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Financial highlights
Operational and Strategic highlights
Commenting on the results, new CEO Mark Lamberti said: “These are satisfactory results achieved in challenging trading conditions. They demonstrate the resilience of the Group’s portfolio of business, with all divisions but one showing good growth.
“The results also reflect progress in IMPERIAL’s previously espoused intent to decouple the Group’s performance from the cyclicality of South African new vehicle sales, by investing in, or developing, less correlated businesses where our experience and expertise enables us to provide value in new markets and geographies.
“In addition the group enhanced its portfolio by exiting sub scale operations and investing in assets and acquisitions that will enhance returns and sustainability for our stakeholders.”
In line with a drive to eliminate complexity in the management and reporting of IMPERIAL, the group’s three major lines of business: logistics; vehicles and financial services (respectively generating 35%, 48% and 17% of group operating profit) will be managed through five divisions:
Key features
The group’s operating profit grew by 2% to a record R6,2 billion, lagging revenue growth as margins in the Vehicle Import, Distribution and Dealerships division were depressed by the delayed impact of a weak Rand during 2013. Operating profit from foreign operations grew to R1,6 billion and now comprises 27% of group operating profit. Diluted core EPS held steady at 1790 cps.
The return on equity of the group was 19% and, notwithstanding the significant organic and acquisitive investment over the last four years, the net debt to equity ratio (excluding preference shares) at year end was 63%, well within the targeted range of 60-80%.
Cash flow from operating activities declined 28% to R3 billion on higher working capital levels.
New bonds (IPL 8,9 and 10) were issued in South Africa to extend the maturity profile of the group’s debt. The group’s liquidity position is strong with R6,6 billion in unutilised facilities.
Divisional Performance
Logistics Africa performed well as the benefits of the rationalisation completed in the second half of the last financial year kicked in, supported by recent acquisitions and new contract gains. The division delivered revenue growth of 22.6% and an improved operating margin (from 5,1% to 5,7%) despite subdued or declining volumes in most of the sectors served.
The Rest of Africa business delivered strong revenue and operating profit growth, benefitting from the emergence of middle class consumers in those African countries where the group has 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.
The Logistics International division delivered a satisfactory performance, although the fragile recovery of the European economy continued to affect activity levels in Germany itself, where the division’s major operations are located. Performance was helped by the growth of German exports to markets outside Europe and the translation effects of a weaker Rand, with revenue and operating profit up 23.6% and 27.4% respectively in Rand terms. Margins increased from 4.8% to 5.0% in Euros on weak volumes and investment.
The profits of the Vehicle Imports, Distribution and Dealerships division were severely depressed by the delayed impact of the weaker Rand during 2013, with the division’s operating margin dropping from 8.7% to 5.6%.
Higher new car prices and affordability drove motorists to pre-owned cars, leading to moderate growth. Consistent sales of 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 division’s 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.
The Vehicle Retail, Rental and Aftermarket Parts division had an excellent year with good growth in both revenue (up 6,6%) and operating profits (up 15,5%), improving its margin from 4,2% to 4,6%.
In South Africa, where passenger car volumes were subdued, the division performed in line with the market, selling 31 816 new (2013: 33084) and 30 759 (2013: 29 547) used vehicles during the year. Industrial action during the period also impacted negatively on volumes.
The car rental business performed satisfactorily. International volumes improved thanks to a stimulus in tourism.
Financial Services delivered an excellent result with operating profit growth of 14% and an improvement in its margin from 22,3% to 26,1%. An 11% improvement in underwriting margins was achieved despite the expected reduction in revenue following the termination of non-performing insurance business lines. Insurance underwriting conditions in the short-term motor industry improved and buoyant equity markets led to higher investment income.
Board changes
For the past eight 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.
As the Chief Executive Officer of Imperial Logistics International, Gerhard Riemann has served on the Imperial board since 2000. He will retire on the 31st December to be succeeded by Carsten Taucke, currently the Chief Executive of Imperial International Shipping.
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.
The near term outlook is daunting. The group expects earnings in the first half of the 2015 financial year to decline 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 core earnings per share for the full year in line with 2014.
Lamberti concluded: “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 are confident that our strategic positioning and operating practices will result in a continued growth of revenue, earnings and value in the medium term.
“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.”
