Imperial: Leaders in Mobility

Imperial Logistics introduction

In the past 12 months, key priorities for the executive management team have been to develop detailed plans to give effect to our strategy, in terms of which we have continued optimising our portfolio of regional businesses to drive organic growth and deepen their competitiveness. To improve returns, the rationalisation of contracts and assets, and where necessary operational restructuring, has been a focus. We are in the process of enhancing our B-BBEE ownership through a transaction which is expected to support the market leading position and competitiveness of our South African operations.

We worked closely with the leadership of Imperial Holdings to position Imperial Logistics as an independent, self-sufficient entity, with a clear and compelling investment proposition. Extensive engagement with funders and the investment community informed this development. We refined our reporting structures to make Imperial Logistics easier to understand and value, and implemented the appropriate management and board structures to support ethical and accountable leadership, in line with the governance standards of listed companies. Intense focus has been given to ensuring an optimal capital structure for Imperial Logistics, with a self-sustaining and appropriately geared balance sheet and suitably structured debt facilities. This will provide the financial headroom and flexibility to fund our organic and acquisitive growth plans, and to pay a stable dividend to shareholders in the years ahead, in line with the current guidance of 45% of HEPS.

One Imperial Logistics strategy

Since 1 July 2016, our Logistics Africa (incorporating South Africa and African Regions) and International businesses have been managed on an integrated basis, with standardised financial measures and a single brand identity. Since then, we have focused on developing a clear and consolidated corporate strategy, based on a thorough review of our operations, competitive environment and addressable markets for outsourced logistics services across our regional businesses.

A key outcome of the review was Imperial Logistics' potential to be a unique, diversified and internationally recognised 3PL services provider. Our inherent DNA, being the entrepreneurial approach and client focus of our constituent businesses, was highlighted as an important point of differentiation. This DNA has been retained in our business as we developed and consolidated our specialised capabilities and expanded the geographic reach of our regional growth platforms, largely through acquisition.

The review informed the formulation of an integrated corporate with the following focus areas:

• Positioning our businesses to provide specialised, integrated and customised services that add value to clients and lower their total logistics costs.
• Achieving an "asset right" business model, through an optimal asset mix in line with client requirements and specific market dynamics, to support targeted operating margins and risk-adjusted returns.
• Deliberately evolving the group's portfolio of regional logistics capabilities to become a multinational integrated solutions provider.
• Positioning our businesses for sustainable competitive advantage in selected industries chosen for their cyclical resilience and long-term growth prospects.

• For an overview of the One Imperial Logistics strategy.

To underpin the delivery of our strategy, standardised financial key performance indicators (KPIs) and reporting have been implemented to improve accountability for performance across all operations (for the financial performance review, consolidated and by region, see here). We continue to develop strategic KPIs related to our strategic aspirations, to support improved decision making and focused resource allocation, which will extend to further non-financial KPIs in time.

• To drive sustainable growth, and improve the quality of earnings, we are measuring real organic revenue and operating profit (margin) growth at business, contract, client, industry and capability levels.
• To enhance returns, we are measuring end-to-end contract profitability, to drive revenue and cost improvement, as a basis for capital allocation to businesses based on targeted returns.
• To improve competitiveness, we are implementing net promoter scores as a measure of client satisfaction, as well as contract retention and wins, and pipeline quality, to inform the necessary management actions.

Corporate strategies

We formulated five corporate strategies to achieve our strategic aspirations, outlined below in relation to the 3PL market context in each case.

Client-centricity is critical to Imperial Logistics' vision to become a "Tier One" 3PL services provider, which pivots on differentiating ourselves against globally diversified competitors. In this respect, we have been careful to define our Tier One aspiration. Although geographic reach and price competitiveness are important elements of our value proposition to clients, we cannot compete head-on on scale or price alone against larger global peers. As such, our aspiration is not only about scale – it is about multinational clients recognising Imperial Logistics as a credible 3PL provider, intrinsically part of their businesses, able to customise and deliver complex solutions that make them more competitive and relevant in the industries and regional markets in which they operate or to which they seek access.

The extent and scope of logistics outsourcing in all our markets – whether it is the large and fragmented 3PL market in South Africa, the underdeveloped and highly fragmented 3PL market in the African Regions or the advanced and intensely competitive 3PL market in Europe - depends on adding tangible value beyond the cost of outsourced services provided. This counters the threat of clients insourcing their supply chains, or of being disintermediated by logistics operators providing specific services within a client's supply chain. Furthermore, service offerings that encompass the full scope of logistics planning, management and execution, which include managing other sub-contracted service providers and minimising commercial and sustainability-related risks in the client's supply chain, attract a price premium for integration benefits.

