Imperial

• Imperial produced solid results and recorded an improvement in all key financial metrics in the 12 months to 30 June 2018, supported by acquisitions, increased vehicle sales and a good performance from Motus. Imperial Logistics performed satisfactorily in mixed trading conditions.
• Excluding businesses held for sale, total revenue and operating profit for the group increased by 13% and 7% respectively.
• Excluding current and prior period acquisitions and disposals, total revenue and operating profit for the group increased by 5% and 2% respectively.
• Operating margin declined to 5,0% from 5,2%, resulting from a reduction in sales of luxury vehicle brands in favour of smaller, lower-margin entry-level vehicles, and the acquisition by Motus of the lower-margin Pentagon (UK) and SWT (Australia).
• Revenue generated outside South Africa increased 21% to R59,0 billion (45% of group revenue) and operating profit generated outside South Africa increased 6% to R2,4 billion (37% of group operating profit).
• A full reconciliation from earnings to headline earnings is provided in the group financial performance section. As reported at the interim results, core earnings is no longer a relevant financial measure and was discontinued in the 2018 financial year.
• Net working capital of R8,8 billion improved by 2% from R9,0 billion in June 2017. Imperial Logistics working capital increased by R1,5 billion as debtor and creditor levels normalised to more sustainable levels when compared to F2017. The acquisitions, mainly Surgipharm, also impacted working capital in F2018. Motus working capital decreased by R1,7 billion mainly due to a reduction in inventory and improved supplier credit terms. We expect inventory levels to normalise in H1 F2019.
• Disposals of non-strategic businesses and properties during the 12-month period generated proceeds of R4,2 billion. Net assets held for sale amounted to R234 million, comprising mainly non-strategic properties in Motus.
• Net debt to equity (including preference shares as debt) improved significantly to 50% from 74% in June 2017 and 84% in December 2017 resulting mainly from cash of R4,2 billion received from the disposal of non-strategic businesses and properties and a 37% improvement in cash generated from operating activities of R5,7 billion.
• Free cash flow increased by 17% to R5,0 billion from R4,3 billion mainly due to a 37% increase in cash generated from operating activities of R5,7 billion (2017: R4,2 billion).
• A final cash dividend of 387 cents per ordinary share (2017: 330 cents per share) has been declared.

Imperial’s activities on the African continent produced 64% and 76% respectively of group revenues and operating profits during the 12 months to June 2018, with the remainder generated mainly in Europe and the United Kingdom. Trading conditions in Imperial’s markets remain mixed.

South Africa

Despite improved sentiment, the economy contracted sharply in the second half of F2018 in South Africa, where R70,0 billion or 55% of group revenue and R4,0 billion or 63% of group operating profit was generated in the 12 months to 30 June 2018. Notwithstanding some monetary easing, high unemployment, low economic growth, tax rate increases and static household income resulted in consumer affordability remaining under pressure.

The impact of this environment on Imperial Logistics’ operating profit, 33% of which is generated in South Africa, has been depressed volumes and competitive pressures, resulting in contract renewals at lower margins. This business was also directly impacted by lacklustre consumer spending, high fuel prices and social unrest. The impact on the operating profit of Motus, approximately 86% of which is generated in South Africa, has been a low-growth trading environment, where national vehicle unit sales as reported by NAAMSA increased by 2%. The luxury brand segment remains under severe pressure as consumer affordability constraints and buying down trends continue.

Rest of Africa

The recovery in commodity prices, gradually improving domestic demand and some policy reforms improved economic prospects in most countries in sub-Saharan Africa, where R12,0 billion or 9% of group revenue and R853 million or 13% of group operating profit was generated in the 12 months to 30 June 2018.

However, the performances of Imperial’s businesses in the rest of Africa (predominantly Logistics) were negatively impacted by subdued growth, recessionary conditions and political instability in certain markets, and the R/USD exchange rate strengthening by 5% on average during the year. The increasingly competitive and uncertain donor aid market resulted in lower than expected volumes and reduced margins.

Eurozone, United Kingdom (UK) and Australia

Our international operations generated R46,9 billion or 36% of group revenue and R1,5 billion or 24% of group operating profit in the 12 months to 30 June 2018.

