Divisional performance

LOGISTICS AFRICA

Despite subdued or declining volumes in most of the sectors served, the division performed superbly, delivering strong revenue growth and an improved operating margin. The benefits of the rationalisation completed in the second half of last financial year, recent acquisitions and new contract gains, contributed to the strong performance on the prior year, which included the negative impact of the transport workers strike in South Africa.

The Industrial Logistics business, which services the manufacturing, mining, commodities, chemicals and construction industries, performed well in a competitive market where volumes were under pressure. The business benefited from restructuring initiatives and delivered profit growth through new business gains and operational efficiencies. KWS Carriers, acquired late in the prior financial year, contributed positively and is performing ahead of expectations. KWS is a managed logistics business focused on the movement of bulk commodities from source to the end users and ports utilising mainly dedicated contracted vehicles.

The Consumer Logistics business performed well despite lacklustre volume growth in our manufacturing client base. Growth was attributable to market share gains, significant new contracts and the consolidation of the retail logistics and managed logistics operations. Imperial Cold Logistics (The Cold Chain) depressed divisional growth and margins in difficult trading conditions and has been restructured accordingly.

The Rest of Africa business delivered strong revenue and operating profit growth during the year in sympathy with the emergence of middle class consumers of fast moving consumer goods, pharmaceuticals and general merchandise in those African countries where we have chosen to operate. New principals enhanced the performance of the distributorship business CIC, the Imperial Health Sciences business saw excellent volume growth performing ahead of expectations, and the minority interest in MDS contributed to earnings growth and continues to perform well. The newly acquired Eco Health, a distributor of pharmaceutical products in Nigeria and Ghana, is performing in line with expectations and made a positive contribution for four months of the year, since it was acquired effective 1 March 2014.

Net capital expenditure incurred to replace and grow fleet and facilities increased 23% to R887 million (2013: R724 million).

LOGISTICS INTERNATIONAL

The fragile recovery of the European economy depressed activity levels in Germany, where our major operations are located. This was offset to some extent by the growth of German exports to markets outside of Europe, resulting in a satisfactory performance from the division. A weaker Rand exchange rate assisted the division’s growth in Rands.

Although German inland shipping volumes declined, excess capacity and low barriers to entry stifled freight rates. Imperial Shipping performed satisfactorily through optimization of the fleet, an increase in vessel productivity, the reduction of fuel consumption and increased efficiencies. Building on our expertise and experience in inland waterway shipping, the division redeployed vessels from our European operations and invested approximately R300 million, to service a Paraguayan based long-term contract, transporting iron ore from Brazil to Argentina along the Rio Parana river. We view this contract, which commenced in February 2014 and is performing to expectation, as a low risk entry into a sector and region with excellent growth prospects.

Lehnkering, which conducts our land-based chemical logistics activities, including warehousing, road transport and contract chemical manufacturing services, performed well particularly in the second half when seasonal agricultural demand increases.

Panopa, which provides parts distribution and in-plant contract logistics services to automotive, machinery and steel manufacturers, performed satisfactorily. New contract gains and good growth in the spare parts logistics business contributed positively, although margins were depressed by the start-up costs of new facilities.

Neska, the terminal operator, had a difficult year. Activity levels at terminals, especially in paper and steel were volatile. The container business performed better in the second half after some lost business was replaced, but the container terminal in Krefeld still remains under utilised and unprofitable.

Net capital expenditure of R1,1 billion (2013: R400 million) was incurred, which is significantly higher than the prior year. This was due mainly to the investment in a number of inland and coastal shipping projects, new warehousing projects in Lehnkering and Panopa, and the contract in South America. The significant weaker Rand exchange rate also contributed to the increase.

VEHICLE IMPORT, DISTRIBUTION AND DEALERSHIPS

The Vehicle Import, Distribution and Dealerships division is primarily an exclusive importer of 18 automotive and industrial vehicle brands (including Hyundai, Kia, Renault, Mitsubishi, Crown forklifts and Genie access equipment) and a distributor through 126 owned and 113 franchised dealerships, including 6 in Australia.

New vehicle registrations as reported to NAA MSA by Associated Motor Holdings (AMH), Amalgamated Automobile Distributors (AAD ), TATA , Mitsubishi and Renault equalled 90 937 (2013: 90 571), up 0,4% compared to a market that declined 2%. Renault volumes were not included in the prior year, as it was an associate.

As a South African importer, the division’s profits were severely depressed by the weakening of the Rand during 2013. The 25 – 30% decrease in the value of the Rand against the relevant basket of currencies between January and December 2013 had a direct and dramatic impact on the cost of new vehicles ordered. However, existing inventories and forward cover on the currency delayed the impact on margins for approximately 6 to 9 months. As new inventory flowed through to the point of sale, the required price increases sequentially depressed competitiveness, volumes, margins and profitability.

Higher new vehicle prices and affordability drove motorists to pre-owned vehicles, which experienced moderate growth. Consistent sales of our exclusive imports in recent years have increased the vehicle parc, establishing a higher base for the provision of after-market parts and services by the dealerships. Revenue streams from after-sales parts and service improved with the provision of services up 18% for the year.

