Motus introduction
Our leading position and fully integrated business model across the automotive value chain gives Motus unique market insight and expertise in South Africa, and forms the basis for strong relationships with OEMs, customers and business partners. Our diversified income streams in our core market, and growth prospects in selected international markets, position Motus to deliver best-in-class earnings, targeted returns and a consistent dividend pay-out, underpinning our ability to create sustainable value for stakeholders through the cycle.
In the past 12 months, key priorities for the executive team have been to formulate and execute detailed plans at group and business segment level in line with our strategic objectives of market leadership, operational excellence, innovation and investment in human capital and change management, as the basis for enhanced financial performance.
In South Africa, we continued to clarify and deepen our value propositions to OEMs, customers, business partners and employees, optimising the competitiveness and growth potential of our business segments and leveraging their presence across the automotive value chain. We made good progress in transforming our management teams, aligned to our employment equity targets, with key appointments of both internal and external candidates.
Focus was also given to integrating the acquisitions made in the UK and Australia, with the transfer of South African expertise, capital discipline and operational excellence. The optimisation of our portfolio continued, with the exit or disposal of non-core investments in certain brands and of properties that were surplus to our needs, and ongoing streamlining of the business further reduced complexity.
Considerable time was spent with shareholders and the investment community leading up to the proposed unbundling and listing, which clarified Motus' investment proposition as an independent entity. Extensive work with the relevant advisers was required to finalise the legal restructuring to form Motus Holdings Limited and to house its local and international subsidiaries. By year-end we had achieved an optimal capital structure with the flexibility and headroom in our balance sheet and debt facilities to accommodate strategic growth and sustain a consistent dividend pay-out. The necessary independent structures were established at board and management level to underpin the exemplary governance standards that are a vital aspect of Imperial's legacy.
One Motus strategy
Since 1 January 2017, Motus has operated as a consolidated automotive group under one collaborative leadership team, with four defined business segments. This was the outcome of three years of extensive portfolio optimisation and restructuring to sharpen strategic, managerial and customer focus, improve inter-divisional collaboration and efficiencies, and reduce complexity, costs and capital employed. This strategic and operational clarity positions Motus well for sustainable value creation.
In line with our strategy, we measure a range of performance targets that pertain to our key value drivers, including the market shares of our Import, Retail and Rental business segments, volume targets in our Aftermarket Parts segment, and customer growth in the financial services segment. Besides targeted volumes, customer satisfaction scores across our dealerships are critical elements of our agreements with OEMs. Capital and cash management is determined by a specific emphasis on our targeted return on invested capital and free cash conversion. We also monitor the defined forward cover instruments in place to mitigate against currency risk, especially in our importer business segment, on an ongoing basis. We will continue to unlock value in the dealership network by benchmarking, against industry standards, both locally and abroad. Management performance is linked to key non-financial measures including the achievement of employment equity targets in our South African operations and innovation in the financial services segment. We will expand these in time to include other measures to drive our strategic objectives.
- More information on Motus’ strategic and financial performance during the year.
Our key strategic intentions are outlined below in relation to the market context in each case.
MARKET LEADERSHIP: grow market share and competitiveness in our core and international markets, through optimisation and data insights.
In South Africa, our leading market position and unrivalled scale, integration and synergy across the automotive value chain enables us to maximise all possible revenue and profit streams for every vehicle sold, diversifying our earnings and providing resilience through the cycle. Continuing to increase our profitability, depends primarily on growing our competitive market share by strengthening our core business – driving organic growth and optimisation within each business segment, while leveraging their strong positions to unlock the full potential of the entire value chain. This will be further supported by the hard-currency earnings out of our recently expanded international operations.
In addition to the margin we make on the sale of a vehicle, the importer segment creates value for the retail segment through the generation of workshop throughput. This has a positive contribution to workshop and parts turnover and margins. This workshop throughput is supported through inclusive warranties, service and maintenance plans. Customers also have the option to purchase VAPS on the dealer floors at point-of-sale and the dealerships earn the regulated commissions on these sales.