Our outsourced value-add logistics, supply chain management and route-to-market solutions, which are applied according to the maturity and individual dynamics of our regional markets, are underpinned by our leading market shares in South Africa, in certain industries in the African Regions, and in specific capabilities in Europe. In each case, we are able to offer integrated solutions that optimise supply chain efficiency and visibility, and provide access to growing markets, the latter specifically to the challenging markets in the African Regions. This preserves our clients' reliance on our services, and in general, the demand for outsourced services, which continues to grow in all our markets.

Our client-centric approach entails designing and delivering service offerings tailored by geography, channel or product segment based on a deep understanding of client needs, in-depth market knowledge, and proven legitimacy in demanding industries; which requires delivering to industry requirements and adapting to the technology and sustainability-related changes affecting these requirements. This is, in turn, supported by evolving our capabilities to the extent that we achieve increases in scope and integration of outsourced services over the course of the client relationship, thereby retaining contracts and supplying services that add more value and therefore more profitability over time.

Service excellence is imperative to our ability to retain, extend and win contracts within our regional businesses, and to deepen our credibility among multinational clients. Conversely, given that we generally operate under a single brand, it limits any contagion risk to our reputation across our operating base. Service excellence requires consistent delivery and continuous improvement across capabilities and within regions, and includes managing the delivery of our sub-contracted business partners according to defined KPIs relevant to client requirements and industry specifications.

Our pursuit of service excellence and continuous improvement is contingent on optimising the management of people, partnerships and processes, supported by:

• Implementing a common framework for managing human capital aligned to international best practice, while allowing for flexible responses to regional priorities. This responds to broader workforce trends (such as the shift in skillsets required for increasing specialisation and customisation, and managing the expectations of a multi-lingual and multi-generational workforce), and to those with national and regional differences (the impact of automation on headcount versus national imperatives to create jobs across Africa; and full employment and an ageing workforce in Europe).
• A pragmatic approach to digitalisation and innovation, with our digital strategy focused on deepening competitive differentiation through customised client-focused innovation and systematic digitisation to support operational excellence; and understanding and applying appropriate digitalisation trends to compete effectively with technology-enabled entrants to the logistics industry and large global competitors with considerably bigger research and development (R&D) budgets.

The appropriate balance of standardised and fit-for-purpose systems and processes are being implemented to support the strategy, which will ultimately provide the systems backbone for improved operational process and solutions design. Ultimately, to ensure consistent service excellence, we are focused on instilling a values-based, inclusive and collaborative high-performance corporate culture.

Local relevance involves applying the relevant operating models for differing emerging and advanced market contexts, based on the relative maturity of their 3PL markets and the skills and expertise available. Our unique route-to-market solution in the African Regions, for example, takes cognisance of distinct emerging market characteristics, and includes a proprietary market aggregation model. The solution gives principals access to consumers in both large and smaller markets in the region, with the reach and uniqueness of this end-to-end offering making it difficult to replicate and protecting us from disintermediation from clients and competitors alike.

Local ownership is an important element of ensuring relevance. It includes retaining an appropriate proportion of local ownership of the businesses we acquire when adding specialised capabilities or expanding our presence in chosen markets and industries. This not only preserves the entrepreneurial flair and client focus of decentralised accountability, but also conforms to localisation requirements in specific markets. Our partnerships with specialist sub-contractors, which are both a critical link in our ability to service clients while also maintaining an optimal asset mix to protect returns, is another element of the local relevance that is key to our success.

Our relevance within specific markets extends to managing the impact of local dynamics on execution and reputation, which requires accordance with national laws, regulations, standards and codes. This limits clients' supply chain risk and enables us to meet the expectations of their customers and other stakeholders, further deepening their reliance on our services.

Imperial Logistics' asset right strategy aims to achieve the optimal mix of asset-light and specialised asset solutions, to achieve targeted operating margins, risk-adjusted returns and client retention. In line with this strategy, reducing asset intensity has been a major driver of portfolio rationalisation in the last few years, which has supported improvements in our free cash flow conversion. While the diversification across our regional platforms shields us from the cyclical realities within certain industries, we continue to apply asset-light operating models to those that are more cyclical. Constant assessment of these industries with the option to exit where we cannot achieve the returns we seek, even with an asset-light model, is ongoing.

This strategy has also informed the development and expansion of our managed solutions operating model, which combines value-add logistics and supply chain management capabilities. We have made good progress in consolidating businesses across the regions with similar service offerings and converting asset intensive transport businesses competing in the commoditised transport market into an asset-light solution, thereby reducing invested capital and simplifying regional structures to limit duplication and reduce costs.

An example of the successful implementation of this operating model has been deploying Transportation Management, Warehousing Management and International Freight Management capabilities as managed solutions in West and East Africa. We continue to investigate opportunities to expand our managed solutions business into relevant emerging and developed markets.

