Good morning, ladies and gentlemen. Welcome to Zeda's interim results presentation. My name is Babalwa George. I'm the executive responsible for investor relations and strategy. I'll be facilitating today's program and taking you through the agenda. The first agenda item is business overview, which will be presented by our Group CEO, Ramasela Ganda. She will hand over to our Group FD, Thobeka Ntshiza, who will take us through financial overview. Thobeka will hand back to Ramasela to conclude with strategy overview and outlook. I will be back to give you an opportunity to ask questions. To kickstart the program, I would like to call on stage the first speaker, Ramasela Ganda.
Thank you, Babs. Good morning, and thank you for joining us today. I'm really pleased to be presenting our interim results for the six months ended 31st March 2024. Originally, this was scheduled to take place on the 29th of May 2024. However, due to the national election in South Africa, we had to reschedule, and I hope you've managed to take some time and exercise your democratic right. More importantly, I appreciate that today you've managed to attend our session. I must acknowledge this has been tough trading environment, characterized by high inflation that has resulted in elevated interest rate, adverse weather condition, particularly hail. We've seen damages to vehicles and a continuous deterioration of the road condition.
Furthermore, during the period of shortage of fleet, we've seen new entrants in the short-term rental business, and the competition continues with the supply of new cars, and these are the environment and the condition we navigated through this period. In 2021, we successfully developed an integrated mobility strategy that position our business to significantly grow through innovation, operational improvement, and optimization. The Zeda business segment comprises of businesses that are so aligned in the mobility landscape, offering short-term and long-term mobility solution. They are so aligned and yet provide diversification to navigate through changing business cycle and tough trading environment, providing us with a natural hedge. We have consistently leveraged our proper planning and focus to understand and capitalize on a growing market trend and seize opportunities presented by market challenges, such as logistics, and that can be evident by heavy commercial strategy yielding impressive results.
Furthermore, we've expanded our corporate leasing client to diversify into several industries, including e-commerce. I'm truly pleased that we've solidified our position in the last mile, while we continue to offer our customers option, including environmentally friendly vehicles, electric and hybrid. Looking at the short-term mobility sector, planning again and focusing remain critical. Considering the changing in consumer travel pattern, disposable income, change in weather condition, and evolving mobility consumption trend, such as subscription, we maintain disciplined practice to ensure the right vehicle are purchased, we fund them appropriately, be it on or off balance sheet, we utilize effectively, and key, we dispose it timeously and appropriately. Doing this with one thing, we are relentless in paying attention to the total cost of ownership and usage. During the shift in the used car market, our operational agility was put to the test.
This period served as a true demonstration of our resilient adaptability and effective strategy. We successfully expanded our used car sales, somewhat defended some profit margin by favoring the retail over wholesale disposal, while maintaining a fleet mix balance. Additionally, we experienced a growth in the discretionary and high-yielding short-term rental business in the inbound and the domestic sector, and we sustain our effort in growing our short-term subscription. Our unwavering commitment to cost management further underscores this robust performance. When you look at it, we delivered solid financial performance, underpinned by strong business fundamentals. With a healthy balance sheet reflecting the success of our capital allocation framework, we consistently delivered exceptional returns to our shareholders. The solid performance underscores our successful execution of our integrated mobility strategy, and the resilience of our business model that empowered us to thrive even in challenging trading environment.
It is important to highlight our achievement of reaching a new record level of ZAR 5.9 billion and ZAR 1.8 billion in revenue and EBITDA, respectively, showcasing our strong growth in this market, with a 19% increase in revenue and 7.5% increase in EBITDA. While we experienced a decline in operating margin from 18%-15% compared to prior year, this was mainly impacted by the decline in the used car margin and increased damage costs from vehicle tires and windshield. This, however, present an opportunity for us to focus on this area as we continue to improve and protect our margins. We continue to demonstrate strong cash-generating capability. I think Thobeka always talk about how we do it when we generate strong cash.
Over the past six months, we have experienced sustained growth in our corporate and heavy commercial leasing business, as well as what I have reported previously, the corporatization of our van rental operation. What does that mean? We have strategically adjusted our fleet mix by replacing some of the smaller vehicles, mostly coming out of the long and old public sector contract that we're coming to an end. We replaced those smaller vehicles with heavy and light commercial vehicles. Even with more expensive vehicle, we delivered ZAR 958 million in cash and maintain our debt, our net debt, at a steady level, and Thobeka will unpack it.
