Chief executive officer’s report

Hubert Brody

Hubert Brody Chief executive officer

2009 OPERATING MARGINS

results for the year underscore the benefits of streamlining the group. imperial’s strong balance sheet and rebalanced portfolio of businesses position us well in the Current market.

We are pleased with our results for the year to 30 June 2009, which were achieved under very difficult economic conditions, particularly in Europe and in the motor retailing environment.

Headline earnings per share (HEPS) from continuing operations were 13% higher than last year at 698 cents, and capital management and cash flow were good. Divisional results generally exceeded our expectations, which were in turn tempered by the sudden downturn in the economy during the year.

These results underscore the benefits of rationalisation in the first half of the year and of recent strategic restructuring actions that included streamlining the group and the closure or sale of a number of weak and underperforming businesses. Over the past two years we were also steadfast in our resolve to exit businesses that were inefficient in their utilisation of capital. In this respect we are disposing of our shareholding in Imperial Bank to Nedbank for R1 775 million.

Despite the sale of our shareholding in Imperial Bank, our motor dealerships will have a relationship with Nedbank which will facilitate the seamless continuation of vehicle finance to customers and continued benefit to our group from the financial services product range that we currently offer.

Trading environment and performance

divisional statistics

 revenue contribution

 

operating profit contribution

 
Revenue Contribution  Operating Profit Contribution 

 operating margin


Trading conditions were very difficult in most of our businesses for most of the year. Specifically, vehicle retailing in South Africa, the United Kingdom and Australia and logistics in Germany experienced unparalleled challenges while car rental, tourism and the southern African logistics businesses were also under pressure.

The group’s logistics operations in Europe performed well in the first half, but the global financial crisis caused a drastic decline in logistics volumes from November. The southern African logistics business was also affected and did well to increase its operating profit by 5,4%, with solid margins in a year when a nine-day strike in the transport industry affected profitability.

The motor retailing division and Associated Motor Holdings, which is the largest business in the distributorships division, excelled in the manner in which they reacted to tough trading conditions and we are delighted with their performance over the year and the rationalisation and cost-conservation steps taken. Conditions, particularly in motor retailing, however remain extremely difficult, in a market that has halved since 2006.

The year saw significant internal streamlining and procedural improvements in the Regent group subsequent to combining the two operations (life and short-term insurance) under one co-ordinated management team. Far-reaching management changes took place during this process and we believe underwriting results are becoming more consistent and sustainable again.

Our exposure to equities has been reduced to a level appropriate for an industrial group, although we will explore avenues to improve the yield on our shareholders’ capital and float. The Regent group is an important component in the total design and capital management balance of our group and has solid cash-generation capabilities.

The ratio of net debt (excluding non-redeemable preference shares) to equity was 50% compared to 81% last year and 75% at the interim stage. This is well below management’s target range of 60 – 80%.

Notably, revenue from services again increased in the review period and now accounts for over 40% of total revenue.

Included in headline earnings for 2009 was a foreign exchange gain of 212 cents per share (R394 million, 2008: R150 million) realised on repatriating some of the capital of our European operations. Our offshore businesses serve as a natural hedge against currency weakness and capital is repatriated from time to time when the exchange rate is favourable.

Vehicle sales

In southern Africa, the group retailed 53 241 new and 47 925 used vehicles, respectively 35% and 19% down on last year. Notably, the vehicle sales market in South Africa for the year to 30 June 2009 recorded a 30% decrease. This can only be described as severe circumstances for businesses where some 80% of overheads are fixed. The decline in the total vehicle market as well as the closure of 40 new and used car dealerships contributed to the drop in our vehicle sales. It is noteworthy however that the mix of new and used vehicles is nearly at a ratio of 1:1, which is viewed as healthy. The group also sold 10 002 new vehicles to outside dealers as a distributor, a 40% decrease from last year. The Australian, Swedish and United Kingdom operations sold 10 727 new and 4 460 used vehicles, respectively 85% and 93% of last year’s sales.

Financial results

The group returned a profit attributable to Imperial shareholders of R1 518 million compared to a loss of R870 million in the prior year. The loss in the prior year included losses on the disposal and closure of the aviation and commercial vehicle assembly and distribution businesses, and in the current year, the gain on the disposal of Tourvest is included. Continuing operations recorded a 13% increase in headline earnings to R1 294 million or 698 cents per share.

Net debt (excluding preference shares) was R5,1 billion compared to R8,5 billion a year ago, a decline of 39%. This reflects the strong focus placed on cash and liquidity management during the year.

In the current economic climate, net capital expenditure was 33% lower at R1 755 million, primarily because of lower expansion capital expenditure. Replacement capital expenditure was maintained at prior-year levels.

