Overview of results

Imperial achieved a pleasing result for its 2013 financial year. All divisions achieved operating profit growth as the portfolio proved to be resilient amid challenging trading conditions in South Africa and Europe. The group made good progress during the year in enhancing its portfolio of businesses by exiting sub-scale operations and adding areas of strategic growth that will maximise returns for our shareholders.

Our over-arching strategic objective is to drive the improvement of returns on capital, as this is the ultimate generator of value for our shareholders. In line with this objective, the group achieved a return on invested capital (ROIC) of 16,2% for the year against a weighted average cost of capital (WACC) of 8,8%. Our target is to achieve a ROIC of 4% above WACC through the cycle.

The group is continuously seeking growth opportunities in and adjacent to existing industries and geographies. In this respect we have benefited from a full-year contribution of Lehnkering and a six-month contribution from the pharmaceutical logistics related acquisition of Imperial Health Sciences (previously RTT Health Sciences), which performed ahead of expectation. Operating profit generated in Africa outside South Africa rose by 33% to R397 million and has doubled over the last three years. Operating profit from international activities (excluding South Africa) increased to 21% of the group result from 17% in 2012.

Revenue was 14% higher at R92,4 billion and operating profit increased by 8% to R6,1 billion. Core EPS improved by 15%. The return on equity of the group was 23%. Despite share buybacks and significant recent acquisitions, the statement of financial position remains healthy with a net debt to equity ratio (excluding preference shares) of 49%.

Following the disposals of sub-scale operations as detailed later in this report and in line with our strategy of focusing on our core industries namely, logistics; distribution of automotive and industrial products; automotive retailing; and financial services, the group has now clustered its businesses into three main pillars as follows:

R’million 2013   2012   % change  
Revenue 33 592     27 704   21  
Operating profit 1 679     1 508   11  
Operating margin (%) 5,0     5,4      
Automotive and Industrial              
Revenue 57 577     51 679   11  
Operating profit 3 578     3 409   5  
Operating margin (%) 6,2     6,6      
Financial Services              
Revenue 4 238     3 999   6  
Operating profit 945     775   22  
Operating margin (%) 22,3     19,4      

The Logistics pillar had an excellent second half and revenue and operating profit increased by 21% and 11% respectively, for the year. The newly named Africa Logistics division (which includes South Africa) was negatively impacted by the transport workers’ strike during the first half of the year and a struggling SA economy, especially in the manufacturing sector. The logistics businesses in the rest of Africa, which is involved in the distribution of FMCG products, performed well. The International Logistics division had to contend with a slowing European economy during the year but was operationally well managed in an environment where activity levels in some of its core markets were under pressure. This business also benefits from exports from Germany into stronger markets outside Europe.

The Automotive and Industrial pillar performed satisfactorily and each division within this pillar delivered growth. Revenue and operating profit in this pillar were up 11% and 5%, respectively. This pillar houses the following divisions:

Distribution, Retail and Allied Services

The division imports and distributes a range of passenger and commercial vehicles, industrial equipment and motorcycles and includes vehicle dealerships in South Africa and Australia.

Automotive Retail

Automotive Retail includes our dealership franchisee activities on behalf of locally based original equipment manufacturers (OEMs) and the activities of Beekman and Jurgens.

Other Segments

This division includes our other motor vehicle value chain activities being Autoparts and Car Rental. Tourism (until sold) together with NAC (disposed of earlier in the year) have also been included in the Other Segments division.

The Distribution, Retail and Allied Services division performed satisfactorily considering some of the challenges faced by it during the year. These include a weakening currency, lack of stock availability on certain products from our principals in Korea and a more competitive market. Revenue and operating profit was up 13% and 5% respectively.

The Automotive Retail division, which represents products of locally based OEMs and is therefore not involved in the importation of vehicles, had an excellent year, with revenue and operating profit up 16% and 14% respectively.