We delivered a strong return on equity of 28.5%, and there's no doubt we continue to utilize the ROE effectively, with a ROE, with a ROIC of 16%, which is 3.2% above our weighted cost of capital of 12.8%. I think of all this period preparing for board and all, there was just one thing that occupied my mind, and I'm happy now to announce that our board has approved an amendment to our dividend policy. If you recall, our dividend policy did not include interim dividend. The board has authorized the distribution of our inaugural interim dividend of ZAR 0.50 per share. Moving on to segment. Leasing. The leasing business delivered exceptional performance, achieving a 17% revenue growth.
This success can be attributable to the strategic initiative that we've implemented in our Greater Africa operation, which experienced a significant revenue growth of 29%, following the portfolio review that we've done. Furthermore, this operation enhanced their contribution to the total group revenue by 4%. Notably, we have increased heavy commercial unit by 51%. South Africa corporate leasing revenue also saw a commendable growth of 17%. As a result of this achievement, we have delivered an impressive EBITDA margin of 59%. This represent a notable increase from the previous margin of 57. Short-term rental. Our rental business delivered a solid performance, achieving just under 20% revenue growth in this market. This was mainly due to the sale of additional 2,200 used cars, and as I've indicated-...
The discretionary and high-yielding business, our inbound, I'm sure most of you have been reading about inbound activity, our inbound business, and domestic travel. Inbound going up 40%, and domestic 39%, and this was seen in countries such as South Africa, Namibia, and Botswana. Despite the strong top-line growth, our EBITDA margin of 26% is 5% lower than prior year. However, I spoke about natural hedge. With a 5% decline in EBITDA margin, the impact when you look at what happened in our used car margin, used car margin went down 8% year-on-year. We further mitigated that decline in used car market, as we've said, when vehicle comes back, when tourism comes back, and when used car market margin goes down, this will be what we see.
Our high-yielding business in short-term rental in inbound and domestic has mitigated the decline in our margin. Even though profitability was under pressure, we managed to maintain our EBITDA at just over ZAR 1 billion. That is despite a high proportion of operating lease of 22.6%, compared to 3% in the prior year, and that was a strategic decision that we've made. We've seen high damages and out-of-service vehicle that, as I've indicated before, which has impacted our utilization to be 72%, which is 100 basis points below our target of 73%. We've also seen a decline in a very price-sensitive replacement business that gives a high utilization from a long length of term. These are, however, challenges that we are well geared to turn them around. As we've indicated previously, the report approved our integrated...
They've approved our strategy on environmental, social, and governance. As we continue to roll out the strategy, we're starting to enjoy the benefit that have both financial and non-financial impact. A payback in our wash bays that we have deployed in major site is yielding positive results, with a reduction of municipal water by 22%, and we've increased liquid waste recycle at 48%. Ethics is very important and key in a Zeda business. We continuously take our leadership through ethical training, and we train Brand Ambassador in all global ethics activities that are there. I am pleased that in this six months we've got zero fatality, and that's something that we work hard to maintain. Our lost time injury frequency rate is, however, high at 0.25, and the Brand Ambassador knows that I consider this to be high.
I spoke about the damages on the road of tires and windscreen due to deterioration of the road infrastructure, and we continue to do the investment in fixing the potholes because we realize this area where we suffer a lot of damages. To date, since we started in partnership with Discovery and City of Johannesburg, we have fixed over 50,000 potholes. We continue to invest in the youth and skills, and we've invested over ZAR 21 million. I will now hand over to Thobeka.
Thank you, Ramasela, and good morning. Our business has an attractive financial profile, characterized by strong balance sheet, strong cash generation, and leading return metrics. If you look at our financial highlights, we have delivered an EBITDA margin of 34%. This continues to be margins that surpasses pre-COVID levels. Return on equity, as Ramasela has shared, at 28.5. Also pleasing to see that our net asset value per share has gone up by 34% to ZAR 14.27 per share. When I take you through the balance sheet, you will further note that our equity proportional contribution into the capital structure has improved to 34%. This was previously at 29%. Our net debt to EBITDA improved to 1.5. To unpack our results even more-...
