Karooooo Ltd.
Q2 2021 Earnings Call Transcript

Published: 20 Jul 2021

[Operator:]

Good day and thank you for standing by. Welcome to the Karooooo First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. after the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. . I'd now like to hand the conference over to speaker today Mr. Zak Calisto, CEO, Founder. Thank you. Please go ahead Sir.

[Zak Calisto:]

Thank you, AJ . I want to thank everybody that made time for our presentation, Q1 FY'22 results. I will go through the presentation and clearly, at the end I will answer as many questions as I possibly can. I founded the company in 2001.We launched in South Africa in 2004 and during April this year we this to Singapore and the revolving to Karooooo and is now 100% of contract as from April this quarter.

[Operator:]

Question number one, from Deepa Malhotra .

[Unidentified Analyst:]

What do you honestly think about prospects about expanding into mature markets like Europe and the U.S.? Don't you think it's too risky or do you think the competitive advantage we have is strong enough to compete in such markets? And if yes, what makes you concerned?

[Zak Calisto:]

So it's quite a long question. So we not -- we put a very small office in the U.S. I think the U.S market is a very exciting market with full of opportunity that we just haven't got the human -- we haven't got enough -- we spread too thin to go tackle the U.S. We in Europe, we compete very favorably with our competitors there and actual fact, we won a lot of the business over there and we believe that that's definitely an area where we want to certainly invest in Europe. And I think the U.S over time to come. We've got enough on our plate, that probably the best solution for us would be an acquisition or a merger in the U.S. at a later time to come. I don't think right now. Right now I think we've got enough in our plate and a lot to do.

[Unidentified Analyst:]

Next question from . What was the impact of COVID restrictions during the period? Aren't, you think your net adds with company if we had zero COVID restrictions in your operating regions.

[Zak Calisto:]

It really are -- obviously I haven't got a crystal ball, but my gut feel is and the way we've prepared is to obviously be growing much faster than what we are growing yet. I think under the circumstances we had to focus on the market that we believe was the easiest to trade under COVID. South Africa is a very open market just like the U.S. Europe was half open, Asia was very closed, it was a very closed market. So we focused where we could do best and we've seen the results we achieved. Obviously, under COVID we believe, and our targets in turn for our management would certainly be to be doing better than we currently doing.

[Anthony Geard:]

Great subscriber growth. Can you provide more color on the geographic breadth of sales and marketing spend, please? Where are you spending the extra money and when do you think the fruit of this investment will be evident? Also the travel restrictions and so most of Africa right now, is your team able to travel in the region?

[Zak Calisto:]

So, the temporary restriction with anything that intensified, still very difficult to travel in the region and I think Anthony, quite frankly, our profile now, it seems would look very different, but it's really, I would say it's even tougher now than it was three months ago. Where did we spend most of our sales -- allocation of sales and marketing? It was predominantly South Africa and a bit of Asia. We want to spend the growth in Europe just, I would say in about two quarters time, we just wanted to see after the summer holidays of Europe what that would look like. And the, but the minute we see Asia will open up, that's where we really want to allocate a lot of capital to. We see Asia as a big opportunity. But at the moment, very tough to do business there especially if you haven't caught the strong presence on the ground and you're busy growing the business, it's quite difficult.

[Anthony Geard:]

Daniel Bartus. Okay. Okay. Daniel since you asked the question, we will have it that way. Okay, I'll do it after it. Could you talk through the seasonality embedded in your four quarters in a normalized environment?

[Zak Calisto:]

So our business is not very seasonal, although our two weakest quarters is Q4 and Q1 and those quarters are normally quite weak quarters given all the holidays specifically in South Africa, in December and then obviously with the Easter and the Jewish holidays and some Asian holidays around the first quarter that makes -- because for us, it's all about trading days. The less trading days we have, that slightly impact us. It's not really the weather. It's more, the trading day if one had to take it directly. I'm not sure if I have answered your question, but I think I am.

[Operator:]

AJ, can you ask the questions from Mike from Canaccord?

[Operator:]

Perfect Sir. Mike, your line is open now. You can ask your question.

[Mike Walkley:]

Great. Thank you. Zak, congratulations on the strong start to fiscal '22 despite probably some of these markets more locked down than you anticipated when you gave the initial guidance. Can you just talk longer term, just, should some of these regions such as Southeast Asia start to reopen, how do you think the business might reaccelerate in terms of longer-term growth, particularly with the sales and marketing headcount additions you've made over the past year.

[Zak Calisto:]

Must of sales was actually in South Africa, although that about 157 people in terms of the new last few months in Asia, in anticipation of the market opening. We believe we all do really well in Asia. We feel very confident and our management feels very confident and we'll have to bold our expansion in terms of distribution. Our distribution is quite limited, even in terms of Asia. We're shifting from allocating capital and we believe we will do well. So where we have got traction, we believe we waiting on the ground. I certainly believe that our platform is way far superior and absolutely it's very comprehensive. So we grew really well in it.