The Other Segments division is down on both revenue and operating profit which was impacted by NAC being sold during 2013.

The Car Rental business had a very good second half and achieved a satisfactory result for the year, despite tough trading conditions in the car rental industry. Revenue growth was encouraging as both revenue days and revenue per day grew. Utilisation also improved from the first half and Auto Pedigree had an excellent year. Revenue and operating profit were up 10% and 6% respectively.

The Autoparts business, which forms a valuable part of our motor value chain, includes Midas, Alert Engine Parts, Turbo Exchange and the newly acquired Afintapart. Midas performed satisfactorily in a sluggish and competitive market. Alert, the engine parts businesses, performed well, while Turbo exchange was negatively impacted by competitively priced imports. Revenue and operating profit were up 8% and 5% respectively.

The Financial Services pillar had an excellent year, achieving operating profit growth of 22%.

Revenue in the insurance division improved by 6% and investment income was higher than in the prior year arising from more favourable equity markets. The underwriting margin was in line with the prior year at 7,9% and improved strongly in the second half to 8,6%. This performance was satisfactory considering the high claims (arising from hail damage) that affected the short-term insurance industry during the year. The life insurance unit grew premium income by 15% while the rest of Africa insurance businesses continue to show good growth.

Operating profit from the Other Financial Services division, which is mainly represented by LiquidCapital, grew by 22%. The growth was driven by the strong annuity income streams that flow from the service and maintenance plans, vehicle financing alliances and a growing range of value added financial products sold within this division.

The group operating margin reduced from 7,0% to 6,6%. This was caused by the reduced margins experienced in the Automotive and Industrial and Logistics pillars. The Distribution, Retail and Allied Services division achieved an operating margin of 8,7% against 9,3% in the prior year. This decline was mainly caused by the aforementioned supply disruptions, the weakening of the Rand and a more competitive market. Automotive Retail maintained its margin at 2,9%. The margin in the Logistics pillar improved significantly in the second half but was lower than the prior year at 5,0% versus 5,4%. This was primarily due to the transport workers’ strike in South Africa during the first half and challenging trading conditions experienced in both the SA and International Logistics divisions during the year.

In aggregate, the group’s operating profit grew by 8%, and core earnings per share (core EPS) increased by 15%.

Net finance costs increased by 9% to R744 million on higher debt mainly incurred to fund the expansion of the group. Despite the higher net finance costs, interest covered by operating profit remains healthy at 8,2 times (2012: 8,3 times).

Income from associates showed an increase of 87%. MiX Telematics, in which Imperial holds a 29% interest, performed well and contributed R39 million (2012: R31 million). MDS Logistics plc, the Nigerian logistics business, in which we acquired a 49% shareholding effective 26 April 2013, made a positive contribution for two months of this year. Ukhamba also performed better due to the reversal of an impairment in the current year of its investment in Distribution and Warehousing Network Limited (DAWN).

The group benefited from a lower effective tax rate of 28,1% compared to 29,3% in the prior year. This was mainly due to the saving of STC, which is no longer applicable.

Earnings attributable to minorities reduced from R408 million to R392 million. This was mainly due to the sale of businesses with minorities, the impact of the strike and an amount of R17 million that was reversed which had been provided for in the prior year.

The table below summarises the reconciliation from Earnings to Core Earnings:

R’million %
Earnings attributable to owners of Imperial 11   3 294     2 980  
Profit on disposal of assets     (41)     (29)  
Impairment of assets     27     49  
Exceptional items     164     31  
Realised gain on disposal of available-for-sale investments     (10)     (19)  
Amortisation of intangible assets arising on business combinations     254     128  
Business acquisition costs     15     51  
Remeasurement of contingent considerations     (66)        
Headline earnings from discontinued operations           (34)  
Other adjustments     6     (2)  
Tax effects     (59)     (38)  
Core Earnings 15   3 584     3 117  

Financial position

Total assets increased by 13% to R52 billion (2012: R46 billion) due to acquisitions, translation effects of a weaker Rand, organic growth and expansion of existing businesses.

