Imperial

Group chief executive officer's review

Contract renewal rate >90%

New business revenue R5,6 billion per annum

I took the helm of Imperial Logistics on 1 February 2019, during a particularly challenging period. The past months have seen unprecedented change in our business – Imperial Logistics became a separately listed entity; my predecessor, who had a deep connection to the group's history, retired; a new leadership team was established; and we renewed the group's strategy and refined its positioning. All of this took place against a backdrop of increasingly volatile and uncertain economic and socio-political conditions.

I spent my first few months as CEO critically evaluating the strategic relevance and competitive advantages of each of our businesses, with a focus on enhancing the strategic coherence of our portfolio. This led to tough decisions and significant changes – further strategic rationalisation of our portfolio since the unbundling of Motus Holdings Limited (Motus), restructuring and reducing costs. The tangible benefits of these actions will be realised from the 2020 financial year and measured accordingly, with the ultimate objective of unlocking value for our shareholders.

These challenges and the testing conditions in most of our markets have not subdued our energy or our ambition. With two-thirds of our operations positioned outside South Africa, our focus as an international company is single-mindedly on our new vision to be the strategic partner of choice, specialising and enhancing our capabilities in distributorship, freight management and contract logistics in selected industry verticals, mainly in emerging markets.

Delivering on the rationale for the unbundling

The strategic rationale for unbundling Motus in November 2018 was to focus each business on a clear, coherent strategy and growth path that would, in time, unlock value for its respective stakeholders.

With the scrutiny that comes with being a separately listed entity, we are well aware of our shareholders' expectations: a strategically coherent portfolio of businesses that delivers on operational and financial targets while deepening sustainable competitiveness, growth and resilience, underpinned by focused capital allocation. I believe the leadership team has made significant progress in achieving strategic clarity, confronting and resolving longstanding impediments to delivery, and developing differentiated solutions in carefully selected industries across our regional businesses. While much has been achieved, there is still more to do, particularly in aligning the International portfolio to our strategic objectives and leveraging our expertise and capabilities across the regions in which we operate – as we highlighted prior to the unbundling – and we are continuing on this trajectory.

Overall, our performance since the unbundling has been excellent in the African Regions but unsatisfactory in South Africa and International. In these regions, focused restructuring, rationalisation and cost cutting to enhance competitiveness and improve margins and performance is ongoing. Certain businesses under pressure in their markets, and facing operational and strategic challenges, have required urgent management attention and the necessary actions are being implemented. Strategically aligning our International portfolio with our core competitive advantage, being Africa, is also under review. To ensure that we can deliver on our strategic objectives, we are equipping the business with the required resources – people, systems, practices – that are critical enablers of our strategy.

Simplifying our strategic positioning

We have defined our immediate and ongoing strategic priorities and focused the collective energy of the business on achieving them. We are confident that our renewed strategy will enable Imperial Logistics to grow revenue sustainably, achieve targeted returns, and deepen our long-term competitiveness and relevance.

The core strategic focus of Imperial Logistics is to grow our African business and align our International portfolio to position the group as the "gateway to Africa" in the medium term. Offering an integrated logistics and market access offering focused on Africa leverages our powerful competitive advantages and capabilities, which will be concentrated mainly on the healthcare, consumer, chemicals, industrial and automotive industry verticals. From this focal point, our scope will extend to other emerging and selected developed markets, based on the relevance of our capabilities, scale benefits and client relationships.

Our unique African Regions network and distributor capability makes us an attractive strategic partner to multinational clients. Leveraging this competitive advantage and refocusing our International portfolio will enable us to cross-sell our service offerings across our targeted regions.

Our strategic objectives in the short term are:

• Continue to grow in Africa, adding new capabilities, entering new industry verticals and serving more countries/regions. We are accelerating our growth in Africa by building on our existing competencies and expanding into new capabilities. We will focus on strategically aligned industries and invest in existing and new geographies that complement our capabilities, industries and client base. This will enable us to enhance our service offering and drive revenue growth opportunities. We will add impetus to our drive to position Imperial Logistics as a strategic partner that provides a "gateway to Africa" for companies seeking access to the continent's fast-growing markets and we will further invest in strategic partnerships which will enable us to evolve and intensify our engagement with our clients.
  
  In support of our clients' growth aspirations, demand generation, light contract manufacturing and brand partnership are among the capabilities we will expand into the rest of Africa. Leveraging our extensive expertise in healthcare, we are also looking at adding sourcing and procurement to other industries. We are exploring new regions in which to leverage our distributor capabilities in pharmaceuticals and consumer goods, as well as opportunities to expand these competencies in our existing geographies.