[Mike Walkley:]

Great. Just a follow-up question for me and I'll pass the line. Zak, are you seeing any change in competitive dynamics in South Africa, in their seat track business, AMIX Telematics made some, headcount reductions last year, and then there's companies such as Samsung are moving in there. So could you talk about competitive dynamics as it looks like you guys continue to do very well in the South African market?

[Zak Calisto:]

These are very competitive it's also one of the most highly penetrated markets in the world. It's very competitive and that always have what our peers are doing. But we're winning on the ground and we are growing our business and I think that maybe the most the thing we've really focused on and at the end of the day, we've only got 8% of the full markets. So we believe we'll continue to grow.

[Mike Walkley:]

And maybe just one quick follow-up to this, just on South Africa, there's been some social unrest in the news there, any impact to your business in the current quarter or do you feel like turns remained pretty strong in that region? Thank you.

[Zak Calisto:]

So they certainly have been impacting this quarter. So what the social unrest was profit losses. If my memory serves me correctly, about two weeks, it appears that it's all calmed down, it's all back to normal. But all that would be a situation that we're not assessing. So we think we have a great month and we probably think that of the business that we would have momentary. However, in August we'll have another aggressive plan. So it relies it's probably 4G more than half or sales. So under the circumstances, I think it will impact the quarter, but it will not if obviously some of us small medium businesses survive a bit. This could happen on us in terms of having lost some customers with COVID, but nevertheless I think even we're really some of our customer base within indictable I believe it's going to impact us.

[Mike Walkley:]

Thanks for taking my questions and best wishes for ongoing success. Matt Pfau from William Blair.

[Operator:]

Sure, Sir. We have our next question. Your line is open. You can ask your question now.

[Matt Pfau:]

Thanks for taking my questions, Zak. Just wanted to follow up on your supply chain and how you feel about your inventory levels and ability to source new inventory. And is there any sort of concern about that being a constraint from a growth perspective?

[Zak Calisto:]

At this point upon Matt, I don't believe so. We've got certainly enough in Vinci at this point in time to conduct business as normal. And if we did ever get into a situation where we have a lot of inventory, I would say it's probably in the next financial year, shoot something that we cannot think about go wrong in terms of supply chain. But we believe this financial year, we certainly feel very comfortable. We can have no issues.

[Matt Pfau:]

Great. And then, and then just one more question for me, just wondering if you could provide some detail on some of your newer growth initiatives, such as or the insurance initiative that you have,

[Zak Calisto:]

What's caused we're hoping to launch in Q4 of this year. With COVID we've been -- we've always put out our launch in the latter part of this financial year. We're doing the tests at this point of time and we feel very confident we're going to do well. And we're going to build this business over the next two to three years, and I believe we'll grow it into a big business. I don't want to promise the market or promise anybody expectations, clear expectations, but myself and management feel that we're doing the right thing and that we believe that's going to create a tremendous amount of value, not only for us, but for our customers as well.

[Matt Pfau:]

Great. Thanks a lot for taking my questions Zak.

[Zak Calisto:]

Thank you.

[Operator:]

The next question is Daniel Bartus.

[Daniel Bartus:]

Okay, Great. Hey Zak, thanks for taking the question. First I noticed the large fleets continue to grow as well. Can you just talk a little bit about what you're thinking in terms of second half or next year, how much of the growth should be coming from larger fleets versus a smaller fleets and are you changing strategy in all to, to go after that opportunity more?

[Zak Calisto:]

So, Matthew Daniel it is large fleet at our extra, very small percentage of the vehicle park in the world. So we've taken the view that we go for the small medium enterprises and then upon going into the large fleet. So we will talk about the large fleet. The Penetration Rate in large fleets is larger than the small and medium enterprises and that we certainly all got installed at the large fleet. And we are already to a lot of quite a few of the large fleet switching from the current providers to us.

[Corona:]

[Daniel Bartus:]

That makes sense. And then I'm just wondering if you could talk a little bit about what you're seeing in Africa outside of South Africa, that's, that's kind of the one area where you can a little bit of weaker growth. Are there things that you see that you can leverage, you can pull to improve growth outside of South Africa in the African region?

