Imperial: Leaders in Mobility

As Imperial Logistics operates internationally, we are exposed to a variety of domestic and global economic and market conditions that may impact on business activity.

The uneven level of global economic activity in recent years, the uncertainty in various global financial markets, the ongoing effect of commodity price volatility and low economic growth in certain markets has affected business activity in general and discretionary spending among consumers.

Slow growth in markets, currency volatility and lower consumer demand together with rising inflation and higher borrowing costs increases the challenge of delivering revenue growth, placing pressure on margins and profitability due to the possibility of contract losses or renewals at lower volumes and margins. This requires other interventions, including restructuring operations, rationalising assets and containing costs, to maintain returns to shareholders.

Weather conditions have the potential to result in low water levels, resulting in lower cargo capacities in the shipping business and higher costs.

• Service excellence and innovative client offerings to support sustainable margins.
• Operating model agility through asset-light capabilities to adapt to market dynamics.
• Regular management review of volumes and margins and identifying financial and operational synergies to extract efficiencies and manage costs.
• Organic and acquisitive growth strategies focused on diversification.
• Review of business development and sales capabilities to secure new contracts.
• Offering substitute products and generics (in healthcare) to maintain market share in lower-cost products.
• Focused sales initiatives to increase client base.
• Capitalise on outsourcing trends during challenging times.
• Maintain targeted levels of own fleet in the shipping business to secure flexibility in low water periods.

Imperial Logistics relies on ongoing commercial relationships with key clients and partners. The loss of a major client or partner or the inability to renew contracts on commercially similar terms could result in adverse financial consequences.

Imperial Logistics has low concentration risk in its portfolio with no single client contributing more than 5% of revenue. Client retention is strong, with multiple contracts with top clients across different markets, driven by client-centric solution design and delivery, and supported by our pragmatic approach to digitisation and innovation.

• Ongoing oversight and monitoring of contract renewals and negotiations.
• Signing long-term client contracts, where appropriate.
• Increased contract management oversight and support for clients.
• Monitoring industry trends to ensure innovative service offerings.

As a multinational organisation, Imperial Logistics is subject to a wide range of legal and regulatory requirements, which we monitor to ensure compliance.

Any breach of compliance could result in fines or sanctions that affect its profitability and may have adverse reputational consequences.

Monitoring the changes in legislative environments and interpretations of laws is of key importance and may have uncertain consequences for our business model and operations, particularly in our African operations which are affected by political and regulatory uncertainty.

New European Union (EU) regulations on emissions stipulate lower emission thresholds, which currently cannot be met by original equipment manufacturers (OEM) and may result in lower production volumes during 2019.

Changes in labour legislation in South Africa may impact the ability to hire employees on short-term contracts at affordable rates.

• Centralisation of selected specialist areas where compliance risk is high.
• Proactive monitoring of operational implementation plans and frameworks for emerging legislation.
• Ongoing review of compliance with anti-bribery and corruption policy and related and legal requirements, supported by relevant training.
• In-country operations and their business partners are well acquainted with the political and regulatory landscape, allowing them to anticipate, manage and mitigate local risk to within risk appetite.
• Manage the business impact of lower OEM volumes due to new EU emissions regulations in F2019.
• Review of the impact of changes in labour legislation and apply necessary mitigating actions.

The changes to the B-BBEE codes require accelerated transformation, specifically higher levels of black ownership in Imperial Logistics’ South African business.

Failure to achieve set targets and to conclude the B-BBEE ownership transaction in the South African operation may impact on competitiveness and sustainability through clients not renewing contracts and the exclusion from participation in new tenders.

• Active monitoring and oversight of B-BBEE scorecards.
• Clear initiatives in place to meet employment equity targets and skills development.
• Enter into B-BBEE partnerships to improve B-BBEE credentials.
• Conclude the B-BBEE transaction that is being negotiated to bring equity to 51% black, including 30% women, ownership levels in the 2019 financial year.

With any expansion and acquisition strategy, there is a risk of entering markets that are not well understood and the group may need to rely on outside partners. After businesses are acquired, their integration into the group requires stringent and pragmatic processes to ensure value is not impaired.

In addition, there is a risk of deploying capital in areas of low return and may require high effort to succeed.

• Clearly defined expansion areas have been identified.
• Regular review of acquisition risks and criteria at executive level.
• Clear acquisition guidelines defined and overseen by the group investment committee.
• Formal authority limits are adhered to.
• Formal post-acquisition review process.
• Retaining existing management and sellers as minority interests post the acquisition, to allow for knowledge transfer over the next three to five years and enough time for succession planning.
• Most acquisitions are in existing/parallel markets and/or capabilities.

Returns may be affected when capital is ineffectively invested in fleet and inventory that is not being optimally utilised, increasing the risk of asset impairments and higher financing and operating costs. Furthermore, in low-growth conditions, operations are exposed to increasing costs in maintaining assets and the risk of these assets sitting idle.