To start with the fleet size, I still think it's relevant to draw correlation of our journey from 2019 to where we are today in 2024. We have delivered record high revenue, 19% up compared to last year, and the highest in the period under review. We have delivered this with 17,000 units lower compared to pre-COVID levels, which is in 2019, as shown on the screen. But when you look at the revenue generated, this is 5% higher compared to pre-COVID levels. How are we doing this? We continue to be measured in how we invest in our balance sheet, in the fleet that we're purchasing to support where we are seeing the demand coming from, and making sure that the fleet is appropriate for the revenue segments that we will be generating revenue from.
In addition, you will see that both operating segments demonstrating the strength of being able to generate revenue growth, notwithstanding the tough economic conditions that Ramasela has shared with you. When we look at EBITDA and operating profit, yes, the margins have contracted compared to 2013, but they continue to be better and stronger than 2019, 2020. This is off the back of the work that we started in 2020 to create an integrated mobility company, looking at extracting cost efficiencies and making sure that these are lasting and continue to carry us in terms of maintaining strong profit margins. But what impacted the margins? Ramasela has spoken about the used cars profit. We have seen this decline by 800 basis points year-on-year. In addition to that, the impact of the poor road infrastructure and the inclement weather increased our damages cost.
In the Gauteng province alone, we experienced eight hailstorms in H1 of our financial year. This had the impact of increasing tire cost, windshield cost, and adding that with the impact on the used cars, we saw pressure in our margins. But we had levers to cushion against this. The first lever, as Ramasela has unpacked, looking at a balance of lease versus buy to ensure that from a holding cost perspective, we maintain an optimal holding cost. The lease versus buy option further gives us an opportunity to protect our end channel of the sale of used cars, choosing carefully what we buy and put on balance sheet, and that which we lease to be able to then dispose right at the right margin after the cycle on the rental side. The car sales business itself, it has very light cost base and infrastructure.
That set base further allows us to be able to defend and maintain our margins, even in the fluctuation of profitability in the market. We will continue to consistently look at all the levers to help cushion our business from any external factors that will negatively impact on our margins. This slide really talks about the strength of our diversified portfolio. We have capitalized on the mobility developments in the geographies that we operate in, and this is demonstrated by how the major revenue categories of our business have performed. Really seeing strong growth from car sales at 28%, leasing having grown at 22%, and having defended our strong base on car rental that we've built over the last three years, with revenue having grown by 7%. I just wanna focus your attention to the car sales business.
We have now met 2019 levels in terms of revenue on significantly lower fleet. This is coming out of the work that we did when we were creating the mobility business, to start looking at how we show up in the market from a disposal through retail versus wholesale, which allows us to be able to go capture even enhanced and more superior returns. And that position has enabled us to be able to defend our used car margin, and that notwithstanding the market pressures, we still believe that our margins are very, very good. The leasing business, we continue to capture the demand coming from the long-haul sector and the last mile, and we have also seen very pleasing demand growth coming through from the Greater Africa regions. We are a company that uses debt and equity to fund our business.
We do sit with a debt-to-equity ratio of 34 equity, 66% debt. But these slides demonstrate to me that our operating model has been tested and indeed proven. This slide demonstrate that in the period of consistently elevated interest rates, we are able to generate earnings from the investments that we have made, and the earnings are sufficient to cover our financing cost. Yes, there has been a downward movement in our interest cover, and that does correlate with what we have seen in the prime rate movement, having gone up by 200 basis points from 1 October 2022. And we've closed at an interest cover of 4.7 times, which is a position that has enabled us to have enough headroom to cover our funding cost and to be able to have the returns remaining for our equity shareholders.
Our tax charge has remained effectively stable, sitting at 28.9 against 28.4 in the previous year. We do have non-deductible expenses from a recurring perspective, coming out of traffic fines and IFRS 2 cost. And coming out of our Greater Africa regions that pay royalties into South Africa, we also do have an impact of withholding tax. We always are looking at how do we continue to be efficient in our tax management and really moving our effective tax rate closer to statutory rate and even better. Earnings per share. I say this is the one financial matrix that took the maximum from the impact of decline in used car, the cost pressures that we saw from the damages cost, our interest rate having gone up by 200 basis points in the period under review, and yes, a marginal movement of the effective tax rate.
