Chairperson's report

Imperial has performed satisfactorily in a difficult operating environment, demonstrating the resilience of our business model and vindicating the strategic decision to increase the sector and geographic diversity of our income streams.

OVERVIEW

During the course of the year there was increasing evidence to support a softening of economic growth expectations worldwide. In South Africa the effects of slowing or more tentative global growth were exacerbated by domestic developments. We are therefore particularly pleased that Imperial has delivered revenues exceeding R100 billion for the first time, record operating profit, and record revenue and operating profits from four of the group’s five divisions.

Our ability to grow the business into the rest of Africa, and in particular to achieve such rapid growth in the African logistics business, is testament to the soundness of the strategic vision the business has been able to conceive and put into practice.

Demographics, stability and investment have fuelled the emergence of a middle-class consumer base in many African countries, creating opportunities for relatively higher growth. Our decision to target the consumer and healthcare sectors, and to do so through aggressive organic and acquisitive growth, has established a robust foundation of market access, sector penetration and local skills. We remain conscious however of the strategic, operating, regulatory and financial risks in these foreign markets, with the board continually and proactively monitoring these risks.

The diversification of our revenue streams was not confined to logistics in Africa and we invested in all divisions to decrease the group’s dependence on South African new vehicle sales where we occupy strong market positions. The 2014 results perpetuate the growth trends of non-vehicle and foreign revenue contributions, which rose to 43% and 34% respectively.

ENVIRONMENT

Three uncontrollable factors had a direct effect on Imperial’s financial performance in the 2014 financial year.

1 The most telling was the weakening of the Rand since the start of 2013 and its lagged impact on the performance of our vehicle import and distribution activities. Without the export benefits that ameliorate the effect of currency movement for original equipment manufacturers that manufacture locally, we as direct importers are negatively impacted by rapid and extreme weakening of the Rand, over a long period. The fact that we earn hard currency through our international operations in Europe and in the rest of Africa has somewhat mitigated this impact, as has our focus in recent years on developing income streams from aftermarket service, parts, and financial services and products..

2 The second economic impact was the softening of the South African economy and lower than anticipated growth rates in Europe. This resulted in muted volumes and demand in our local and international logistics businesses and a reduction in passenger vehicle sales, as the South African consumer came under increasing pressure.

3 The second economic impact was the softening of the South African economy and lower than anticipated growth rates in Europe. This resulted in muted volumes and demand in our local and international logistics businesses and a reduction in passenger vehicle sales, as the South African consumer came under increasing pressure.

INVESTING IN A MORE COMPETITIVE SOUTH AFRICAN ECONOMY

We need to evaluate carefully what it will take to create a more competitive South African economy. Although South Africa has a mature institutional framework, there are some clear issues which hinder its competitiveness and attractiveness as a business destination. These include the lack of flexibility in our labour markets, the lack of secure and affordable energy and the limited skills in many areas, including in the technical disciplines.

While the main concern of the leadership of organised labour should be the improvement of the living conditions of manual workers relative to the rest of society, this needs to be addressed in a different manner than demanding large real wage increases through protracted, oftentimes violent strike action.

The mistrust between employer and employee has been fuelled by the growing discrepancy in living standards and by centralised bargaining, which has sadly supplanted the day-to-day responsiveness of management to worker concerns. Wage increases alone cannot address this situation sustainably and a new approach by all is necessary to create a more productive labour market conducive to investment.

Allied to this, the current inflexibility of our labour markets is a hindrance to addressing the pressing issue of youth unemployment and the imperative to provide opportunities for first-time work seekers to obtain skills and experience. Statistics released by government during June confirmed that the African population aged between 15 and 35 has effectively de-skilled since 1994.

SOUTH AFRICAN BUSINESS

The leadership of Imperial is committed to playing its part to improve the fragile relationship between business and government. We acknowledge our obligation as business leaders to work with government in new and different ways to address issues of common concern and to build trust through collaboration. South Africa’s long term growth prospects, economic stability and attractiveness as an investment destination are dependent to a large degree on how successfully government and business together are able to do this.

We regard the National Development Plan (NDP) as a sound framework by which we can bring to bear the considerable talent and resources from all sectors of our society to create more effective partnerships, based on honest communication and clear intent. To this end, the board and senior executives of Imperial will devote time and resources to support any initiative which translates the NDP’s broad objectives of growth and employment into concrete programmes. We will ensure that our membership of over 70 industry and professional bodies positions us to provide constructive input to the national agenda.

STRATEGY

The broad strategic direction of Imperial is unchanged. We will invest the cash flows generated by two distinctly different South African vehicle businesses in other sectors of mobility, both locally and internationally. Building on the entrepreneurship, expertise and market positions which flowed from our earliest days as a motor dealership, we will strive to expand our activities in carefully selected segments of the logistics, vehicle and vehicle-related financial services markets.

We will continue to allocate capital and resources sensibly to those organic and acquisitive growth opportunities that will enhance and be enhanced by the group’s existing assets and capabilities. And we will extend our presence in Africa, Europe, South America, Australia and the United States through five major divisions which operate under separate management structures to enable decentralised entrepreneurial creativity within the group’s clearly-defined strategic, capital, budgetary and governance principles.

We believe, however, that a more challenging environment demands a sharper definition of our subsidiaries’ competitive positioning and the value added by Imperial in its role as a parent.