Our trusted partnerships with OEMs, as an exclusive distributor, enable us to influence their decisions to make the most appropriate right-hand drive vehicle models available for the local market, underpinned by our data and market insight, and to secure competitive pricing and terms of warranty, which supports our competitive edge and drives volumes in both the importer and financial services segments.
Our unrivalled footprint of strategically located dealerships, largely in growing urban areas, and our diverse portfolio of 23 vehicle brands, supports our leading market share. Furthermore, our strong balance sheet enables us to allocate 15% to 20% of importer volume to our rental fleet, which in turn supports OEM volume targets and drives sales of new vehicles by giving rental customers the chance to experience new vehicle models. Our car rental business defleets through our used car operations, ensuring that we have a constant and reliable source of the right used vehicles, in the right condition, and at the right price.
In the retail segment, we seek to achieve economies of scale in selected international markets through acquisitions that complement the group's existing networks. Following the significant acquisitions of Pentagon in the UK and SWT in Australia, there are good prospects for further complementary acquisitions in these markets to allow for broader brand representation. Although it is not a primary focus, given the constraint of our large market share, we also continue to acquire strategically located dealerships in South Africa, in line with our strategic focus on metropolitan localities where we are under-represented.
The financial services segment complements, completes and leverages the value chain, to provide a strong annuity earnings stream. Our ability to analyse our extensive proprietary data (including sales, residual values, service schedules and parts failure rates) enables the development and accurate pricing of innovative VAPS and management of claims costs and fund burn rates, which supports profitability.
A key strategic focus is to grow non-vehicle revenue in the Financial Services and Aftermarket Parts segments. With the integration and rebranding of the VAPS business (M-Sure), and the amalgamation of the financial services structure, where there is considerable opportunity to expand our financial services offerings across Motus and independent dealership networks.
The Aftermarket Parts segment has a large national and increasing international footprint with significant buying power, and we are focused on vertically integrating and shortening the supply chain by disintermediating low value-adding intermediaries, enabling us to distribute and sell competitively priced products for vehicles out of warranty. Our addressable market in this segment is a large and continually growing car parc in South Africa, and even more significant in other African markets given the large volumes of pre-owned vehicles imported from the Far East where high taxes are levied on older vehicles.
Our acquisition of a controlling stake in wholesale distributor ARCO in Taiwan will enable us to control a larger proportion of the value stream and provides attractive opportunities to consolidate the supply of parts into other international territories. There is also opportunity to grow our network in South Africa through the acquisition of large retailers and wholesalers in specific areas. In the African Regions, the opportunity is significant, and we are investigating local partnerships to provide a viable route-to-market given the emerging market characteristics of widespread informal retail outlets.
Importantly, to support our leadership position in our core market, we are also focused on identifying suitable B-BBEE partners to deepen our competitiveness within specific business segments.
The resilience that stems from the group's diversified earnings streams, supported by the market positions and growth prospects of our business segments, and the defensive and additive value of integration – all underpinned by financial discipline and cost control – provide an earnings and margin profile that will secure a consistent dividend pay-out ratio throughout the cycle, a key factor in our investment proposition as a separately listed entity.
IMPROVE OPERATIONAL EXCELLENCE: remain the partner of choice for OEMs and business partners through exceptional customer service, technology solutions and operational alignment.
Our strategic partnerships with OEMs and other business partners are pivotal to our business model, as we are the essential link between them and customers; underpinned by our ownership of 70% of our importer and retail dealerships, we provide customer touchpoints at points of sale, service, repairs and maintenance, which entrenches the OEM relationship. It is critical, therefore, that we remain relevant to customers by delivering exceptional value across the vehicle ownership lifecycle and staying abreast of their changing preferences and behaviour, to remain the partner of choice for OEMs.
The basis for this is to understand customer mobility needs through data analysis, develop personalised services and engender loyalty. Innovative projects are underway in the financial services segment to introduce new loyalty programmes and achieve a single view of a customer across all Motus touchpoints, to deepen our understanding of their behaviour and preferences. We continue to showcase the evolving mobility experience in partnership with OEMs, introducing new formats such as showrooms in shopping malls and virtual showrooms. Another important initiative is to consolidate our pre-owned dealer brands and online presence to capture a greater share of this growing market.
