Logistics South Africa – Continuing only  HY1 
2019 
       HY1  
2018*

change 
on HY1
 
   HY2 
2019 
       HY2 
2018
 

change 
on HY2
 
   2019         2018 
change
 
  
   Revenue (Rm) 6 737          6 790   (1)    6 637           6 394     13 374           13 376 
   EBITDA (Rm) 725          727         651           694  (6)    1 376           1 421  (3)   
   Operating profit (Rm) 505          507         445           480  (7)    950           987  (4)   
   Operating margin (%) 7,5          7,5         6,7          7,5        7,1          7,4       
   Return on invested capital (%) 12,2          13,4                              13,0           13,8       
   Weighted average cost of capital (%) 10,9          11,1                              10,8           11,0       
   Net debt (Rm) 2 058          2 280   (10)                         1 491           2 241  (34)   
   Net working capital (Rm) 762           785   (3)                         302           793  (62)   

* Restated due to the reallocation of results relating to our infrastructure solutions business from Logistics South Africa to Logistics African Regions.

Note: Continuing operations; excluding businesses held for sale, head office and eliminations.

Operating context

  • Material macroeconomic factors affecting our South African operations included persistently poor economic conditions and low consumer spending – translated into exceptionally low volumes across most sectors.
  • Load shedding during the year impacted production activity in many sectors, which also negatively affected our volumes.
  • Government's growth plan is unlikely to stimulate growth in the short term and high unemployment continued to plague the country.
  • We continued to face margin pressures from clients.
  • The impact of this lacklustre trading environment has been reduced volumes, and ongoing competitive and client pressures, particularly in the consumer-facing, healthcare and manufacturing client base.

Performance highlights

  • Excluding CPG and businesses held for sale, we maintained revenue and reduced operating profit by 4%.
  • This was due primarily to depressed consumer demand and exceptionally low volumes across all industries, particularly in the consumer-facing, manufacturing and healthcare client base.
  • New contract gains, a good performances from the supply chain management and consulting business (Resolve), fuel and gas, and commodities businesses. Ongoing improvements in efficiencies in the supply chain significantly reduced costs which further supported performance.
  • Excluding the CPG business, the division has grown operating profit by 5% per annum over the last three years, achieving ROIC of 16%.
  • New contract gains added R2,2 billion of annualised revenue.
  • Client retention rates remained high at around 95%.
  • Net capital expenditure increased to R569 million (2018: R388 million) due to the replacement of the transport fleet and fleet expansion to accommodate new contracts.
  • The CPG business, classified as a discontinued operation, recorded a R503 million operating loss for the year.
  • The ROIC of 13,0% reduced from 13,8% in the prior year mainly due to lower operating profit.

nico van der westhuizen

An unpredictable operating environment and increasingly pressured market made for a difficult 2019. Weak economic conditions, low consumer spending and volatile fuel prices significantly impacted our businesses and profitability.

Nico van der Westhuizen – CEO South Africa

In the CPG business, contract losses, volume and margin pressures deepened in line with the unexpected pace and extent of economic decline, which accelerated structural changes in the market – specifically as retailers centralised their distribution facilities and disintermediated supply chain providers to protect their margins. Despite numerous turnaround and cost cutting initiatives, the CPG business model (providing multi-principal distribution capability) had become uncompetitive and unsustainable, and a return to profitability was unlikely.

This made the decision to exit the business unavoidable, at which we immediately turned our focus to minimising the impact on our people, clients and suppliers. Roadshows were undertaken to communicate the decision to our employees and involved constructive, ongoing engagement with the relevant unions and other key stakeholders, facilitated by a commissioner appointed by the Commission for Conciliation, Mediation and Arbitration (CCMA). Key contracts are being accommodated in other business units under a different commercial model and CPG operations will be fully terminated by the end of calendar year 2019. It is important to note that this decision does not represent our exit from the consumer industry vertical in South Africa, but only the rationalisation of the multi-principal distribution capability that had become unviable.

Excluding CPG, the South African division has shown its resilience. It has lifted operating profit by 5% over the last three years and achieved an excellent ROIC of 16% in a market of no real economic growth. This has demonstrated our ability to adapt our asset utilisation models to the changes in specific industries and our progress in rationalising and consolidating businesses and facilities, and reducing costs. The South African division removed c.R140 million (excluding CPG) of fixed overhead costs per annum which resulted in a once-off cost impact of c.R25 million in this financial year.