A final ordinary dividend of 120 cents per share was declared, bringing the total ordinary dividend for the year to 200 cents per share.

Future strategic focus

Through the recent restructuring of the group, we have succeeded in strengthening the balance sheet and management can now focus on expansion into our chosen focus areas. These areas are logistics, tourism and selected aspects of financial services that are aligned to our current business.

Internationally, our expansion will be aligned to Imperial Logistics International, and opportunities in Europe in the current depressed regional economies are beginning to emerge. Our southern African logistics division will continue its organic and acquisitive growth and we will also pursue acquisitions that are adjacent to our current operations and skills base where we have a competitive advantage.

In line with our stated goal of enhancing capital efficiencies and entering adjacent industries, the southern African logistics business created a fourth division housing its integrated services. Volition, recently acquired, has been transferred to this unit, and the objective is to complement and enhance the existing service offerings of Imperial Logistics with professional services leveraging people, processes and information technology assets.

We believe tourism in southern Africa has significant potential and will investigate related opportunities carefully with the intention of expanding the business in a manner that amplifies our current strong base in inbound tour operations and coach touring. We have appointed Moeketsi Mosola, the former CEO of SA Tourism, to build and carry out this initiative.

The strategy to limit the group’s relative exposure to the motor retailing industry continues. Far-reaching steps have been taken to right-size our motor operations in line with our expectations for motor vehicle demand and our requirements for return on capital.

Expansion of the group during the year

In line with our refined focus, corporate activity was again concentrated in our logistics division during the year.

The southern African logistics operations acquired majority stakes in Tip Trans Holdings, Express Hauliers, Logistical Transportation Services, Rustgold, Volition Consulting Services and the minority shareholding in Liebentrans. Imperial Logistics International acquired Hansmann, a logistics provider to the motor industry in Wolfsburg, Germany, and Garex, which provides similar services in Poland.

The car rental and tourism division acquired the businesses of U-Drive, AA Autobay and Gage Car Hire Brokers.

The dealership division acquired Key Delta, a franchise for Opel, Isuzu and Chevrolet, as well as the minority shareholders in Beekman Canopies and Jurgens Caravans.

We established a joint venture with McCarthy Motor Holdings to import and distribute Chinese manufactured vehicles.

Skills development, health and social investments

The group’s training centre in Germiston, Gauteng for petrol and diesel mechanics was completed at a cost of R24 million and opened during the year. The centre is aligned to the MERSETA (the industry sector and education training authority), and has capacity to train 640 apprentices per year, in conjunction with existing group facilities. Quality standards in the group’s dealerships will be maintained through this training initiative which also contributes to addressing the national skills shortage in this area.

Leadership and management development programmes with a strong focus on black management development are under way in all divisions.

The Imperial Ukhamba Community Development Trust supports three schools in under-privileged parts of Gauteng and has spent over R11 million at these schools since its inception. The projects have achieved significant progress in terms of numeracy and support 3 500 learners through curriculum development, textbooks, teacher training and construction of much-needed infrastructure.

Appreciation

If 2008 was a difficult year for the Imperial group, amid widespread restructuring, 2009 added unprecedented global turmoil. The performance of our 34 353-strong workforce under these conditions was no less than inspirational and I thank every one of you.

The steady support of our suppliers, customers, partners and the public sector, as well as the counsel of my colleagues on the executive committee and the members of the board, is deeply appreciated.

Prospects

The southern African logistics industry is expected to remain under pressure for most of the 2010 financial year, although business activity is adequate for the division to deliver satisfactory returns.

Conditions in Europe remain tough. However, the rise in commodity prices indicates growing demand by global manufacturers which would increase activity in Imperial Logistics International. Later in the financial year we expect that certain important customers in the steel industry will recommission furnaces that were prematurely closed for scheduled maintenance. When this happens, it will contribute to higher volumes in the in- and outbound logistics operations we conduct for them.

The car rental and tourism division is currently operating under difficult trading conditions given a weak international inbound tourism market, slowdown in business travel and a sluggish used vehicle market. While we expect a slow but sure recovery in these markets, international sporting and cultural events, including the FIFA World Cup, will provide further stimulus to the division in the second half of the new financial year. We will not build significant capacity for these events in isolation, however higher utilisation and consequently better margins are expected.

While our motor vehicle retailing divisions have started to benefit from cost savings, we expect vehicle sales to remain weak in the year ahead.

Underwriting results will be maintained in our insurance operations and investment results are expected to improve. The lower equity content in the portfolios will provide more stability to the performance of this division.

While early signs of improvement in the global economies are beginning to emerge, business conditions in all our markets remain tough. Our strong balance sheet and rebalanced portfolio of businesses position us well in the current market.

Hubert Brody
Chief executive officer

25 August 2009