Vehicle Retail, Rental and Aftermarket Parts

VEHICLE RETAIL, RENTAL AND AFTERMARKET PARTS

In the start of a recent drive to eliminate complexity in the management and reporting of Imperial, the car rental and aftermarket parts businesses were combined with the automotive retail division. The combined division is now referred to as Vehicle Retail, Rental and Aftermarket parts. Prior years’ comparatives have been restated accordingly.

DIVISIONAL STRUCTURE Vehicle retail   Car rental   Aftermarket parts   Leisure PASSENGER DEALERSHIPS   COMMERCIAL DEALERSHIPS We own and operate a network of 86 motor vehicle and motorcycle dealerships in South Africa, all of which are also distribution channels for financial services, products, insurance, vehicle servicing and parts.   In the commercial sector, we own and operate 20 dealerships in South Africa. In the UK, commercial vehicles are sold through 38 franchised dealerships. These represent major brands and provide light, medium, heavy and extra-heavy vehicles, as well as related financial services, parts and servicing.   CAR RENTAL   PRE-OWNED VEHICLES AND PANEL SHOPS The car rental business operates under two brands, Europcar and Tempest. Tempest is focused on the price-sensitive market. Europcar, a premium brand, offers a full range of vehicles and operates throughout the SADC region. Europcar is the second largest car rental business operating in the region.   Rental cars are disposed of through Auto Pedigree, the largest pre-owned vehicle dealer network in South Africa, with 65 branches, as well as through Imperial Auto Auctions. A chain of 18 panel shops approved by most OEMs maintains the car rental fleet and undertakes consumer repairs for insurance companies.   The aftermarket parts business is mainly a distributor of general and hard (vehicle-specific) parts and accessories to the automotive industry through a network of approximately 522 owned and franchised stores.   The business has six manufacturing operations (of which one is in Australia), eight depots and 36 retail outlets, as well as a number of approved agents). We manufacture and retail caravans, trailers, canopies, truck bodies and related products through Beekman Canopies and Jurgens. THE FRANCHISED DEALERSHIPS IN SOUTH AFRICA REPRESENT A STABLE AND WELL-BALANCED PORTFOLIO OF LOCALLY-BASED OEMs, INCLUDING: Audi, BMW, Chevrolet, Chrysler, Dodge, Fiat, Ford, Honda, Isuzu, Jaguar, Jeep, Land Rover, Lexus, Mazda, Mercedes-Benz, Mini, Mitsubishi, Nissan, Opel, Renault, Smart, Toyota, Volkswagen, Volvo and BMW and Honda motorcycles. Our network of dealerships is one of the largest in South Africa. THE COMMERCIAL SEGMENT BENEFITS FROM A GOOD DEALER FOOTPRINT AND A STRONG PORTFOLIO OF MA JOR BRANDS IN SOUTH AFRICA: Freightliner, FUSO, Hino, Hyundai, Isuzu Trucks, Mercedes-Benz, Tata, UD Trucks and Western Star International, Nicholas and MAN (service and parts only). IN THE UNITED KINGDOM: DAF, Fiat, Ford, Hino, Isuzu Trucks, Mercedes-Benz, Nissan and Volkswagen. MAN and Renault Trucks (service and parts only). THE FOLLOWING BRANDS ARE REPRESENTED IN THE LEISURE SECTOR: Campworld, Beekman Canopies, Gypsey, Howling Moon, Jurgens, Jurgens Safari, Sprite, Safari Centre, WJ Motorhomes.

This division was restructured during the year to ensure continued focus and strategy, simplify the group structure and eliminate complexity. Going forward, it will include the aftermarket parts business and the car rental business, which were previously managed separately.

The vehicle retail business is relatively stable and benefits from a well-diversified portfolio of brands, albeit in a competitive retail market. The division is a franchisee of major brands, and in this sector strategic positioning is driven by a well-balanced portfolio of brands, prime dealer locations and the quality of front-line sales.

WHERE WE OPERATE

The largest geographic market is South Africa, which accounted for 84% of the division’s revenue and 91% of operating profit in 2014. It undertakes some business in the rest of Africa through Beekman Namibia and Europcar, which has branches in Botswana, Namibia, Swaziland and Lesotho.

Since 2006, our operations have also included the United Kingdom where we retail commercial vehicles and provide parts, servicing and financial services to clients from 38 truck and van dealerships. We have 64 franchised aftermarket parts stores outside South Africa.

We are active in the Australian market to which we export kits and where caravans are manufactured, assembled and sold. The Australian caravan market is more than ten times larger than the South African market and represents a growth opportunity for this sector of the business.

MARKET OVERVIEW

As noted in the market overview for the Vehicle, Import Distribution and Dealership division, the new passenger vehicle market experienced difficult trading conditions. Partially offsetting these trends, pre-owned vehicle sales benefited from higher new vehicle prices. Aftersales parts and service revenues increased due to growth in the installed base of vehicles.