Economic conditions in Europe were positive. The continuing economic expansion in Europe has resulted in unemployment in the EU and the Euro area decreasing to below pre-global financial crisis levels. However, certain sectors in which we operate remain under pressure, eg steel. The US tariffs on Chinese products will likely divert trade flows from China to Europe, particularly steel, which could push steel prices down further and could result in reduced exports for our automotive customers. Our German shipping operations were negatively impacted by low water levels on the River Rhine in the first half of F2018. Hot weather conditions since July 2018 have again resulted in low water levels. Palletways’ performance was hindered by toughening economic conditions in the UK. The new EU emissions regulation stipulating lower emission thresholds and process for approval, will lead to OEMs reducing vehicle production volumes in H1 F2019, and negatively impact sales of vehicles manufactured in Europe.

Economic growth and the passenger vehicle market in the UK are being depressed by the uncertainties arising from Brexit and consumers switching from diesel vehicles to petrol vehicles. Latest forecasts indicate an overall decline in the UK vehicle market in calendar 2018 with the passenger vehicle market forecast to decline by over 5% and the heavy commercial vehicles sector by approximately 6%. The Australian vehicle market recorded growth despite being fragmented and highly competitive, but margins on new vehicles remain under pressure.

From late 2014, a fundamental transformation was initiated to unlock intrinsic value within the group. Touching every part of the organisation, the changes sought to retain the entrepreneurial creativity and capital management excellence that had underpinned the group’s past success, while ensuring that the structure, strategies and value propositions of its divisions were clarified, simplified and focused, for sustainable competitive advantage, growth and returns. This transformation and development of Imperial was centred around strategic clarity, managerial focus and shareholder insight. The first was achieved through portfolio rationalisation, the second through organisation structure and the third through disclosure. The substantial portfolio rationalisation resulted in the group disposing of assets that did not fit the group and underlying business unit’s strategies, or did not generate sufficient returns on capital or executive effort, and acquiring those that did. Since 2014, as many as 55 businesses and 90 properties were sold that generated revenues of R14,4 billion, operating profit of R1,1 billion and released capital of R7,0 billion. In total, R5,7 billion was invested in acquiring 17 strategically aligned high-quality assets that generated revenue of R14,2 billion and operating profit of R1,0 billion in their first full year of operation, and which are expected to deliver sustainable organic growth and enhanced returns and cash flows in the future.

The above-mentioned approach exposed the absence of operational synergies and resulted in the group consolidating its logistics and automotive operating companies and assets within two large, self-sufficient, multinational companies, Imperial Logistics (from 1 July 2016) and Motus (from 1 January 2017), each with its own board, chief executive officer, executive committee and increasingly self-sustaining balance sheets, and with decreasing functional support from the holding company. Appropriate executive management changes were made to accommodate the new structure and the succession of retiring executives.

The internal separation necessitated a realignment of the group’s governance structure and two strong operating boards were established. To entrench the independence and focus of Imperial Logistics and Motus further, most of the functions of the Imperial Holdings head office were systematically devolved to the two divisions. Pursuant to more efficient capital and funding structures, significant effort ensured that each business unit achieved appropriately geared, independent and self-sustaining balance sheets as evidenced by these results.

In light of the above, the role of Imperial Holdings as the custodian of governance and the provider of capital to the divisions is no longer necessary. Consequently, and after due consideration to whether the long-term prospects of Imperial Logistics and Motus will be enhanced by them being separately listed, the board approved the external separation of the two divisions through the unbundling of Motus. The proposed unbundling, which is expected to be concluded in Q4 2018, will enable each of the two divisions to operate in a more focused and efficient manner, allowing each of the businesses to achieve their respective strategic goals, be separately accountable to debt and equity providers and unlocking value for shareholders over the long term. The unbundling will also provide shareholders with the opportunity to participate directly in Imperial Logistics and/or Motus.

In the event of the unbundling of Motus, Imperial Logistics and Motus will not have formal credit ratings. No rating is required as the funding for both Imperial Logistics and Motus can be satisfied by the banking market with no requirement to access the bond market. The impact of this is immaterial from a cost of funding perspective. The debt syndication process and refinancing of existing facilities as a result of the proposed unbundling are in process and on track. Sufficient commitments including an underwriting for the off-shore facilities have been secured for Imperial Logistics and Motus to facilitate growth, provide flexibility and maintain strong liquidity at competitive pricing levels.

The bonds were redeemed by utilising existing banking facilities at market value on 6 August 2018 and an offer to acquire the preference shares was announced on 13 August 2018. We anticipate the buyback to be implemented during October 2018. Notwithstanding that preference shareholders are not entitled to participate in the unbundling, the board is of the opinion that the buyback will be an efficient means for Imperial to simplify its capital structure and preference shareholders to dispose of the preference shares in an orderly and effective manner.

