Imperial: Leaders in Mobility

In the last year, my time and attention as CFO and then also as acting CEO, and that of the executive and divisional management teams, have been focused primarily on creating two large self-sufficient businesses, while continuing to deliver on day-to-day operational objectives in challenging trading environments. It is a source of great pride for all of us with a longstanding association with Imperial Holdings, that Imperial Logistics and Motus have grown to be not only South African market leaders but also internationally significant in their respective industries.

The path to separation

The board's decision to proceed with the unbundling of Motus is the culmination of an ambitious transformation that began four years ago. As the custodian of strategy, capital management, operational excellence and governance, group leadership sought to re-establish a trajectory for sustainable performance and returns while retaining the entrepreneurial creativity and capital management excellence that had underpinned Imperial's past success. The transformation and development of Imperial was centred around strategic clarity, managerial focus and shareholder insight; the first achieved through portfolio rationalisation, the second through organisational restructuring and the third through enhanced disclosure.

At that time, the executive team conducted a thorough strategic evaluation of the group's vast portfolio of businesses and assets. This exposed those unrelated to the group's core capabilities and those that were underperforming, sub-scale or providing insufficient return on executive effort. These included operations as diverse as chemical manufacturing, port management, industrial equipment and life insurance, among others. The group's extensive property portfolio included warehouses and dealerships in non-strategic locations.

The evaluation also confirmed the businesses with the most promising competitive prospects – within the logistics and automotive value chains. What followed was a substantial portfolio overhaul to optimise Imperial's business focus and assets within these areas of mobility. Since 2014, as many as 55 businesses and 90 properties were sold that generated revenues of R14,4 billion, operating profit of R1,1 billion and released capital of R7,0 billion. R5,7 billion was invested in acquiring 17 strategically aligned high quality assets that generated revenue of R14,2 billion and operating profit of R1,0 billion in their first full year of operation, and which are expected to deliver sustainable organic growth and enhanced returns and cash flows in the future. The acquisitions included, among others, consolidating the group's ownership of the Vehicle Import and Distribution business, growing its logistics footprint in the Southern African Development Community (SADC), East and West Africa regions to a R10 billion business and adding to our capabilities and geographic footprint outside the African continent. These strategic outcomes are vital elements in the competitive positioning and growth prospects of both the vehicles and logistics businesses.

In the absence of any significant operational synergies between the two, the rapid establishment of Imperial Logistics and Motus as two large independent divisions, managed and reported on separately, was the logical next step. Thorough consideration of the cyclical and structural dynamics, specifically the disruptive change expected to redefine their core markets in the coming years, informed the simplification and focusing of their structures, strategies and value propositions. This has positioned them clearly and strongly for sustainable competitive advantage, growth and returns. The process of separation also enhanced shareholder insight through greater visibility and disclosure of the strategies, performance and prospects of each business and their respective operating divisions.

In each case, managerial focus was honed through internal restructuring for organisational simplicity, which involved the alignment of their asset portfolios according to complementary capabilities, and clear market, customer and product focus. The restructuring removed complexity, duplication and cost, and disciplined capital management was further entrenched with the governance structures and processes to ensure effective balance sheet and working capital management. Targeted return on invested capital continues to guide capital allocation and the assessment of organic growth plans, asset renewals and acquisitions.

The appropriate executive management changes made to accommodate the new structure and the succession of retiring executives entailed a transition to significantly younger leadership teams, which deepened a predisposition to change and innovation in each business. Furthermore, recognising that people and culture are the foundation for the delivery of customer value propositions, organisational effectiveness and reputational integrity, significant investment was made in human capital management and supporting systems. Similarly, a strategic focus on digitisation and innovation, with the right structures to oversee the investment and application of IT, was prioritised. In both businesses, this investment and implementation in these primary enablers of differentiation, efficiency and resilience, continues.

In the strategies of each business (Imperial Logistics and Motus), there is ample evidence of stakeholder expectations being considered. Each has explicit plans to defend and strengthen its market positions, commercial relationships and licences to operate, by deepening industry legitimacy and social relevance in its markets. The latter includes investment in initiatives that respond to critical societal concerns, such as transformation and localisation, road safety and local development, and managing material environmental impacts according to the nature of their operations. Besides being an expectation of good governance, legitimacy and relevance are important features of commercial resilience, both in differentiating the value propositions offered to clients, principals, suppliers and business partners, and in mitigating operational, reputational and market risk.

