headline earnings grew 14.6%, with recurring headline earnings per share of ZAR 351.11 growing by 15%. Return on equity, being only 6 months return on full equity, increased to 10.3%, up from 10.0% last year. An interim dividend of ZAR 0.46 per share has been declared, up 15% from ZAR 0.40 per share last year. The 3 graphs again illustrate the continued strong 5-year performance of the business, albeit that performance was impacted by COVID during 2020. With regard to the balance sheet, noncurrent assets are similar year-on-year and include the reduction in properties due to the disposal of TFC properties and the commensurate increase in right-of-use assets due to the leaseback of these properties as well as additional CapEx covered in a later slide. ZAR 380 million of the anticipated ZAR 444 million has been received to date with the disposal of TFC properties with the balance expected in May. Working capital has been managed effectively. Trade debtors grew 21.1% with debtors not within terms as a percentage of trade debt is reducing from 9.2% last year to 8.0% year-on-year. Stock value has grown at a slower rate than revenue growth due to the impact of higher contributions of quick moving retail and fuel stock and the continued increased participation of our centralized distribution center. Creditors days have reduced slightly due to the mix of creditors. Net interest-bearing debt increased by only 5.7%, reflecting the growth in debtors balances and the inflationary impact on stockholding, offset by the partial proceeds received to date on the disposal of TFC properties. The group debt-to-equity ratio improved to 55.8% from 63.1% last year, with an interim debt-to-EBITDA ratio of 3.9x compared to 4.2x last year. Interest cover was 7.9x compared to 8.2% last year. Net asset value per share continues to increase albeit that assets are at historic values. In summary, the balance sheet has remained strong throughout the challenging COVID and economic slowdown periods. Gearing has improved in line with the expectation. Working capital is well positioned, and there's sufficient headroom available to fund identified growth opportunities. This slide reflects the recurring headline earning waterfall between half year 2021 and half year 2022. Gross profit, growth was strong, growing by ZAR 121.9 million year-on-year. Expenses increased largely due to inflationary pressures and the inclusion of expenditure from new and non-like-for-like sites at TFC sites. Interest received increased due to a combination of higher debtors balances driven by revenue growth and increased interest rates. Interest paid to banks increased by 14.5%, a combination of higher interest rates and slightly higher average borrowings for the period. The Kaap Agri Green Namibia joint venture has shown improvement year-on-year. Headline earnings adjustment mainly relates to the profit on disposal of TFC properties. And as mentioned earlier, in total recurring headline earnings grew by 14.6%. We added in this slide for the first time at our last year-end to illustrate the items impacting earnings to calculate headline earnings and recurring headline earnings. Headline earnings adjustments relate to profit on disposal of TFC properties as well as various low return generating or nonessential assets. Nonrecurring items include costs associated with the disposal of TFC properties, new business development as well as certain legal costs. Furthermore, adjustments for the remeasurement of put option liabilities exercisable by noncontrolling subsidiary shareholders are also added back. Recurring headline earnings per share grew by 15% year-on-year. And lastly, as you'll see, recurring headline earnings grew by compound annual growth rate of 19.7% and recurring headline earnings per share by a compound annual growth rate of 19.1% when compared to March 2020 pre-COVID levels. We've previously indicated that we have prioritized return on invested capital or ROIC and EVA as key performance indicators to measure our efficiency of allocating capital within the group, and this methodology is being firmly entrenched throughout the business. Through 2018 and into 2020, we invested significantly into the business, both in upgrades and expansions as well as acquisitions. During this time, we experienced an economic slowdown, which reduced returns particularly in our like-for-like space. Added to this, we had COVID in 2020. Invested capital has largely generated the desired returns except for TEGO, which experienced challenges as we refine the design of our footprint. We also indicated previously that the decision to acquire properties within TFC was problematic from a return perspective and that this would be addressed. Collectively, all the above factors contributed to a reducing ROIC trend till September 2020, albeit that ROIC remained above our weighted average cost of capital. The curtail CapEx in 2021 aided the increase in ROIC, and our half year ROIC position for 2022 has improved year-on-year. Our cautious approach to capital spend is yielding benefits. And together with strong trading performance as well as the ZAR 205 million partial proceeds received from the disposal of the TFC properties entity as a result in improved debt levels and an improvement in ROIC. We are committed to driving organic growth from capital already invested throughout the group and are freeing up underperforming capital. I'll hand back to Sean for the segmental reviews.