With all of those elements really being a constraint in terms of pushing for the maximum on earnings per share, we closed at earnings per share of ZAR 165.5. We will continue to look at how we seek out the opportunities within operational excellence, funding cost, to make sure that whatever profit margin pressure's coming through, we continue to mitigate and continue to grow our headline earnings per share. We have delivered robust earnings. As Ramasela has said, ROIC of 16% and return on equity at 28.5%. We structurally limited overcapitalization of our balance sheet.
We made sure that in the capital allocation, the assets that we put on balance sheet were commensurate and matched the demand that we were seeing in H1, and was sufficient to meet the consumer demands to enable us to protect the return on invested capital and return on equity, and that strategy is proving to be right, and we will continue to deploy it. Our operating assets is the strength of our business. If you look at how this has moved, you see the fleet assets for rental having declined from ZAR 5 billion to ZAR 4.3 billion, and the leasing business having grown from ZAR 3.6 billion to ZAR 4.3 billion.... When you look at the debt movement, it does follow the same pattern, where we have seen growth in the long-term proportion of the debt to support the leasing business.
The rental business net book value decline in itself is not as a factor of a decline in fleet size, but just to remind all of you, as what Ramasela has said, we have increased the proportion of leases into our fleet, this having grown to 22.6% from 3% in the prior year. These are vehicles that are not on balance sheet, so we do not have a depreciation charge, but we do have a lease charge, and these vehicles do support, together with the vehicles on balance sheet, the demand on the market and for us to be able to meet market demand.
Just to also highlight on the inventory movement, yes, it does look slightly up compared to previous year, but this is less a function of absolute value growth, but, or unit growth, but really more driven by the average unit cost of the vehicles that are slightly higher, and also because driven by the fleet mix. We continue to always make sure that we defleet just in time to be able to meet the demand for the starting month. I really do like this slide. It shows the embedded equity that sits in our business, and let me unpack what I mean by embedded equity. Yes, as I mentioned earlier, we are a business that is both debt and equity funded, and when we buy our operating assets, they are not wholly only funded by debt.
We generate strong cash at each reporting cycle, and we use the cash to reinvest in the business, and we supplement further investment and growth using the debt. But what you see now is how that equity investment and the proportional equity investment has improved from 20% to 40% in HY, in HY 2024. This means that only 60% proportional value of our operating assets is debt-funded, and the balance is equity-funded, and equity debt already belongs to Zeda. Net debt at the end of March, having closed at ZAR 5.2, this was ZAR 5.1 in the previous period. When you look at our capital structure, as I mentioned earlier, equity at 34%, net debt at 66%.
From our date of unbundling to 31 March 2024, we have generated ZAR 1.1 billion in equity, and that is the equity that is providing the headroom from a capital structure to reinvest in the business. And as Ramasela has mentioned, ZAR 958 million in cash. That's allowing us to be able to continue to have sufficient fund to start the new period, the new financial period, and being able to protect our net debt to almost flat compared to prior year in the period that we've increased our fleet. From a cash flow analysis, just to highlight that we have invested ZAR 3 billion in fleet purchases for the period under review, and decrease in working capital of ZAR 1.2 billion. We sit with a total funding facilities of ZAR 8.8 billion, with a headroom of just under ZAR 2.7 billion.
To further confirm that for the period under reporting, we have met all our financial covenants. When you look at this slide, this really talks about the journey and the evolution of our funding, where from March 2021, we had started with a ZAR 1 billion floor plan funding from being externally funded. That journey has matured and progressed, that we saw a ZAR 2 billion syndicated structure coming into our business in November 2023, and in September 2023. We further introduced a diversified financier base in September of 2023, having introduced a different profile of financiers, starting to enable us to have an extended maturity profile and even more competitive and better funding cost. All of this work that we have done to date enable us to be able to introduce Zeda Financing Limited.
Zeda, intending to go into the debt capital market, to have a program size of ZAR 5 billion, with the registration to be completed by September 2024, with the plans to go to the debt capital market in our quarter two of FY 2025. From a sustainability finance fundraising framework, the intention will be to go to market in FY 2025 in quarter four. We have been deliberate to look at these two structures because they are appropriate for our business. The debt capital market will support our continuous bold growth ambitions to be the leading mobility service provider in Africa, and our ESG strategy, as Ramasela has shared with you, will be supported by this framework in our continuous commitment to be a sustainable organization while we pursue our integrated mobility solution. With that, I hand back to Ramasela. Thank you.