Goodwill and intangible assets rose to R5,2 billion from R4,2 billion mainly as a result of the RTT Health Sciences acquisition and translation effects of a weaker Rand.

Investment in associates increased to R1,3 billion (2012: R889 million) mainly due to the acquisition of 49% of MDS Logistics, a Nigerian logistics business providing integrated supply chain and logistics solutions.

Net debt to equity (excluding preference shares) at 49% was higher than the prior year (39%). This was mainly due to acquisitions, expansion of existing businesses and share buybacks amounting to R742 million during the year. Translation of our foreign debt due to a weaker Rand also impacted on our debt level at year end. The net debt level is below the target gearing range of 60% to 80% and still leaves significant room for further expansion of the group.

The group’s Euro bond (€236 million) matured and was partly refinanced during the year. A new bond (IPL 7) amounting to R750 million was issued in South Africa and a combination of cash and existing facilities was used to repay the balance of the Euro bond. The group’s liquidity position is strong with R5,9 billion in unutilised facilities.

Net working capital increased by 34% from the prior year due to acquisitions, foreign exchange translation differences and a much improved inventory position in the Distribution, Retail and Allied Services and Automotive Retail divisions compared to the prior year. We are now optimally stocked in these divisions. As a result, our net working capital turn reduced to 15,0 times from 17,5 times in the prior year.

Shareholders’ equity increased due to higher retained income and the weakening of the Rand which resulted in gains on the foreign currency translation reserve of R731 million accounted for in the statement of comprehensive income. This was offset by dividends paid of R1 478 million and by R742 million utilised for the repurchase and cancellation of 4,0 million shares in the open market.

New business written on service, maintenance and warranty contracts generated by the Financial Services division resulted in insurance, investment, maintenance and warranty contracts growing to R4,0 billion, up 23% from the prior year (2012: R3,2 billion).

Cash flow

Cash generated by operations before capital expenditure on rental assets was 3% lower than the prior year at R7,2 billion. After financing costs, tax payments and capital expenditure on rental assets, net cash flow from operating activities decreased to R4,1 billion, down R243 million when compared to the prior year. This was mainly due to a higher absorption of cash by working capital compared to the prior year, as our inventory position in the Distribution, Retail and Allied Services division increased as we secured more vehicles from our Korean suppliers. Capital expenditure on rental assets was higher than in the prior year.

Net replacement and expansion capital expenditure excluding car rental vehicles, was 25% higher than the prior year. A net R539 million was spent on acquisitions during the year. We made further investments in associates of R321 million, the major one being the acquisition of 49% of MDS Logistics, a Nigerian logistics business.

Cash flows from investing activities were impacted by our Insurance business increasing its exposure to equity markets and investing its cash into longer-term deposits which benefited the group through good investment returns.

Under financing activities, the Euro bond matured and was replaced by a new bond (IPL 7) amounting to R750 million and other short-term debt. Four million shares worth R742 million were purchased in the open market during the year and dividends paid increased from R1,4 billion to R1,8 billion.

Business conditions in Imperial’s markets

The new vehicle market was favourable during the year, growing in South Africa by 7,6%. Good credit availability, improved affordability and continued low interest rates underpinned the growth in the vehicle market. The used car market also improved during the year as a result of new vehicle price inflation.

Industrial action impacted the group during the year and could affect the group from time to time. Supply from Korea was disrupted by strike action and shortened work hours at the Hyundai and Kia plants. In South Africa, the national transport industry strike in the last week of September and first two weeks of October significantly curtailed our ability to service our South African transport customers.

In the Africa logistics division, trading conditions in the South African market were challenging. The manufacturing sectors of the South African economy struggled to gain momentum, which impacted on a number of our businesses, and certain segments of the retail sector experienced pressure.