The social development legacy of the group was also considered during separation, with the allocation of flagship corporate social investment projects to Imperial Logistics and Motus Holdings, respectively; over and above their ongoing focus on the social, economic and environmental programmes that respond to the most critical sustainable development issues in their sectors.

Strategic review

It was an eventful year, with considerable unforeseen challenges. Besides the priority of delivering an improved performance, it is testament to the collaborative and consultative process followed throughout the process to unbundling, that it continued without detraction or delay despite the executive management changes. Considerable time was spent engaging with shareholders and the investment community, and local and international debt providers, to provide strategic and operational updates, and to explain and understand their views on the rationale for the proposed unbundling; with no major pushback by most of our major local and international shareholders.

The optimisation of the business portfolios continued in the year with several key acquisitions and disposals. To grow their portfolios outside South Africa the following strategically aligned acquisitions were made:

• Imperial Logistics acquired 70% of Surgipharm Limited in Kenya for US$35 million (R485 million), which became effective on 1 July 2017. This has expanded its industry presence and relationships with pharmaceutical principals on the African continent and provides an excellent platform for further growth in other East African markets.
• Motus acquired Pentagon Motor Holdings, which operates 38 passenger and light commercial vehicle franchises from 21 prime retail dealerships in the UK, for £26 million (R479 million), effective 1 September 2017. Pentagon supports Motus' strategy to deploy capital and retail expertise to grow beyond South Africa, and complements its existing commercial vehicle business in the UK.
• Motus acquired 75% of Australian-based SWT Group Pty Ltd, which operates 16 dealerships, for AU$24,2 million (R261 million), effective 1 October 2017. This complements its existing dealership footprint in the growing Australian vehicles market.
• Motus acquired 60% of ARCO Motor Industry Co Limited, a distributor of motor vehicle engine parts based in Taiwan for R185 million. This is in line with its strategy to shorten the supply chain in sourcing products for its route-to-market network in Africa, which will eliminate costs and improve supply chain efficiency.

Disposals of non-core, strategically misaligned, underperforming or low return on effort assets included:

• The group's interest in and claims against Schirm GmbH, the contract manufacturing service business of Imperial Chemical Logistics GmbH, and related property transactions for a total cash price of €134 million (R2,0 billion). The transaction was concluded on 17 January 2018 and payment received on 30 January 2018.
• Non-strategic properties for proceeds of R1,7 billion; a further 17 properties with a carrying value of R234 million are held for sale.
• Transport Holdings in Botswana, which released capital of R200 million.
• Laabs GmbH, a €16 million revenue liquid food transporter specialising in liquid chocolate products and raw materials in Europe, for €2 million (R32 million) in October 2017.
• Interests in smaller entities in Imperial Logistics amounting to approximately R55 million.

With the portfolio optimisation largely complete, and the appropriate management, operational and governance structures to operate as separately listed entities in place, the final contingency in the separation of Imperial Logistics and Motus Holdings was to ensure self-sustaining balance sheets and efficient capital structures.

Proceeds from the sale of businesses and properties allowed us to significantly improve the group's net debt to equity ratio (including preference shares as debt) to 50% from 74% in June 2017 and 84% in December 2017. This was without any proceeds from the B-BBEE deal in Logistics South Africa, which is in progress, and on which the unbundling is not contingent. We are of the view that each division is now appropriately capitalised with appropriate headroom to pursue their respective growth strategies.

Proposed unbundling of Motus

In the event of the unbundling of Motus, Imperial Logistics and Motus will not need to have formal credit ratings, as their funding needs can be satisfied by the banking market with no requirement to access the bond market. The debt syndication process and refinancing of existing facilities are on track, with sufficient commitments secured including the underwriting of the off-shore facilities. This will enable Imperial Logistics and Motus to facilitate growth, provide flexibility and maintain strong liquidity with an immaterial impact on cost of funding.

