Commentary
RESULTS OVERVIEW
- Despite deteriorating trading conditions, currency volatility and an ambitious restructuring programme, Imperial achieved all of the strategic, operational and financial objectives announced at the start of the financial year.
- Total Group revenue and operating profit grew by 1% to R119,5 billion and by 2% to R6,5 billion respectively, supported by the inclusion of the Palletways acquisition for 12 months and solid results from the Logistics South Africa and Motor-Related Financial Services sub-divisions.
- Revenue and operating profit from continuing operations, excluding Regent, were up 1% to R116,8 billion and 2% to R6,0 billion respectively.
- Excluding current and prior year acquisitions and disposals, total revenue for the Group was flat and operating profit declined by 1%.
- Foreign revenue was unchanged at R49,9 billion (43% of Group* revenue) and foreign operating profit increased 3% to R2,2 billion (37% of Group* operating profit).
- Non-vehicle revenue increased 6% to R50,7 billion (43% of Group* revenue) and operating profit increased 9% to R2,8 billion (45% of Group* operating profit).
- The operating margin from continuing operations at 5,2% was slightly up on the prior year (5,1%).
- A full reconciliation from earnings to headline earnings and core earnings is provided in the Group Financial Performance section.
- Net working capital improved to R9,0 billion from R9,8 billion at June 2016 and R11,2 billion at December 2016.
- Net working capital turn improved from 12,5 to 12,7 times on the prior year.
- Disposals of non-strategic businesses and properties during F 2017 generated proceeds of R3,0 billion. Assets held for sale amounted to R979 million, comprising non-strategic properties.
- Net debt to equity (including preference shares as equity) reduced from 73% to 71% (98% at December 2016).
- A final cash dividend of 330 cents per ordinary share (2016: 425 cents per share) has been declared, bringing F 2017 dividends to 650 cents per ordinary share (F 2016: 795 cents per share).
ENVIRONMENT
With a footprint in 34 countries on six continents, Imperial’s activities on the African continent produced 67% and 76% respectively of Group* revenues and operating profits in the financial year, with the remainder generated on other continents, mainly in Europe and the United Kingdom.
South Africa
With official unemployment rising to 28% and consumer and business confidence deeply depressed by political uncertainty, the economy declined steadily towards a technical recession in South Africa, where R67,0 billion or 57% of Group* revenue and R3,8 billion or 63% of Group* operating profit was generated.
Positive emerging market sentiment and a gradual weakening of the US$ resulted in the R/US$ exchange rate strengthening by 11% during the year, with short-term volatility exacerbated by local factors.
Specific uncontrollable factors that affected our South African business were a reduction in logistics volumes and a 7% decline in national vehicle sales. The strengthening of the Rand by 11% against the US Dollar and by 9% against the Euro with intermittent short-term volatility created significant foreign exchange hedging losses.
Rest of Africa
Falling commodity demand, low oil prices and the consequent impact on currencies and private consumption continued to depress the growth rate in sub-Saharan Africa, where R11,2 billion or 10% of Group* revenue and R792 million or 13% of Group* operating profit was generated in the 2017 financial year.
Specific factors affecting Imperial in certain African countries during the 2017 financial year were slowing GDP growth rates; rising inflation and interest costs; lower consumer demand; and currency volatility, specifically the weakening of the Naira official exchange rate during the year which created foreign exchange losses on monetary items, including working capital and intragroup loan funding. The Naira parallel rate strengthened materially late in the second half of the 2017 financial year and access to foreign currency has improved.
Eurozone, United Kingdom (UK) and Australia
Our operations in the Eurozone generated R38,7 billion or 33% of Group* revenue and R1,4 billion or 24% of Group* operating profit.
Buoyed by a solid German economy and the results of the French presidential election, consumer confidence in the European Union rose to its highest level since before the GFC. The snap election in the United Kingdom produced the opposite result to that intended, weakening the Conservative Party, the Pound and the Prime Minister’s hand in negotiating a “hard Brexit”.
Specific factors affecting Imperial during the year were 80-year low water levels on the Rhine, and lower demand and pricing pressures in the steel, energy, commodities and construction sectors. The strengthening Rand depressed the translation value of our foreign operations.
Against this background, we provide shareholders with current information on the Group’s strategy and performance.
STRATEGIC CLARITY
Groups do not compete only subsidiaries do.
Since late 2014, we have therefore directed our efforts as a holding company to enhancing the sustainable competitive position of our subsidiaries. This entailed two major initiatives: an aggressive disposal and acquisition programme to agglomerate a portfolio of companies whose sectoral focus and common operating capabilities would ensure the creation of intragroup value for stakeholders; and simultaneously, the definition of the value proposition that each client facing company would require to compete and win in its chosen markets.
The first of these initiatives has to date resulted in the disposal of 42 businesses and 52 properties that were under performing, of low return on effort or strategically incompatible. These disposals generated revenues of R11,2 billion and operating profit of R982 million, and employed R4,2 billion of capital at the time of sale. The concurrent acquisition programme entailed the investment of R5,4 billion to acquire 15 companies that generated revenue of R13,7 billion and operating profit of R880 million in their first full year of operation. The second initiative involved divisional and company leaders more accurately defining their market, product and customer focus, and thereafter configuring those capabilities necessary to render competitive advantage, growth and returns.
The rationalisation of the portfolio and the clarification of strategy resulted in the assembly and consolidation of Imperial’s entire logistics and vehicle operating companies and assets within two increasingly self-sufficient divisions each under its own board, Chief Executive Officer and Executive Committee. By year-end, Imperial Logistics (with sub-divisions South Africa, African Regions, and International) and Motus (with sub-divisions Import and Distribution, Retail and Rental, Aftermarket Parts and Financial Services), were separately established and reported on as Imperial’s only operating entities. Numerous executive management changes were required to accommodate the new structure and the succession of retiring executives. At year-end, 23 of the 35 most senior executives in the group were new to their roles.