The consumer market across many other African countries continued to grow with the increase in the size of the emerging middle class, particularly in those sectors in which our African logistics businesses have chosen to focus, namely FMCG and pharmaceutical products.

In Germany, we experienced tough market conditions due to the slowdown in the European economy. Transport volumes were depressed, although activity levels in the chemical industry and gas shipping market held up well. We also benefited from German exports into markets outside Europe.

Competitive trading conditions persisted in the car rental market which has seen rental rates remain under pressure. The impact of a change in revenue mix (increase in insurance replacement business), higher accident rates and hail storms during the year had an adverse impact on operating margins.

The autoparts industry is mature and competitive but stable. As a result, we experienced competitive pressures and a decline in consumer spending on discretionary products, like camping equipment and accessories, which impacted us negatively.

The current cycle in the motor industry favours our Financial Services pillar. New business growth was driven off the back of an increase in vehicle sales in a favourable new car market.

Insurance underwriting conditions in the short-term industry were more challenging, with two large hailstorms having a negative impact during the year. The termination of certain loss-making books of business however, contributed positively, resulting in underwriting margins being in line with the prior year. Equity markets were favourable and investment returns higher.

Vehicle sales

In South Africa, the group sold 123 737 new and 63 266 used vehicles in the year, respectively 2,9% and 7,9% more than the prior year. The national new vehicle market grew by 7,6% year on year for the 12-month period to June 2013, according to NAAMSA.

The Australian and United Kingdom operations sold 10 854 new vehicles, which was in line with the prior year, and 4 346 used vehicles which was 4,3% lower.

Acquisitions and disposals during the year

Acquisitions during the year consisted of:

100% of the pharmaceutical distribution and healthcare supply chain services business conducted by RTT Group (Pty) Limited (RTT Health Sciences) was acquired, effective from January 2013. The business is now branded Imperial Health Sciences and is one of Africa’s leading pharmaceutical distributors and healthcare supply chain service providers. Imperial Health Sciences specialises in multi-channel solutions for delivering essential medicines and consumer health products in South Africa as well as to developing markets across the African continent, including Namibia, Botswana, Mozambique, Zimbabwe, Zambia, Kenya, Tanzania, Malawi, Uganda, Ethiopia, Rwanda, Ghana, Côte d’Ivoire and Nigeria;
60% of LTS Kenzam (Pty) Limited, a logistics business that distributes bituminous products throughout southern Africa to sites in South Africa and cross-border to Mozambique, Malawi, Zimbabwe, Zambia, Botswana, Democratic Republic of Congo, Lesotho, Swaziland and Namibia;
60% of KWS Carriers (Pty) Limited, a business focused on the movement of large volumes of bulk commodities from source to the end users and export ports utilising mainly subcontracted vehicles;
49% of MDS Logistics plc, a Nigerian logistics business, providing integrated supply chain and logistics solutions. It offers warehousing and distribution solutions primarily in the FMCG, pharmaceutical and telecommunications industries in Nigeria, through a network of 50 distribution centres;
Midas acquired 80% of Afintapart SA (Pty) Limited, a commercial vehicle parts distributor;
100% of Orwell Trucks Limited in the UK, a Mercedes Benz commercial vehicle dealer; and
After the reporting date, the group acquired a further 11% shareholding in Renault SA, thereby increasing our shareholding from 49% to 60%. The transaction is still subject to Competition Commission approval.

The group continues to focus on the strategic fit and returns of its businesses. As a result, the following disposals were made:

The group’s 60% holding of Megafreight, a freight forwarding business;
The group’s 62% holding of NAC, the aircraft distributor and aviation services business, releasing R433 million of capital; and
After the reporting date, the group disposed of its Tourism division, which had become sub-scale in the context of the group, to Cullinan Holdings Limited, subject to approval by the Competition Commission. The purchase price will be settled by the issue of 81 818 181 shares in Cullinan Holdings. The transaction will result in Imperial having a 10% shareholding in Cullinan Holdings.


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