In F2018 the group expanded its portfolio outside South Africa in both Imperial Logistics and Motus through the following strategically aligned acquisitions:

• Imperial Logistics acquired 70% of Surgipharm Limited in Kenya for USD35 million (R485 million), effective 1 July 2017. Surgipharm is strategically aligned to accelerate our industry presence and relationships with pharmaceutical principals on the African continent and provides an excellent platform for further growth in other East African markets. This acquisition performed slightly below expectation during the period due to political uncertainty and disruptive elections in Kenya, but still contributed positively;
• Motus acquired Pentagon Motor Holdings, which operates 38 passenger and light commercial vehicle franchises from 21 prime retail dealerships in the UK, for £26 million (R479 million), effective 1 September 2017. Pentagon supports Motus’ strategy to deploy capital and its vehicle retail expertise in pursuit of growth beyond South Africa, and it complements our existing commercial vehicle business in the UK. This acquisition performed satisfactorily despite the UK passenger market being depressed by the convergence of declining UK passenger vehicle sales, market realignment from diesel vehicles and Vauxhall changing ownership from General Motors to the French PSA group;
• Motus acquired 75% of Australian-based SWT Group Proprietary Limited, which operates 16 dealerships, for AUD24,2 million (R261 million), effective 1 October 2017. This acquisition performed in line with expectations during the period and complements our existing dealership footprint in Australia; and
• Motus acquired 60% of Arco Motor Industry Co Limited, a distributor of motor vehicle engine parts based in Taiwan for R185 million. The acquisition is in line with our strategy to shorten the supply chain in sourcing products for our route-to-market network in Africa, thereby eliminating costs and improving efficiency in the supply chain.

In F2018 the group disposed of the following non-core, strategically misaligned, underperforming or low return on effort assets:

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

Performance

Imperial Logistics recorded growth in revenue and operating profit of 3%. Excluding businesses held for sale (mainly the disposal of Schirm) revenue and operating profit grew 8% and 5% respectively. These results were supported by a solid performance from our West African healthcare businesses (mainly Eco Health) and CPG business in Mozambique (CIC); the disposal and closures of some smaller, strategically misaligned businesses in South Africa and African Regions; the inclusion of the Surgipharm acquisition for the full 12-month period and excellent results from the automotive and international shipping segments in Logistics International.

Results were partially offset by lower volumes, margin pressures, renewal of contracts at lower margins in South Africa, the loss of a large public healthcare contract in African Regions, lower operating profit performance from the sourcing and procurement business (Imres) in African Regions and disappointing performances in the European inland shipping, retail and industrial businesses. Excluding current and prior year acquisitions and disposals, revenue increased by 5% and operating profit declined by 1%. Profit before tax improved by 26% as foreign exchange losses mainly in African Regions were contained to R70 million compared to R216 million in the prior year. Net finance costs reduced 8% due to a significantly improved and strengthened balance sheet, and amortisation of intangibles reduced by 17% mainly due to the sale of Schirm.

The net debt to equity ratio improved significantly from 122% in the prior year to 50% following the sale of non-core or underperforming businesses and non-strategic properties, reduced capital expenditure requirements and the recapitalisation of African Regions. The ROIC of 12,2% compares to 11,5% in the prior year and is above the target hurdle rate of WACC+3%.

Net capital expenditure increased to R578 million from R492 million in the prior year. Capital expenditure in the current year comprised mainly replacement of transport fleet in South Africa, reduced by proceeds from asset disposals of R730 million, including property disposals of R367 million. Property disposals were lower when compared to the prior period.

Imperial logistics

	HY1   2018		% change  on HY1  2017		HY2  2018		% change  on HY2  2017		2018		2017	% change  on 2017
Revenue (Rm)	26 511*		5		24 888		3		51 399		49 715*	3
Operating profit (Rm)	1 391		7		1 462		–		2 853		2 764	3
Operating margin (%)	5,2				5,9				5,6		5,6
Return on invested capital (%)									12,2		11,5
Weighted average cost of capital (%)									8,5		7,1
Targeted ROIC (WACC+3%)									11,5		10,1
Debt:equity ratio (%)									50		122

Note: ROIC and WACC are calculated on a rolling 12 month basis. The above table includes businesses held for sale and eliminations.

*Restated.