Our unrivalled scale and scope across the automotive value chain in South Africa, which underpins our specialised industry expertise, also supports our attractiveness to other strategic partners. Our extensive network of dealerships provides a distribution platform not only for our own finance and insurance (F&I) products and VAPS but also those developed in joint ventures with financial services partners.
To provide the system's backbone for operational excellence, we are implementing technology solutions to realise efficiencies, drive new growth opportunities and strengthen competitive advantage. The rationalisation, upgrading and standardisation of fragmented legacy systems, and consolidation of back-office systems and shared services, where it makes sense to do so, is ongoing. Proper separation between customer information that is proprietary to OEMs, and compliance with legislation such as the Protection of Personal Information Act (PoPI) in South Africa, is a key consideration in building the strategic IT capability to support business insight and reporting, and enhanced data gathering and analytics to drive innovation across our physical and virtual sales platforms.
DRIVE INNOVATION: partner with OEMs to deliver innovations to customers, leverage IT solutions and ensure agility in response to disruption.
The automotive industry faces deep disruption with connected cars, telematics and electric engines as well as shifts in vehicle ownership fundamentally altering the mobility landscape. In view of the trends, we are focused on ensuring the ongoing relevance of our business by optimising and evolving our business model to protect our installed base; deepening our relationships with OEMs, customers and business partners. Simultaneously, we are investing in "disrupting ourselves" through innovation, supported by our exposure to leading-edge developments in the advanced markets in which we operate, specifically the UK which is expected to see among the most rapid structural shifts in the automotive industry worldwide.
Guided by this insight, we are investing in designing new solutions and operating models (for instance, smaller technology enabled dealerships and retail formats), instilling the required business culture, acquiring specialist skills and partnering with leading-edge technology developers. This will allow us to pre-empt the disruption in our core market and given our control across the full value chain, we have the ability to implement the necessary changes quickly within multiple segments as they become necessary to maintain our competitive lead.
While innovation is a strategic priority in each business segment, the financial services segment operates as an innovation hub, based on its proven expertise, proprietary data, and ability to predict and respond to mobility-related trends. We are investing in developing, building, pricing and commercialising innovative mobility products and services, partnering with highly specialised developers to bring these innovations to market, supported by the actuarial, data science and user experience skills we already have and continue to grow in this segment.
We have implemented the relevant structures, including appointing an innovation executive and an innovation forum to design and drive innovation projects, with sponsorship at a senior executive level within the organisation. Because all innovation cannot take place within Motus, these structures will allow us to partner leading-edge technology developers, who have access to the required skills and experience, on open innovation projects. To deepen senior management's awareness and understanding of global innovation and disruption, we continue to arrange learning experiences in global centres of innovation such as Silicon Valley and Berlin. Changing the way senior people think is a key driver in instilling a culture of innovation throughout the business.
INVEST IN HUMAN CAPITAL AND CHANGE MANAGEMENT: develop and empower leaders, improve practices and processes and ensure a strong focus on transformation and succession.
The competitiveness of our value propositions, particularly to customers, depends on high-calibre and fully engaged people at all levels, and on deepening an inclusive and collaborative high-performance culture at Motus. Ensuring a competitive employee value proposition, with the attendant policies, best practices and systems, across all the dimensions of human capital management, is a key strategic focus to support our intention to be an employer of choice in our industry. In the coming year, we will continue to invest in our talent to align their capabilities with business objectives and career opportunities. We are also developing a leadership development framework to ensure our leaders and managers are able to meet the expectations of our investors, customers and employees.
In our core market, transformation is fundamental to our reputation as an exemplary corporate citizen and to our competitiveness. We have made solid progress in increasing the representation of employees from designated groups at senior management level, including employment equity candidates that have risen through the ranks of our business, and through external appointments. Proper succession planning, aligned with our employment equity plans, is in place at executive and senior management level, supported by sufficient bench strength and long tenures among senior management at Motus. Our engagement efforts, including employee focus groups and diversity workshops, have helped us identify and develop clear action plans to address the barriers to transformation and sensitise our people to the importance of an inclusive culture. A key focus is to accelerate transformation at dealership principal level, where long career progressions and specific skillsets tend to hamper diversity. A pilot programme for 20 dealer principals and portfolio managers will be rolled out in the coming year.