International Freight Management amounts to over a quarter of the global 3PL market and is essential to providing integrated solutions as a Tier One 3PL provider. Besides the limited capability we have in South Africa, it is currently a gap in the portfolio. Developing scale in this capability will extend Imperial Logistics' end-to-end solution offering to existing and potential clients and improve its competitive position versus global 3PL service providers. This will be achieved organically and through selected strategic acquisitions of regional capability.

Medium-term priorities

As noted, a core intention of our strategy is to move from a portfolio of distinct regional businesses to leveraging the capabilities we have in each region to deliver integrated solutions to clients within selected industries, across our regional platforms and into new markets. The process of analysing these industry opportunities, according to our competitive advantages, specialist capabilities and regional footprints is underway.

The extent to which it is commercially viable to connect operations to deliver cross-regional integrated offerings is being carefully assessed to determine our growth priorities within certain industries, in terms of both organic and acquisitive growth potential and returns. Our strategy is not to develop global offerings within all the industries in which we have a regional foothold or strong competitive positions, as there are clear limits to the transfer of capabilities and operating models between our markets, with different emerging and advanced market characteristics.

As such, we will be specific in each case to ensure that we do not enter markets where the associated risks are too high and where we do not have the competitive advantage or on-the-ground experience to succeed. In each industry in which we believe we can grow, our geographic expansion will be carefully assessed in line with market realities and our ability to implement or acquire businesses that apply the most appropriate operating models in each case. Our assessment of market opportunities takes full cognisance of the disruption risk within specific industries, and our relevance and legitimacy, and the extent to which we are able to respond to the expected changes in market structure and local expectations in each case.

Although we continue to look for these points of leverage across all our businesses and regions, there are ample opportunities to grow as we optimise our regional growth platforms, with selective opportunities for capability development or geographic expansion either through organic or acquisitive means. For this reason, in the medium term, there is no need to restructure the business according to industry verticals, and to change the accountability for performance and risk diluting the entrepreneurial flair and client focus intrinsic to our DNA and hence our competitive differentiation.

Our immediate strategic priorities, therefore, are focused on realising the medium-term growth and earnings potential of our regional businesses. This is being done according to the unique dynamics and distinct differences in their markets relative to their 3PL maturity, macroeconomic prospects and the growth potential within specific industries in which we have strong positions.

We have clearly defined criteria for selective acquisitive growth. Where we identify opportunities to penetrate or protect existing markets through bolt-on acquisitions in existing geographies and selected industries, or to expand our regional portfolios and leverage existing capabilities by adding capabilities in new regions and selected industries, we will pursue them. Other considerations will be to ensure that acquired businesses can benefit from our strategic direction, our financial discipline and access to capital, and the transfer of best practices and capabilities. Ultimately, all acquisitive growth targets will need to achieve our targeted KPIs and to justify the return on executive effort required to integrate them and achieve the desired strategic, operational and financial synergies.

• For more information on our regional priorities, see Optimising our regional growth platforms.

Closing and appreciation

Our strategic focus for the next five years will be on those markets and industries where the business case is compelling, based on our existing capabilities and industry positions, supplemented by selective acquisitions that conform to our criteria.

In South Africa, growth potential exists to leverage our end-to-end capabilities to grow our integrated solutions offering across major industries as the large and fragmented insourced logistics market matures. Our unrivalled reach and track record in delivering unique route-to-market and managed solutions in the challenging, but defensive and fast-growing healthcare and CPG industries in the African Regions, provide excellent opportunities for growth. In our International operations, the new management team is focused on strengthening commercial focus and business development to drive revenue growth and achieve targeted returns, underpinned by client-focused innovation, in the sectors in which we have strong competitive positions.

Careful prioritisation of these growth opportunities will ensure that we allocate our capital and executive effort to those with the highest potential to drive sustainable revenue growth, targeted returns and strengthen our competitiveness according to our strategic aspirations. Our medium-term expectations are:

• Organic revenue growth of double GDP growth plus inflation in the South African and International operations, and of low double-digits in the African Regions.
• Cash conversion of between 70% and 75%.
• Return on invested capital (ROIC) of weighted average cost of capital (WACC) plus 3% for total Logistics.
  • South Africa: ROIC of WACC plus 3%.
  • African Regions: ROIC of WACC plus 3%.
  • International: ROIC of WACC plus 2%.
• Dividend payout ratio of approximately 45% of HEPS.

Based on the strategic clarity and financial headroom and flexibility we have achieved, and which we will ensure that we maintain, we believe our strategic plans and financial expectations are achievable and should support convergence to the valuation multiples of our best-in-class peers in the medium term.

My thanks are due to the executive and regional management teams and our people the world over. Your focus and commitment have delivered the strategic positioning and improved performance, despite difficult markets and significant internal change, on which our future success as an independent company will be based.