• Strategically align our International portfolio with our core competitive advantage, being Africa. The Logistics International portfolio is under review and could result in further disposals of non-core assets and investment in new areas that support our Africa growth strategy.

Our strategic objectives, which will be executed through a phased approach, are:

• Add IFM capabilities. Acquisition, partnerships or building these ourselves will enable Imperial Logistics to offer global coverage to support African trade flows. This will likely entail the acquisition, merger or partnership with an existing IFM network that has a well-established presence in key markets.

• Invest in capabilities outside Africa that support the growth of target industry verticals in Africa – mainly in healthcare, consumer, chemicals, industrial and automotive. In growing our target industry verticals we will invest in capabilities in select new emerging and developed markets. We will leverage expansion opportunities with multinational clients that recognise us as emerging market or specific industry specialists and likewise leverage our proven capabilities to expand into new emerging markets such as the Middle East, Eastern Europe, India and Asia where trade growth with Africa continues to expand.

• Expand our distributor capability geographically, augmenting our existing competencies and adding new capabilities will, over time, create cross-selling and up-selling opportunities. Our plan is to access local experience and adequate scale through selective acquisition. We will initially focus on the healthcare and consumer industries but will consider opportunities in new industries and geographies where relationships can be leveraged and in order to meet the needs of our multinational clients.

Recording strategic progress

In South Africa, our efforts to rationalise, cut costs and unlock value have included exiting unprofitable contracts, consolidating operations and properties, and reducing fleets and overheads. Despite numerous turnaround and cost cutting initiatives, our CPG business continued to make losses. After a detailed strategic evaluation of the business, we concluded that future returns were unlikely to exceed the cost of capital due to structural changes in the CPG market. With the business model having become uncompetitive and unsustainable, we decided to exit the business, which resulted in an impairment of assets including goodwill of c.R590 million and provisions for closure cost of c.R850 million post-tax. The board approved this decision on 30 May 2019.

This has been an extremely painful decision to make and I feel a great responsibility towards our people, clients and suppliers. During this process, we have therefore taken into account the interests of our staff, clients and other key stakeholders. Key contracts have been accommodated in other business units under a different commercial model. It is important to note that this decision does not represent our exit from the consumer industry vertical in South Africa, but only the exit of the multi-principal distribution capability in FMCG products that had become unviable. Excluding the CPG business, the South African business has grown operating profit by 5% per annum over the last three years, achieving an ROIC of 16% (excluding the invested capital of CPG). Its margins improved from 5,8% in F2018 to 7,1% this year. This demonstrates its resilience in a low-growth environment. Excluding CPG, and despite a challenging trading environment, our pipeline of new opportunities remains healthy. In South Africa, we have added R2,2 billion of annualised revenue in the past 12 months and retained 95% of client contracts that were up for renewal.

Significant deterioration in macroeconomic conditions in all three divisions, which include a depressed growth outlook, uncertainty and higher WACC rates has driven the decision to impair certain historic goodwill to the value of c.R1,1 billion (c.14% of total goodwill and intangible assets). These factors have resulted in the reduction in the value in use of certain of our cash-generating units, leading to the goodwill impairment. The affected businesses, however, are still cash generative and profitable. The remaining goodwill consists mainly of operations which are in growing markets and industries, are cash flow generating with low capital requirements, and which meet targeted hurdle rates.

We are reviewing our Logistics International portfolio to align it with our strategic direction and core competitive advantages. To this end, we are considering the disposal of our shipping business in Europe (including South America). While this business is profitable and meets our hurdle rates, it is non-core to our strategy. It cannot be scaled further in our target markets (centred on Africa) and the significant capital expenditure it requires each year would be better deployed elsewhere to facilitate our growth plans and strategy. Further disposals of non-core and low-return on effort businesses in the short to medium term will be considered in this region.

In terms of our acquisitive growth and capital allocation strategy, we will only consider buying businesses with strong organic growth potential and cash flow profiles which are strategically aligned, enhance our key competitive advantages and meet our financial hurdle rates. While we remain the leading logistics provider in South Africa, our scale and footprint limits our growth opportunities in this market. Therefore, our acquisitive growth strategy will continue to be focused on growing our business outside South Africa (74% of group revenue and 63% of group operating profit is currently generated outside of South Africa).

