Imperial

 

	Logistics International	HY1  2018			HY1  2018		%  change  on HY1		HY2  2019			HY2  2018		%  change  on HY2		2019			2018			%  change
	Revenue (€m)	760			733		4		757			780		(3)		1 517			1 513
	EBITDA (€m)	40			44		(9)		40			61		(34)		80			105			(24)
	Operating profit (€m)	24			27		(11)		24			44		(45)		48			71			(32)
	Operating margin (%)	3,2			3,7				3,1			5,6				3,2			4,7
	Revenue (Rm)	12 412			11 592		7		12 128			11 608		5		24 540			23 200			6
	EBITDA (Rm)	650			705		(8)		647			909		(29)		1 297			1 614			(20)
	Operating profit (Rm)	402			434		(7)		373			650		(43)		775			1 084			(29)
	Operating margin (%)	3,2			3,7				3,1			5,6				3,2			4,7
	Return on invested capital (%)	9,8			8,3											7,1			9,6
	Weighted average cost of capital (%)	7,3			5,4											7,6			6,3
	Net debt (€m)	200			384		(48)									226			195			16
	Net working capital (€m)	31			21		48									34			14			143

Note: Continuing operations; excluding businesses held for sale.

Operating context

• Economic activity in Europe continued to slow in the second half of F2019.
• Improvement in unemployment rates made skilled employees difficult to recruit and retain.
• Uncertainty in UK operations due to Brexit.
• Volumes in key sectors of automotive, chemicals and steel remained under pressure.
• Normalising water levels for the Rhine river since January 2019 will have a positive effect on the inland waterways business.
• Major costs incurred as a result of portfolio rationalisation and elimination of fixed overheads.

Performance

• Unsatisfactory performance for the financial year largely due to significant once-off costs associated with material business restructuring (c.€9 million) and the prolonged impact of the implementation of WLTP (c.€4 million) that resulted in lower production volumes in the automotive business.
• Results were supported by contract renewals and new business gains (c.R2,1 billion annualised revenue) mainly in the automotive segment.
• 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 network imbalances. Despite lower operating profit in F2019, the business' cash generation remains higher than its pre-acquisition performance.
• Slowing economic activity impacted performance.
• Shipping performed well, supported by international shipping operations in South America and in Europe inland shipping. The low water levels in Europe were partially mitigated by increased freight rates.
• Net capital expenditure increased to R413 million (2018: R373 million) and included the replacement of the specialised chemicals and gas fleet.
• The weaker trading performance and impact of once-off costs resulted in ROIC declining to 7,1% from 9,6%.

Uncertainty around the implications of Brexit, and the trade war between the US and other global powers, have weighed on the Eurozone economy, subduing volumes. Following the election of the European parliament, increasing political polarisation and the heightened risk of more fragmented decision-making on key economic matters is exacerbating consumer and business nervousness and dampening investment. Recession is looking more likely for the German economy.

Against this backdrop, we continue to rightsize and futureproof our business. We are reviewing all our businesses against our criteria for strategic alignment and growth potential. Whereas most of our businesses are well managed, profitable and stable, our focus has been on turning around the underperformers, which has included revising our pricing models. Negotiations with clients are under way in this regard. We incurred once-off costs of around €9 million in the year to facilitate a restructuring that will take out around €15 million a year of fixed overhead costs, supporting mid and long-term profitability. We have also changed our operating model, resulting in a more focused business delineated by dedicated commercial and operational competencies. Our operations unit will continue to design and deliver differentiated client solutions, with our commercial unit concentrating on sustaining and growing valuable client partnerships in our target industry verticals.

Our strategy is to grow market share in the industries where we have leading positions and clear competitive advantages, specifically automotive and chemicals, to offset the impact of the expected cyclical downturn. We are also looking at diversifying into more counter-cyclical industries and segments, for instance automotive spare parts which are more resilient. In certain segments of the steel industry, which are experiencing structural decline and where we have little competitive edge, we will seek to reduce our exposure over time.

To anticipate shifts in the automotive industry, we have enlisted the help of our innovation team to investigate potential future developments and their impact on us. We are also staying close to our clients, which enables us to assess developments in collaboration with them and be proactive in designing solutions. The commercialisation of the division is supporting this approach, with our teams engaging with senior client teams to understand, anticipate and support their strategies as they change. We are also looking to leverage our trusted relationships with clients to enter new emerging markets in automotive, and are evaluating opportunities in Eastern Europe and Asia, as well as in Africa in combination with the other group divisions.