Bonds were redeemed by utilising existing banking facilities at market value on 6 August 2018, and an offer to acquire the preference shares was approved by shareholders on 19 September 2018. The buyback will be implemented during October 2018. Notwithstanding that preference shareholders are not entitled to participate in the unbundling, we believe the buyback provides an efficient means for Imperial to simplify its capital structure and preference shareholders to dispose of the preference shares in an orderly and effective manner.

The appropriate legal structures for both entities have been finalised, with the transfer of the group's automotive interests to Motus Holdings Limited. Obtaining the requisite regulatory approvals, including the JSE, South African Reserve Bank and Takeover Review Panel, are in progress and are expected to be obtained by the end of October 2018.

The impact on existing share incentive schemes, pension and provident funds, and medical aids has been assessed and the most effective structures for both businesses are being implemented. The Ukhamba B-BBEE scheme will be replicated in Motus after unbundling to ensure that all shareholders in Ukhamba Holdings retain the same economic rights they have presently.

The allocation of key group functions continued over the year to ensure that in the event of the unbundling, each business will be equipped with the appropriate resources and skills to operate as listed entities. This included company secretarial, investor relations, treasury and taxation functions (some as shared services).

Financial review

Imperial produced solid results and recorded an improvement in all key financial metrics, despite difficult trading conditions in many of our key markets. Group revenue was up 11% to a record R128,7 billion and operating profit grew by 6% to R6,4 billion. EPS from continuing and discontinued operations climbed 38% to 1 681 cents per share, and HEPS from combined operations was up 27% to 1 570 cents per share.

Operating margin declined to 5,0% from 5,2%. The trend of buying down from luxury vehicle brands in favour of smaller lower-margin entry level vehicles in Motus, and its acquisition of the lower-margin Pentagon (UK) and SWT (Australia) businesses were the main reasons for the decline in operating margin.

Excluding businesses held for sale, total revenue and operating profit for the group increased by 13% and 7%, respectively, while revenue and operating profit excluding acquisitions and disposals increased by 5% and 2%, respectively.

Foreign revenue rose 21% to R59,0 billion (45% of group revenue) and foreign operating profit increased 6% to R2,4 billion (37% of group operating profit).

Net working capital was up 2% to R8,8 billion from R9,0 billion in June 2017. Imperial Logistics increased working capital by R1,5 billion, due to debtor and creditor levels normalising to more sustainable levels when compared to F2017, and due to the acquisitions, mainly Surgipharm, made during the year. Motus' working capital decreased by R1,7 billion mainly due to a reduction in inventory and improved supplier credit terms, with inventory levels expected to normalise in H1 F2019.

Disposals of non-strategic businesses and properties during the year generated proceeds of R4,2 billion. Net assets held for sale amounted to R234 million, comprising mainly non-strategic properties in Motus. As noted, the group's net debt to equity ratio improved significantly to 50%, resulting mainly from cash of R4,2 billion received from the disposal of non-strategic businesses and properties, and a 37% improvement in cash generated from operating activities of R5,7 billion.

Free cash flow rose 17% to R5,0 billion from R4,3 billion mainly due to a 37% increase in cash generated from operating activities of R5,7 billion (2017: R4,2 billion).

A final cash dividend of 387 cents per ordinary share (2017: 330 cents per share) has been declared, bringing the F2018 dividend to 710 cents per ordinary share (F2017: 650 cents per share). The dividend is in line with our targeted pay-out ratio of 45% of HEPS, subject to prevailing circumstances.

Operating context and regional performance

Trading conditions across the group's regional markets were mixed. Activities on the African continent produced 64% and 76%, respectively, of group revenues and operating profits during the year, with the remainder generated mainly in Europe and the UK.

South Africa

In South Africa, where R70,0 billion or 55% of group revenue and R4,0 billion or 63% of operating profit was generated, the environment remained difficult. Despite improved sentiment the economy contracted sharply in the second half of F2018. Although interest rates eased, little support for further monetary easing, climbing unemployment, low economic growth, higher taxes and static household income continued to weigh heavily on consumer spending.

Imperial Logistics, which generated 33% of its operating profit from its South African operations, felt the impact in lower volumes and competitive pressure, with contract renewals at lower margins. Depressed consumer spending, high fuel prices and social unrest also took a toll. However, the exiting of unviable contracts, restructuring non-performing operations and rationalising properties and assets, will support enhanced profitability going forward.