Strengthening the commercial mindset within the group, improving our people practices and systems, and accelerating strategic innovation are priorities. We recently appointed highly experienced industry experts as chief commercial officers in our South African and International divisions, and global heads for each of our targeted industry verticals. Our structures and processes are being designed to build a strong client-centric and collaborative culture that supports our ONE Imperial – "one business, one brand" approach.

We acknowledge the investment community's concern that our business is difficult to assess. We have therefore simplified our market disclosure, and introduced secondary segmental disclosure in our 2019 annual results according to our three core capabilities per region, being distributorships, contract logistics and freight management. We continue to disclose revenue generated by industry per region.

Managing the factors that matter most

Imperial Logistics defines material issues as those factors most likely to influence the conclusions of all our stakeholders in assessing our ability to create, sustain and enhance value over time. Our process to determine these issues considers input from key stakeholder groups – including leadership, key executives, clients, business partners, employees, the investment community and the media – and informs our priorities and action plans.

Accelerating strategic delivery emerged as a material theme from this comprehensive process. As we undertake to demonstrate our credibility as a management team to our stakeholders, we will seek a careful balance between urgent delivery on short-term operational and financial targets, and the disciplined advancement of longer-term strategic initiatives. This balance will depend on aligning organisational structure to support our strategy; investing in people, partnerships and culture; optimising and integrating our processes; and ensuring fair and responsible remuneration and reward practices aligned to the right performance measures – all of which are necessary to unlock value.

Empowering our people and accelerating transformation remains top-of-mind. We have more than 27 000 employees whose level of engagement, relevant skills and diverse ideas determine the efficacy of our client-focused solutions, operational excellence, continuous improvement and success in delivering our strategy. We are committed to leveraging the talent we have and providing growth opportunities for employees across the group. To ensure that our people can work effectively, we will align people policies and practices across Imperial Logistics to best practice within the next two to three years.

Numerous strategic people priorities were initiated to establish a competitive people architecture, robust human capital practices and governance frameworks. While these initiatives are progressing well, significant and urgent time and attention has also been given to ensuring that we address the critical gaps in our people agenda. These include more effectively attracting, identifying and developing talent, addressing the issue of an aging workforce by developing and employing younger people with diverse backgrounds and industry know-how, and accelerating our employment equity performance as we continue to lag behind our competitors and clients.

We are accelerating race and gender diversity within the group to ensure that we transform our succession pipeline, that our workforce is representative of the demographics in our countries of operation, aligned to and have the required capabilities to deliver on our strategy, and to promote a culture of diversity and inclusivity. Significant progress has been made over the past 12 months with appointments of key executives in all three divisions. These appointments include black and female executives and managers in our South African business from diverse industry backgrounds and skills sets.

We have also appointed a global chief people officer, a member of the group's executive committee, who will be responsible for driving our people-related and human resources initiatives and for developing and implementing integrated, world-class people policies and practices in our group.

All our key management appointments that have been made across the group include highly skilled individuals who bring with them significant international experience and expertise, all of which will be value-adding to our existing skills base and critical in the execution of our strategy.

Deepening our legitimacy in our industries by remaining relevant to our clients, and in the countries and communities in which we work by investing in their development, is fundamental not only to our success but also to our survival.

Our focus on optimising and integrating our systems is pragmatic and cost-effective, and we are applying appropriate digitalisation to drive continuous improvement and internal efficiencies through the right mix of standardised and customised system solutions. Driving innovation to ensure that we remain competitive, relevant to our clients and well-positioned to address industry disruptors from a technology perspective, is also key. We have established an innovation fund to enable us to invest in start-up projects in the supply chain and logistics technology that have high-growth potential.

The wellbeing of the communities in which we operate is imperative and we recognise that CSI, enterprise development and environmental management form an integral part of our responsibility to our stakeholders as a well-governed and accountable organisation. Our approach to CSI is aligned to our strategic objectives and we have identified healthcare, education and skills development as primary focus areas across the group. We believe strongly that the initiatives in which we invest and actively participate must provide tangible solutions to socioeconomic problems and sustainable benefits to our communities and countries.

Confronting difficult market conditions

For the financial year to 30 June 2019 excluding discontinued operations and business held for sale, Imperial Logistics delivered an unsatisfactory performance, growing revenue from continuing operations by 6% and decreasing operating profit by 9%. Results were supported by a good performance from African Regions, offset by weaker operational performances, certain once-off trading costs in International and the once-off costs associated with our business rationalisation and restructuring in our South African and International operations of c.R170 million. Excluding the once-off costs, operating profit for the group decreased by 1%. The rationalisation process, however, will result in significant removal of costs in the South Africa (excluding CPG) and International from F2020 of c.R385 million per annum.