Logistics South Africa

Logistics South Africa performed satisfactorily in difficult market conditions, decreasing revenue by 1% and increasing operating profit by 4%. Excluding businesses held for sale revenue increased by 1% and operating profit reduced by 1%.

	HY1  2018		% change  on HY1  2017		HY2  2018		% change  on HY2  2017		2018		2017	% change  on 2017
Revenue (Rm)	8 510		2		7 800		(4)		16 310		16 498	(1)
Operating profit (Rm)	522		13		430		(6)		952		919	4
Operating margin (%)	6,1				5,5				5,8		5,6
Return on invested capital (%)									13,7		12,3
Weighted average cost of capital (%)									11,0		10,6
Targeted ROIC (WACC+3%)									14,0		13,6
Debt:equity ratio (%)									64		40

Note: ROIC and WACC are calculated on a rolling 12-month basis. The above table includes businesses held for sale and eliminations.

Performance was enhanced by a positive contribution from the Itumele Bus Lines acquisition which was included for 12 months, and the disposal and closures of some smaller, strategically misaligned businesses in the current and prior years. However, the second-half performance was negatively impacted by a further reduction in volumes and depressed margins. Solid results from the transport and warehousing, and specialised freight businesses contributed positively to operating profit, which was offset by an underperformance from the CPG businesses, where the ambient and merchandising segments performed below expectation due to depressed volumes. Challenging market conditions and a competitive trading environment also resulted in contract renewals at lower margins. The managed solutions business recorded moderate growth during the year.

ROIC improved to 13,7% from 12,3% mainly due to improved capital management and the sale of strategically misaligned and underperforming businesses.

The disposal of 30% of Imperial Logistics South Africa to a broad-based black economic empowerment (B-BBEE) partner is progressing steadily with a selected partner. We expect to announce key terms of a transaction in H1 F2019. As previously announced, the B-BBEE transaction is not a prerequisite for the potential unbundling of Motus.

Logistics African Regions

Imperial Logistics African Regions performed below expectation with revenue and operating profit increasing by 9% and 3% respectively with a mixed performance across the portfolio. Revenue and operating profit, excluding businesses held for sale, increased by 19% and 1% respectively.

	HY1  2018		% change  on HY1  2017		HY2  2018		% change  on HY2  2017		2018		2017	% change  on 2017
Revenue (Rm)	5 551		4		5 272		15		10 823		9 947	9
Operating profit (Rm)	408		4		351		1		759		740	3
Operating margin (%)	7,4				6,7				7,0		7,4
Return on invested capital (%)									17,5		23,8
Weighted average cost of capital (%)									11,1		6,7
Targeted ROIC (WACC+4%)									15,0		10,7
Debt:equity ratio (%)									23		>150

Note: ROIC and WACC are calculated on a rolling 12-month basis. The above table includes businesses held for sale and eliminations.

Results were supported by a good performance from our West African healthcare businesses (mainly Eco Health) which had record sales during the year. These businesses are leading distributors of pharmaceuticals in Nigeria and Ghana. The acquisition of Surgipharm contributed positively but performance was depressed by political uncertainty and disruptive elections in Kenya. The results from the CPG route-to-market business were enhanced by strong growth in the cross-border trade from South Africa into SADC markets and the disposal of the loss-making Botswana business (Global Holdings). Certain asset-heavy operations in the transport division were discontinued, in line with the risk mitigation strategy and the objective to become more asset-right, thereby enhancing returns.

The CPG route-to-market Namibian operations performed satisfactorily in ongoing recessionary conditions. Transport operations in Namibia are experiencing reduced volumes, exacerbated by the recession, vindicating our strategy to reduce asset intensity. Our sourcing and procurement business (Imres) delivered an unsatisfactory operating profit performance compared to the prior year due to increased competition, change in the product mix, uncertainty in aid and relief markets, and longer lead times in executing orders which resulted in lower margins. However, this business continues to generate good cash flow and delivers ROIC in line with the targeted hurdle rate. The sub-Saharan healthcare logistics business was negatively impacted by the loss of a large public healthcare contract.

The average strengthening of the Rand by 5% against the US Dollar also negatively influenced the Rand performance during the period.

The business was recapitalised during the year resulting in a significantly lower net debt to equity ratio.

ROIC at 17,5% declined from 23,8% mainly due to the underperformance of the sub-Saharan and Kenyan healthcare logistics businesses and the sourcing and procurement business, an increase in our investment in Eco Health, from 68% to 87% and normalised working capital.