More importantly, we have retained 95% of our client contracts and secured new contract revenue of R2,2 billion in the last year. This is testament to the dedication of our teams who have continued to deliver differentiated services to our clients, consolidating our position as their partner of choice. To drive growth, we will leverage the advantages to our clients of our depth of experience and industry insight through our renewed operating model – which will ensure a dedicated commercial sales focus supported by operational excellence within our chosen industry verticals. This will be underpinned by our ONE Imperial – "one business, one brand" approach, which emphasises an ethical, collaborative, innovative, client and delivery-driven culture.

Our people are the critical enablers of our commitment to improve the delivery of our short-term financial and operational targets, without diluting our attention on our longer-term strategic objectives. We continue to invest significantly in the development of our people, with a specific emphasis on accelerating transformation both within our organisation and through our business partnerships. This is fundamental to deepening our competitive advantage and protecting our legitimacy in South Africa. During the year we appointed a number of black and female employees to key executive and management positions. We also concluded a B-BBEE transaction with the Afropulse Group, a wholly black women-owned business, to form Imperial Logistics Advance, a 51% black-owned and more than 30% black women-owned business that focuses on the energy, mining and chemicals industries.

Technology and innovation are important themes in protecting our market leadership position. Our short-term approach is to develop pockets of practical innovation that will add significant value in the short term while ongoing investment will provide a foundation for longer-term growth opportunities.

Our people had to deal with deep uncertainty in the last year, as an inevitable consequence of the difficult strategic decisions we made, quite besides the worrying economic and socio-political conditions in which we live and work. During the year, 3 014 of our employees in South Africa were impacted by organisational restructuring. This resulted in the transfer of 2 764 employment contracts and, regrettably, the retrenchment of 250 employees after due process. As we move forward, we will rely on the resilience and resourcefulness of our people to compete more effectively. Without the drain on management time and divisional performance of a significant underperforming business, we are confident in our ability to deliver on our strategy, which is focused on protecting our market leadership and deepening our competitiveness and relevance to our clients in our chosen industries.

We also continue to invest in environmental initiatives that reduce our operating costs and reliance on unstable municipal supply, with particular focus on fuel, electricity and water. We continue to explore the business case for investing in specialised assets on behalf of our clients, for instance Euro 5 emissions standard trucks and gas-powered vehicles, where possible, and multipurpose vehicles able to transport multiple products at different temperatures. This is in addition to route optimisation software and vehicle management systems that also contribute to fuel efficiency. Pleasingly, we achieved an 18% reduction in water consumed due to the increased use of recycled water and obtaining water from alternative sources. Road fuel and electricity consumption decreased 9% and 4% respectively compared to prior year and is mostly due to reduced fleet utilisation and the consolidation of facilities.

As we replace our fleet we ensure that our vehicles are fitted with the latest safety specifications, to support the highest standards of driver health and safety. This is supported by annual driver training to support our focus on instilling a culture of health and safety in all of our operations. While road accidents and road injuries per million kilometres decreased 24% and 45% respectively for the year, we also recorded two employee fatalities. We convey our sincere condolences to the families, friends and colleagues of Sibusiso Mhlongo and Patrick Ratyela.

The people of Imperial Logistics South Africa are smart, passionate and tenacious. I have every confidence that we have what it takes to meet our performance targets and progress our strategic objectives in a market that will remain difficult for the foreseeable future. We firmly believe that we have more opportunity in tough times to demonstrate the benefits to our clients of the scale and reach of our specialist capabilities, and the competitive pricing that our high efficiency enables.

Strategic objectives

Support client
centricity
    Leverage asset flexibility to
deliver organic growth
    Accelerate
transformation
    Optimise core
capabilities

Support client centricity

Simplifying our operating model will support our client-centric approach and remove duplication. Re-organising our business by priority industry will improve engagement, giving our clients a single point of contact through which to access the industry teams. Their specialist expertise in these industries will improve the development of customised solutions, deepening client dependence on our services. Our priority industries are those in which we believe we can compete most effectively and generate targeted returns. They include consumer, healthcare, mining and manufacturing, chemicals and energy. We will continue to participate in automotive, public sector, hospitality and tourism.