Commercial vehicle sales in South Africa reached a post-2008 record and showed growth of 9% year-on-year, but are still below the levels experienced between 2005 and 2008.

The car rental sector remains highly competitive. Over the last two years, growth in the car rental segment has slowed and, during 2014, the group experienced a drop in the length of the average rental due to a tighter economic environment.

The replacement and international sectors of the market, in which we are well represented, grew ahead of the corporate and government sectors, which contracted during the year. Corporate and government volumes are down since the peak achieved in 2012. International prices are marginally lower than levels achieved in 2010, despite a significant depreciation in the Rand.

We expect this industry to remain competitive in South Africa, with major industrial companies materially invested in car rental vehicles and infrastructure.

The aftermarket parts business focuses on the sale of aftermarket parts for vehicles which are between five and ten years old. In 2014, this represented 33% of the vehicles on the road in South Africa, up from 27% in 2008. The potential market for the business’ products will lag the strong new vehicle growth which occurred from 2010 – 2013.

South African industry commercial vehicle sales

Source: Lightstone Auto Vehicle Parc Statistics 2014 (NAAMSA)

Total parc (self-propelled, excluding motorcycles) (’000) Data source: Econometrix Pty Ltd, 03 April 2013. Ageing calculations done internally from source data

Longer term trends in the South African passenger vehicle market In South Africa, the passenger vehicle market is relatively stable and growth in new motor vehicle sales is likely to continue to track economic and employment growth. However, the penetration of vehicle sales in South Africa is low, approximately in line with other emerging markets. We therefore see significant upside to the market as the income of emerging consumers increases to the point of being able to afford a motor vehicle. Vehicle penetration – South Africa versus other markets Source: World Bank, UBS estimates The lack of public transport infrastructure means that motor vehicles are likely to remain important to consumers. Financing of both new and pre-owned vehicles in South Africa is a critical aspect of the purchase process. In our largest market of South Africa, company vehicles are the exception rather than the norm, as the workforce is highly mobile and likely to remain so. Individuals therefore tend to purchase their own vehicles, and will take out finance on an individual basis. A significant portion of new and pre-owned vehicles are financed.

RESULTS OF OPERATIONS R million H1 2014   % change on H1 2013     H2 2014   % change on H2 2013     2014   2013   % change on 2013   Revenue 17 519   11,8     16 478   1,5     33 997   31 895   6,6   Operating profit 740   14,2     819   16,7     1 559   1 350   15,5   Margin (%) 4,2         5,0         4,6   4,2       Return on invested capital (ROIC) (%)                     15,8   13,6       Weighted average cost of capital (WACC) (%)                     9,5   8,6       Weighted average invested capital                     7 506   7 197       KEY DATA REVENUE (Rm)   OPERATING PROFIT (Rm)   OPERATING MARGIN (%)     NUMBER OF NEW VEHICLES SOLD (SOUTH AFRICA)   NUMBER OF PRE-OWNED VEHICLES SOLD (SOUTH AFRICA)

STRATEGY OVERVIEW

The division’s competitive advantages include its position as the largest automotive retailer in South Africa and its established relationships with 14 leading original equipment manufacturers (OEMs), whose export initiatives ameliorate currency movements.

Our retail operations represent almost all major vehicle brands in South Africa and we benefit from scale and the inclusion of a broad spread of motor-related products and services in our portfolio.

We own 85% of our facilities, many of which benefit from prime locations. Our products offer a mix of passenger and commercial vehicles, which provide diversification.

Our investments in people ensure that our sales interface is a point of differentiation. In terms of technical skills, we invest continually in artisanal skills. For example, we run the largest private technical training network for trades in South Africa.

FINANCIAL AND OPERATING PERFORMANCE

Results overview

The division had a pleasing year with good growth in both revenue and operating profit. In South Africa, passenger vehicle volumes were subdued, performing in line with the market, but affected somewhat by industrial action during the period.

Passenger vehicle revenue grew as a result of an improved sales mix and new vehicle price inflation. Commercial vehicle unit sales growth in South Africa was strong in line with the market’s 9% year-on-year increase.

Operations in the United Kingdom performed well, with commercial new vehicle unit sales increasing 29% to 4 836 and pre-owned vehicles 14% up to 1 033 units. Orwell, acquired in the second half of 2013, made a full-year contribution and is performing in line with expectations. The translation effects of a weaker Rand exchange rate assisted the growth in Rands.

Aftersales parts and services showed good growth, despite the negative effects of the industrial strike action in South Africa in the first half, which suppressed parts supply and delivery. Revenue from services grew 17%, while price and volume increases contributed to improved parts revenue. The significant increase in new vehicle sales over the last few years has increased the potential for future aftersales parts and services revenue for the division.

The car rental business performed satisfactorily. The decision to target higher quality business resulted in revenue days declining 10% and revenue per day increasing 5%. Utilisation declined slightly and the average fleet size was reduced to enhance returns. International volumes improved as tourism was stimulated by targeted sales initiatives and the weaker currency.