For Motus, with its local operations accounting for 86% of operating profit, low growth in national vehicle unit sales (up 2% as reported by NAAMSA) and severe pressure on the luxury brand segment due to constrained consumer affordability curbed its performance. However, Motus grew unit vehicle sales by 7%, demonstrating the resilience of its diversified positioning in smaller SUV and entry-level importer brands.

Rest of Africa

The recovery in commodity prices, gradually improving domestic demand and some policy reforms improved economic prospects in most countries in sub-Saharan Africa, where R12,0 billion or 9% of group revenue and R853 million or 13% of operating profit was generated in the year.

Predominantly relating to Imperial Logistics' operations in the African Regions, the improved conditions were offset by subdued growth, recessionary conditions and political instability in certain markets, and the R/US$ exchange rate strengthening by 5% on average during the year. The increasingly competitive and uncertain donor aid market resulted in lower than expected volumes and reduced margins.

Eurozone, UK and Australia

The group's international operations accounted for R46,9 billion or 36% of group revenue and R1,5 billion or 24% of operating profit in the year, mainly generated in Europe where economic conditions were positive, and unemployment has decreased to levels below those seen before the global financial crisis.

Certain sectors, specifically steel, remained under pressure. US tariffs on Chinese products are likely to divert trade flows, particularly of steel, from China to Europe which could place more pressure on prices. The tariffs could also impact exports for Imperial Logistics' automotive clients. Our German shipping operations were negatively impacted by low water levels on the River Rhine in H1 F2018. Hot weather conditions since July 2018 have again resulted in low water levels. Palletways' performance was hindered by toughening economic conditions in the UK, as the uncertainties arising from the economic implications of Brexit continued to depress economic growth. The new EU emissions regulation stipulating lower emission thresholds and process for approval will lead to OEMs reducing vehicle production volumes in H1 F2019.

For Motus, along with the switch from diesel to petrol vehicles, the economic uncertainty in the UK was felt in a soft passenger vehicle market. The latest forecasts indicate a decline of over 5% in passenger vehicles, and 6% in heavy commercial vehicles in calendar 2018. The Australian vehicle market recorded growth despite being fragmented and highly competitive, but margins on new vehicles remained under pressure.

Analysis of financial performance and results for the 12 months ended 30 June 2018

Group profit and loss (extracts)

	Total  2018	Continuing 2018	Discontinued 2018		Total   2017	Continuing   2017	Discontinued  2017	Total  % change	Continuing  % change
Revenue (Rm)	128 683	51 303	77 380		115 889*	49 635*	66 254	11	3
Operating profit (Rm)	6 406	2 813	3 593		6 049	2 739	3 310	6	3
Operating margin (%)	5,0				5,2
Net finance costs (Rm)	(1 386)	(649)	(737)		(1 680)	(831)	(849)	(18)	(22)
Income from associates (Rm)	90	56	34		103	61	42	(13)	(8)
Forex losses (Rm)	(93)	(50)	(43)		(619)	(194)	(425)	(85)	(74)
Profit on sale of property (Rm)	639	22	617		212	181	31	201	(88)
Amortisation of intangibles (Rm)	(432)	(417)	(15)		(521)	(505)	(16)	(17)	(17)
Other non-operating items (Rm)	(358)	(113)	(245)		(357)	(257)	(100)		(56)
Profit before tax (Rm)	4 866	1 662	3 204		3 187	1 194	1 993	53	39
Tax (Rm)	(1 458)	(566)	(892)		(901)	(228)	(673)	62	148
Net profit after tax (Rm)	3 408	1 096	2 312		2 286	966	1 320	49	13
Net profit for the year – Regent (Rm)					279		279
Attributable to non-controlling interests (Rm)	(135)	(168)	33		36	(164)	200	(>100)	2
Attributable to shareholders of Imperial (Rm)	3 273	928	2 345		2 601	802	1 799	26	16
Effective tax rate (%)	30,5				29,2
Return on invested capital** (%)	12,9	12,2	13,0		11,3	11,5	11,8
Weighted average cost of capital** (%)	9,7	8,5	10,4		9,0	7,1	10,1

*

Restated.