Logistics International

Logistics International’s revenue was flat and operating profit decreased by 1% in Euro, while revenue and operating profit increased by 4% and 3% respectively in Rand, which weakened by 4% on average against the Euro during the year. Revenue and operating profit, excluding businesses held for sale (Schirm), increased by 8% and 12% respectively in Rand terms and increased by 4% and 6% respectively in Euro.

	HY1   2018		% change  on HY1  2017		HY2  2018		% change  on HY2  2017		2018		2017	% change  on 2017
Revenue (€m)	788*		3		793		(2)		1 581		1 574*	–
Operating profit (€m)	28,8		(2)		45,8		–		74,6		75,3	(1)
Operating margin (%)	3,7				5,8				4,7		4,8
Revenue (Rm)	12 450*		7		11 816		2		24 266		23 270*	4
Operating profit (Rm)	461		3		681		3		1 142		1 105	3
Operating margin (%)	3,7				5,8				4,7		4,7
Return on invested capital (%)									9,6		8,2
Weighted average cost of capital (%)									6,3		5,4
Targeted ROIC (WACC+2%)									8,3		7,4
Debt:equity ratio (%)									56		128

Note: ROIC and WACC are calculated on a rolling 12-month basis. The above table includes businesses held for sale and eliminations.

*Restated.

The significant driver of growth was the automotive contract logistics business, which grew both new and existing business during the year. Results were also supported by a good performance from the international shipping operations. The European inland shipping business underperformed due to low water levels on the River Rhine. The retail, steel and industrial sub-divisions delivered unsatisfactory results resulting from lower volumes. Palletways performed below expectations due to toughening economic conditions, and continued competitive pressure in sub-scale operations.

ROIC improved to 9,6% from 8,2% and is above the targeted WACC+2%.

Notwithstanding challenging economic and trading conditions, Motus increased revenue and operating profit by 17% and 9% respectively, with all four sub-divisions recording revenue and operating profit growth. This was mainly due to competitive vehicle pricing and a strong improvement in entry-level and small SUV vehicle sales in South Africa as consumers are trading down. As a result, luxury brand sales declined by 20% during the year. The acquisitions of Pentagon in the UK and SWT in Australia contributed positively to revenue, but at lower margins. Excluding current and prior year acquisitions and disposals, revenue and operating profit increased by 4%. Profit before tax improved by 64% resulting from a significant reduction in foreign exchange losses being R43 million compared to R425 million incurred in 2017 mainly relating to the unwinding of excessive and uneconomical forward cover in Renault. The profit on sale of R617 million relating to a property in Australia and the 13% reduction in finance costs also boosted performance.

During the period, in South Africa, Motus grew unit vehicle sales by 7% compared to national unit vehicle sales growth of 2% as reported by NAAMSA. The Motus passenger and commercial vehicle businesses, including the UK and Australia, retailed 146 455 (2017: 113 074) new and 81 123 (2017: 70 158) pre-owned vehicles during the 12 months.

Property disposals and consistent levels of investment in vehicles for hire resulted in net capital expenditure declining by 85% from R2,2 billion in June 2017 to R322 million.

While we have provided separate ROIC, WACC and net debt to equity ratios for each sub-division, these ratios should not be analysed in isolation as the sub-divisions of Motus operate in a uniquely integrated manner, to optimise client offerings and market penetration with numerous cross-selling initiatives across the Vehicle value chain.

Motus’ debt to equity ratio increased marginally to 50% mainly due to acquisitions, partly enhanced by disciplined working capital management and proceeds received from the disposal of non-strategic properties.

MOTUS

	HY1  2018		% change  on HY1  2017		HY2  2018		% change  on HY2  2017		2018		2017	% change  on 2017
Revenue (Rm)	39 678		16		37 981		17		77 659		66 540	17
Operating profit (Rm)	1 716		5		1 877		13		3 593		3 310	9
Operating margin (%)	4,3				4,9				4,6		5,0
Return on invested capital (%)									13,0		11,8
Weighted average cost of capital (%)									10,4		10,1
Targeted ROIC (WACC+3%)									13,4		13,1
Debt:equity ratio (%)									50		46

Note: ROIC and WACC are calculated on a rolling 12-month basis.

Vehicle Import and Distribution

Exclusive South African importer of Hyundai, Kia, Renault and Mitsubishi automotive brands with over 80 000 vehicles imported annually; and Nissan distributorships in four African countries.