• Active management and investment in optimising inventory and fleet levels.
• Strategic focus on lowering capital intensity.
• Enhanced governance oversight and active management review and monitoring of the realisable value of assets.
• ROIC is a key performance indicator and metric.

The volatility of exchange rate fluctuations may impact on the competitiveness and profitability on the pricing of imported products through the inability to compete on price with local products.

The general weakening of African currencies against the US Dollar may impact the availability of hard currency to pay the suppliers of imported products and the ability to source foreign currency and hedges at competitive rates.

• Active management of currency volatility through a hedging strategy (by using forward contracts, buying hard currency and/or entering options) supported by established policy and governance structures.
• Foreign currency exposure is actively managed by treasury and management, including through restructuring payment terms and sourcing funding in-country.
• Ability to re-price products to mitigate the impact of weakening currencies.
• Negotiated, preferential pricing and support from principals to support margins.

Imperial Logistics manages a complex network of suppliers, including sub-contractors that it relies on to deliver superior service to its clients.

Imperial Logistics is dependent on essential consumable supplies, services and infrastructure, specifically fuel for vessels, electricity and transport networks. Any disruption to the availability of these could impact the production and distribution of products.

• Ongoing oversight and monitoring of contract renewals and negotiations.
• Signing long-term supply contracts, where appropriate.
• Increased contract management oversight and support for suppliers.

The pace of change has accelerated and will inevitably require incumbents to embrace digital capabilities to be competitive. Sustained competitive advantage is increasingly achieved through innovation.

Our highly differentiated strategic approach to innovation and our focus on developing customised solutions for our clients, is underpinned by an asset-right approach, service excellence and flawless execution (through process improvement and digitisation) and continuous improvement (through client-centric innovation).

Our route-to-market service offering in the African Regions, which provides access to consumer markets that are hard to penetrate and includes marketing the brands of our principals, gives us access to extensive customer data that can be leveraged to tailor their product offerings. This deepens clients’ reliance on our service and mitigates against the risk of disintermediation by the brand owners themselves.

• Keeping abreast of innovative changes by competitors, and developing the management mindset to “disrupt ourselves”.
• Developing and implementing customised solutions that drive competitiveness and relevance of clients and to reduce costs and increase profitability.
• Expand online trading site and increase business-to-customer (B2C) capabilities in Palletways and capture e-commerce opportunities in healthcare in Africa through specialised micro-delivery capabilities.
• Focused client-centric innovation supported by the rapid development, testing and implementation of supply chain solutions.

The legacy of decentralised IT systems and infrastructure from Imperial Logistics growth through acquisition makes it critical to reduce systems complexity through consolidation, while ensuring that cybersecurity and innovation is addressed.

IT strategies need to be flexible and effective in meeting the requirements of internal and external clients and delivering new IT solutions for competitive differentiation and operational effectiveness.

Progress has been made to align the digital strategy to the corporate strategy, with an appropriate balance of standardised and fit-for-purpose systems and processes being implemented in key areas. This systematic digitisation of processes is supporting integration, reducing complexity and leveraging excellence across different businesses.

• Board oversight and monitoring of material IT projects.
• Strategy alignment review done per division to ensure appropriate IT strategies.
• Centralised IT departments that are reporting into a divisional chief information officer (CIO).
• Divisional project management – within the CIO’s office.
• Cybersecurity minimum guidelines implemented.
• Ongoing cyber risk assessments as part of the emerging risk landscape.
• Ongoing management of disruption due to system implementation to improve IT architecture.
• Flawless execution and support by enabling data-driven and data-backed decision making; and increasing automation.
• Screen and embrace new and disruptive digital technologies to generate new business models and additional revenue.

The limited pool of qualified skills in African markets and the impact of an ageing skilled working population in Europe are challenges in accessing the talent needed to resource the growth strategies. Besides leadership skills, our businesses depend on specialised technical and client facing skills, which need to be developed and retained.

The inability to attract and retain the necessary skills in a European employee market, may result in existing operational capacity not being fully utilised.

• Implementation of best people practices, supported by the appropriate systems, is in progress to become an employer of preference in all markets.
• Identification of key current and future skills and aligning these to integrated talent management programmes.
• Customised solutions through specialised workforce training and management initiatives.
• Co-ordinated transformation policies and programmes focused on development and promotion of internal candidates, and recruitment of employment equity candidates.
• Improve employee communication to provide guidance about business model and company strategy.
• Improve the employee value proposition to compete effectively for skilled and talented employees.

The possibility of labour disruptions in South Africa during wage negotiations may have an adverse effect on the domestic operations and those of our clients by disrupting or hampering distribution and warehouse activities and increasing costs.

• Active participation in transport industry labour councils.
• Preparation for negotiations and monitoring of the negotiation process.
• Review of operational labour plans to ensure continuity of services.