In chemicals, our leadership position is based on a highly advanced offering to clients and deep legitimacy in meeting the exacting requirements of this industry. Although we have a strong pipeline of opportunities, our growth is Germany is constrained by securing licences for warehousing, which is difficult due to concerns around hazardous goods. However, we believe we can leverage our position to grow in other markets beyond Germany.

In our UK operation, Palletways, we believe the impact of Brexit uncertainty has already been felt and we are not expecting further adverse implications, given that the business is more heavily exposed to the UK economy than European markets. The changes we have already made, including a more robust pricing model, has positioned the business to improve its performance in the year ahead. However, as a situation like Brexit has no precedent, the element of risk remains.

An important growth driver for us is to develop capabilities that facilitate our entry into new markets and geographies. Our strategy to acquire a meaningful IFM capability will allow us to build a truly global network that supports a synergistic relationship with our African counterparts. This will make Imperial Logistics not only a provider of choice within the continent but also in servicing the routes into and out of Africa, further differentiating us from our competitors. We are currently investigating opportunities that will give us the global capability we need to complement our existing capabilities and markets. Given the appetite for consolidation in the IFM space and high asset prices expected, we are having to think differently about how to achieve this strategic imperative and believe that our regional positions, and specifically our African reach, make us an attractive partner/buyer for the right business.

As part of our portfolio review, the disposal of our shipping business in Europe and South America is under consideration. Although this business is profitable and meets our hurdle rates, it is non-core to our strategy as it cannot be scaled further in our target markets centred on Africa, and the capital expenditure required could be better deployed to fund our strategy.

From a human capital perspective, we are carefully managing the impact on our people of the substantive change to the business, especially following the necessity of retrenchments which affected 100 employees in the year. We are concentrating on investing in our human resources function, including bedding down our systems and improving talent management, to stabilise the organisation following a significant period of restructuring. We are committed to offering our people a competitive value proposition so that they are fully engaged and equipped to deliver on our growth strategy, and we have been successful in attracting industry specialists to drive our growth plans. Our culture of providing service excellence to our clients is a powerful advantage that we are consolidating and deepening in tandem with becoming a more commercially minded organisation, in line with the group's "ONE Imperial – one business, one brand" approach.

Innovation and effectiveness remain key to our strategic ambitions in highly competitive and fast-changing markets. Our new CIO and IT team has developed a clear roadmap for investment, to ensure we have the right IT architecture in place and the competencies to achieve value-added innovation for our clients in line with the group's strategy.

Our primary performance indicators are financial, however, we are building a more holistic approach to performance measurement. We are working to develop a broader set of KPIs that include non-financial measures of our progress in the core enablers of both our profitability and sustainability. In this regard, we continue to invest in environmental management and specifically in offsetting the carbon footprint of our business, and are also developing our social investment strategy.

We remain steadfast in our commitment to follow through on the objectives of the restructure and to embrace the changes that will have positive long-term benefits for our business. We have a strong and energetic management team in place, and believe that the organisation is fit to grow. We will continue to find ways to improve efficiency and futureproof our strategies to ensure long-term resilience.

We look forward to seeing the benefits of our efforts in the coming financial year.

Strategic objectives

Align portfolio to group strategic positioning and competencies			Acquire IFM capability to offer end-toend solutions in supporting trade flows in and out of Africa			Expand presence into selected new emerging and developed markets by acquiring new capabilities and geographies

Effects
			Acquiring strategically aligned capabilities, extension of new geographies and disposing of non-aligned units will boost organic growth by allowing the group to cross-sell capabilities and provide end-to-end service offerings.
			A focus on facilitating trade flows into and out of Africa through our service offering and large volume capabilities will support our competitiveness and differentiation.
			Lower overhead costs, achieving a more flexible asset model and releasing capital for our strategic growth plans will enhance returns.

Evaluation

Success will be measured by our ability to close targeted acquisitions and integrate them effectively, and to achieve adequate value for divestments.