Renault became a subsidiary of this division with effect from 1 December 2013 and performed in line with expectations.

A satisfactory operating profit was generated by industrial products and services despite a declining forklift market and lower demand from the mining sector.

Although second half performance improved in Australia, new car sales declined 14% as we altered the sales mix from rental to retail sales. Pre-owned sales declined 12%.

Net capital expenditure reduced by 15% to R714 million (2013: R844 million) as a result of lower investment in properties compared to prior year.

VEHICLE RETAIL, RENTAL AND AFTERMARKET PARTS

The revenue and operating profit for the prior year included NAC and Tourism amounting to R1,1 billion and R1 million respectively. On the revised revenue base the increase is 10%.

The Vehicle Retail, Rental and Aftermarket Parts division, now comprises 86 passenger car dealerships, franchising the products of 14 locally based Original Equipment Manufacturers, 20 commercial vehicle dealerships representing 12 brands, 38 truck and van dealerships in the United Kingdom, Car Rental (comprising Europcar and Tempest), panelshops, 65 outlets retailing pre-owned vehicles and Aftermarket Parts (comprising Midas, Alert Engine Parts and Turbo Exchange). Car Rental and Aftermarket Parts were previously managed and reported on separately.

In South Africa, the division sold 31 816 new (2013: 33 084) and 30 759 (2013: 29 547) used vehicles during the year.

The division had a pleasing year with good growth in both revenue and operating profits. In South Africa, passenger car volumes were subdued, performing in line with the market, but affected somewhat by industrial action during the period. Passenger car revenue grew as a result of an improved sales mix and new vehicle price inflation. Commercial vehicle unit sales growth in South Africa was strong in line with the market’s 9% year on year increase.

Operations in the United Kingdom performed well with commercial new vehicle unit sales increasing 29% to 4 836 and used vehicles 14% up to 1 033 units. Orwell made a full year contribution and is performing in line with expectations. The translation effects of a weaker Rand exchange rate assisted the growth in Rands.

After sales parts and services showed good growth, despite the negative effects of the industrial strike action in the first half which suppressed parts supply and delivery. Revenue from services grew 17% while price and volume increases contributed to improved parts revenue. The significant increase in new vehicle sales over the last few years has increased the potential for future after sales parts and services revenue for the division.

The car rental business performed satisfactorily. The decision to target higher quality business resulted in revenue days declining 10% and revenue per day increasing 5%. Utilisation declined slightly and the average fleet size was reduced to enhance returns. International volumes improved as tourism was stimulated by targeted sales initiatives and the weaker currency.

Retail unit sales at Auto Pedigree were higher and the business improved its performance significantly on the prior year. The panel business was affected in the first half by strike action which depressed an otherwise solid performance for the year.

The After Market Parts business performed satisfactorily in a competitive and mature market. Price increases as a result of the weakening in the currency assisted revenue growth.

Net capital expenditure reduced by 39% to R614 million (2013: R1 012 million) due to the reduced car rental fleet and the sale of properties in the vehicle retail business.

FINANCIAL SERVICES

The Financial Services division provides insurance products and services with a bias towards the vehicle market through Regent, maintenance, service, extended warranty and roadside assistance, through Liquid Capital, Vehicle leasing through Imperial Fleet Management and Ariva. The division delivered an excellent result, achieving operating profit growth of 14%.

Insurance underwriting conditions in the short-term motor industry improved in the second half. This, together with Regent’s decision to focus on its core markets and distribution channels, and to exit non-performing classes of business, increased underwriting performance by 27% with underwriting margins improving from 8% to 11%, despite the expected 10% reduction in revenue. Buoyant equity market performance led to higher investment returns. We continue to manage our equity position prudently and reduced equity exposure in the second half to mitigate downside risk. Regent’s other significant product lines in short term insurance performed well with improved penetration in a slowing new vehicle market. Regent Life performed well, with underwriting profit up 19% for the year, largely as a result of the Individual Life funeral book where gross premium Income grew by 22%. Regional business beyond South Africa continues to contribute meaningfully to the division.

Motor related financial services and products grew operating profit by 10%, despite more conservative impairment provisions in the vehicle financing alliances and the impact on the maintenance funds of higher parts costs resulting from the weaker currency. The advances generated through the alliances with financial institutions grew encouragingly, as did the funds held under service, maintenance, roadside assistance and warranty plans. Innovative new products, improved retention and penetration rates in our sales channels also contributed positively to the growth in these businesses, providing valuable annuity earnings to underpin future profits.

Volumes in Imperial Fleet Management continue improving with new contract gains. Ariva, a private leasing joint venture, is performing in line with expectations in a market with high growth potential.

Net capital expenditure in this division mainly relates to vehicles for hire. In the current year, a net R278 million was invested in the fleet, compared to net proceeds received of R237 million in the prior year. In the prior year certain of these vehicles were leased through one of our banking alliances resulting in a cash inflow, whereas in the current year we acquired these vehicles by making use of our banking facilities.