Thank you, Thobeka. Just on our outlook and a strategy update. We are resolute that our strategy will continue to deliver sector-leading returns and provide opportunity for growth in all business segment and regions that we choose to operate in. As we have now entrenched heavy commercial leasing for long haul, we are embedding ourselves in the last mile in the form of van rental. We are now operating in 29 branches, and for the first time, our international airport provides you with the LCVs. Our Greater Africa region operations are all poised to increase their contribution to the group revenue. As I've indicated, we are all in good position to grow revenue and profitability. Countries such as Zambia, Mozambique, Namibia, and Lesotho are well ahead of track to meet their current year target. We're seeing a good turnaround in our Ghana operation.
We continue to experience high activity level and strong order book of over just 800 units in SA Leasing, corporate and public sector. Last year, or when we start this financial year, we've introduced iLease subscription to the market, and that launch went exceptionally well, kept us very busy. We've seen a lot of interest from the market. However, due to a strict credit vetting process, which we still will maintain, the conversion has been rather slow. We are ever continued to evolve the solution to the market demand because we believe that this will be the disruption to this market. Our inbound activity in the short-term rental, including domestic travel, is picking up very well with public sector activity, subscription remaining our key growth focus in the short-term rental. Our strategy of increasing retail used cars that generate strong profit margin with minimal incremental cost.
Because our retail is not to grow the footprint with brick and mortar, ours is to use digital footprint with a digital dealership. May I add, this will be the first in the dealership of used car market, and we are excited about this. Customer centricity is very important to our brands of Zeda, Avis, and Budget, and we continue to seek and develop new opportunities and new means to improve our customer journey. With the introduction of the self-service at major airport, our reservation and real-time customer feedback through the board, we see this really taking a good shape. As I always say, I do not expect good service for our customers or even execution of strategy that deliver robust and sector-leading returns without taking care of our Brand Ambassador . It is, for me, one of the most critical aspect of my job.
We have launched our culture value handbook with senior managers that have all made a pledge. In addition, we've socialized the culture handbook throughout the company. We are in the process of reviewing employee value proposition to ensure that we remain relevant in this evolving workforce. Just a bit of what we've promised when we close the 2023 financial year, and what we've delivered. Growth is our strategy, and yes, indeed, we've delivered double-digit growth line. All our revenue, as Thobeka has indicated, you have seen that growth coming through. Margins, protection of margin remain very key. In our leasing business, we've grown those margins, and yes, in the rental business, and as part of the group, the margins are still under pressure because of the change in the environment, but for us, it's to protect it.
Yes, for the first time, with the returns that we have been generating, we have declared an interim dividend, and we continue to manage the balance sheet. As Thobeka has indicated, that we now have the Zeda Financing Limited, and going to the debt capital market in the near future. What is our story for this second half? No doubt, headwinds are still there. The used car margin, we're still expecting a further decline in margin of between 2 and 3.5%. Price pressure, we still expect high volumes on new cars, while disposable income still expected to be under pressure, mainly because all indication is that interest rate is likely to come to an end, if we're lucky, when we finish the financial year. However, the Zeda story, based on the strategy, still relevant, as we've indicated that we're able to navigate.
What is the Zeda story? There's no doubt in the room today, ladies and gentlemen, that our story and our strategy is about growth and about seizing opportunities, and we have demonstrated that, and we will continue to demonstrate that. The growth that will come from long haul and last mile, and the growth that will come from our innovation that we'll continue to do. A subscription model that we still believe will continue to disrupt the business. Our story is about the protection of the margin, because growing the top line, you've seen, and we continuously want to protect our operating margin. Operational efficiency is key, and the one thing that we know is that, that there's one thing that is under control.
Be it damages on the road, we still believe that is still under our control, and we are well poised and geared to make sure that we continue to maintain and protect our margin as we grow Zeda business. And thank you very much for attending this morning and being with us. I'll now hand over to Babalwa.
Thank you, Ramasela. Thanks, Thobeka. Ladies and gentlemen, I would now like to open the floor for questions. I will start by taking questions from the room. Please raise your hand and introduce yourself. From time to time, I will be reading questions from the webcast and checking on the conference call. You can go ahead.