**

WACC for each sub-division of the group is calculated by making appropriate country/regional risk adjustments for the cost of equity and pricing for the cost of debt depending on jurisdiction. The group WACC calculation is a weighted average of the respective sub-divisional WACCs. See definitions on here. ROIC is calculated based on taxed operating profit plus income from associates divided by the 12-month average invested capital (total equity and net interest-bearing borrowings).

Excluding disposals and acquisitions in both the current and prior period, revenue and operating profit for the group increased by 5% and 2%, respectively.

Total profit before tax increased by 53% or R1 679 million and was impacted by the following:

• The increase in group operating profit of R357 million;
• Net finance costs decreased by R294 million due to lower average debt levels;
• Foreign exchange losses decreased by R526 million to R93 million. Foreign exchange losses in Imperial Logistics (mainly in African Regions due to the strong Rand) were contained to R50 million against R194 million in the prior period. In Motus, losses of R43 million compared to a loss of R425 million, due to the unwinding of uneconomical and excessive cover in the prior year;
• Profit on sale of properties amounted to R639 million resulting in an increase of R427 million from the prior year. The sale of the property in Australia, which was the largest property sale during the year, contributed R616 million;
• Amortisation of intangibles arising from business combinations decreased by R89 million due to certain intangible assets being fully amortised in F2017, and the sale of Schirm;
• Other non-operating items was in line with the prior period at R358 million and comprise mainly the following:
  • A positive remeasurement of contingent liabilities of R31 million;
  • A positive remeasurement on the put option liability resulting in a gain of R42 million;
  • Business acquisition costs of R18 million;
  • Loss on sale of subsidiaries, mainly Schirm, of R149 million;
  • Impairment on the sale of Jurgens of R173 million; and
  • Goodwill impairments of R75 million.

R173 million relating to the sale of Jurgens is a once-off item that negatively impacted the HEPS performance in F2018. Excluding the impact of Jurgens, HEPS excluding Regent is up 33%.

The effective tax rate for the group at 30,5% is higher than 29,2% in 2017, mainly due to non-deductibility of losses on the sale of businesses in the current period.

Non-controlling interest increased compared to the comparative year due to improved results from Renault and Eco Health. Recent acquisitions of Surgipharm, Itumele Bus Lines and SWT also contributed to the increase. The prior year includes losses relating to the minorities arising in Renault and TATA.

Reconciliation from earnings to headline earnings

R million	June  2018		June  2017	% change
Net profit attributable to Imperial shareholders (earnings)	3 273		2 601	26
Profit on disposal of assets/investments	(804)		(320)
Impairments of goodwill and other assets	226		219
Loss on sale of subsidiaries and businesses	147		151
Tax effects of headline earnings adjustments	221		66
Other	(6)		(17)
Headline earnings	3 057		2 700	13

The table reflects the total group operations including Motus, and Regent in F2017.

Earnings and headline earnings per share

Cents	June 2018		June 2017	% change
Total EPS	1 681		1 339	26
Continuing EPS (Logistics)	477		412	16
Motus EPS	1 204		809	49
EPS excluding Regent	1 681		1 221	38
Regent EPS			118
Total HEPS	1 570		1 390	13
Continuing HEPS (Logistics)	543		379	43
Motus basic HEPS	1 027		861	19
HEPS excluding Regent	1 570		1 240	27
Regent HEPS			150

The table reflects the total group operations.

Financial position (extracts)

R million	June  2018		June  2017	%  change
Goodwill and intangible assets	9 805		9 529	3
Property, plant and equipment	9 829		10 371	(5)
Investment in associates and joint ventures	1 100		1 002	10
Transport fleet	5 358		5 560	(4)
Vehicles for hire	3 924		3 963	(1)
Investments and other financial assets	859		805	7
Net working capital	8 761		8 956	(2)
Deferred tax asset	405		394	3
Current tax liability	(219)		(7)
Properties held for sale	234		979
Net debt	(11 125)		(14 647)	(24)
Non-redeemable, non-participating preference shares	(441)		(441)
Other liabilities	(5 365)		(6 203)	(16)
Total shareholders' equity	23 125		20 261
Total assets	70 503		68 853
Total liabilities	(47 378)		(48 592)

Above table includes Motus and Logistics for F2017 and F2018.