Thank you, Graeme. The next few slides will inform you of our segmental strategy, reviews and outlook. Firstly, our trade division, which includes Agrimark's New Holland agency services and the Forge operations in Natal. In terms of the half one 2022 review, strategy will remain focused on growth from organic market share, selective footprint expansions, optimization efforts and maximizing supply chain opportunities. Sales of Agri inputs shows market share growth in fertilizer, good sales growth of packaging materials off the back of a higher fruit export volume, while animal feeds continued to experience lower sales than primer due to good grains in the animal feed areas. Retail sales growth was moderate at 5.7% in this division, experiencing strong growth of 11.5% in building materials, which as previously commented on is higher than the sector, while achieving 7.6% in pool and garden categories, while the retail irrigation category was down by 5.5%. The New Holland agency sales growth of 33.4% was still very healthy for the first half of the year. Forge increased profitability by 34.6% in the period under review, albeit off a low base and not affected by the KZN floods at this stage. All in all, bringing the whole division to a 22.7% increase in revenue off the back of OpEx growth and of a high 15.5% due to new sites and non-like-for-like additions and therefore growing profitability at 19.9%. The OpEx was mainly driven by non-salary and wage cost increases. In terms of the outlook for this division, we will continue our market share drive, supported by our business-to-business digitization initiatives. The fruit sector volume outlook remains very positive. However, price and input cost pressures will most likely weigh heavily on farm profitability. Wheat is also expected to experience lower profits in the second half of this year than in the first half. We therefore expect farm infrastructure spend to be lower on the back of these high input cost pressures experienced by farmers. Retail diversification will continue and we expect the trend of cash contribution at 26%, contributing 40.5% of divisional GP to continue even during this high Agri growth period. We also expect continued retail margin improvements due to our continued focus on central pricing, assortment, replenishment and other optimization initiatives. TEGO agency sales are expected to be similar to the prior year. In terms of the retail fuel and convenience division, the half year 2022 review, which for the purpose of this review includes the fuel company operations and not TFC properties, which was disposed of in March '22. This division operates 44 retail fuel sites and 4 additional QSRs and convenience stores on the same premises. The strategy has remained consolidated to the onboarding of PEG due to the transaction. Additional COVID recovery has been experienced and a medium-term selective footprint growth will be processed. Only one new retail fuel operation was acquired in the period and onboarded in March this year. COVID continues to have an impact on TFC Ops due to restrictions experienced on cross-border traffic and continued lower QSR footfall, which is slowly recovering. TFC Ops liters declined by 4.7%, although marginally better than the retail fuel sector per se, the price of fuel is having a significant impact on mainly commuted traveling patterns. Although volumes declined, TFC Ops PBT grew by 11.6%, assisted by opportunity profits realized during price increases on fuel. At the end of half one, the average site tenure remains high due to half the properties rented by TFC Ops still being owned by Carr Property and situated on Agrimark sites within its network, which are deemed to be evergreen sites in the calculation. This site 10-year measure will change post the TFC props and the PEG transaction, so as to handle all TFC upsides in a similar fashion. In terms of the Retail & Fuel Division outlook, the PEG transaction is due to be completed and executed. More detail on that later in the presentation. Pipeline investigations will be kept low in line with the strategy and focus in terms of onboarding of PEG. Therefore, our forward-looking liter growth is expected to be in excess of a 100% in the next 12 months off the back of COVID recovery, a site annualizing and the PEG transaction at an additional 9 months that will be expected in the next year as well as considering the current price pressures experienced. The forward-looking liters in this instance is there for the next 12 months to the end of March '23. We will remain focused on expenses in this division during this financial year. Our strategically structured Black ownership of 40% should increase to 5.98% by financial year-end post the PEG transaction. And our average forward-looking site tenure is expected to be about 13 years, post the PEG and TFC