Financial performance

PROFIT AND LOSS

Revenue increased 12% to R103,6 billion. R5,2 billion or 5,7% of this growth was attributable to acquisitions; defined as businesses that were not owned on 1 July 2012. The 6,4% organic growth was generated by Logistics Africa (12%), and Logistics International (23% attributable to currency translation gains). Seasonal effects, the tightening of the South African economy and the weakening of the Rand resulted in second half organic growth of 4,4% compared to 8,7% in the first half.

The group operating margin reduced from 6,6% to 6,0% mainly as a result of the R710 million decline in the Vehicle Import, Distribution and Dealership division’s operating profit, which reduced the operating margin from 8,7% to 5,6% as explained in the divisional review. The Logistics Africa margin improvement from 5,1% to 5,7% was attributable to an excellent operational performance and the effect of the transport workers’ strike in South Africa in the prior year. The Logistics International margins increased from 4,8% to 5,0% in Euros on weak volumes and investment. Margins improved as a result of increased efficiencies. The Vehicle Retail, Rental and Aftermarket Parts division improved its margin from 4,2% to 4,6% as a result of improved margins on the sale of pre-owned vehicles and cost management initiatives. Financial Services performed well and improved its margin from 22,3% to 26,1% due to a much improved underwriting performance and higher investment returns.

In aggregate, the group’s operating profit grew by 2% and diluted core earnings per share (Diluted Core EPS) were unchanged. In the prior years, the deferred ordinary shares owned by Ukhamba Holdings were included in diluted earnings per share but excluded from the basic earnings per share computations. The conversion terms of the deferred ordinary shares are now fixed over the next 11 years with no variations. These shares are therefore now included in the basic earnings per share computations, but not in the comparative period. As a result, diluted core earnings per share are comparable with the prior year and basic core earnings per share are not.

Net finance costs increased 24% to R926 million on higher debt levels. Despite the higher net finance costs, interest covered by operating profit remains healthy at 6,7 times (2013: 8,2 times).

Income from associates contributed R76 million (2013: R86 million) and declined on last year due mainly to the negative performance of Ukhamba, which was impacted by the impairments of certain of its investments. Mix Telematics, in which Imperial holds a 25,6% shareholding, contributed R40 million, in line with the prior year. MDS Logistics, a Nigerian logistics business in which the Group holds a 49% shareholding, performed well and contributed R27 million for the year.

The group benefited from a lower effective tax rate of 27,2% compared to 28,1% in the prior year.

Share of earnings attributable to non-controlling interests (minorities) reduced from R392 million to R355 million, mainly due to lower profits from the Vehicle Import, Distribution and Dealership division which has the most significant minorities.

The table below summarises the reconciliation from Attributable Earnings to Headline and Core Earnings:

FINANCIAL POSITION

Total assets increased by 14% to R59 billion (2013: R52 billion) due to acquisitions, translation effects of a weaker Rand, organic growth and the expansion of existing businesses.

Property plant and equipment increased by R1,2 billion to R10,5 billion during the year mainly due to a further R790 million investment in our property portfolio, which occurred largely in the Logistics International division, the Australian dealership business and in the South African vehicle businesses. The translation effects of a weaker Rand contributed R359 million to the increase.

Intangible assets rose to R6,8 billion from R5,2 billion mainly as a result of the Renault and Eco Health acquisitions and translation effects of a weaker Rand.

The transport fleet increased mainly as a result of the R749 million expansion of the shipping fleet in the Logistics International division and a net R510 million in the African transport fleet.

Investments and loans relate largely to the Regent investment portfolios where exposure to equities and longer dated deposits was reduced. This resulted in the 23% decrease to R2,5 billion and the improved cash position at year end.

Net working capital increased by 41% from the prior year due to acquisitions, foreign exchange translation differences, an increase in inventory and lower accounts payable in the vehicle businesses compared to the prior year. As a result, our average net working capital turn reduced to 14,0 times from 17,2 times in the prior year.

Net debt to equity (excluding preference shares) at 63% was higher than the prior year’s 50%. This was due mainly to the increase in working capital, acquisitions, expansion of the existing businesses and share buy backs of R502 million during the year. Translation of foreign debt due to a weaker Rand also increased the debt level at year end. The net debt level is within the target gearing range of 60% to 80% and still leaves significant room for further expansion of the group.

New bonds (IPL 8, 9 and 10) amounting to R3 billion were issued in South Africa to extend the maturity profile of the group’s debt. The group’s liquidity position is strong with R6,7 billion in unutilised banking facilities (excluding asset based finance facilities). We have also improved the mix of fixed and floating debt so that the fixed rate debt represents 56% of the total debt, providing better protection in a rising interest rate environment.

The group recently registered a Domestic Treasury Management Company (DT MC) in terms of the new South African Reserve Bank regulations. This enables the group to fund R2 billion p.a. from South Africa to support the growth of our African and offshore operations. Within this annual limit, the group will also be able to raise offshore funding in this entity, guaranteed by the South African operations. This is a major addition to our treasury capabilities.