The most significant factors impacting the financial position at 30 June 2018 were:

• The Rand weakening by 5% to the US$ and 7% to the Euro. This resulted in the overall balance sheet increasing with a net R538 million increase in the foreign currency translation reserve attributable to shareholders;
• The disposals of Schirm and Transport Holdings resulted in operating assets of R2 598 million and operating liabilities of R627 million being disposed of;
• Assets held for sale decreased by R745 million due to the disposal of properties; and
• The acquisitions of Surgipharm (R485 million), Pentagon (R479 million), SWT (R261 million) and ARCO (R185 million) during the year, and purchasing a further 19% in Eco Health (R581 million). The acquisitions added a further R157 million of on balance sheet net debt at acquisition.

Goodwill and intangible assets increased by 3% to R9,8 billion mainly due to the following:

• Acquisitions of R1,1 billion, mainly Pentagon (R189 million), SWT (R213 million) and Surgipharm (R341 million) to goodwill and in total, R243 million to intangible assets;
• The weakening of the Rand resulted in a R480 million increase;
• Disposals resulted in a R754 million decrease to goodwill and intangible assets; and
• Amortisation decreased intangible assets by R432 million.

Property, plant and equipment (PPE) decreased by 5% to R9,8 billion mainly affected by the following:

• PPE related to the disposal of Schirm GmbH and of Transport Holdings Botswana, both amounting to R1,0 billion;
• R413 million increase due to the purchase of Surgipharm, Pentagon and SWT;
• Currency adjustments resulted in an increase of R172 million; and
• Impairments of R115 million.

Transport fleet decreased by 4% or R202 million mainly due to the net disposal of assets through the disposal of Schirm and Transport Holdings Botswana amounting to R144 million, in addition, the value of disposals and depreciation are higher than the capital expenditure.

Vehicles for hire was in line with the prior year as less was invested in vehicles for hire by the Vehicle Import and Distribution sub-division.

Net working capital of R8,8 billion improved by 2% from R9,0 billion in June 2017. Logistics working capital increased by R1,5 billion as debtor and creditor levels normalised to more sustainable levels when compared to F2017. The acquisitions, mainly Surgipharm, also impacted working capital in F2018. Motus working capital decreased by R1,7 billion mainly due to a reduction in inventory and improved supplier credit terms. We expect inventory levels to normalise in H1 F2019.

Movement in equity for the 12 months to June 2018

R million	2018
Net profit attributable to Imperial shareholders	3 273
Net profit attributable to non-controlling interests	135
Increase in the foreign currency translation reserve	538
Increase in the hedge accounting reserve	184
Remeasurement of defined benefit obligations net of tax	(67)
Movement in share-based reserve net of transfers to retained earnings	17
Dividends paid	(1 285)
Non-controlling interests (buy out)	(102)
Non-controlling interest acquired, net of disposals and shares issued	350
Non-controlling share of dividends	(193)
Shares repurchased net of shares used to settle share-based equity schemes	14
Total change	2 864

Cash flow

R million	June  2018		June  2017	%  change
Cash generated by operations before movements in working capital	8 721		8 388	4
Movements in net working capital (excludes currency movements and net acquisitions)	811		688
Cash generated after working capital movements	9 532		9 076
Interest paid	(1 386)		(1 670)
Tax paid	(1 336)		(1 520)
Cash generated by operations before capital expenditure on rental assets	6 810		5 886	16
Capital expenditure on rental assets	(1 079)		(1 709)
Cash flows from operating activities	5 731		4 177	37
Net disposal (acquisitions) of subsidiaries and businesses	859		(1 687)
Capital expenditure (non-rental assets)	240		(954)
Net movement in associates, investment, loans and non-current financial instruments	(209)		326
Cash flows from investing activities	890		(1 939)
Dividends paid	(1 478)		(1 688)
Hedging of share scheme	(362)		(10)
Change in non-controlling interest	(684)		(252)
Capital raised from non-controlling interest	223		149
Repurchase of ordinary shares	(113)
Net movement in cross-currency swaps	(152)
Cash flows from financing activities	(2 566)		(1 801)
Decrease in net debt (excludes currency movements and net acquisitions)	4 055		437
Free cash flow	5 016		4 296	17
Free cash flow to headline earnings (times)	1,6		1,6

Cash generated by operations after working capital movements, interest and tax payments was R6,8 billion (2017: R5,9 billion), up 16%.