[Zak Calisto:]

I think it's on our core focus to grow at this point in time to grow Africa. It hasn't been a focus for the last four years. We have put in a bit more focus, but with COVID and the traveling restrictions, it's become a bit more difficult. I think we need to focus on Asia, Europe and South Africa. And obviously we will focus on Africa and it's not that we're not focusing on it. And we all driving the Africa business, but it's not our major focus, although we are investing we've now done quite a comprehensive deal with Toyota for all of Africa. So we are investing that relationship. And but I think fundamentally the real growth is the right now in the next two to three years, it's not going to come from Africa, it's going to come from other segments. Africa, at this point in time is also being quite odd with COVID. Its specifically to Q4 last year and we see Q1 this year, COVID even taking a more deadly poll in Africa. Where, medical assistance is not the greatest. And so Africa is that COVID is definitely having a strong impact on it on Africa, specifically on South Africa.

[Daniel Bartus:]

Just quickly, lastly, you, the travel restrictions have been hurting you guys in certain regions and, we we've talked a lot about it. It's, it's holding back your growth to some degree in certain pockets of the world, but are there ways that you can adjust the business to operate more efficiently, remotely and not, needing to travel on the ground? And I'm wondering if you could just give us some color on, is it sales and marketing that's being hurt by the travel restrictions? Is it more G&A and getting management on the ground or, or is it mostly related to the implementation of the devices? Thanks.

[Zak Calisto:]

I think it's a combination of everything, but I think fundamentally if you get to the bottom line is if you look at Asia, we've got very strong team in Singapore, we've got a relatively strong team in Thailand, but our teams on strong in that in a lot of countries and approximately two years ago, we had a lot of managers and I think where we went wrong, we had American, South African, Singaporeans, Europeans to go run in these countries and work side by side, and localize the business. The reality is that we thought ladder the people on the ladder, getting to the countries. It's very difficult to get the name. And even if they do get in to get out and visit their families, it's very difficult. So we need to -- it's very difficult to un-board people, train them through zoom, get the cultural one, get the distributions quite difficult. Every known that Asia was going to be a little bit difficult on kitties today, we would probably pick the focusing, which is much less there's much less risk picture. And what we will see now is you'll probably find that, if Asia continues, this way, we're just going to pick up our business into Europe to grow there and South Africa. So but the real opportunity is really Asia. Asia is a massive opportunity, but so is Europe. And we just don't want to allocate capital at this point in time. And so after that, the summer holidays, because just judging by what happened last year, October summit in all of Europe went in total title lockdowns, cause it starts getting cold. So, I'm not a specialist on this, but I don’t think anyone I just want to be quite thinking why we allocate that capital.

[Daniel Bartus:]

Okay, great. That's really helpful. Thanks Zak.

[Operator:]

And then we've got Alex from Raymond James, certainly. Alex, your line is open up.

[UnidentifiedAnalyst:]

Great. Thanks Zak. I have two questions on the pricing environment. You mentioned some pricing uplift, constant currency. I'm just wondering if you could, can talk about what drove that increase absent theft impact. And then you also talked about providing some support still to certain customers that were impacted in the quarter. Could you just help us quantify that impact as a five percent of the base and how that level of support kind of trended over the past 16 months? Thanks.

[Zak Calisto:]

So in terms of the ARPU, we've, it's pretty difficult to keep your art to absolutely consistent. So we believe that ARPU between 150 to 160 is really consistent, we've done, otherwise you start speaking about your art preset makes any sense. And I think it's just it's really it's quite a fire approximately a few ranks, I think in constant currency, it's gone up by ZAR3, if I'm not mistaken, we've not that material, but that gets offset the time, the currency. And again, the customers that we've given them, either discounts or we allow them two months or three months. How we do that, we have visibility of the piece about vehicle, or their customer's vehicle. And if we see the customer is not using the vehicles and the vehicles are parked at the Ola and then the issues with the vehicles, then obviously we cooperate with him if you're not interest to get the patrol. And I believe in the long-term retain great relationships and we have approximately outside proposal comp about four to five percent of our base have got some level of discounts, I would say approximately four to five percent of full base. Most of that would be some in South Africa, some in Africa and quite a lot in Asia.

[UnidentifiedAnalyst:]

Okay. That's great. That's great color. One, one thing I don't think we've talked about as much and you kind of tease this when talking about customer acquisition costs, but can you just talk about the 5G refresh cycle? What it's going to mean for the business down the road in terms of costs and what are some of the incremental revenue opportunities that you're working on?

[Zak Calisto:]

I think so the base price to look at, some, sometimes it's quite difficult to differentiate between customer acquisition and subscriber acquisition.So, customer acquisition, once you have the customer service, the customer safe with the time that tomorrow we're not going to acquire any more customers then speedy about customer service and tiny and looking after those relationships, which is a very different thing to necessarily the marketing pal salaries.I don't want to say they will be no south heritage or marketing, but it will be substantially different in terms of the amount of money that you spend on sounds and marketing. And obviously this subscriber costs is really when someone, one of our customers and that's really what recaps the monitors, it's the vehicle, the technology, the guys, the vehicle, the customer acquisition as such that things front. So when you're buying customers, you have the negative effects on your P&L today that you could have that customer for the next 20, 30, 40 years where you've got very little marketing to read. Does that make sense?

