Overview of results

Imperial had an outstanding 2012 financial year. The group benefited from a strong new vehicle market in South Africa and an excellent performance by the Logistics division, especially in Europe. Revenue and operating profit were up 25%. The group remains focused on generating strong returns which resulted in the return on average shareholders’ interest (HEPS) of the group for the year being 23% on a healthy statement of financial position.

The group’s new vehicle unit sales in South Africa grew by 19%, compared to market growth of 13%. This resulted in strong growth being achieved in the Distributorships, Automotive Retail and Financial Services divisions. Revenue in this cluster of retail orientated businesses was up 22% and operating profit increased by 23%.

The Logistics division increased its revenue by 34%, and operating profit by 33%, 14% of which is attributed to the Lehnkering acquisition which contributed for 6 months towards the group’s growth in both revenue and operating profit. Whilst the International Logistics division had an excellent year, the SA Logistics division performed satisfactorily under tough trading conditions.

Revenue in the Car Rental and Tourism division was up 15% due to good volume growth and improved rental rates. Operating profit improved by 8%.

The group operating margin of 7% was in line with the prior year. The Distributorships division achieved an operating margin of 8,7% against 8,4% in the prior year and increased revenue by 29%. Automotive Retail maintained its operating margin at 2,9%, with revenue up 14%. The operating margin in the combined Southern African and European logistics business was in line with the prior year at 5,4%. While operating margins in Europe improved, margins in Southern Africa were slightly lower. This was mainly due to tougher trading conditions and the inclusion of CIC for a full twelve month period versus eight months in the prior year. The Car Rental and Tourism division margin dropped to 10,0% from 10,6% primarily due to a sluggish used car market and a challenging trading environment in the Tourism business.

The Financial Services division achieved an operating profit of R775 million, which was slightly higher than the prior year. Revenue in the insurance business grew 11%, while the underwriting margin declined to 7,8% from 11,4%. Underwriting conditions in the short-term insurance business were more difficult than the prior year where the underwriting result was exceptional. In contrast, the Life insurance unit continued to perform well and achieved good growth. Insurance investment income was lower than the prior year, as a result of lower yields on interest-bearing investments and a volatile equity market over the period.

Operating profit from other financial services grew strongly and was up 52%. The operating profit in this segment is generated from a combination of annuity income which includes service and maintenance plans, vehicle financing alliances and a growing range of value-added financial products.

Over the past number of years the group has pursued a strategy to add parts, components and industrial equipment businesses to its portfolio. These acquisitions include Jurgens, Beekmans, Midas, Turbo Exchange, Goscor, E-Z-GO and the newly acquired Datadot, Sedgeway, Bobcat and access equipment businesses. In total, across the group including NAC, these businesses contributed revenue of R7 billion and operating profit of R503 million, 16% and 23% respectively better than the prior period.

In aggregate, the group’s operating profit grew by 25%, and Core Earnings per Share (Core EPS) increased by 32%. Consistent with the reported interim results for the six month period ended 31 December 2011, the group has decided to report a Core Earnings number in order to exclude significant non-operational items of income and expenditure from the reported headline earnings. The table below summarises the reconciliation from HEPS to Core EPS:

Net finance costs increased by 23% to R681 million on higher debt, which was mainly incurred to fund the acquisition of Lehnkering. Despite the increase in net finance costs, interest covered by operating profit remains healthy at 8,3 times (2011: 8,2 times).

The increase in the minorities’ share of profit is largely attributable to the performance of the Distributorships division in which a number of minority shareholders participate.

The effective taxation rate at 29% is in line with the statutory rate of 28%.

Income from associates increased by 35% from the prior year. Mix Telematics, in which Imperial holds a 28% interest, contributed R31 million and performed very well. The contribution from smaller associates also increased from the prior year.

Total assets increased by 24% to R46 billion (2011: R37 billion). This was due to strong organic growth, expansion of existing businesses and new acquisitions.

Intangible assets increased to R4,2 billion from R1,8 billion mainly due to the Lehnkering acquisition.

Net debt to equity (excluding preference shares) at 39% was only slightly higher than the 31% at June 2011, despite a net R1,9 billion being spent on acquisitions in the current year, of which Lehnkering was the most significant. An additional R1,2 billion in net debt was also assumed by the group as a result of new acquisitions. The Lehnkering acquisition was effective from 2 January 2012 when payment was made. The net debt level is below the target gearing range of 60% to 80% and leaves significant room for further expansion within the group. The group’s liquidity position is strong with R6 billion in unutilised facilities.

Net working capital increased by R1,4 billion from 30 June 2011. In June 2011, inventory levels were exceptionally low due to stock shortages, which have now been alleviated. Levels of imported vehicle stocks have improved and our ability to satisfy demand for the majority of our products has improved significantly. In addition, there has been an increased investment in stock and debtors to support higher revenue, especially in the motor businesses. Acquisitions also contributed to the increase in working capital. Despite a 25% increase in Revenue, the net average working capital turn was maintained at 21 times as in the prior year.

Shareholders’ equity also increased due to the improved profitability and the weakening of the Rand which resulted in gains on cash flow hedges and the foreign currency translation reserve accounted for through the statement of comprehensive income.