Shareholders’ equity increased due to higher retained income and the weakening of the Rand which resulted in gains on the foreign currency translation reserve of R521 million. This was offset by dividends paid of R1,9 billion, R502 million for the repurchase and cancellation of 3 million shares in the open market, R420 million reduction in the hedge accounting reserve and a put option liability of R1 billion relating to the 32% that we will acquire from the minority shareholders in Eco Health.

New business written on service, maintenance and warranty contracts generated by the Financial Services segment resulted in insurance, investment, maintenance and warranty contracts growing to R4,3 billion, up 9% from the prior year.

CASH FLOW

Cash generated by operations before capital expenditure on rental assets was 21% lower than the prior year, at R5,7 billion. This was mainly due to a higher absorption of cash by working capital compared to the prior year. The main drivers of this were outflows relating to inventories and accounts payable. After interest, tax payments and capital expenditure on rental assets, net cash flow from operating activities decreased to R3,0 billion, down R1,2 billion when compared to the prior year.

The main contributors to the net R297 million invested in new business acquisitions during the year were Renault SA and Eco Health. The payment in respect of the net assets acquired for these two acquisitions amounted to R579 million, which included cash of R357 million which movement is reflected under our cash resources line. The Eco Health purchase price amounted to R813 million, of which R299 million was paid in July 2014.

Net replacement and expansion capital expenditure excluding rental assets, was 29% higher than the prior year. This was mainly due to an increase in capital expenditure in the logistics businesses where we invested in transport fleet, which includes the expansion into South America and the expansion of facilities in both Africa and Europe. The weaker Rand exchange rate also contributed to the increase.

Inflows from equities, investments and loans resulted from our Insurance business decreasing its exposure to equity markets and holding more short term deposits in its investment portfolio.

IPL 4 (R1,5 billion) matured in March 2014 and was refinanced by a seven year bank revolving credit facility. R3 billion worth of new bonds were issued during the year. Dividends amounting to R1 940 million were paid during the year, up 11% from the prior year.

BOARD CHANGES

For the past 14 years Hubert Brody has served with distinction as an executive, Chief Executive Officer and non-executive director of the Imperial board. Following his resignation as Chief Executive on the 28th February this year, and his subsequent facilitation of an orderly succession process, he will resign from the board on the 31st December to relocate to the Western Cape in pursuit of new professional and personal vistas.

As the Chief Executive Officer of Imperial Logistics International, Gerhard Riemann has served on the Imperial board since 2000. During that time his experience and leadership has been central to the development of our International logistic operations and his wisdom has enhanced the deliberations of the board. He will retire on the 31st December to be succeeded by Carsten Taucke, currently the Chief Executive of Imperial International Shipping.

The board extends its heartfelt gratitude to both gentlemen and wishes them well in the next phase of their lives.

ORDINARY DIVIDEND

A final ordinary dividend of 420 cents per share (2013: 440 cents per share) has been declared. This brings the full dividend for the year to 820 cents per share, which is in line with the prior year.

PROSPECTS*

There is no reason to expect a material change in the market conditions facing Imperial’s businesses in the short term. The South African economy, heavily correlated with the activity of its major trading partners, will experience slow or no growth as low and middle income consumer markets buckle under unemployment and debt, and industrial markets experience lower demand exacerbated by protracted militant labour activity. The development of consumer markets in Africa will provide a higher growth rate off a low base with local political and socio economic factors necessitating vigilance and country diversification. The United Kingdom will continue to experience a steady recovery with that of Europe more tentative.

In this context Imperial’s progress and performance in the current year will rely on three factors: the competitive dynamics of the markets in which we operate; our relative competitive position in those markets; and the manner in which we deploy our resources, capabilities and capital. Although these factors differ for each of our divisions we expect our strategic positioning and operating practices to result in a continued growth of revenue, earnings and value in the medium term.

The short term outlook is daunting. We expect earnings in the first half of the 2015 financial year to decline on the prior period as the currency impact on the Vehicle Import, Distribution and Dealership division flows through. In the absence of any further softening of the Rand this should right itself in the second half to produce earnings for the full year in line with 2014.

* Information in the Prospects section has not been reviewed or audited by the Group auditors.

CONCLUSION

While the short term outlook is highly dependent on currency stability we remain confident of the medium term prospects of Imperial.

Imperial’s financial objective is to generate value for shareholders by increasing returns on capital. This will be achieved firstly by constituting and growing a portfolio of assets whose competitiveness and value is enhanced by being part of Imperial, and secondly by the appropriate rationing and control of capital.

Today Imperial has the strategies, assets, capabilities, and resources to accomplish this.

MARK J. LAMBERTI – Chief Executive Officer
OSMAN S. ARBEE – Chief Financial Officer