[UnidentifiedAnalyst:]

Yeah. Yeah, that makes sense, but I guess a little bit more specifically, I'm just curious what 5G in going to mean in the terms of the refresh, the refresh cycle and some of the incremental revenue opportunities that you're already working on now for when 5G comes under your base?

[Zak Calisto:]

It's all really about data and it's all about evolving our platform. We're able to deal with much more data much quicker. I do believe we had that sort of environment we probably three years before we did into that. We're really getting very much stronger and to be much stronger. So we're busy improving our business. We're busy building our data capabilities and I believe with that, we'll be able to drive more value to our customers. But fundamentally at the end of the day, it's just going to be a faster and more comprehensive service. It's going to be . That's the way we see it, but that's all going to take a little bit of time to get to that level where we've got a total 5G base. At this point in time, we have no time and that obviously will impact your cost of acquiring a customer or a subscriber if having said that what we also expect to find prices but also substantially drop over. It's the same way as 2G and 3G and 4G. we don’t believe that's going to be there.

[Unidentified Analyst:]

Okay. Very helpful. Thanks.

[Zak Calisto:]

Thank you very much Alex. We got one from Parker from Stifel.

[Operator:]

Parker, your line is open now.

[Parker Lane:]

Great. Thanks for taking my question. Just one for me today. If I look at the consumer and the proprietor aspect of your business, can your remind us how you go to market there? Is that primarily a self-service approach where consumers are buying your platform online and do you see any heightened levels of churn and contraction right now in that area of the business relative to small enterprise, medium enterprise in those large fleets?

[Zak Calisto:]

We're trying to actually over 16 months. We see the business not very different to what it was five years ago. We've proved out that internal business to deal with the reality that we're seeing that side of the business we would have faced had we not -- we've really invested a lot in our internal systems in the last three years and I think it's also allowing us and the customers service the customer continue to fill in the market. Have I answered your question Parker? I might have missed a point.

[Parker Lane:]

Yeah, I am just trying to figure out when we think about the opportunity for you to sell to a large fleet that seems like a very involved sales process, but if it's just a person that is buying your technology for one car or their families vehicles, the sales process seems quite different in those situations. I am just wondering if there's been any change in a more distributed world where sales people can't be on the ground in the way you are actually selling to those smaller customers.

[Zak Calisto:]

So what we find is for instance in South Africa, in America as you know, a lot of the business can be done over telephone. South Africa was not that way inclined but things have changed substantially in the last three years and today we can do quite a lot of business with them on the phone and we're becoming quite successful and we're certainly increasing on month-on-month and we're getting just at it. So I'd say most of ourselves today very much in the way they get conducted in America which is there most and over the phone.

[Parker Lane:]

Got it. Congrats on the quarter and thanks for taking my questions.

[Zak Calisto:]

Thank you very much. We've got one question from Chris .

[Unidentified Analyst:]

There was a big decrease from the unit cost of acquiring subscriber from 2016. Is this sustainable and see more decline in cost?

[Zak Calisto:]

Chris, I think on to that, what I'll do Chris if you don't mind, I'll give you a core a bit just to take you through more detail in case I did not pick it up myself in that.

[Unidentified Analyst:]

Then can you provide a bit more color on the South African subscriber basis? Are you doing particularly well in gaining corporate clients or do you think corporate clients need a vehicle. If that seem like really strong results, well done, thanks.

[Zak Calisto:]

So Anthony what we've seen in South Africa is we're winning both on the business front and on the consumer front and we're winning equally on both trends. What we exclude is the mouth of customer that we're on-boarding with that our business customers that would up the same that we're starting to increase substantially quicker than consumer. Really what causes sustaining the business additional vehicles make a margin only to see if there is any more sophisticated online market place. Sp really the way we see our business in terms of cost very much a growing model the make in model where we've take and we buy the vehicles from our customers. We actually keep inventory and we sell them. I think the today it's all of our convenience just the platform the way it used to be in olden days I think it's an old model. I don’t believe it's got legs anymore. Today everybody wants convenience and one certain level of warranties. We're in a very strong position that we now own the vehicle where that comes from the vehicle. The top of the age that if the way the vehicle is being driven. So that gives us quite a strong position. So for us it's all about bringing value to the seller and to the buyer and to give him a level of comfort and that's where the industry is actually going.

[Zak Calisto:]

I think that's all the questions for today. I want to thank everybody that stayed on the call. Thank you very much and the quarter talking to you again in approximately three months time. Thank you. Bye, bye.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect.