Imperial achieves record revenue and operating profit, despite deteriorating trading conditions and a severely weakened Rand

25 August 2015

Group financial highlights

· Revenue up 7% to R110,5 billion (37% foreign)
· Operating profit up 1% to R6,2 billion (32% foreign)
· HEPS unchanged at 1624 cents per share
· Core EPS down 3% to 1754 cents per share
· EPS down 6% to 1582 cents per share
· Free cash flow up 111% to R4,5 billion
· Return on invested capital 12% (2014: 13%)
· Weighted average cost of capital 9% (2014: 9%)
· Return on equity 17% (2014: 19%)
· Full year dividend of 795 cents (2014: 820 cents)

Commenting on the results, Imperial Group CEO Mark Lamberti said:
“Imperial is a better group today than it was a year ago.

There is proof of this on many fronts, not least a stable operating profit performance despite a consistent deterioration of the operating environment throughout the year.  The Group’s ability to weather a R558 million fall in the profitability of our Vehicle Import division due to Rand weakness is quantitative evidence of generally improved strategic, operational and financial management.”

 Group performance highlights

· Revenue increased by 7% to a record R110.5 billion, despite continued deteriorating trading conditions throughout the year in South Africa and Europe
· Operating profit was up by 1% for the financial year to R6,2 billion, supported by a stronger second half performance, which was up 17% on the first half, and the acquisitions of Pharmed, Imres and S&B Commercial . This increase, despite a 37% drop in operating profit in the Vehicle Import, Distribution and Dealerships division as a result of the significant weakening of the Rand by 14.5% in the current financial year (7% in FY2014)
· Imperial maintained HEPS at 1624 cents
· The net debt to equity ratio of 69% is well within the targeted range of 60-80%, indicating capacity for further acquisitions and organic growth
· A final cash dividend of 445 cents per share was declared, up 6%, resulting in a full year dividend of 795 cents per share for 2015 compared to 820 cents per share in 2014
· Non vehicle revenue and operating profit, including Regent, increased 8% to R48,9 billion (43% of Group revenue) and 14% to R3,7 billion (59% of Group operating profit) respectively
· Foreign revenue, including Regent, increased 17% to R41,1 billion (37% of Group revenue) and foreign operating profit, including Regent, increased 23% to R2,0 billion (32% of Group operating profit). Rest of Africa (“ROA”) revenue, including Regent, increased 50% to R11,2 billion (10% of Group revenue) and operating profit increased 60% to R835 million (13% of Group operating profit)


Imperial’s strategy seeks to drive capability-based growth and focused value creation through strategic clarity and financial discipline at Group and divisional level. In pursuing growth, key imperatives will continue to be; refining the Imperial portfolio, sharper executive focus and higher returns on capital and effort in the medium term. This will be accomplished by disposing of assets that are non-core, strategically misaligned, underperforming or of low return on effort, while acquiring mainly foreign businesses to offset the limited growth opportunities dictated by Imperial’s position as a South African market leader in logistics and motor vehicles.

Sustainability and quality of earnings will be assured by higher investment in people, systems and governance.

In the current financial year, the execution of this strategy supported the record revenues achieved with the acquisition of Pharmed, Imres and S&B Commercial:
· Pharmed - Effective 9 July 2014, the Logistics Africa division acquired 62,5% of the issued share capital of Pharmed (based in South Africa), a pharmaceutical wholesaler which generated turnover of R612 million. The Pharmed acquisition augments Imperial Health Sciences in support of Imperial’s strategy to integrate pharmaceutical wholesaling and distribution into its service offering
· Imres - Effective 1 September 2014, the Logistics Africa division acquired a 70% interest in Imres. Imres is based in the Netherlands and is a wholesaler of pharmaceutical and medical supplies to its client base which includes NGO’s, hospitals and retailers. It operates in the international medical relief industry, targeting mainly African and emerging countries with developing healthcare needs. Imres generated annual revenues of approximately R1.2 billion (EUR88 million). Imres adds sourcing and procurement capabilities to Imperial’s service offering with the potential to leverage off Imperial’s existing network and capabilities on the African continent
· S&B Commercials - Effective 1 September 2014, the Vehicle Retail, Rental and Aftermarket parts division acquired 100% of the issued share capital of S&B Commercials Plc. S&B Commercials is a Mercedes Benz (Commercial and Van) and Fuso dealer in the UK with annual turnover of approximately R1,7 billion (£96 million). The acquisition enhances Imperial’s current dealer network by adding new territories to our Mercedes Benz footprint while further diversifying our brand representation in the United Kingdom

As per the strategy, Imperial disposed of non-core assets during the year and is in the process of selling Imperial’s interest in Regent:
· Regent - Imperial has entered into exclusive negotiations with The Hollard Insurance Group and an associated party (“Hollard”), regarding the acquisition of Imperial`s interest in Regent Insurance Company Limited and Regent Life Assurance Company Limited (“Regent”). The due diligence is progressing positively

Operating environment

Despite signs of recovery in the second half of 2014, global economic growth expectations for 2015 declined as developed markets recovered at a slower pace than expected, China’s growth slowed and slower developing markets faced two transitions: lower commodity prices that are punishing exporters; and US dollar strength (in anticipation of tightening monetary conditions) that is exerting pressure on capital inflows and therefore currencies.

South Africa was a victim of these developments with the fragility of the economy exacerbated by the electricity crisis and reflected in the skittish consumption patterns of ordinary South Africans and the low confidence of investment decision makers.  These were manifest in softer demand for Imperial’s products and services and aggressive competition on every front.  Vehicle buyers were highly price sensitive trading down to smaller or pre-owned vehicles, consumer goods volume growth was weak and bulk commodity volumes were in sharp decline.

The slow recovery of the Eurozone and more specifically weak volumes in the industries that we serve in Germany, exerted pressure on Imperial’s volumes, rates and utilization.  The region, including the United Kingdom where Imperial performed well, accounts for 24% of Group revenue and 18% of Group operating profit.

The higher growth of African economies in recent years is also being muted by lower commodity prices and softer currencies.  During the year these factors, however, had limited impact on the consumer and pharmaceutical markets in which we operate.

Divisional performance

Logistics Africa

· In South Africa, the division continued to perform satisfactorily and delivered strong revenue and operating profit in a testing environment, benefitting from operational efficiencies and its favourable market position as the country’s leading provider of end to end logistical solutions. New contract gains compensated for marginal or negative volume growth in the mining, manufacturing and retail sectors
· The division’s operations in the ROA continued their strong performance, with revenue and operating profit growing by 58% and 89% respectively, supported by good volume growth and the contribution of strategically aligned acquisitions in the pharmaceuticals sector (Imres and Eco Health)
· Imperial will continue to pursue growth in the ROA, looking for appropriate acquisitions that will be value accretive and support our diversification strategy
· Real growth of revenues  and operating profit is expected from the Logistics Africa division in 2016

Logistics International

· Logistics International’s operating profit in Euros was slightly up on the prior year, impacted by slow economic growth which suppressed volumes, rates and utilization in most Eurozone logistics sectors combined with a decline in dry freight rates in the European inland shipping market
· The contract in South America, which commenced in February 2014, is performing in line with expectations and contributed positively for the year
· Revenue and operating profit were up 2% and 1% respectively in Euros
· The strengthening of the Rand against the Euro undermined the Rand-denominated results. In 2015 average Rand/EUR was R13.73 compared to the 2014 average Rand/EUR of R14.07
· New CEO Carsten Taucke was appointed on 1 January 2015
· A major restructuring of the organisation and executive team was completed during the year to effect integrated client centric “One Face Logistics Solutions” in Transport Solutions and Supply Chain Solutions
· Real growth of revenues and operating profit in Euro’s is expected from the Logistics International division in 2016

Vehicle Import, Distribution and Dealerships

· As predicted, the division faced continued challenging trading conditions during the year, with the cost of new inventory escalating as a result of the much weaker Rand. Imported vehicles landed cost increased and gross margins narrowed leading to reduced competitiveness, lower sales and higher inventories
· This was exacerbated by the advantage enjoyed by local OEM’s as a result of the Automotive Production & Development Programme (“APDP”)
· Revenue remained relatively flat, but margin pressure led to a 37% decline in operating profit for the financial year
· Price increases, adequate inventory levels and good levels of forward cover resulted in an improved performance in the second half, with operating profit increasing by 8% and operating margins improving to 3.8% from 3.2% from the first half
· Car parc of Imperial imported brands doubled over the past five years and exceeded 1 million in 2015. The increase in the car parc provides and underpin to earnings through growth in annuity streams from after-sales parts and services (services revenue up 10%)
· In the absence of a marked deterioration of the Rand relative to our current forward cover position, Imperial expects the Vehicle Import, Distribution and Dealerships division to grow revenue and operating profit in 2016

Vehicle Retail, Rental and Aftermarket Parts

· This division continued to deliver good growth of revenue and operating profit during the year, achieving industry leading margins
· In South Africa, the vehicle retail businesses delivered a solid performance, retailing 30 641 (2014: 31 816) new and 31 484 (2014: 30 759) pre-owned vehicles during the year. Despite lower new unit sales, passenger vehicle revenue grew due to an improved sales mix and new vehicle price inflation
· South Africa’s medium commercial, heavy commercial and extra heavy vehicle markets experienced a softening of new retail unit sales on the prior year. The United Kingdom commercial vehicle market grew strongly.
· The car rental business experienced a difficult year with lower volumes in most segments
· Imperial expects the Vehicle Retail, Rental and Aftermarket Parts division to produce single digit growth of revenues and operating profit in 2016

Vehicles are Imperial’s major source of operating cash flow.  Imperial will apply strict operating disciplines to mitigate consumer & currency volatility in a low growth environment.

Financial Services

· The sale of Regent has been announced and exclusive negotiations are currently progressing positively. If consummated the Regent transaction will be structured to allow the Group to retain access to the income flows generated by the distribution of vehicle-related insurance and value-added products through cell captives
· Regardless of the outcome of the negotiations, motor related financial services will remain an integral part of Imperial’s strategic focus on the full automotive value chain
· Regent’s underwriting profit increased by 46% with underwriting margins improving from 11.3% to 15.8%.  Equity markets were less favourable when compared to the prior year, which led to lower investment returns on prudent equity positions
· Liquid Capital grew operating profit by 6%, despite more conservative impairment provisions in the vehicle financing alliances
· Vehicle sales are expected to decline in the year ahead. Initiatives to drive direct sales and offer a differentiated value proposition to the market should mitigate this and support revenue and operating profit growth, excluding Regent, in 2016
· Imperial expects Financial Services (excluding Regent) to grow revenue and operating profit in 2016


The factors contributing to heightened uncertainty and volatility in economies, markets and industries globally are well publicised, as are  the additional consequences of unemployment, low growth and confidence, increasing socio-political tensions, and electricity supply failures facing South African business.  None of these are expected to change markedly in the short to medium term.

Concluding the results presentation, CEO Mark Lamberti said:
“In the absence of a marked deterioration in current conditions, we expect Imperial's operating performance for the 2016 year to be positive, with single digit growth in revenue and operating profit from continuing operations. 2016 performance to date is in line with expectations.

The Group has embarked on various strategies to enhance the value added by Imperial Holdings and the competitiveness and sustainability of its subsidiaries.  We are confident that these initiatives will improve risk adjusted returns and unlock shareholder value in the medium term.”

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