Good morning. Thank you for the presentation. Sean Chioke from Nedbank. I've got a couple of questions, so I'll maybe shoot with just three for now. So the first one is: How sustainable is the margin momentum in your leasing business? I understand there is a fleet mix and sort of improvements in terms of operational efficiencies, but can you please provide us more context here in terms of our commercial vehicles, 200 basis points margins higher versus the normal fleet? Was public sector really a drag on performance in this segment? Is corporate generally better, or the margin you see in Greater Africa is stellar? So if maybe we could get the distinction on the different margin profiles within this segment. So that's the first question. And then the second question is around...
You spoke a bit about damages in terms of, you know, windscreens, potholes. If we look at, you know, your percentage in terms of your damage cost, maybe two parts to it, what is that impact in terms of your financial performance? And secondly, if you link that to the utilization of your fleet, you know, generally as you use your fleet, is that a function of more damage cost, or there's a science to still getting your utilization rates higher, but your damage costs coming lower? If we could get clarity on that, that's the second question. And the last one is around, sort of your operating leases.... So as the market normalizes, somehow the system will clean itself out, in terms of the flooding of cars.
And I'm sure you've enjoyed this period, because a lot of your OEMs have been under pressure to try and get cars off the shelves, and there were benefits we see it on your balance sheet mix. Do you see this sort of cyclical or very much being more structural? Thanks.
Thank you, Sean. I think, let's answer the questions. The first question's on leasing EBITDA, sustainability, and profile of those margins in the leasing segment.
Okay, thanks, Babalwa. So, Andisiwe will take the first one, Tlhabi will take the damage cost and operating lease structure, Thobeka will take it, but I think I need it more. There was a part I didn't get. Maybe Thobeka got that one. Okay.
Okay.
We'll start with Andy. Andisiwe? The roaming mic, please. It's behind you.
Thank you, Sean. I think from a leasing perspective, Ramasela mentioned the diversity of the leasing book. And we've definitely seen exceptional performance coming out of the leasing book, both in South Africa as well as from a Greater Africa perspective. As you rightfully state, a lot of this has also been driven by an optimization of the business and ensuring that we extract value. But I think it's also important to note at this point that the business model and how we respond to opportunities in the market is well within our control, in that we only place orders or look for business once we had to have a confirmed order.
So as we respond to the market opportunities, as we see our clients' needs are evolving, and we've gone through a very robust onboarding and vetting process, we're then able to see from a risk appetite perspective, how much of that risk we can take on, and how much of that opportunity we want to extrapolate from the market. So as we see, and we stay quite close to the market, we're able to then respond appropriately. So when it comes to sustainability, I think it's well within our control, in terms of the market. But definitely, when we look at the segments that have been growth pillars for us, be that the heavy commercial and e-commerce space, that continues to boom, if we look at what's happening in the market and as we respond appropriately.
But also, if we look at our Greater Africa with, in terms of supporting our customers as they expand their businesses and their reach, on the continent and responding appropriately, obviously, within the different frameworks that we have in the different countries. So I think definitely from a sustainability perspective, it's something that we stay quite close to in making sure that we manage, our risk appetite, accordingly as well.
Thanks. Question: Of the part about public sector, was a drag?
Oh, I think we've seen many, I think over the years, ebbs and flows when it comes to public sector. I think we've coming from a space where we had quite a big concentration in terms of our book. But you would have seen from our presentation that corporate still remains rather a very big foundation of our book, and has grown significantly in the climate. So public sector has definitely not been a drag. In fact, the size of our public sector book is the smallest I think it's been to date. But we are still in the space, we continue to participate, and where opportunities come in, we will then seize those.
Thanks.
Is there one other?
Okay. Tlhabi ? Tlhabi, sorry.
A mix in terms of public sector.
Margin profile between public Greater Africa as well as corporate.
If I can maybe give you the mix in terms of the book from a fleet size perspective, 80% of that is still within the corporate sector. Our public sector really makes up a very small proportion of that, about 2%, and the balance of that would sit in Greater Africa. Thanks.
Thank you. Tlhabi?