While Imperial Holdings remains the entry point for providers of debt and equity capital and the custodian of strategy, governance and succession, these changes have enhanced management focus, capital allocation, intra-divisional collaboration and the elimination of complexity, duplication and cost within the divisions. In the short-term these factors will enable increased penetration and performance in the supply chains of both sectors, through better co-ordinated and competitive value propositions to clients.
Although further portfolio and competitive strategy refinements are inevitable, the efforts of recent years have irrevocably altered the fundamental trajectory and future of the Imperial group.
Work is in process to determine the viability, and benefit to Imperial shareholders, of listing Imperial Logistics and Motus separately, and following due consultation with relevant stakeholders, the board will make an announcement on this decision on or before the release of the results to June 2018.
CAPITAL ALLOCATION
Despite external challenges and an ambitious restructuring process, Imperial’s investment thesis is unchanged. The following provides detail on progress during the reporting period with each of our five capital allocation objectives:
- To release capital and sharpen executive focus, by disposing of non-core, strategically misaligned,
underperforming or low return on effort assets.
We disposed of:
- The Regent Group (excluding the retained VAPS business) for R1,8 billion, including the proceeds of R697 million for the non-South African operations received at the end of January 2017. Payment of the remaining R1,1 billion was received at the end of June 2017;
- Non-strategic properties for which R900 million was received in F 2017. A further 21 properties with a carrying value of R979 million are held for sale.
- A minority stake in Mix Telematics for R478 million with payment received on 30 August 2016;
- Jurgens and Prestige Safari for R253 million in February 2017;
- 51% of 10 entities in the AMH Group to a related party for R55 million, concluded on 30 August 2016;
- LTS Kenzam for R10 million cash in January 2017;
- A 100% interest in Global Holdings (Botswana) in exchange for a 25% shareholding in PST, an entity that was merged with Global Holdings; and
- Interests in 6 smaller entities amounting to approximately R11 million.
Although the bulk of identified disposals were concluded, continual analysis of the strategic and financial performance of businesses will result in refinements to the portfolio of Imperial Logistics and Motus over the medium term.
In addition, as one of South Africa’s largest employers and a leading logistics provider across the entire value chain, Imperial is committed to the racial transformation of the South African economy. Imperial has therefore commenced a transaction process to introduce a direct 30% Broad-Based Economic Empowerment shareholding (including Black Women) into Imperial Logistics South Africa. This will result in Imperial Logistics South Africa becoming a 51% Black-Owned Enterprise.
- We will invest capital in South Africa to maintain the quality of assets and market leadership in our
logistics and motor vehicle businesses.
Acquisitions during the period include:
- a 70% stake in Sasfin Premier Logistics for R38 million in July 2016;
- 55% of Itumele Bus Lines for R147 million in November 2016; and
- the remaining 10% minority stake in Midas for R87,5 million.
Net capital expenditure of R1,9 billion was invested in continuing operations during the year.
- We will invest capital in the African Regions primarily to achieve our 2020 objective for the revenue
and profits generated in that region to equal that of our South African logistics business, and
secondarily to expand our vehicle businesses in the region.
- We acquired 70% of Surgipharm Limited in Kenya for a consideration of USD35 million (ZAR470 million) effective 1 July 2017.
- The capital light Imperial Managed Logistics business was expanded in Nigeria and Ghana.
Net capital expenditure of R165 million was invested in continuing operations during the year.
- We will invest the cash generated from operations and divestments to grow our businesses beyond the
continent, but with an emphasis on logistics.
- We acquired a 95% stake in Palletways for £155,1 million (R3,0 billion) including the purchase of debt at acquisition, effective 5 July 2016.
- Palletways acquired 100% of Topco in Italy for R14 million.
Net capital expenditure of R645 million was invested in continuing operations mainly in Europe and South America.
Acquisitions post year-end include:
- The acquisition of Pentagon Motor Holdings, which operates 21 prime retail dealerships in the UK, was announced on 15 August 2017 for a cash consideration of £28 million (R493 million). The effective date will be 1 September 2017.
- The acquisition of 75% of Australian based SWT Group Pty Ltd, which operates 16 dealerships, for a cash consideration of AUD24,2 million (R254 million). The transaction is subject to certain conditions precedent.
- The development and sustainability of Imperial will be underpinned by investment in human capital
and information systems.
- Group wide capital expenditure on human capital development and information systems amounted to R371 million.
DIVISIONAL PERFORMANCE
Imperial Logistics
HY1 2017 |
% change on HY1 2016 |
HY2 2017 |
% change on HY2 2016 |
2017 | 2016 | % change on 2016 |
||||||||
Revenue (Rm) | 25 862 | 8 | 24 803 | 4 | 50 665 | 47 912 | 6 | |||||||
Operating profit (Rm) | 1 300 | 8 | 1 458 | 9 | 2 764 | 2 543 | 9 | |||||||
Operating margin (%) | 5,0 | 5,9 | 5,5 | 5,3 | ||||||||||
Return on Invested Capital (%) | 11,5 | 11,8 | ||||||||||||
Weighted average cost of capital (%) | 7,1 | 7,6 |
Imperial Logistics is active mainly in Africa and Europe, with established capabilities in transportation, warehousing and distribution management. Our expertise and experience in each of these enable us to provide integrated supply chain and route-to-market solutions to global and national market leaders. We focus across the value chains of consumer packaged-goods, chemicals, healthcare and automotive as well as within specialised sectors of mining, manufacturing and agriculture.
Imperial Logistics recorded growth in revenue and operating profit of 6% and 9% respectively, supported by the Palletways acquisition in Logistics International, a solid performance from Logistics South Africa despite challenging trading conditions, and an excellent performance from Ecohealth in Nigeria.
Excluding acquisitions and disposals in the current and prior year, revenue and operating profit declined by 3% and 7% respectively. These declines are partly due to the strengthening of the Rand by 8% on average against the Euro and by 6% against the US dollar during the year.
Net capital expenditure was reduced significantly to R492 million from R1,9 billion in the prior year when investment was incurred on additional chemical manufacturing capacity in Europe and two additional convoys in South America. The current year capital expenditure was also reduced by the proceeds from property disposals of R589 million.
Logistics South Africa
HY1 2017 |
% change on HY1 2016 |
HY2 2017 |
% change on HY2 2016 |
2017 | 2016 | % change on 2016 |
||||||||
Revenue (Rm) | 8 217 | 10 | 7 990 | 14 | 16 207 | 14 447 | 12 | |||||||
Operating profit (Rm) | 498 | 20 | 455 | 10 | 953 | 828 | 15 | |||||||
Operating margin (%) | 6,1 | 5,7 | 5,9 | 5,7 |
Logistics South Africa performed strongly, increasing revenue and operating profit by 12% and 15% respectively. The significant contributors to this were increased volumes in the commodities, fuel and gas operations, and strong performances from Managed Logistics and Resolve.
The acquisition of Itumele Bus Lines included for eight months, contributed positively in line with expectations.
The consumer logistics businesses recorded revenue and operating profit growth supported by a solid performance from Imperial Health Sciences and an improved performance from Imperial Cold Logistics, which reduced its losses from the prior year.
Logistics African Regions
HY1 2017 |
% change on HY1 2016 |
HY2 2017 |
% change on HY2 2016 |
2017 | 2016 | % change on 2016 |
||||||||
Revenue (Rm) | 4 874 | (9) | 4 482 | (21) | 9 356 | 11 016 | (15) | |||||||
Operating profit (Rm) | 397 | 1 | 349 | (8) | 746 | 773 | (3) | |||||||
Operating margin (%) | 8,1 | 7,8 | 8,0 | 7,0 |
Logistics African Regions’ performance was depressed by slowing economic growth rates and rising inflation and interest rates, which resulted in lower consumer demand in many of its African markets. Revenue and operating profit declined by 15% and 3% respectively mainly due to the weakening of the Naira and the Metical by 41% and 37% respectively during the year, the strengthening of the Rand by 6% against the US dollar during the year, subdued demand from Imres’ key markets, and a weak performance from CIC due to lower consumer demand in Botswana and downsizing of the business in Mozambique. The sub-division’s results were supported by an excellent performance from Ecohealth, Nigeria’s leading distributor of pharmaceuticals.
The strategy to become a significant route-to-market partner of multi-national consumer goods and pharmaceutical companies in Southern, East and West Africa is on track. The sub-division continues to expand in sub-Saharan Africa by leveraging its asset-light managed logistics capabilities and extending its focus from traditional road transport to include cross-border and international logistics services and warehousing operations.
Logistics International
HY1 2017 |
% change on HY1 2016 |
HY2 2017 |
% change on HY2 2016 |
2017 | 2016 | % change on 2016 |
||||||||
Revenue (Rm) | 12 168 | 35 | 12 052 | 15 | 24 220 | 19 512 | 24 | |||||||
Operating profit (Rm) | 447 | 16 | 658 | 7 | 1 105 | 1 000 | 11 | |||||||
Operating margin (%) | 3,7 | 5,5 | 4,6 | 5,1 | ||||||||||
Revenue (Euro million) | 795 | 32 | 843 | 38 | 1 638 | 1 298 | 26 | |||||||
Operating profit (Euro million) | 29 | 12 | 46 | 28 | 75 | 63 | 19 | |||||||
Operating margin (%) | 4,0 | 5,0 | 4,6 | 5,0 |
Logistics International’s revenue and operating profit in Euros increased 26% and 19% respectively, boosted by the acquisition of Palletways. The performance in Rand terms was depressed by an 8% stronger average Rand/Euro exchange rate.
The Transport Solutions business experienced lower shipping volumes in South America resulting from a poor corn harvest in Brazil, delayed soya harvest and lower iron ore volumes. In Germany, bulk-shipping volumes declined due to 80-year low water levels on the River Rhine, and lower demand and pricing pressures from the steel, energy, commodities and construction industries. Following the commissioning of two additional push boats with 24 barges in March 2017, the South American operation is now fully operational with seven push boats with 84 barges.
Revenue and operating profit in the Supply Chain Solutions business declined due to lower volumes from key customers in the retail, industrial and contract manufacturing chemical operations.
Despite the uncertainty of Brexit, the weakening of the Pound and budgeted losses from the start-up operations in Poland, Palletways, included in these results for the full 12 months, performed strongly during the year and ahead of expectations. The franchise network of Palletways in the UK continues to expand and gain new business. The expansion of the network in European markets remains on track.
MOTUS
HY1 2017 |
% change on HY1 2016 |
HY2 2017 |
% change on HY2 2016 |
2017 | 2016 | % change on 2016 |
||||||||
Revenue (Rm) | 34 095 | (1) | 32 455 | (4) | 66 540 | 68 479 | (3) | |||||||
Operating profit (Rm) | 1 642 | - | 1 668 | (5) | 3 310 | 3 402 | (3) | |||||||
Operating margin (%) | 4,8 | 5,1 | 5,0 | 5,0 | ||||||||||
Return on Invested Capital (%) | 11,8 | 12,2 | ||||||||||||
Weighted average cost of capital (%) | 10,1 | 10,2 |
Note: Since the publication of the H1 2017 results there have been adjustments to the sub-divisions of Motus, requiring the segmental report to be amended and the reported H1 2017 numbers to be restated as above. These changes comprise reallocations of: appropriate eliminations to Motus out of Group Head Office and eliminations; the transfer of the African distributorship operations from the Vehicle Retail and Rental sub-division to the Vehicle Import and Distribution sub-division; and the transfer of Beekmans from the Vehicle Import and Distribution sub-division to Aftermarket Parts sub-division. The above numbers are also adjusted to include the VAPs business in Financial Services. A restated segment report for December 2015 and December 2016 is available on the company’s website www.imperial.co.za
Motus is a strategically coherent focussed motor vehicle business, covering the full motor value chain from OEM's. Portfolio and strategy development is being directed firstly at acquiring and rapidly integrating like businesses and assets that can be enhanced by Motus’s capabilities and resources, and secondly at continuing to dispose of or rationalise underperforming businesses, dealerships and brands.
The formation and structuring of Motus, under one collaborative leadership team, will enhance returns in the medium term by reducing duplication, complexity, costs and capital employed, unlocking intra-divisional efficiencies and more deeply penetrating the vehicle value chain, while maintaining market share in a challenging environment.
Revenue and operating profit for Motus declined by 3% due to a slowing vehicle market and higher cost of inventory in the Vehicle Import and Distribution sub-division in the first half, partially offset by a strong performance from the Financial Services sub-division. Excluding acquisitions and disposals in the current and prior year, revenue and operating profit increased by 2% and 3% respectively.
National vehicle sales in South Africa for the financial year contracted by 7% as reported by NAAMSA. Motus' new vehicle sales in South Africa declined 7% over the same period. The Motus passenger and light commercial vehicle businesses, including the UK and Australia, retailed 113 074 (2016: 118 787) new and 70 158 (2016: 69 637) pre-owned vehicles during the year.
The strengthening of the Rand against the Pound (20% on average) and Australian Dollar (3% on average) reduced the Rand denominated results of the UK and Australian businesses, which increased revenue by 12% and 11% and operating profit by 14% and 22% respectively in local currencies.
During the year, a foreign exchange loss of R388 million was realised. This relates to the unwinding of uneconomical and excessive forward cover, mainly in Renault, caused by a volatile Rand exchange rate, excessive ordering in a slowing market and delayed model launches. The Group’s foreign exchange controls and policies were reviewed and remain appropriate, but the Group’s oversight of their application was subsequently strengthened. Imperial’s current policy is to cover forward on average up to seven months on a rolling basis, depending on the brand of vehicle.
Net capital expenditure of R2,2 billion was incurred during the year (2016: R2,1 billion) largely on vehicles for hire.
The Regent transaction was concluded on 26 June 2017 and the consequent acquisition of the VAPS business by the Financial Services sub-division has enhanced its ability to provide Motus customers with a wide range of innovative products that will engender client satisfaction, loyalty and annuity income.
Vehicle Import and Distribution
Exclusive South African importer of Hyundai, Kia, Renault, Mitsubishi and five smaller automotive brands, with Nissan distributorships in 6 African countries.
HY1 2017 |
% change on HY1 2016 |
HY2 2017 |
% change on HY2 2016 |
2017 | 2016 | % change on 2016 |
||||||||
Revenue (Rm) | 9 117 | (5) | 9 040 | 3 | 18 157 | 18 307 | (1) | |||||||
Operating profit (Rm) | 286 | (29) | 442 | (13) | 728 | 913 | (20) | |||||||
Operating margin (%) | 3,1 | 4,9 | 4,0 | 5,0 |
Retail dealerships that were previously part of Vehicle Import, Distribution and Dealerships are now included in the Vehicle Retail and Rental sub-division.
Revenue and operating profit from this sub-division declined by 1% and 20% respectively, impacted by lower vehicle sales volumes due to market contraction, lower consumer demand, and an underperformance by Renault. Renault’s competitiveness and volumes were depressed by uncompetitive pricing due to the high cost of inventory caused by expensive and excessive forward cover. This was partially offset by solid performances from Hyundai and Kia, enhanced by manufacturer assistance, a change in the vehicle mix and price increases.
Due to the decrease in sales through the dealer network and in line with the market, importer unit sales of passenger and light commercial vehicles per NAAMSA definition decreased by 7% to 75,518 units from 81,494 units in the prior year. The Motus importer segment market share was maintained at 14% compared to the prior year.
At the end of June 2017 forward cover on the US Dollar and Euro imports extends up to February 2018 at average rates of R13.75 to the US Dollar and R14.73 to the Euro.
The African operations performed below expectations, reducing operating profit in challenging trading conditions with weak consumer demand in most of our operating markets. The capital deployed in these operations is being reduced.
Vehicle Retail and Rental
Representative in South Africa of 22 OEMs through 358 vehicle dealerships (including 94 pre-owned), 245 franchised dealerships and 19 commercial vehicle dealerships, with 113 car rental outlets (Europcar and Tempest) and 3 technical training centres.
Operator of 58 franchised commercial vehicle dealerships in the UK, 18 franchised passenger vehicle dealerships in Australia and 16 Car rental outlets (Europcar and Tempest) in Southern Africa.
HY1 2017 |
% change on HY1 2016 |
HY2 2017 |
% change on HY2 2016 |
2017 | 2016 | % change on 2016 |
||||||||
Revenue (Rm) | 28 175 | 3 | 27 458 | (1) | 55 633 | 55 132 | 1 | |||||||
Operating profit (Rm) | 784 | 22 | 694 | (11) | 1 478 | 1 426 | 4 | |||||||
Operating margin (%) | 2,8 | 2,5 | 2,7 | 2,6 |
All retail dealerships that were previously part of Vehicle Import, Distribution and Dealerships are now included in this sub-division.
Notwithstanding subdued vehicle sales volumes and slowing consumer demand, the Vehicle Retail and Rental operations recorded an increase in revenue and operating profit of 1% and 4% respectively, assisted by price increases and cost containment.
The Motus passenger and light commercial vehicle (LCV) businesses in South Africa experienced a 6% decline in new vehicle sales to 53 381 units compared to 56 543 units in the prior year. Total pre-owned retail unit sales increased by 4% as consumers traded down. Current market conditions continue to depress vehicle sales, particularly those of luxury vehicle brands. The commercial vehicle markets also experienced a reduction in new retail unit sales, reducing revenue and operating profit. The General Motors SA rationalisation had no meaningful impact on our operations.
Revenue and operating profit in the UK Commercial business increased 12% and 13% respectively in Pounds Sterling but the strengthening of the Rand (20% stronger on average over the period) reduced the Rand denominated results.
Car rental increased its revenue and operating profit by 11% and 10% respectively, and grew market share. Despite a challenging and competitive operating environment, all sectors, with the exception of government, performed well during the year. The utilization rate of vehicles was maintained at 72%, but accident costs remain high. In addition to process optimization and automation of the vehicle inspection, claims and recovery processes, the business has rolled out tracker telematics, with more than 13 000 units already installed.
The Australian operations increased revenue and operating profit by 11% and 22% respectively in AUD off a low base, driven by increased unit sales specifically in Ford vehicles.
Aftermarket Parts
Distributor, wholesaler and retailer of accessories and parts for older vehicles, through 700 owned and franchised outlets. (Midas (AAAS), Alert Engine Parts and Turbo Exchange).
HY1 2017 |
% change on HY1 2016 |
HY2 2017 |
% change on HY2 2016 |
2017 | 2016 | % change on 2016 |
||||||||
Revenue (Rm) | 3 125 | 7 | 3 028 | 4 | 6 153 | 5 824 | 6 | |||||||
Operating profit (Rm) | 190 | 8 | 216 | 5 | 406 | 382 | 6 | |||||||
Operating margin (%) | 6,1 | 7,1 | 6,6 | 6,6 |
Revenue and operating profit grew 6%, enhanced by price increases, a change in the sales mix and a good performance from Alert Engine Parts. AAAS recorded a marginal increase in revenue and operating profit as the business was negatively impacted by the disruption from the move to a new facility. The Jurgens and Prestige Safari business was sold during the year.
Financial Services
Manager and administrator of Service and Warranty plans for approximately 480 000 vehicles; developer and distributor of innovative vehicle-related financial products and services through dealer and vehicle finance channels, and a national call centre; fleet management services.
HY1 2017 |
% change on HY1 2016 |
HY2 2017 |
% change on HY2 2016 |
2017 | 2016 | % change on 2016 |
||||||||
Motor Related Financial Services | ||||||||||||||
Revenue (Rm) | 965 | 7 | 1 071 | 14 | 2 036 | 1 837 | 11 | |||||||
Operating profit (Rm) | 458 | 19 | 375 | 10 | 833 | 725 | 15 | |||||||
Operating margin* (%) | 47,5 | 35,0 | 40,9 | 39,5 | ||||||||||
Insurance (discontinued operations) | ||||||||||||||
Revenue(Rm) | 1 526 | (1) | 1 152 | (24) | 2 678 | 3 049 | (12) | |||||||
Operating profit (Rm) | 266 | 17 | 223 | 8 | 489 | 434 | 13 | |||||||
Operating margin (%) | 17,4 | 19,3 | 18,3 | 14,2 |
Despite lower vehicle sales, the Motor Related Financial Services business grew revenue and operating profit by 11% and 15% respectively. Higher profitability in demo sales and rental income was due to higher business volumes and an increase in sales by vehicle importers to car rental companies. Profitability of the maintenance funds increased as cost price increases did not materialise. The loan book and returns from the alliances with financial institutions recorded good growth.
We continue to focus on growing the fleet management business and building synergies within the retail motor divisions to leverage scale for our customers.
Following the approval of the sale of the Regent Group by the Financial Services Board on 26 June 2017, Imperial retained the VAPS’s business, the profits of which are included in the Motor Related Financial Services sub-division. During the year Regent’s underwriting result decreased by 8%, mainly due to the sale of the African operations in January 2017, partially offset by an improved performance in the Life business and lower loss ratios in the short-term business.
GROUP FINANCIAL PERFORMANCE
Group profit and loss (extracts)
R million | Total 2017 |
Continuing 2017 |
Discontinued 2017 |
Restated Total 2016 |
Restated Continuing 2016 |
Restated Discontinued 2016 |
Total % Change |
Continuing % Change |
|||||||||
Revenue (Rm) | 119 517 | 116 839 | 2 678 | 118 849 | 115 800 | 3 049 | 1 | 1 | |||||||||
Operating profit (Rm) | 6 538 | 6 049 | 489 | 6 382 | 5 948 | 434 | 2 | 2 | |||||||||
Operating margin (%) | 5.5 | 5.2 | 18.3 | 5.4 | 5.1 | 14.2 | |||||||||||
Net finance costs (Rm) | (1 680) | (1 680) | (1 440) | (1 440) | 17 | 17 | |||||||||||
Income from associates(Rm) | 103 | 103 | 138 | 138 | (25) | (25) | |||||||||||
Forex losses (Rm) | (619) | (619) | (72) | (72) | |||||||||||||
Profit before tax (Rm) | 3 625 | 3 187 | 438 | 4 402 | 3 984 | 418 | (18) | (20) | |||||||||
Tax (Rm) | (1 060) | (901) | (159) | (1 221) | (1 054) | (167) | (13) | (143) | |||||||||
Net profit after tax (Rm) | 2 565 | 2 286 | 279 | 3 181 | 2 930 | 251 | (19) | (22) | |||||||||
Attributable to non-controlling interests (Rm) | 36 | 87 | (51) | (184) | (128) | (56) | (119) | (168) | |||||||||
Attributable to shareholders of Imperial (Rm) | 2 601 | 2 373 | 228 | 2 997 | 2 802 | 195 | (13) | (15) | |||||||||
Effective tax rate (%) | 30,1 | 29,2 | 28,6 | 27,4 | |||||||||||||
Return on Invested Capital (%) | 12,4 | 12,8 | |||||||||||||||
Weighted average cost of capital (%) | 9,0 | 9,5* |
Note: 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). See glossary of terms. |
|
* | Restated to new calculation method. 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. |
Total Group revenue and operating profit grew by 1% to R119,5 billion and by 2% to R6,5 billion respectively. Excluding acquisitions and disposals in the current and prior year, revenue remained flat and operating profit declined by 1%.
The Group profit before tax declined by 18% due to:
- Foreign exchange losses of R619 million compared to R72 million in the prior year as a result of:
- The unwinding of uneconomical and excessive forward cover in Motus, mainly Renault, as referred to earlier, previously reported in the Statement of Comprehensive Income at 31 December 2016; and
- Mark to market valuation of monetary items in Logistics African Regions, mainly due to the devaluation of the Naira (41% devaluation on average for the period) and Metical (37% devaluation on average for the period). This was largely offset by price increases which led to higher operating margins in Ecohealth in Nigeria.
- higher finance costs from higher costs of funding and higher average debt levels during the year, which resulted from increased working capital (on average) during the year and acquisitions. This was exacerbated by delays in the receipt of proceeds from properties and businesses held for sale;
- income from associates and joint ventures decreased by R35 million on the prior year mainly as a result of the sale of Mix Telematics; and
- loss on sale of subsidiaries amounting to R151 million compared to the prior year profit on sale of subsidiaries of R430 million.
The above factors were offset by:
- the profit on sale of properties (net of impairments) of R212 million (2016: R28 million);
- impairment of goodwill, investment in associates and joint ventures and other assets amounting to R209 million (2016: R367 million); and
- the non-recurring impairment of intangibles amounting to R151 million in 2016.
The effective tax rate for the group is 30,1%, up from 28,6% in the prior year as a result of over provisions reversed in 2016. No additional deferred tax asset was recognised on the losses incurred in Renault and this was largely offset by the deferred tax asset raised in Imperial Cold Logistics.
Losses recorded by underperforming subsidiaries, mainly Renault, contributed by a loss recognised to non-controlling shareholders. Furthermore, the profit share of the non-controlling shareholders reduced compared to the prior year due to the purchase of the non-controlling shareholders’ interest in Associated Motor Holdings and AAAS (Midas), and the sale of the Goscor group in the second half of 2016 which had a 32.5% non-controlling shareholder.
Reconciliation from Earnings to Headline and Core Earnings:
R million | 2017 | Restated 2016 |
% change | ||
Net profit attributable to Imperial shareholders (earnings) | 2 601 | 2 997 | (13) | ||
Profit on disposal of assets | (320) | (98) | |||
Impairments of goodwill and other assets | 185 | 437 | |||
Loss (profit) on sale of businesses | 151 | (431) | |||
Impairment and re-measurement of investment in associates and joint ventures | 34 | 92 | |||
Reclassification on loss on disposal of available for sale investment | (8) | ||||
Tax and non-controlling interests | 57 | (3) | |||
Headline earnings | 2 700 | 2 994 | (10) | ||
Amortisation of intangible assets arising on business combinations | 521 | 437 | |||
Foreign exchange gain on intergroup monetary items | (92) | ||||
Re-measurement of contingent consideration, put option liabilities and business acquisition costs | 109 | 117 | |||
Tax and non-controlling interests | (171) | (139) | |||
Core earnings | 3 159 | 3 317 | (5) |
Earnings, Headline Earnings and Core Earnings per Share
Cents | Group Total 2017 |
Continuing 2017 |
Discontinued 2017 |
Restated Group Total 2016 |
Restated Continuing 2016 |
Restated Discontinued 2016 |
Group Total % change |
Continuing % change |
Discontinued % change |
||||||||||
Basic EPS (cents) | 1 339 | 1 221 | 118 | 1 554 | 1 453 | 101 | (14) | (16) | 17 | ||||||||||
Basic HEPS (cents) | 1 390 | 1 240 | 150 | 1 552 | 1 451 | 101 | (10) | (14) | 48 | ||||||||||
Basic Core EPS (cents) | 1 626 | 1 480 | 146 | 1 720 | 1 617 | 103 | (5) | (8) | 42 |
Financial position
R million | 2017 | Restated 2016 |
% change | |||
Goodwill and intangible assets | 9 529 | 7 501 | 27 | |||
Property, plant and equipment | 10 371 | 11 602 | (11) | |||
Investment in associates and joint ventures | 1 002 | 993 | 1 | |||
Transport fleet | 5 560 | 5 953 | (7) | |||
Vehicles for hire | 3 963 | 3 469 | 14 | |||
Investments and loans | 805 | 404 | 99 | |||
Net working capital | 8 956 | 9 804 | (9) | |||
Other assets | 1 839 | 1 871 | (2) | |||
Assets held for sale | 979 | 6 287 | (84) | |||
Net debt | (14 647) | (16 075) | (9) | |||
Non-redeemable, non-participating preference shares | (441) | (441) | – | |||
Other liabilities | (7 655) | (8 576) | (11) | |||
Liabilities directly associated with assets held for sale | (3 017) | |||||
Total shareholders' equity | 20 261 | 19 775 | 2 | |||
Total assets | 68 853 | 69 835 | (1) | |||
Total liabilities | (48 592) | (50 060) | (3) |
Goodwill and intangible assets rose by 27% to R9,5 billion primarily due to the acquisition of Palletways of R3,3 billion and Itumele Bus Lines of R114 million. This was partly offset by the amortisation of intangible assets of R634 million and Rand strength of R922 million.
Property, plant and equipment decreased by R1,2 billion to R10,4 billion primarily from the disposal of properties and the reclassification of properties to “held for sale assets” during the year.
The transport fleet decreased by 7% or R393 million as the net investment in trucks and barges of R366 million and net acquisitions of R249 million was reduced by currency adjustments of R334 million resulting from a stronger Rand and depreciation of R674 million.
Vehicles for hire increased by R494 million resulting from vehicle price increases, a higher fleet in the car rental business at year-end and increased sales to car rental companies by vehicle importers.
Net working capital improved to R9,0 billion from R9,8 billion as a result of an increase in trade payables of R 1,7 billion, partially offset by the increase in both trade receivables and inventory of R636 million and R236 million respectively. Net working capital turn improved from 12,5 to 12,7 times compared to the prior year.
Investment and loans increased by 99% due to the additional investments for the new cell captive arrangements with Regent for the VAPS business, and the loans receivable from the sale of Jurgens during the year.
Assets held for sale includes non-strategic properties that have been identified for sale. The sale of Regent, non-strategic properties disposed in F 2017, Imperial Express, LTS Kenzam and Global Holdings, which were classified as held for sale in 2016, have been concluded.
Total assets decreased by 1% to R68,9 billion due mainly to the disposal of Regent, businesses held for sale, property disposals and currency adjustments, which were offset by acquisitions.
Despite the R3,0 billion acquisition of Palletways, the net debt to equity ratio (including preference shares as equity) reduced to 71% from 73% in June 2016 (98% at December 2016) supported by proceeds from the sale of Regent and non-strategic properties, an improvement in working capital and a reduction in capital expenditure.
The net debt level is within the target gearing range of 60% to 80%. The net debt to total EBITDA ratio of 1,7 times is in line with the prior year.
In addition to attributable profits, shareholders’ equity was impacted by:
- the strengthening of the Rand which resulted in a loss in the foreign currency translation reserve of R659 million; and
- an increase in the hedging reserve of R159 million as a result of the favourable forward cover position of Motus relative to the Rand exchange rate at 30 June 2017
Movement in equity for the 12 months to June 2017
R million | 2017 | |
Net profit attributable to Imperial shareholders | 2 601 | |
Net profit attributable to non-controlling interests | (36) | |
Decrease in the foreign currency translation reserve | (659) | |
Reduction in the hedge accounting reserve | 159 | |
Re-measurement of defined benefit obligations | 116 | |
Movement in share based reserve | (72) | |
Dividends paid | (1 688) | |
Non-controlling interests: | ||
Palletways (share issue) | 147 | |
Midas (NCI buy out) | (36) | |
Itumele (new acquisition) | (52) | |
Itumele (new acquisition) | 118 | |
Disposal of NCI share in Regent cell captives | (122) | |
Other movements | 10 | |
Total change | 486 |
Cash flow
R million | 2017 | Restated 2016 |
% change | ||
Cash generated by operations before movements in working capital | 8 388 | 8 931 | (6) | ||
Movements in net working capital (excludes currency movements and net acquisitions) | 688 | (788) | |||
Cash generated after working capital movements | 9 076 | 8 143 | |||
Interest paid | (1 670) | (1 461) | |||
Tax paid | (1 520) | (1 910) | |||
Cash generated by operations before capital expenditure on rental assets | 5 886 | 4 772 | 23 | ||
Capital expenditure on rental assets | (1 709) | (1 611) | |||
Cash flows from operating activities | 4 177 | 3 161 | |||
Net (acquisitions)/disposal of subsidiaries and businesses | (1 687) | 760 | |||
Capital expenditure (non-rental assets) | (954) | (2 527) | |||
Equities, investments and loans | 702 | 179 | |||
Dividends paid | (1 688) | (1 909) | |||
Other | (113) | (1 321) | |||
Decrease (Increase) in net debt (excludes currency movements & net acquisitions) | 437 | (1 657) | |||
Free cash flow | 4 296 | 2 536 | 69 | ||
Free cash flow to headline earnings (times) | 1,59 | 0,85 |
Cash generated by operations after working capital movements, interest charge and tax payments was R5,9 billion (2016: R4,8 billion), up 23%.
Net working capital decreased due to excellent working capital management in the second half of F 2017.
Capex reduced from R4,1 billion to R2,7 billion, down 36%. Capex in the prior year included the bulk of the contributions towards the chemical manufacturing plant and the additional convoys in South America. The current year capex was also reduced by the proceeds from the property disposals of R884 million.
The main contributors to the net outflow of R1,7 billion relating to acquisitions and disposals was the acquisition of Palletways (R1,7 billion cash) and the disposal of the Regent cash (R1,9 billion outflow), which was offset by R1,8 billion proceeds received from the sale of Regent.
Inflows from equities, investments and loans amounted to R702 million, resulting mainly from the sale of Mix Telematics.
Dividends amounting to R1,7 billion were paid during the year.
In 2016 other significant cash flow items included share buy backs amounting to R558 million, a higher outflow from a change in minorities and settlement of cross-currency swaps. In addition capital raised from non-controlling interests increased from R26 million in 2016 to R149 million due to the Palletways acquisition.
Liquidity
The group’s liquidity position is strong with R12,4 billion of unutilised banking facilities, excluding asset backed finance facilities. The Group debt profile is 69% long-term (longer than 12 months) and 55% at variable rates. The group’s international scale credit rating by Moody’s is Baa3 with a negative outlook and the national scale rating was recently upgraded to Aa1.za.
DIVIDEND
A final cash dividend of 330 cents per ordinary share (2016: 425 cents per share) has been declared, bringing the full year dividend to 650 cents per ordinary share (F 2016: 795 cents per share). The 18% decline in the dividend exceeds the 10% decline in HEPS as a result of a stepped reduction in the pay-out ratio (previously based on Core HEPS) towards a targeted 45% of HEPS, subject to circumstances.
BOARD CHANGES
Given his expanded role as an executive director of the Motus Corporation divisional board, Mr Philip Michaux has elected to step down as an executive director of Imperial Holdings, effective 21 August 2017.
As previously announced Mr Manny De Canha relinquished his executive responsibilities on 30 June 2017 and will retire on 31 January 2018. He will continue to serve as a non-executive director on the Imperial Holdings board until 31 October 2017.
PROSPECTS
Against the backdrop of economic recovery in most developed and emerging economies, South Africa’s socio-political and economic outlook is fragile. In the near term, politics will divert party leadership and the government from national priorities, and further sovereign downgrades are possible. Internationally, geopolitics and central banks could dampen growth and influence capital flows. The impact of this unpredictable environment on sentiment, economic activity and the volatility of the Rand is unlikely to assist the fortunes of Imperial.
Despite this, we anticipate solid operating and financial results in the year to June 2018, subject to stable currencies in the economies in which we operate and South Africa retaining its investment grade. We expect:
- The self-sufficiency and effectiveness of both divisions to be further entrenched with balance sheet efficiency and independence a priority.
- Logistics and Motus to grow revenues and operating profit from continuing operations.
- Imperial Holdings’ continuing operations to increase revenues and operating profit with a double-digit growth in headline earnings per share, stronger in the second half.
APPRECIATION
Our gratitude is due to 49 364 colleagues throughout Imperial whose resilience in dealing with difficult external circumstances has been tested by the unprecedented rate of internal change. The multifaceted restructuring of Imperial over the past three years was among the most complex and ambitious in South African business.
A particular thanks to our co-directors, executive committee colleagues and fellow managers at all levels of the organisation. These are not easy times in which to lead.
Finally, we thank our owners and funders for their support. We will continue to execute on our espoused strategies.
MARK J. LAMBERTI – Chief Executive Officer
MOHAMMED AKOOJEE – Chief Financial Officer
The forecast financial information herein has not been reviewed or reported on by Imperial’s auditors.
DECLARATION OF FINAL PREFERENCE AND ORDINARY DIVIDENDS
for the year ended 30 June 2017
PREFERENCE SHAREHOLDERS
Notice is hereby given that a gross final preference dividend of 431.93836 cents per preference share has been declared by the Board of Imperial, payable to holders of 4 540 041 non-redeemable, non-participating preference shares. The dividend will be paid out of reserves.
The preference dividend will be subject to a local dividend tax rate of 20%. The net preference dividend, to those shareholders who are not exempt from paying dividend tax, is therefore 345.55069 cents per share.
ORDINARY SHAREHOLDERS
Notice is hereby given that a gross final ordinary dividend in the amount of 330.00000 cents per ordinary share has been declared by the Board of Imperial, payable to holders of 201 139 981 ordinary shares. The dividend will be paid out of reserves.
The ordinary dividend will be subject to a local dividend tax rate of 20%. The net ordinary dividend, to those shareholders who are not exempt from paying dividend tax, is therefore 264.00000 cents per share.
The company has determined the following salient dates for the payment of the preference dividend and ordinary dividend:
2017 | ||
Last day for preference shares and ordinary shares respectively to trade cum-preference dividend and cum ordinary dividend | Tuesday, 19 September | |
Preference and ordinary shares commence trading ex-preference dividend and ex-ordinary dividend respectively | Wednesday, 20 September | |
Record date | Friday, 22 September | |
Payment date | Tuesday, 26 September |
Share certificates may not be dematerialised/re-materialised between Wednesday, 20 September 2017 and Friday, 22 September 2017, both days inclusive.
On Tuesday, 26 September 2017, amounts due in respect of the preference dividend and the ordinary dividend will be electronically transferred to the bank accounts of certificated shareholders that utilise this facility. In respect of those who do not, cheques dated 26 September 2017 will be posted on or about that date. Shareholders who have dematerialised their shares will also have their accounts, held at their CSDP or Broker, credited on Tuesday, 26 September 2017.
On behalf of the board
RA Venter
Group Company Secretary
21 August 2017
AUDITOR'S REPORT
These summarised consolidated financial statements for the year ended 30 June 2017 have been audited by Deloitte & Touche, who expressed an unmodified opinion thereon. The auditor also expressed an unmodified opinion on the financial statements from which these summarised consolidated statements were derived.
A copy of the auditor's report on the summarised consolidated financial statements and of the auditor's report on the consolidated financial statements are available for inspection at the company's registered office, together with the financial statement identified in the respective auditor's reports.
The auditor's report does not necessarily report on all of the information contained in these financial results. Shareholders are therefore advised that in order to obtain a full understanding of the nature of the auditor's engagement, they should obtain a copy of the auditor's report together with the accompanying financial information from the company's registered office.