Effects      
    Improved customised solution development and solution orientation will drive sustainable organic growth.
    Deeper industry insight, capabilities and solutions will enhance competitiveness and relevance.
    Value-added solutions at higher margins and reduction in the cost to serve will support higher profitability.

Evaluation

Past performance has been measured mainly by financial indicators. While this was also the case for the year under review, we are developing measures appropriate to our strategy and culture, and the behaviours we want to encourage. We will continue to develop and embed the relevant measures for disclosure in the medium term, including:

  • Revenue growth per industry.
  • Client satisfaction, based on net promoter score.
  • Client-focused solutions and innovation.

Progress

We are implementing a new operating model, where centralised commercial teams will take responsibility for business development and sales, and operations teams will be responsible for the delivery of capabilities and solutions to clients. This will reduce internal competition for contracts, duplication of effort and simplify how we engage with clients, without centralising the accountability for operational growth within our business units.

Work to consolidate relevant functions into the structure and appoint the right people with the appropriate skills, and to migrate clients to industry teams, is ongoing. A new chief commercial officer has been appointed, along with senior executives to head up each key industry team, and business plans are being developed in each case. Reward and recognition practices will be aligned to the relevant responsibilities in the new structure.

Longstanding strategic relationships, competitive cost structures after further rationalisation and our ability to customise solutions saw the division retain 95% of its contracts. A strong pipeline of new business – of R2,2 billion – was likewise forged on the back of these differentiators.

Leverage asset flexibility to deliver organic growth

To drive growth, we need to remain flexible in the way we apply traditional (in which we own specialised assets) and non-traditional (in which we manage third-party assets) models to deliver services to clients that make the most commercial sense to them. Asset intensive growth opportunities are carefully assessed using measures that include target market share and acceptable returns with new and existing clients and in new industries and capabilities. Our objective here is to entrench our client relationships and mitigate the risk of disintermediation. In combination, we are expanding our asset light services and solutions to diversify our business and entrench our services with clients. These solutions depend more on people, processes and technology and less on asset ownership to add value to clients. Establishing these new services still requires investment in team set-up, systems implementation, technology and business development.

Effects      
    Asset-flexible client solutions will drive organic growth in existing and new markets.
    Ability to deliver comprehensive solutions to clients irrespective of their requirements increases competitiveness and relevance.
    Asset flexibility dilutes overheads and provides higher returns, improving profitability.

Evaluation

Measures for success include:

  • Revenue and operating profit growth.
  • ROIC of 3% above WACC.
  • Client-focused solutions and innovation.

Progress

During the year, net capital expenditure increased from R388 million to R569 million, primarily due to the replacement of the transport fleet and fleet expansion to accommodate new clients. We continually assess our asset flexibility to ensure that we have the right balance of assets to deliver competitive services to our clients.

Our focus on expanding our range of services and capabilities included designing specialised high cube capacity trailers to improve our offering to our clients in the packaging industry. We will continue to assess our asset needs to be able to grow our existing client base in South Africa, focusing on expanding our service offering and to enter new market sectors. We will balance asset investments with other opportunities to deliver organic growth in the longer term, including investing in strategic partnerships, technology and innovation, and other business development opportunities.

Accelerate transformation

Transformation is fundamental to deepening our competitiveness, relevance and legitimacy in South Africa. As a moral and commercial imperative, we strive to continually improve our B-BBEE performance. Our approach to transformation is collaborative and we work with our clients, partners, suppliers and the public sector to drive progress. Our clients demand that we meet minimum transformation criteria to participate in tenders. These include black ownership of over 50%, black women ownership greater than 30% and a minimum B-BBEE rating of Level 3. Achieving this is fundamental to winning new business and retaining existing clients.

Effects      
    Enables client retention and growth by increasing the availability of tender opportunities.
    High B-BBEE ratings are critical to competitiveness in energy, mining and manufacturing industries, and diversity increases relevance to employees.
    Sustainable organic growth and improved returns.

Evaluation

Measures for success include:

  • Progress from Level 3 to Level 2 B-BBEE rating according to the revised dti Codes by 2022.
  • Achieve employment equity targets.
  • Growth and client retention, particularly in the energy and mining sectors.