Props transactions. A high majority of sites have favorable lease renewable terms. We have once again included this slide to consider the fuel price impact on the retail fuel division as well as the group. Starting on the right-hand side of the table, it is quite evident that fuel prices have increased substantially year-on-year, both diesel and petrol. And whereas TFC has capitalized on opportunity profits in the short term, increasing prices per se do not drive profitability. For example, in the table below as well as the information on the right-hand side, TFC Ops as benefit during the first half by ZAR 11.7 million versus ZAR 4 million in the prior year based on those opportunity profits after price increases. It is, however, important to note that this still only represents about 12.5% of the TFC Ops profitability over the last 2 years on average. What does drive profits in this division is fuel volumes. As can be seen in the table below the graph, as at 31 March, if the petrol price of 95 unleaded was ZAR 21.60 on an inland basis with the regulated petrol gross profit of ZAR 2.29 per liter set at the time, this would result in TFC earning a 10.6% GP margin. With an increase of ZAR 1 in the petrol price, this would result in TFC earning still ZAR 2.29 per liter, yet the gross margin drops to 10.1%, with TLC making the same rand profitability if volumes stay the same. The reversal happens when a price decrease is affected on petrol. It therefore is not the price of fuel that drives profitability. It is the volumes. We have had a number of questions regarding the potential yet unconfirmed deregulation of petrol unleaded 93. This product only represents 7.9% of TFC's current volumes. It therefore would be quite unwise to forecast the impact at this stage as the industry is taking steps to have this proposal reviewed. This low percentage of 93 unleaded makes up the total fuel retail volumes and even lower when considering total fuel sector volume. It is therefore unlikely to give much, in fact, hardly any relief at all to petrol consumers making the proposal quite economically unjustifiable when considering the number of jobs in the retail fuel sector, which could be lost due to this very unwise proposal. Moving on to the grain services division. In terms of the first half review, strategy has remained unchanged from our last update. We continue to invest where it makes sense. It can be seen on the graph on the top right the wheat intake exceeded previous year and was the highest in over a decade again. The division has also been able to increase the volume of grain contract facilitation year-to-date, as indicated in the graph on the bottom right-hand side. All in all, therefore, an increase of 9.1% in profitability for the division on top of a previous record year. This high grain intake year is actually quite challenging in terms of maintaining a balance between income and expenditure rates. Outlook for this division is that both wheat and Canola planting should be similar to the prior year. However, if the financial year 2023 volumes are unlikely to match the 2022 volumes due to rain starting later, it is also unlikely that the division's second half of the financial year will be as profitable as the second half in the prior year. This division should remain a solid profit contributor to the group. In terms of our manufacturing division, which is made up of Agriplas and TEGO, Agriplas producing irrigation product for the agricultural sector, in particular the fruit sector, and TEGO currently producing wins for harvesting and storage in the same sector as well as contract manufacturing of alternative injection molding products. In terms of the review, our strategy is unchanged. We will be focusing on market share increases, new products, optimization, no one-way plastic and fruit sector. Agriplas had a very slow quarter one due to very high rainfalls in Limpopo and Mpumalanga. There has been a huge improvement in quarter 2, still, however, ending half one profitability down 28%. TEGO, although maintaining prior year volumes, profitability is still under pressure and in line with prior year. Therefore, not yet contributing to group growth yet. In terms of the outlook, Agriplas is expected to increase exports in the second half with a significant order book improvement happening into quarter 3. Second half should exceed half -- first half. In terms of TEGO, the new Xtra Volume Pome bin tailored to the Pome sector is expected in September 2022. Maximizing alternative contract manufacturing options will continue. And although we still believe a subdued F '21 will continue into the financial year of 2022, the sales of the XVP bin is expected to kick off in first quarter of financial year 2023. I'll hand over to Graeme to cover the highly positive feedback on cash flow, capital spend and debtors.