	HY1  2018		% change  on HY1  2017		HY2  2018		% change  on HY2  2017		2018		2017	% change  on 2017
Revenue (Rm)	10 043		10		10 085		12		20 128		18 157	11
Operating profit (Rm)	303		6		485		10		788		728	8
Operating margin (%)	3,0				4,8				3,9		4,0
Return on invested capital (%)									12,7		6,4
Weighted average cost of capital (%)									11,3		10,1
Debt:equity ratio (%)									37		109

Note: ROIC and WACC are calculated on a rolling 12-month basis.

Revenue and operating profit from this sub-division increased by 11% and 8% respectively, as sales volumes increased by 11% (Hyundai up 4%, Kia up 22% and Renault up 22% per NAAMSA) with our vehicle mix aligned to market demand resulting from pressure on consumer affordability. The Motus importer segment market share increased from 14% in the prior year to 15%.

At the end of July 2018, Hyundai and Kia forward cover on the US Dollar and Euro imports extends to February 2019 at average rates of R12,89 to the US Dollar and R15,61 to the Euro. New trading arrangements with Renault since October 2017 have rendered forward cover redundant. With the exception of Renault, Motus’ current guideline is to cover a minimum of seven months forward and up to 75% of annual forecast orders, as stipulated by the South African Reserve Bank.

The African distributorship business improved its performance from the prior period but is still performing below expectations due to weak consumer demand mainly in the aftermath of political elections in Kenya. The capital deployed in these operations has been reduced and the viability of these operations is under review.

During the period, ROIC increased to 12,7% from 6,4%, resulting from increased profitability, a significant reduction in working capital, lower investment in vehicles for hire and the sale of non-strategic properties.

Vehicle Retail and Rental

South Africa: Represents 23 OEMs through 356 vehicle dealerships including 104 pre-owned, 232 passenger dealerships and 20 commercial vehicle dealerships, with 118 car rental outlets (Europcar and Tempest).

Internationally: Manages and operates 112 franchise outlets from 68 sites comprising 84 commercial vehicles and 28 passenger car franchise outlets in the UK, 30 passenger vehicle dealerships in Australia and 16 car rental outlets (Europcar and Tempest) in southern Africa.

	HY1  2018		% change  on HY1  2017		HY2  2018		% change  on HY2  2017		2018		2017	% change  on 2017
Revenue (Rm)	32 359		20		30 400		16		62 759		53 362	18
Operating profit (Rm)	814		4		873		26		1 687		1 478	14
Operating margin (%)	2,5				2,9				2,7		2,8
Return on invested capital (%)									9,4		10,7
Weighted average cost of capital (%)									9,9		10,0
Debt:equity ratio (%)									62		46

Note: ROIC and WACC are calculated on a rolling 12-month basis.

The Vehicle Retail and Rental operations recorded a strong performance, increasing revenue and operating profit by 18% and 14% respectively, supported by an increase in overall vehicle sales volumes, despite subdued trading conditions in South Africa and challenging trading conditions in the UK. New and pre-owned retail sales volumes increased by 33% and 15% respectively, assisted by the inclusion of the UK (Pentagon) and Australian (SWT) acquisitions which enhanced revenue but reduced margins. In South Africa, margins were enhanced by a realignment of the importer dealership operating model to unlock value.

The Motus passenger and light commercial vehicle businesses in South Africa experienced a 2% increase in new vehicle sales units from 51 374 in 2017 to 52 180. Dealerships of the importer brands performed well due to an increase in sales volumes in Hyundai, Kia and Renault. Higher sales of entry-level hatch vehicles and small SUVs were recorded compared to lower sales volumes in the luxury brands segment. Reassessment of the dealership footprint resulted in closure of nine underperforming dealerships during the year. Total pre-owned retail unit sales declined marginally as consumer preference shifted to new entry-level vehicles instead. The commercial vehicle business in South Africa recorded a 3% increase in new retail unit sales, increasing revenue and operating profit. The parts and aftersales segments continue to perform well. As evidenced in the improved operating margin in SA, the benefits of rationalisation of the dealer network, elimination of cost and complexity post the consolidation of the motor businesses under one management are starting to show benefits.

Revenue and operating profit of the UK operations increased by 70% and 25% respectively, supported by the Pentagon acquisition, which improved its performance in the second half. Despite this, the newly acquired passenger segment of our business performed below expectation and remains under pressure due to Brexit-related consumer concerns, a reduction in sales of diesel vehicles and Vauxhall changing ownership from General Motors to the French PSA group. The latter resulted in substantially reduced OEM assistance, which improved in the second half as PSA implemented its new trading policies. The UK commercial operations performed to expectation and grew revenue and operating profit by 5% and 1% respectively.