Net working capital movements resulted in an inflow of R811 million, mainly due to a reduction in inventory and improved supplier credit terms in Motus. We expect inventory levels to normalise in H1 F2019.

Net capital expenditure reduced significantly to R839 million from R2,7 billion in 2017 mainly due to the benefit of property disposals of R1,7 billion. In addition, there was a reduction in capital expenditure in vehicles for hire in Motus. Capital expenditure in the prior year included the bulk of the contributions towards the chemical manufacturing plant and the additional convoys in South America.

The main contributors to the net inflow of R859 million relating to acquisitions and disposals were proceeds received on the disposal of Schirm (R2,0 billion), which was partially offset by the acquisitions of Pentagon (R479 million), Surgipharm (R382 million), SWT (R238 million) and ARCO (R65 million) during the year.

Dividends amounting to R1,5 billion were paid during the year.

Other significant cash flow items included share buybacks amounting to R113 million, buy out of minorities of R684 million (mainly Eco Health) and settlement of cross-currency swaps of R152 million. Capital raised from non-controlling interests of R223 million relates to Renault. The costs associated with the hedging of share schemes also increased to R362 million.

Liquidity

The group's liquidity position is strong with R13,9 billion of unutilised banking facilities, excluding asset-backed finance facilities. 80% of the group debt is long term in nature and 52% of the debt is at fixed rates. The group's blended cost of debt is c.4,8 % after tax.

In March 2018 Imperial's Baa3 global scale ratings outlook was changed to stable by Moody's after being placed under review for downgrade on 29 November 2017 in line with the sovereign rating. The group's international and national scale credit ratings by Moody's are Baa3 and Aa1.za.

Prospects*

We anticipate that both Imperial Logistics and Motus Holdings will deliver solid operating and financial results in the financial year ending 30 June 2019, subject to stable currencies in the economies in which they operate. With the appropriate capital structures, and minimal impact on funding and costs, each business will be able to fund its own growth and strategic aspirations while continuing to pay a stable dividend (approximately 45% of HEPS). We expect growth in revenues and operating profit from each business, as well as growth in HEPS, subject to any once-off costs relating to the proposed unbundling.

* At time of publication.

Closing and appreciation

Imperial Holdings is set to conclude its extensive renewal with the separate listings of its two subsidiaries; each a South African market leader with multinational reach, each uniquely positioned to grow in full view of the cyclical and structural realities of its markets, and each offering a compelling value proposition to its clients, employees and partners, and thereby its shareholders.

Imperial Logistics and Motus Holdings are set for organic growth, innovation and excellence. Honed strategic focus on their independent strategic initiatives, in view of the industry sectors and economic landscapes in which they operate, will enable management teams to identify and execute growth opportunities, with direct responsibility and accountability for performance. Improved operational efficiency mainly through the reduction in complexity and costs, through streamlined activities and operations, and in-depth asset focus is expected over time. Their financial profiles are robust, with good cash generation, self-sufficient balance sheets, comfortable gearing levels and the financial headroom to pursue their plans for organic and acquisitive growth.

The senior management teams at the helm of both businesses are strong, long-serving and highly experienced, with the depth of skill required to deliver on their organic and acquisitive growth plans, with proven client-centric, entrepreneurial flair and agility. Management in both businesses are cognisant that delivering on their stated strategic objectives, showing improving financial performance in line with guidance are the foundation for credibility and trust among shareholders and the investment community, and in achieving fair valuations versus their industry peers.

As we are approaching the possible end of an era and potentially the last financial reporting year for Imperial Holdings in its current structure, we extend gratitude to 48 339 colleagues throughout Imperial whose resilience in dealing with difficult external circumstances has been tested by the unprecedented rate of internal change. The multi-faceted restructuring of Imperial over the past four years was among the most complex and ambitious in South African business.

Particular thanks is extended to our previous leaders, management, colleagues and co-directors for their invaluable guidance and counsel during the 70-year history of one of South Africa's most extraordinary companies.

Finally, we thank our owners and funders for their continued support through the years.

Mohammed Akoojee

Acting chief executive officer and chief financial officer

14 September 2018