Thanks, Sean. Moving on to the cash flow performance for the 6 months, from the graph one can see that the group continued to generate strong cash flows from operations through improved cash profits. Although effectively managed, working capital has increased. Inventory value has grown at a slower rate than revenue growth due to the impact of higher contributions of quicker moving retail and fuel stock, and the continued increased participation of our centralized distribution center. Trade debtors also grew at a slower rate than revenue, with debtors not within terms as a percentage of trade debtors reducing from 9.2% to 8.0% year-on-year. With regard to creditors, important to note, as in previous years, is that 7 months of supply payments are made in the first 6 months due to the timing of our year-end supply payments. And this normalizes again across the full year when reduced supply payments are made in September. A net ZAR 59.7 million was generated through investment activities. This included an outflow of ZAR 150 million related to CapEx and acquisitions, set off by ZAR 205 million partial proceeds received from the disposal of TFC Properties. Interest paid was higher than previous periods due to the increase in interest rates as well as a slight increase in average net interest-bearing debt. And lastly, the final dividend paid relating to the 2021 financial year amounted to an outflow of ZAR 85 million. In summary, a very healthy cash position for the period, showing similar trends to last year, except for the larger increase in working capital, which is being closely monitored. Moving on to capital expenditure. Capital spend during the period returned to more normalized levels. During the period, we spent ZAR 150 million on CapEx, including acquisitions. Of this amount, 53.7% went towards expansions, 6.7% to replacement and upgrades, 10% was spent on the acquisition of a further 25% shareholding in Forge and 29.7% on the acquisition of a new TFC retail fuel site. Capital allocation is in line with our growth and diversification strategy. And as such, the bulk of spend was within the trade and TFC segment. Let's take a look at our debtors position and as per usual, give some detail on the book for those that are less familiar with our credit approach and the performance of our debtors book. We have a clear and committed strategy to grow our debtors book through responsible credit extension to enable revenue growth by increasing our credit customers' ability to purchase from our various offerings. So as you know, credit granted can only be used for purchases at the various trade and retail fuel and convenience outlets. So we provide production credit and not consumer credit. Our credit vetting process takes into account a number of variables, including a range of financial and nonfinancial considerations as well as the nature and value of any securities available. The resulting credit rating is used to determine the size of the facility that is approved as well as the interest rate charge on the account. Our debtors book grew 21.1% during the period, driven by revenue growth and totals almost 16,000 accounts. Roughly 21% of these accounts are seasonal with payment periods linked to the cash flow cycle of the underlying product. These seasonal accounts could have repayment terms up to 12 months. Debtors by product type remains similar to last year and vary according to the time of the year. We have seen good growth in the fruit book, a combination of volume and inflationary growth. And lastly, our bad debt write-off bears testimony to the robustness of our credit model and the quality of the underlying accounts with only 0.07% of the debtors book being written off during the period and 0.17% over the last 5 years. If we take a look at our out-of-term debtors, in other words debtors that are overdue, this graph shows the monthly 5-year trend of overdue debtors as a percentage of total debtors and highlights the following: annual monthly trends are similar year-on-year, except for April to July 2020, reflecting the increase in wine grape overdues resulting from Covid lockdown restrictions on alcohol sales. July 2020 saw late payments being received from certain Western Cape table grape farmers who were waiting on exporter payments. 2021 was a good year from an overdue collections perspective, and the current year has continued in this pain with out of terms as a percentage of debtors reducing by 1.2% of debtors, the lowest out of terms percentage in 5 years. The recent seasons above-average wheat harvest has assisted wheat farmers cash flow positions. So in summary, our book has been resilient during the past few years, and we believe our book is in a very healthy state is well secured by various securities. We are well positioned to support our customers given the stable to positive arid conditions being experienced in most of our areas. Sean will close out from here.

As you would have seen in the SENS announcement on 4 October, we have disposed of TFC Properties to an outside party. This disposal has no impact on the trading of TFC operations. This disposal included 21 properties on which new long-term net leases have been entered into. The rationale for this disposal has been shared previously and is a result of our ongoing strategic review of return on invested capital. As such, the decision was made to free up underperforming capital in this investment. Kaap Agri Limited will be receiving ZAR 444 million from this disposal, and this cash will be used to settle debt in the short term and to provide funding for future value-enhancing opportunities. To date, ZAR 380 million has been received with the balance payable against transfer estimated during May. The disposal was fully implemented on 1st of March. The PEG acquisition was communicated by KALs on 19 January. It is an exciting acquisition and the culmination of more than 2 years' worth of engagement, partly due to the COVID-related delays. TFC will purchase the share and loan plans of PEG Retail Holdings, which operates 41 fully retail service stations, including convenience and QSR. The majority of these sites are on national highway sites and represent all the major oil brands. The graphic shows the existing TFC sites in red on the right-hand side and the newly acquired PEG sites in blue. Post this transaction, TFC will clearly have a very good national presence, albeit still a relatively small percentage of the national retail fuel market. As you can see from the table, while KALs ownership of TFC will decrease, the post-transaction position of TFC will increase significantly when looking at BEE shareholding, both direct and including modified flow through. This will result in TFC being one of the BEE leaders in the retail fuel industry and should bode well for future growth opportunities. This acquisition will be funded through bank funding at TFC level and existing cash resources with no need to issue any shares to fund this transaction. The usual CPs are being attended to in terms of this transaction. A shareholder circular was distributed on the 4th of May containing more details on the transaction to be voted on at the shareholders' meeting on the 6th of June. The targeted effective date is 1 July 2022, with the PEG transaction expected to contribute 3 months' performance to the current financial year. In conclusion, we can therefore summarize the first half of the year in that it was a very high inflationary cycle. We have gained market share in various parts of the business and continue our diversified growth. The growth has mainly come from both Agri and retail within Agrimark's agency Agrimark and Forge businesses. TFC has made it through a period of declining sector volumes, has taken price change opportunity as well. And our DC continues to operate at high levels, and our support service cost to serve has remained in control. We have continued our digitization initiatives with good progress on our ERP modernization as well as business to consumer online offering as well as our business-to-business data-driven approach. CapEx normalized in the period. Debt levels grew earning moderately with this high inflationary cycle, and we continue to improve our ROIC and our EVA. We are also adequately positioned for potential fuel price decreases, which could reverse opportunity profits that we achieved in the first half during the second half. From an outlook point of view, as stated, wheat and Canola harvest at the end of 2021 are highly unlikely to match prior records at the end of 2022. The largely positive outlook in the agri sector bodes well for farm income. Backed with current high input cost inflation, farm profitability will be pressured. We will continue our market share initiatives to counter these pressures. The TFC pipeline will be more focused on onboarding of PEG and very selective high-return sites. And while TEGO's performance will remain subdued in F '22, Agriplas is expected to maintain momentum for the rest of the year. Although the economy is expected to remain sluggish, we will capitalize further on changing consumer behaviors to our favor and to enhance shareholder value. Our expectations on the rest of the year therefore have not changed since our training update and our AGM. We expect to reach the upper end of our medium-term growth targets in F '22. Finally, we will continue to focus on volume and value enhancement for our shareholders. We thank you for your time and we'll move forth with to any questions that have been sent in.