Logistics South Africa, excluding CPG and businesses held for sale, maintained revenue compared to the prior year and reduced operating profit by 4% in a difficult, low-growth and increasingly competitive trading environment. Performance was negatively impacted by depressed consumer demand and exceptionally low volumes across most industries – particularly in the consumer-facing, manufacturing and healthcare client base. Challenging market conditions have been further exacerbated by load shedding, lower consumer spending and higher unemployment. Results were supported by good performances from the supply chain management and consulting (Resolve), fuel and gas, and commodities businesses, which increased revenue and operating profit. All businesses were rationalised, resulting in improved efficiencies and significantly reduced costs, as we continued to face margin pressure from clients. Despite the challenging trading environment, this division added R2,2 billion of annualised revenue in the past 12 months through new contract gains and retained 95% of client contracts.

Logistics African Regions delivered a good performance with revenue and operating profit increasing by 16% and 8% respectively, supported by excellent results in our healthcare distributorship businesses in Nigeria, Ghana and Kenya. Our healthcare sourcing and procurement business, Imres, also increased revenue and operating profit, benefiting from a strong order book and long-term contract gains. Significant new contract gains included signing our first pharmaceutical client (MSD) for our multi-market aggregation distributor model (simplified solutions in healthcare). Our consumer distributorship segment performed well, supported by good performances in Mozambique and Namibia, despite ongoing recessionary conditions in Namibia. The managed solutions business was negatively impacted by lower chrome volumes, challenging economic conditions in Zimbabwe which led to lower cross-border activity, and lost volumes from global aid organisations – mainly as a result of the loss of a large public health contract reported on previously.

Logistics International delivered an unsatisfactory result with revenue in Euro maintained in comparison with the prior year while operating profit declined by 32%. Revenue increased by 6% and operating profit decreased by 29% in Rand which was 5% weaker on average against the Euro during the year. Performance was negatively impacted by significant once-off costs incurred during the year resulting from the material business restructuring (c.€9 million) and the prolonged impact of the implementation of WLTP (c.€4 million) that resulted in significantly lower vehicle production volumes in the automotive business. Excluding the once-off costs, operating profit in Euro decreased by 9% year on year. Results for the 12 months were supported by contract renewals and new business gains mainly in automotive; and a good performance from the shipping operations. Palletways continues to contribute positively and good progress has been made in appointing additional members and changing our pricing model to address the increased costs caused by the network imbalances in the UK.

Despite the mixed trading conditions across regions, Imperial Logistics' renewal rate across our divisions on existing contracts is in excess of 90%, with an encouraging pipeline of new opportunities and supported by an excellent new contract gain rate. New business revenue of approximately R5,6 billion was secured during the past 12 months.

Looking ahead

I am confident that the decisions taken in the short term will have far-reaching benefits for our business and its stakeholders. Looking to the 2020 financial year and beyond, we will realise tangible bottom-line benefits of new contract gains, new acquisitions, restructuring, exit of non-core and unprofitable businesses, and reducing costs significantly in all our divisions. As a result, for the financial year to 30 June 2020 we expect Imperial Logistics to deliver high single digit revenue growth, and low double digit growth in operating profit growth and HEPS, subject to stable currencies and economies in which we operate, while maintaining a strong financial position, executing a disciplined capital allocation strategy and continuing to pay a dividend of 45% of continuing HEPS.

Giving thanks

I believe that my first few months in the business have been insightful and productive and have equipped me and my team with the clear strategic vision needed to take our business forward. While I am disappointed with our F2019 financial and operational performance, the bold and difficult strategic decisions that we have taken to refocus the business will reap real benefits from the next financial year. Delivery on our strategic, operational and financial objectives and targets going forward is non-negotiable.

I would like to thank our board, shareholders, funders, employees and other stakeholders for their ongoing support during the difficult times, and for sharing our journey towards a strategically focused and fully aligned "ONE Imperial". Thank you for your patience, and your contribution to and confidence in the path we have taken to ensure that Imperial Logistics remains relevant, competitive and strategically positioned to unlock value. I believe we are well placed to deliver on our objectives and stated targets going forward.

I would also like to extend my thanks to Marius Swanepoel, whose vision, guidance and leadership have contributed to the success of Imperial Logistics over the last number of years.

We continue to have an incredible, resilient business driven by strong and dedicated people. Imperial Logistics is among the top 30 logistics providers in the world and every day we impact the lives of millions of people. With the support of our stakeholders, we will be a formidable business far into the future.

Mohammed Akoojee

Group chief executive officer