In the implementation of best-in-class human capital management systems and best practices, we are ensuring the right balance of standardisation and procedural flexibility within certain business areas, to ensure that the initiatives implemented are workable and meaningful in different workplace contexts.
Medium-term priorities
Motus is positioned to benefit from the shorter-term structural trends in our core market, and to deal effectively with disruption over the longer term. The trend of customers buying down from luxury brands may continue to impact the retail business, but this will be offset by our diversified brand offering and the defensive positioning of the importer brands, as the demand for entry level vehicles and small and medium-sized SUVs grows.
Besides the ongoing optimisation of our business segments, and extracting maximum leverage across the value chain, we will invest significantly in growing financial services, specifically through joint ventures that leverage our powerful intellectual property in the automotive sector. Similarly in Aftermarket Parts, we will drive further vertical integration and optimisation of the supply chain through acquisitions and local partnerships.
Although the expansion of our South African dealership footprint is not a primary strategic focus, we will be selective in acquiring attractive dealerships should they become available. Consolidating our position in our core market, subject to approval by competition authorities, will be weighed up against potential acquisitions in other segments and markets, according to their potential for highest returns. Capital will be allocated on a case-by-case basis, in view of the potential synergies with our existing networks.
Further bolt-on acquisitions, in areas adjacent to our current networks, will be targeted to build critical mass and leverage synergies in our international operations. We will continue to leverage South African expertise to ensure capital discipline and operational excellence, while retaining local experience to support market understanding. The scale and competitiveness of the UK market will make it difficult to penetrate, and we will continue with a regional approach to expansion, while navigating the impact of Brexit on economic growth expectations. The high degree of fragmentation in the Australian market should provide greater opportunity for expansion in the territories in which we have established a footprint, namely New South Wales and Victoria.
The group's innovation capability will drive the continuous evolution of products and services to ensure relevance in the mobility-as-a-service and fintech space. Despite our reliance on OEM innovation and product pipelines, as the essential link between the OEM and the customer, we will continue to provide a superior route-to-market for mobility service offerings. Our empowered fleet management offering positions us well for changing vehicle ownership models, as individual ownership gives way to large fleet owners implementing ride-sharing or car-sharing models.
The rollout of required infrastructure is likely to delay the shift to electric vehicles in South Africa, but the pressure to do so will mount as OEMs evolve; however, the run-off in vehicles with combustion engines will make this a gradual shift. Given the nature of the South African market and the extensive infrastructure and regulatory changes required, the shift to autonomous vehicles is likely to be limited. With our first-hand exposure to the disruptive trends in advanced markets, we will continue to assess the rate at which they are likely to accelerate in South Africa and the impact on our business models, which will inform pre-emptive responses to the necessary changes.
Outlook and appreciation
In South Africa, improving consumer and business sentiment and higher forecast GDP growth rates are expected to support a gradual recovery in vehicle sales. However, the Rand is likely to stay volatile in relation to major trading currencies, the impact of which will be carefully managed through our defined forward-cover policy. Our medium-term growth profile is nonetheless compelling, underpinned by the resilience of our business model. Organic growth within our business segments will increase scale and operational synergies across the automotive value chain and acquisitive growth in selected international markets will increase our geographic diversification.
Our key performance aspirations for the medium term include:
- Turnover growth of inflation plus 2 times GDP.
- ROIC target of WACC plus 3%.
- Consistent dividend pay-out guideline of 45% of HEPS in F2019.
Should shareholders and regulators approve the proposed unbundling, we believe we are well positioned for a successful listing on the JSE. Notwithstanding this seminal development for Motus, we will ensure that our operational teams remain focused on delivering our strategic objectives and enhancing our financial performance.
On behalf of Osman Arbee and the executive team, I convey our appreciation to the people of Motus for delivering a strong performance in the year, while preparing the business for a successful future as the leading independent automotive group in South Africa, and among the largest in the world, which is set to deliver a highly competitive value proposition to our stakeholders.