Thanks, thanks, Sean. So from a damages perspective, I think the impact, from a short-term mobility, cost perspective, it's something that we track quite, closely, and it's based on volumes, so we track the damage cost per rental day. I think the cost that we had budgeted for is basically based on what we've seen from history, but I can say that the increase has been significant enough to impact our financial statements adversely. I think if we look at how it links up to the utilization, really, if you look at some of the items that, Ramasela and Thobeka spoke to, we've seen increases in windscreens as well as tire damage.
Now, you can appreciate that those are safety elements, where the fleet has to be down, for prolonged periods to be able to rectify those. So it links up to the utilization that if you've got quite a number of vehicles that are down for safety elements, you then have less fleet that is available to be rented out. So that is how it then links up to your utilization. But I think it's not the only thing, obviously, that impacted the utilization. We spoke to the decreases in our replacement insurance segment, which is typically our longer length business. That is a second element that has impacted our utilization. I hope that answers.
Thank you, Tlhabi. Thobeka, on operating leases?
... So, I think just to also share with Sean that operating leases have traditionally been part of our business. This is not a unique circumstance in 2024, and it is part of the agility in our operating model that perhaps was less available during the constraint of new vehicles. And as that supply chain has recovered and normalized, the opportunities are now back again. Is this a once off? No, it's not cyclical. It is going to be structurally continue to be part of how we manage our fleet and how we manage the capitalization onto our balance sheet.
Thanks, Thobeka. I would like to read two questions from Jonathan on the webcast. They are for you, Thobeka. The two major shareholder concern seems to be the group's overall debt levels, particularly in this high interest rate environment, and whether the business generates sufficient cash net of the never-ending requirements to add to fleet. You have declared a dividend in this set, which helps dispel the comment that Zeda doesn't generate cash. What is the ideal level of debt that you are ultimately targeting? If I can take the second question, Thobeka, EBITDA seems to be a sub-optimal measure for a business like Zeda, which has such a high real depreciation charge. What is management's view as to the ideal or targeted long-term debt to profit before, interest and tax level, PBIT level?
So, to first address the question on the debt, and the slide that I presented in terms of the interest charge and the interest cover, it was really to demonstrate that to the stakeholders, that in the use of financial leverage, it continues to be important for us to make sure that the debt is invested in the operating assets that generate sufficient earnings, that the earnings will be able to cover the debt servicing cost, plus the return to the equity shareholders. And in this period of consistently elevated interest rate, we continue to sit with a strong interest cover of just over four times, and we have been able to comfortably service all our debt requirements. What does that look like in terms of optimal?
When we look at optimal, we don't measure it in absolute terms, we measure it in terms of how it contributes from a capital structure perspective. As I mentioned, we're sitting with equity at 34, with debt at 66, and as we continue to generate strong equity, that equity will always be the first capital allocation portal that will then be supplemented by debt, and then that debt contribution will always be in proportion to supporting the capital structure, and remaining appropriate to generate sufficient returns, for all stakeholders.
Thanks, Thobeka. The question on EBITDA is a sub-optimal measure for a company like Zeda?
So we believe EBITDA is actually appropriate for a company like Zeda. If you look at our balance sheet, what generates revenue in our balance sheet are the operating assets that sit in our balance sheet, that from a cost of sales or from a cost of doing service, it's the depreciation charge that comes into the, into the income statement. And that, for us, is important because when you look at that EBITDA measure, it then says: Once you've generated your earnings, once you've put through your depreciation charge, does that sum allow you to be able to then have been able to meet your debt obligation? Hence, we always look at the net debt to EBITDA ratio, because that says whatever you're doing in the income statement, is it sufficient for the debt?
We also make sure that that is also a proxy for our cash generation in the period, because we sit with a huge proportion component of non-cash item that sits in our income statement. That depreciation cost is always a good proxy for future investments that are going to be required by the business as you continuously then depreciate the asset through use for the generation of revenue.
Thanks, Thobeka. Operator, can I check if there are any questions on the conference call?
At this stage, we have no questions on the telephone lines.
Thank you. Any more questions from the room? Okay, I'll take two questions from Rowan on the webcast. The question reads as follows: Can you please give an indication in changes in rate per day and billing days in car rental? What are expectations for rate per day going forward, given increasing competition? And the second question from him is: What portion of the leasing business is heavy commercial now?
Okay, I think Lita will take the first one, and Andisiwe did address the second one, but maybe you can just quickly say.