Progress

• Undertook a significant rationalisation and cost reduction process, focusing on the consolidation of head office and support functions.
• Reviewed our portfolio to align it to our strategic direction and competitive advantages, which includes considering the feasibility of disposing of our non-core shipping business.
• Continued to identify and investigate acquisition targets of key capabilities in emerging markets.
• Advanced the delivery of turnaround strategies for underperforming businesses.
• Changed the pricing model in Palletways to address the increased costs caused by network imbalances.
• Continued to implement a commercial operating model, focusing on developing a dedicated commercial team equipped to deliver focused growth strategies.

Effects
			End-to-end solutions and global coverage will drive organic growth and enable us to build organically by integrating teams and clients.
			End-to-end solutions and global coverage will increase our competitiveness.
			IFM capabilities facilitate cross-selling, enhancing potential returns.

Evaluation

Success will be indicated by:

• Revenue growth.
• Cross-selling and increased share of business from existing customers.
• New client gains as a result of enhanced service portfolio.

Progress

• Investigating the acquisition of an existing global IFM network with a presence in key markets like Asia, Europe and Americas, to connect these to Africa through up and downstream selling to existing clients.
• Identifying opportunities to build IFM capability organically, including by leveraging existing capability in airfreight as an add-on capability for existing clients.
• Investigating opportunities in global food growth by investing in perishable IFM capabilities, to connect the Americas and Oceania to relevant African markets like Kenya.

Effects
			Enhanced capabilities are central to the group’s ability to provide end-to-end services to clients that will support our African operations and boost organic growth.
			Integration of strategically aligned acquisitions facilitates synergies and enables cross-selling.
			Being able to offer a full range of services alongside the capability to manage large volumes at a global level will deepen our competitiveness.

Evaluation

• Cross selling and increased share of business from existing customers.
• Gain new clients through enlarged service portfolio.

Progress

We are advancing our plans to:

• Extend our service portfolio to offer end-to-end services to global blue chip and mid-size companies.
• Leverage route-to-market expertise with IFM and contract logistics capability to cross-sell to existing multinational clients in Africa, focusing initially on growing our capability into Eastern Europe, Middle East in the medium term and eventually into Asia.
• Develop a distribution network in targeted regions, focusing on the acquisition of smaller distributor companies, to grow emerging market footprint.
• Advanced plans to diversify current contract logistic capabilities into new industries, including communication, high tech, retail and FMCG.
• Invest in capability development to provide end-to-end transparency and visibility to complex supply chains, connecting existing solutions to new capabilities.
• Invest in innovative future logistics trends in line with our innovation approach.

People, processes and systems

During the year we:

• Started work to develop a "ONE Imperial" culture to support the new operating model.
• Completed the integration of core people data and began the roll out of our new human capital management (HCM) system. The initial focus is to use the system to maintain people and position data (based on job profiles). Once completed, we will investigate the feasibility of using the HCM system to support the performance management process.
• Redesigned the onboarding process to enhance engagement with new employees. In total, 21,9% of new hires (2018: 22,4%) for the year were women, meeting our target of 20%.
• Launched the future collaboration project, in which more than 130 employees participated in developing a collaboration charter to support the new operating model and drive growth activities.
• Invested R30 million in development interventions, which included basic and advanced training for team leaders and shift supervisors to develop managerial and leadership skills. Participants in the Develop Yourself programme made excellent proposals on how to improve top-down communication with employees and new ways to recruit young apprentices and trainees.
• Started developing a people analytics database to measure and manage key people indicators.
• Standardised employment contracts as far as possible and within the agreed terms with unions and workers councils.

Looking forward we will develop revised leadership guidelines on what we expect of our leaders, standardise our talent management processes and continue to work with our peers in Germany to develop a framework that supports more standardised collective bargaining agreements and offers industry workers similar working conditions.

More information is available online: Effective human capital management.

We will continue to implement new technology to support a modern workplace, improving the efficiency of our IT architecture and life cycle management, and reduce time and costs through process standardisation and automation technology.

IT projects that are currently under way include:

• Implementation planning for the Solo Plan automotive software solution is being reviewed, with a project launch to stabilise the platform under way.
• The replacement of legacy systems is being prioritised to be completed by the end of the 2020 financial year.

More information on the group approach to innovation is available in the innovation report.