The Australian vehicle market recorded growth in the reporting period but margins on new vehicles remain under pressure. The Australian operations increased revenue by 26% but operating profit decreased as margins in the Ford franchise normalised from a high base in the prior year. This was partially offset by the inclusion of the SWT acquisition which is performing in line with expectations.

Car rental increased its revenue and operating profit by 11% and 15% respectively due to increased vehicle rental volumes from the inbound and leisure segments, and higher post-rental vehicle sales through Auto Pedigree. The vehicle rental utilisation was maintained at 71%, while accident costs were lower than the prior year.

ROIC reduced to 9,4% from 10,7% due to increased working capital and the acquisitions of Pentagon and SWT auto dealer groups.

Aftermarket Parts

Distributor, wholesaler and retailer of accessories and parts for older vehicles, through 35 owned branches, 43 owned retail stores and a network of 720 franchised outlets (Midas (AAAS), Alert Engine Parts and Turbo Exchange).

	HY1  2018		% change  on HY1  2017		HY2  2018		% change  on HY2  2017		2018		2017	% change  on 2017
Revenue (Rm)	3 354		7		3 278		8		6 632		6 153	8
Operating profit (Rm)	205		8		242		12		447		406	10
Operating margin (%)	6,1				7,4				6,7		6,6
Return on invested capital (%)									18,3		20,7
Weighted average cost of capital (%)									11,2		10,8
Debt:equity ratio (%)									91		53

Note: ROIC and WACC are calculated on a rolling 12-month basis.

Revenue and operating profit grew by 8% and 10% respectively, supported by tighter cost control and good performances from Alert Engine Parts and Beekmans. However, performance was negatively impacted by market contraction, increased pricing pressure and consumers trading down. The acquisition of 60% of Arco contributed positively to the performance in the second half.

ROIC decreased to 18,3% from 20,7% due to increased working capital and an investment in a warehouse facility which was included in invested capital.

Motor Related Financial Services

Manages and administers service, maintenance and warranty plans. Develops and sells value-added products and services (VAPS) with over 730 000 clients through owned and independent dealers, call centres and online. Provides fleet management services, differentiation and innovation and a valuable touch point with our customers across our dealer network.

	HY1  2018		% change  on HY1  2017		HY2  2018		% change  on HY2  2017		2018		2017	% change  on 2017
Revenue (Rm)	1 083		12		1 083		1		2 166		2 036	6
Operating profit (Rm)	465		2		424		13		889		833	7
Operating margin* (%)	42,9				39,2				41,0		40,9
Return on invested capital (%)									69,5		65,7
Weighted average cost of capital (%)									13,6		13,8
Debt:equity ratio (%)									(136)**		(116)

Note: ROIC and WACC are calculated on a rolling 12-month basis. Includes the VAPS business for all reporting periods.

*The operating margin reflects various business ventures that yield operating profits without any associated revenues.
**Includes net cash of R1 426 million.

Motor Related Financial Services grew revenue and operating profit by 6% and 7% respectively, supported by higher profitability in demo vehicle sales and maintenance funds, and positive growth in the newly branded M-Sure VAPS operations. Increased sales of monthly versus longer-term service and maintenance plans impacted the growth of maintenance and warranty contracts on the balance sheet. Arising from the Regent transaction, the prior year includes once-off income of R46 million included in the VAPS business, which is not included in the current year.

We continue to focus on growing the fleet management business, building synergies within the retail motor sub-divisions and improving the sales penetration of our products into other channels.

ROIC increased from 65,7% to 69,5% due to higher profitability during the rolling 12-month period.

Group profit and loss (extracts)

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

*

Restated.

**

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

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

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

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

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

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

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

Reconciliation from earnings to headline earnings

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

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

Earnings and headline earnings per share

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

The table reflects the total group operations.

Financial position (extracts)

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

Above table includes Motus and Logistics for F2017 and F2018.

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

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

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

• Acquisitions of R1,1 billion, mainly Pentagon (R189 million), SWT (R213 million) and Surgipharm (R341 million) to goodwill and in total, R243 million to intangible assets;
• The weakening of the Rand resulted in a R480 million increase;
• Disposals resulted in a R754 million decrease to goodwill and intangible assets; and
• Amortisation decreased intangible assets by R560 million.