With regard to the first, we will be reviewing carefully those sectors or businesses that fail, or lack the potential, to render a distinctive proposition to clients or the required return on capital and managerial effort. We will also devote energy and innovation to the elimination of complexity and its associated direct and indirect costs. At the same time we will remain alert to those unforeseen or unimagined external developments that might enhance growth and returns.

As a holding company we are mindful of our obligation to add value to subsidiaries in excess of the cost of doing so. In this regard our major areas of focus will be the development of the group, the allocation of capital, ensuring the strategic clarity of all subsidiaries and the development of executive calibre and succession.

EXECUTIVE LEADERSHIP DEVELOPMENT

We are proud of our employees and have recruited, developed and retained highly-skilled individuals at all levels in the business. It is our intention to bring greater investment and attention to bear on the development of executive calibre and depth. Over the past year, we have invested R170 million in the education, training and skills development of our employees. Although this investment resulted in over 700 000 hours of training time – much of it for early entrants to the workplace – almost none of this was devoted to our most senior executives. In recent months we have therefore started to augment our development initiatives with an integrated approach to enhancing the capability of our senior executive leadership.

This will entail both the development and deployment as needed of our current leaders, and the attraction of new talent to support our growth trajectory, succession requirements and quest for an appropriate transformation mix. Our transformation efforts will not only be driven exclusively by compliance with existing or future codes, but also by the imperative to recruit and develop substantial business leaders who represent the demography of our marketplace. Accordingly, this process will be driven through line management by the CEO, in tandem with a remuneration model based on a collaborative, rather than a silo-based approach.

Likewise at board level, we will plan for the future needs of the business and ensure that we address talent management and succession in a manner that aligns the board’s capabilities with the specific requirements of Imperial and the jurisdictions in which it operates.

THE UKHAMBA OVER THE COUNTER (OTC) SCHEME

In 2004 Imperial established a structure whereby 15 000 previously disadvantaged employees became beneficiaries of the Ukhamba Trust, which owns the shares of Ukhamba Holdings, which in turn was awarded a 10,1% stake in Imperial.

During the year, we introduced an OTC trading scheme for the Ukhamba shares. Operationally this has been a success, allowing Ukhamba beneficiaries to achieve some liquidity, but still remain invested in the company.

GOVERNANCE AND SUSTAINABILITY

The board is acutely aware of the change in risk profile which is a natural consequence of our growth and diversification strategy. It is incumbent on us as a board to ensure that we fully appreciate the business risks inherent in our strategy and that we are equipped with a full understanding of the means to mitigate this risk.

Our attention will address both the formal governance and compliance structures necessary for control and oversight, and equally the appropriateness of management, business structures and processes, without which governance practice is redundant. This holistic approach to governance is essential in a group as large and decentralised as Imperial and is entirely appropriate for its entrepreneurial culture.

This year we have again attempted to increase our awareness and reporting on matters of sustainability. While these issues are covered comprehensively in the separate Sustainable Development Report, available on the group’s website at www.imperial.co.za, the likely promulgation of a carbon taxation instrument in some form has added a new dimension to our responsibilities. We have introduced a framework for managing environmental issues across the group, but need to understand and be prepared for changes related to CO₂ emissions.

APPRECIATION AND SUCCESSION

I would like to extend my heartfelt thanks to Hubert Brody, who resigned as CEO earlier this year. Hubert leaves a lasting legacy to the group. His deft handling of the business through the global financial crisis was exemplary. Thanks to his leadership, the group was able to navigate through the crisis, emerging as a restructured and streamlined business and learning important lessons along the way. He will be remembered for the efficient capital management processes he implemented in the group, as well as for his warm and personal touch.

We are delighted to have appointed Mark Lamberti as his successor. I have thoroughly enjoyed my initial period working with him. Mark brings many years of business experience and with it the knowledge and capability to guide the company and to identify opportunities for the group in the next stage of its development. Mark is fully aware of the prevailing entrepreneurial culture of the business and is himself cast in this mindset. He is also well aware of the need to channel the group’s entrepreneurial spirit within a very clear strategic direction and framework.

A key aspect of Mark’s mandate is to develop the next generation of leaders and he relishes this challenge. He will be looking at innovative ways to develop leadership depth, not only among his own direct reports, but also in the level below.

The CEO of Imperial Logistics International, Gerhard Riemann, has served on the Imperial board since 2000. During that time his experience and leadership has been central to the development of our international logistics operations and his wisdom has enhanced the deliberations of the board. He will retire on
31 December 2014 to be succeeded by Carsten Taucke, currently the CEO of Imperial International Shipping. I thank Gerhard for his dedication and in particular for his leadership in engendering the loyalty and commitment of our international colleagues to Imperial.

During the year we also welcomed Jurie Strydom, Mohammed Akoojee and Philip Michaux to the board. Each of these gentlemen handles portfolios of increasing depth and breadth and we look forward to them enhancing the deliberations of the board.

LOOKING FORWARD

The performance of the past year has entrenched Imperial’s position as a significant South African company with growing international interests.

Today we have the strategies, leadership, assets and governance to sustain the development of the group in the interests of all stakeholders.

For this I thank my fellow directors and the group’s employees. One of the greatest assets of the group is the skill and motivation of Imperial people, and the energy with which they work on behalf of the group.

THULANI GCABASHE
CHAIRPERSON