Thank you for all the questions that have come through. The first question I'd like to highlight is related to our Agrimark Grain division. What are the drivers of revenue versus the drivers of profits and margin in this division. What I can say there is that, obviously, in the Agrimark Grain division, revenue is highly impacted by the weak prices, which are obviously really volatile and especially in this year. So I wouldn't watch revenue in this division to determine profitability. It is still volume throughput through the silos as well as storage days, which drive profitability. So when we do have record wheat tonnages going to the silos, we expect profitability to be higher. Then when we have lower weather impacted years where the harvests are lower. The second question is what level of cost utilization the silos currently have. And in the 2021 year, we had about a 99% capacity utilization of wheat capacity available. And in this last year, we had 109% of wheat capacity utilization in the silos. So it's very high. And I think the question stemmed from the fact that we've mentioned that sometimes when the harvest is too large, it actually cost us money to handle it. So in this last year or 2, we found that a better level would be around 90%, given that some are over full and some are slightly less full. But although it cost us money, we have also found that even at a very high level of silo utilization, there is a marginal contribution. But yes, if I had to give you a number on what the perfect level is, probably 90%. The CapEx replacement cycle for the Agrimark Grain division is really quite low, actually probably around ZAR 10 million every 2 years and quite low, it makes up a very small portion of our total CapEx whether it'd be for a placement course of growth purposes or capacity increases. We're currently increasing one of our silos capacity. That doesn't happen every year. Then the next question is what do we see as our longer term relevance of fuel sites and electrification. So and I suppose this all depends on who you speak to. If you speak to an electric vehicle guy, he'll tell you that in 5 years there won't be any fossil fuels left in South Africa. We doubt that that is a very realistic view. One can now speak to the fossil fuel guys that are starting to invest into greener technologies. And you'll find that their view is more at 15 to 20 year. So I suppose a 12- to 15-year level or period to get us to a point where there is a similar number of fossil engine vehicles versus electric stroke hydrogen-driven vehicles. So we're looking at about 2035 to 2040 where electric vehicles and hydrogen vehicles might exceed the number of vehicles inside. We're still talking, growing that fossil fuel. I think our country has a number of challenges. This was actually in terms of electricity, the cost of conversion to these new guinea technologies is very high. I'll give you an example. If you're running a highway site and you wanted to park 100 trucks on the site, which all had to charge between 11:00 and 1:00 a.m. dropped in the morning, which is when they want to charge, do we need a 100 charging stations at least ZAR 0.5 million a shot. So it just gives you the level of -- an indication of the level of cost of conversion to more greener technologies. So we're not quite sure how that will happen. Currently, there are certain providers trying to get into that market, and we are testing that as we speak at some of our sites. And obviously, our highway sites now and post the PEG transaction would be a good network of charging locations for the different OEMs that would like to release electric vehicle engines. So our view is 12 to 15 years before fossil fuels becomes less than alternative driven engines. Then there's another question. Are there still benefits to operating more fuel sites? I think if anything in life, there is still benefit but I think what we have achieved is we've achieved that balance between our agricultural gross profit contribution, our general retail gross profit contribution, our fuel gross profit contribution and our convenience retail gross profit contribution. So our growth going forward in the fuel side, having now post being got to 85 sites is probably a lot more selective and more probably just to be enhancing to our current network. Now I think where the scale benefit comes in is that in the past this sector has been driven that a site is a BTY and it is a company on its own. And therefore as probably a less efficient overall support service cost in terms of audit fees, insurance fees, no general controls, administration, HR functions, et cetera, which are being duplicated on all these sites. So we do believe that there is a more efficient business model, which can apply to a number of sites so that you can actually make them run more efficient from a support service cost point of view. Then the next question, thank you, is that depreciation added to on the cash flow versus replacement CapEx. It's about ZAR 150 million on Slide 25. What's the difference between the 2? Graeme, will you please just take us through that on Slide 25?

Yes. Thanks, Sean. If we look at the CapEx, ZAR 150 million consists of about ZAR 44 million acquisition of operations, 15 subsidiaries, rightly, as mentioned, ZAR 10 million for replacement of which there's appreciation. But over and above that, there's about ZAR 80 million, which was spent during the period on expansions and there's depreciation calculated on that expansion element of the CapEx as well. So that makes up the difference. The other question is around a level of replacement CapEx and if we go back over the last few years, F '20, we really held back on CapEx. So our replacement CapEx in that year was very low. Last year, our replacement CapEx was around about ZAR 32 million. To Sean's point, the grain services replacement CapEx is only about ZAR 3 million in that period. Our current half year replacement CapEx is around about ZAR 10 million. So I mean, in terms of a normalized replacement CapEx number, I think it's fair to look at somewhere between ZAR 30 million and ZAR 50 million, probably the higher of the 2 numbers being a more normalized replacement CapEx cycle.