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

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

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

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

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

Movement in equity for the 12 months to June 2018

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

Cash flow

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

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

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

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

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

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

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

Liquidity

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

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

Dividend

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

Board changes

Messrs Raboijane (Moses) Kgosana and Younaid Waja resigned as independent non-executive directors of the Imperial board and from the various sub-committees and subsidiaries on which they served on 8 September 2017 and 13 October 2017 respectively. The board thanks Messrs Kgosana and Waja for their contribution to the group and wishes them well.

Former group Chief Executive Officer (CEO) Mr Mark Lamberti resigned with effect from 30 April 2018. Mr Lamberti has served Imperial with distinction since March 2014, leading a multifaceted portfolio, organisation and management restructuring, a key objective of which was to accelerate executive development and transformation to align Imperial’s employee and leadership profile with the economically active demographics of South Africa. The board thanks Mr Lamberti for his excellent leadership and commitment to the group, and wishes him well.

Mr Osman Arbee was appointed group CEO with effect from 1 May 2018, in addition to his position as CEO of Motus.

As previously announced, Mr Arbee is currently on medical leave and is expected to return to work in January 2019 to continue in his role as CEO of Motus. During his recovery period, he will be available to management to advise on strategic matters. In the interim, the proposed unbundling of Motus remains on track and the management structures of both Imperial Holdings and Motus, and the current Motus finance structure, are sufficient to provide appropriate support during Mr Arbee’s absence. Mr Ockert Janse van Rensburg was appointed acting CEO of Motus in addition to his role as the Chief Financial Officer (CFO) of Motus.

Consequently, Mr Mohammed Akoojee was appointed acting CEO of Imperial Holdings, in addition to his role as the CFO, until the conclusion of the proposed unbundling.

Mr Marius Swanepoel will continue to serve as the CEO of Imperial Logistics and will undertake the role of the CEO of Imperial which will be renamed Imperial Logistics on conclusion of the proposed unbundling. Mr Swanepoel will retire as CEO in June 2019 and will remain as director to 31 December 2019. Mr Akoojee will succeed Mr Swanepoel as CEO with effect from 1 July 2019.

Prospects

Over the past 12 months, the group has produced solid financial results in testing trading conditions, while approaching the final stages of one of the most comprehensive organisation renewals by a South African-based multinational.

We anticipate that both Imperial Logistics and Motus will deliver solid operating and financial results in the financial year to June 2019, subject to stable currencies in the economies in which each operates.

For the financial year to June 2019, we expect:

• Imperial Logistics and Motus will have appropriate capital structures, with minimal impact on funding and costs, to enable each to fund its own growth and strategic aspirations while continuing to pay a stable dividend (approximately 45% of HEPS);
• Imperial Logistics and Motus to record growth in revenues and operating profit; and
• Growth in headline earnings per share for Imperial Logistics and Motus, subject to any once-off costs relating to the proposed unbundling.

Appreciation

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

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

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

Mohammed Akoojee

Acting Chief Executive Officer and Chief Financial Officer

20 August 2018

The forecast financial information herein has not been reviewed or reported on by Imperial’s auditors.

for the year ended 30 June 2018

Preference shareholders

Notice is hereby given that a gross final preference dividend of 416,62500 cents per preference share has been declared by the board of Imperial, payable to the holders of the 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 333,30000 cents per share.

Ordinary shareholders

Notice is hereby given that a gross final ordinary dividend in the amount of 387,00000 cents per ordinary share has been declared by the board of Imperial, payable to the holders of the 201 971450 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 309,60000 cents per share.

The company has determined the following salient dates for the payment of the preference dividend and ordinary dividend:

	2018
Last day for preference shares and ordinary shares respectively to trade cum preference dividend and cum ordinary dividend	Tuesday, 25 September
Preference and ordinary shares commence trading ex preference dividend and ex ordinary dividend respectively	Wednesday, 26 September
Record date	Friday, 28 September
Payment date	Monday, 1 October

The company’s income tax number is 9825178719.

Share certificates may not be dematerialised or rematerialised between Wednesday, 26 September 2018 and Friday, 28 September 2018, both days inclusive.

On Monday, 1 October 2018, 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 1 October 2018 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 Monday, 1 October 2018.

On behalf of the board

RA Venter

Group Company Secretary

20 August 2018

These summarised consolidated financial statements for the year ended 30 June 2018 have been audited by Deloitte & Touche, who expressed an unmodified opinion thereon. The auditor also expressed an unmodified opinion on the consolidated 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.