Progress

Our 2019 B-BBEE scorecard is expected to achieve a Level 3 rating against the dti Codes and a Level 2 rating against the Road Freight Sector Codes. It will be available at the end of September 2019. Black representation at top management level was 47% (target: 33%), senior management at 28% (target: 20%), middle management at 43% (target 39%) and junior management at 76% (target 77%). Some 89% of appointments made in the year went to black candidates and 92% of our training spend was directed at the development of black employees. Meeting our employment equity targets in an environment in which we had to reduce headcount and with low staff turnover at all management levels is a challenge. However, we have done an analysis of staff close to retirement to identify positions for the accelerated succession of black talent. Through facilitated job-shadowing, this initiative will enable institutional knowledge and skills transfer, and smooth transitions into these roles for the identified successors.

Diversity workshops and climate surveys are regularly conducted to foster an organisational climate that values diversity and encourages inclusion. In addition, 98 leaders attended change management training to help them embed employment equity practices and policies. We also launched the Imperial Logistics Women's Forum, comprising representatives across all employment levels, to identify and address issues encountered by women in the workplace.

Looking forward we will focus on building an external talent pipeline for business critical positions, focusing on African male and female candidates to supplement the internal talent pool. We will also look for opportunities to centralise certain procurement categories to increase our spend with black companies and develop structured engagement interventions to assist our sub-contractors and suppliers improve their B-BBEE ratings.

Sinawe Fund

The Sinawe Fund – an enterprise and supplier development intervention – has provided black-owned equity to three small, medium and micro-sized enterprises (SMMEs), as well as ongoing technical and general management support customised to each SMME's growth stages and development gaps. All businesses have grown their revenues significantly over the year, however, increased operating costs have resulted in lower than expected earnings. Cost management plans have been put in place and are being monitored. One business has employed an additional 16 people and moved to bigger premises to accommodate the growing demand for its products. The outlook for all SMMEs remains positive and we expect to see improvements in the coming year along with the first set of dividends from the portfolio.

Unjani Clinics

The Unjani Clinics initiative empowers black women professional nurses to operate and ultimately own primary healthcare container clinics in their communities. Unjani Clinics NPC operates 63 clinics in total with 25 funded exclusively through the enterprise development spend from Imperial Logistics. The clinics have facilitated one million consultations since 2013, and offer an affordable, quality healthcare service to the employed but uninsured population (estimated between 10 and 12 million people), who are able to pay a small fee towards their healthcare needs. The model shifts primary healthcare services to professional nurses and away from government facilities, which are stretched and underresourced. The clinics provide access to essential medicines and primary healthcare at the point of need, reducing the vast amount of time and travel costs patients incur to receive attention at a state facility.

Leveraging opportunities through Imperial Logistics Advance

The disposal of 30% of Imperial Logistics South Africa to a B-BBEE partner was substantially more complex than we had originally anticipated. As a result, we concluded a smaller transaction in December 2018 with strategic B-BBEE partner, Afropulse Group Proprietary Limited – a wholly black women-owned business. The newly incorporated entity – Imperial Logistics Advance – incorporates the tanker services food and chemicals business unit, the tanker services fuel and gas business unit and Imperial KWS Logistics Proprietary Limited, with an annual turnover of approximately R3,5 billion. Afropulse acquired 25% of Imperial Logistics Advance for R200 million. The business is 51% black-owned and more than 30% black women-owned and has a Level 4 B-BBEE rating, which we aim to improve to a Level 2. The core capability of Imperial Logistics Advance is the bulk road transportation management of liquids, gases, powders, ores and grains, which requires specialised assets and skills.

More information is available online: support relevant social imperatives within our operating regions.

Optimise core capabilities

Optimising our core capabilities includes assessing the strategic alignment of business units, possibilities for further consolidation of our businesses and the development of industry specific capabilities. As we continue to enhance the depth of our capabilities in core industries, we will leverage our networks to become a leading distributor in both formal and informal markets. We will maintain market relevance through our ability to offer highly specialised services to clients that are unmatched by competitors in the South African market.

Effects      
    Optimisation and consolidation facilitate our ability to win new business through increased cost competitiveness and increase access to incremental revenue streams.
    Our ability to offer integrated solutions to clients, which combine existing and new capabilities, differentiate our service offering.
    Leveraging the benefits of scale and scope lowers our costs.

Evaluation

Success will be assessed through:

  • Reduced operational complexity.
  • Improved returns, cost reductions and revenue growth.