New business arising from maintenance and warranty contracts, which was generated through the Financial Services division, on the back of strong vehicle sales, contributed to the robust growth of 31% to R3,2 billion in insurance, investment, maintenance and warranty contracts on the statement of financial position.

Cash flow

Cash generated by operations which amounted to R7,4 billion before capital expenditure on rental assets, was 22% higher than the prior period. After financing costs, tax payments and capital expenditure on rental assets, net cash flow from operating activities increased by 11%. Capital expenditure on rental assets was higher than in the corresponding period, mainly due to the increase in the demo fleet in Distributorships and higher demand by other Car Rental companies of our imported brands of vehicles, which are rented out through our Financial Services division.

Net replacement and expansion capital expenditure excluding car rental vehicles was higher than the prior period as trading conditions warranted renewed expansion and replacement.

A net R1,9 billion was spent on the acquisition of subsidiaries and businesses during the year, with Lehnkering being the most significant.

The Imperial Capital bond (IC 02) with an issue value of R500 million was repaid during the year and it was decided to not issue any further notes under the DMTN programme.

Business conditions in Imperial’s markets

Strong growth continued in the motor vehicle market throughout the financial year to June 2012. The market benefited from improving bank approval rates, low interest rates, real growth in disposable income and low vehicle inflation. While improved affordability and good value have been key drivers of new vehicle sales, similar trends have not been evident in the used car market, which was sluggish.

The manufacturing sector of the South African economy is currently weak and a number of our South African Logistics customers are under pressure. Despite volume pressure in our customer base, we continue to benefit from the trend to outsourcing by companies that require a viable and cost-effective option and prefer to focus on their core businesses.

German industries, particularly export-oriented sectors, where the majority of Imperial Logistics International’s customer base operates, enjoyed significant growth despite the European debt crisis, assisted by a weaker Euro.

The car rental market remains highly competitive. The pressure on rental rates, which was mainly created by the oversupply of vehicles subsequent to the 2010 FIFA World Cup, is however easing, as market capacity is better utilised due to improved demand in certain sectors. Rates in the international inbound and leisure rental markets are still depressed. The depressed international economic environment, especially in Europe continues to affect inbound tourism volumes.

Insurance underwriting conditions were weaker than the prior year, particularly in the short-term industry. Investment markets were also less favourable with lower interest rates and volatile equity markets.

The current cycle in the motor industry favours our Financial Services division as high levels of new contracts are generated, which provides a valuable growing annuity earnings.

Vehicle sales

In South Africa, the group sold 114 754 new and 58 608 used vehicles over the financial year, respectively 19% and 7% more than the prior period. The national vehicle market grew by approximately 13% year on year for the twelve month period to June 2012, according to NAAMSA.

The Australian and United Kingdom operations sold 10 846 new vehicles, which was 19% higher than the prior period and 4 540 used vehicles, which was 18% higher.

Expansion of the group during the year

Acquisitions during the period consisted of

• 100% of Lehnkering was acquired for an enterprise value of €270 million. Lehnkering is one of Europe’s leading full-service specialist logistics companies that serves the chemical, agricultural, petrochemical and steel industries. It offers a complete range of logistics solutions, including inland waterway shipping of gas, liquid and dry bulk cargo; road transportation, chemical warehousing and outsourced chemical manufacturing services. The Lehnkering acquisition became effective on 2 January 2012. The acquisition was funded from new Euro denominated banking facilities secured for a period of five years at a pre-tax interest rate of approximately 3,8%;
• 74,9% of Dettmer Bulk Reederei, a dry bulk shipping business operating on the Rhine;
• 70% of Datadot, a business that installs micro dots as a security identification system used in the detection of theft. DataDots are widely used to identify and protect motor vehicles, motor cycles, trailers, marine craft, home, business and personal assets;
• 75% of Safari Centre, a vehicle accessories and outdoor equipment business which is complimentary to Jurgens and furthermore also augments the dealership businesses that retail SUV’s;
• 60% of IJ Snyman Transport, a logistics service provider to leading retail, FMCG and construction companies in Angola, DRC, Namibia, South Africa and Zambia;
• Acquired control and increased our shareholding to 80% in Transport Holdings in Botswana, which provides fuel transportation, mining consolidation and transport, general cross border transportation and local distribution within Botswana;
• 80% of Kings Transport, which specialises in the break bulk sector of the logistics market;
• 70% of the shares in LaGrange Transport, which specialises in the fresh fruit market in the Western Cape;
• 60% of Synchronised Logistical Solutions, operating in the automotive logistics industry;
• 60% of Segway SA, which imports and distributes electric personal transporters;
• 67,5% of Bobcat, a leading supplier of compact equipment into the construction, mining and agricultural sectors;
• Acquired an additional 20% and increased our shareholding to 60% resulting in control of Accordian, which is a distributor of TATA vehicles;
• 100% of Watts Truck and Van in the UK, a DAF Truck dealer, which complements and strengthens our network in this brand in the UK;
• 51% of Hi Reach Manlift, a company that is now called Goscor Hi-Reach, which is the sole distributor in South Africa of the Genie range of mobile elevating work platforms, ‘cherry pickers’, and other related equipment; and
• 80% of Goscor Access Rental, through which products in Goscor Hi-Reach are rented.