Retail unit sales at Auto Pedigree were higher and the business improved its performance significantly on the prior year. The panel business was affected in the first half by strike action which depressed an otherwise solid performance for the year.

The aftermarket parts business performed satisfactorily in a competitive and mature market. Price increases as a result of the weakening in the Rand assisted revenue growth.

Net capital expenditure reduced by 39% to R614 million (2013: R1 012 million) due to the reduced car rental fleet and the sale of properties in the vehicle retail business.

What were the major challenges during the year?

PASSENGER VEHICLE DEALERSHIPS

A subdued new South African vehicle market dampened the business’ otherwise good performance during the year. In response, we maintain a continual focus on cost control and review our dealership footprint constantly to ensure we remain competitive. Revenues are underpinned by a diversified portfolio of brands, and increased penetration of aftersales parts and services and a good mix of commercial and passenger vehicle sales.

Due to our scale in the market, we frequently manage competitive brands with divergent requirements. Our revised structure facilitates the process of ensuring that we have the right skills to manage a diverse brand and product portfolio.

We continue to experience a shortage of key skills, including artisan labour. We therefore maintain our investments in training and development, particularly in the training of apprentices, with approximately 800 apprentices trained at the Imperial Technical Training Centre in 2014.

COMMERCIAL DEALERSHIPS

The South African commercial market performed well and a key driver for this business is the potential for government infrastructure development in South Africa and the rest of Africa.

In the United Kingdom commercial market, the switch in the market to Euro 6 vehicles was a key driver for unit sales growth in the first half. A recovering economy also assisted volumes.

LEISURE AND RENTAL

Labour action at our manufacturing business in South Africa had a material impact on this business as production was effectively halted for a four-week period during the year. A multi-year agreement has now been put in place with the major unions on site.

The major strategic project undertaken during the year in the car rental business was the replacement of the reservation and accounting system, called ‘Project Evolve’. The project’s objective is to modernise the system and enhance functionality to improve fleet utilisation, cost savings, operational efficiencies and enable the business to exploit synergies on the basis of better business information. The system was launched in July 2014 in Tempest and will be rolled out in Europcar at the beginning of the 2015 calendar year.

“The shift into electronic media has changed the interface with the customer on the floor. The profile of our salesperson has therefore changed dramatically, as we need to keep ahead of this trend.” PHILIP MICHAUX: CEO, VEHICLE RETAIL, RENTAL AND AFTERMARKET PARTS

What did we achieve during the year?   The division posted a good set of results, despite a challenging environment. Our restructuring was completed to split passenger and commercial vehicle sales. These separate management teams allow for greater focus on each product sector and stronger benchmarking and managing of internal performance measures. In car rental, systems benefits have been introduced in the de-fleeting process where it has been possible to significantly reduce the lead time for readying vehicles for sale, with a commensurate impact on costs and margins. We also changed our business mix by exiting low-margin sectors of the business. Auto Pedigree benefited from new vehicle price inflation as first time buyers found good value from pre-owned vehicles. The turnaround initiatives in our panel shops are starting to bear fruit and we are positioning this business for future growth.

Where do we still need to focus our attention? PASSENGER VEHICLE DEALERSHIPS – SOUTH AFRICA Given that the South African passenger vehicle market is not expected to grow during the coming year, our focus will remain on maximising the efficiencies in the business, particularly in the aftersales departments. Effective working capital management will remain critical to this business’ continued achievement of acceptable returns on invested capital. Investments in new facilities will be based on their ability to enhance the returns of the business. We will also focus on pre-owned motor vehicle sales as this market should benefit from new vehicle price increases. COMMERCIAL DEALERSHIPS Although the recent strikes have been disruptive, the commercial vehicle market remains strong. This presents an ongoing opportunity for the premium brands which we represent and which have excellent products for this market. LEISURE The leisure business is exposed to the challenges facing the current South African labour market. With its manufacturing facilities, the business is vulnerable to industrial action in most sectors.

Management of the business embarked on active training and information sessions to ensure good labour relations practices are in place at sites.

AFTERMARKET PARTS AND RENTAL

A critical initiative in the forthcoming period is the construction of the new Midas head office and distribution warehouse in Longmeadow, Johannesburg. The new warehouse will represent a consolidation of operations from three existing distribution centres. A state-of-the-art warehouse management system will be installed following this move and will drive further efficiencies in securing parts availability and reducing working capital. We anticipate benefits flowing from this initiative from 2016.

In the aftermarket parts business, we will focus on expanding our distribution footprint and product range.

The management of working capital remains a key focus area, as does securing the availability of imported parts through partnerships with key suppliers.

In the car rental business, the successful implementation of the IT system remains a key management priority, as it represents a fundamental part of achieving efficiencies in our car rental business. In this competitive market we also remain focused on tight capital management and on improving returns from vehicle utilisation.