Progress

During the year, we continued to assess our capabilities and to identify areas for optimisation.

Examples of this include:

  • Optimising our control tower capabilities.
  • Being the only accredited cyanide transporter in South Africa and having the only accredited phenyl wash bay in the country.
  • Developing performance-based vehicles capable of carrying heavier loads of larger volumes.

We are investigating the opportunity to leverage our existing networks and capabilities to distribute specific products to remote and informal markets. We are currently investigating the feasibility of participating in the fast growing e-commerce market and are subsequently identifying strategic partners with fulfilment capability.

Acquisitions to align capabilities     Initiatives to optimise capabilities     Initiatives to rationalise capabilities
  • Commenced the acquisition of Lowveld Bus Services.
   
  • Develop industry-specific capabilities to improve competitiveness.
  • Integrate capabilities, focusing on distribution and route-to-market.
  • Implement solutions sales process to improve our service offering.
  • Consolidate linehaul, IMS and technical services to simplify the business.
   
  • Exit the CPG business.
  • Integrate distribution and route-to-market capability in offering.
  • Increase internal collaboration to replicate and roll out best-in-class solutions.
  • Removed c.R140 million of fixed overhead costs per annum (excluding CPG).

People, processes and systems

Human capital

In line with the strategic decisions taken during the year, our people priorities were to limit the impact of the CPG closure on our employees in the business and the implementation of the new operating model, including aligning reward and recognition structures to support the new model and a client-centric approach. Pleasingly, the progress made in core data and the talent management process assisted the redeployment of people impacted by the organisational restructuring.

To support the group's people strategy to embed best people management practices and position Imperial Logistics as an employer of choice, we are focused on transforming the workforce (as discussed above), improving our talent and performance management processes, and progressing the implementation of a human capital management system.

Progress

  • Enhanced the talent management process, enabling us to identify the appropriate talent for each job profile and understand where we can potentially promote employees in the talent pipeline. This has enhanced transparency around career paths for the operational levels (unskilled and semi-skilled). Going forward, our focus will be to develop clear career paths for roles beyond these levels and equip line managers to hold effective talent conversations with their teams.
  • Launched the Executive Development and Women's Development programmes, which develop leadership capability and resilience in the face of change.
  • Our Graduate programme builds our talent pipeline for specialist and management roles. 63% of this year's 38 graduates are black and in 2020 we will increase our intake, with 67% of graduates being women.
  • In total, R5 million was invested in the Thabang Fund since 2017 to develop black semi-skilled and unskilled employees in various fields.
  • Training spend amounted to R160 million (2018: R135 million).
  • Rebuilt and rebranded the talent recruitment strategy in line with being an employer of choice. This included the launch of a LinkedIn profile, helping us to reach more black candidates, and increased engagement at universities to support the intake to the Graduate programme.
  • Developing a framework to standardised talent acquisition, which will include the necessary expertise to manage talent sourcing.
  • Aligned our people processes, policies and practices across group companies to support the implementation of a people management and payroll system. Implementation will take place over the next two years.
  • Started implementing the new performance management practice, with a balanced scorecard of KPIs to ensure employee effort aligns to strategic objectives.
  • Successfully concluded industry wage negotiations, securing a three-year wage settlement with the National Bargaining Council for the Road and Freight Logistics Industry (NBCRFLI).

Going forward, we will continue to enhance transparency around career paths at all levels and equip line managers to hold effective talent conversations with their teams.

More information is available online: Effective human capital management.

Information technology and innovation

We have developed a South African IT roadmap which details specific priorities and requirements to support our existing operations and future business development plans, which includes client-focused innovation.

This year, our IT strategy focused on:

  • Streamlining our IT operating model by adopting a fit-for-service delivery model.
  • Ensuring the appropriate blend of IT architecture and business skills needed to offer contemporary, innovative business solutions.
  • Standardising and consolidating decentralised legacy systems into stable and robust fit-for-purpose solutions built on reliable platforms, thereby reducing the risks related to running these systems.
  • Upgrading our IT architecture to cloud-based platforms, strengthening our data recovery and availability and reducing our current server footprint.
  • Proactively supporting our ability to deliver innovative, value-added and differentiating technology solutions, including the use of blockchain for smart contracts, serialisation and digital freight exchange.
  • Providing a data repository for quality information that can be used for predictive analytics to enhance decision making.

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