Yes, I think the best way of. Thank you very much. In its purest form, to measure volumes in car rental, you need at the individual rentals that we generate. Just to give you a sense, for the first six months in 2023, we had on average 53,300 customers per month. Now we've got 57,600 customers. We've got an extra 4,000 odd new customers that are coming this year than the previous year. That's the purest form of looking at what are your volumes. So that's about 8.1%. So that's the first one. What was the second question? Rate per day.
Yeah.
Because the dominant brand between Avis and Budget on our side is Avis, which is a premium brand, we've got new, clean cars, relatively new, and in fact, we don't keep our cars for more than 12 months. We've always been able to command a premium relative to the market. The way I want to address that is to say that there is a differential between the price that we fetch in the marketplace and what our competitors fetch. When we look at over the period, that differential is between 13% and 18% that we command in the marketplace by virtue of our brand and our strength, as well as the safety, the cleanliness of the vehicles that we carry compared to the marketplace. I think that's the best way of addressing the rate per day.
However, having said that, we do believe that the availability of vehicles in the marketplace puts pressure on your ability to actually fetch the highest possible price. Is there another question that I'm missing?
I think it was the leasing, the proportion of heavy commercial.
Oh, thank you. So we have grown our heavy commercial book quite significantly over the last year. Ramasela shared in the presentation, it's 51% up from a unit count perspective. But in terms of our total fleet book, the composition is about 7% of the book. We've also, I think we shared at the end of last year, also introduced some electric trucks into the fleet as well, supporting our customers in the last mile space. Thank you.
Thanks, Andisiwe. Can I check if there are any questions from the room? I'll take questions from the webcast, from Hayden Smith. For you, Ramasela: "Please tell us about your thoughts on buybacks. This would be far better for investor returns than dividends." That's the first question. He also asked us to clarify: "Please clarify your outlook on second-hand vehicle sales margins.
Okay. Thank you very much, Babalwa and Hayden. Hayden, I think it is always important to contextualize the Zeda journey. Having come as an unbundled, in just 18 months, where shares were given to shareholders, that we do still have an overhang, and we have engaged on this so that we do have a significant overhang that is putting much pressure on even our share price, and that has been a point of concern, and we've been discussing with board, and I'm really pleased to appoint that we are moving in a direction that we will be able to address that in the near future.
Because we do believe and agree with you that the buyback will have been good, but at the time that we're in now, the continuous flow back that comes from that hanging shares, it is something that we really want to attend to, and we will be attending to it in the near future, to make sure that when we now do an appropriate return within the form of a buyback, we believe it will be very accretive. I think at the moment, we didn't believe that it will do that based on this overhang that we're sitting with. The second-hand business, I think I'll give it to Claudine to really unpack where have...
Thank you, Hayden, for the question. In terms of the used car margins, as we indicated in our last year's sets of results, that we would see a normalization of the margins going into this year. I think for the outlook of the next six months, we expect further move on the margin between 2%-2.5%. But that being said, still not to the levels that we experienced pre-pandemic stage. Thanks.
Thanks, Claudine. Last question I'll take from Hayden is for you, Thobeka: "In your results commentary, you talk about watching costs or managing costs and have put measures in place for this. What are you focusing on?
So we are focusing on damages in terms of continuously looking at, call it, the recent trend, and how do we improve the driver awareness around whether there's going to be a hailstorm, or in terms of really just from being conscious where you drive and which roads we're seeing are starting to have an impact, and proactively engaging our customers on that. That is definitely our big single lever that we are looking at. The second one is minimizing the out-of-service impact because that has a direct correlation to utilization.
What we are continuously looking at is expanding really and diversifying the portfolio of the panel beaters and the workshops that are supporting our business, so that it enables us to be able to turn back those vehicles quite quickly. Then the third one, which sits under Claudine's portfolio, is really around strategic sourcing. As I mentioned, we are big consumers on windscreens , tires. How do we procure that even more efficiently so that the cost continues to be managed? Those are the levers that we're really looking at.
Thanks, Thobeka. Operator, can I check if there are any questions on the call?
Ma'am, we don't have any questions on the call. Thank you.
Thank you. Any questions from the room? Ladies and gentlemen, we are 10 minutes over. We have now reached the end of our session. We are looking forward to engage with you in the next week. For our guests, refreshments are served just outside. For everyone else, please enjoy your day, and thank you for joining us. Thank you.
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