Divisional performance

LOGISTICS AFRICA

The division had an excellent six months, delivering strong revenue and operating profit growth in a difficult environment. The SA economy struggled to gain momentum with the manufacturing sector under pressure and many segments of the retail sector experiencing little or no growth. As a result, volumes remained subdued and declined in certain sectors of the South African economy. Recent acquisitions and new contract gains across industry sectors contributed to the strong performance.

The industrial logistics businesses, which service the manufacturing, mining, commodities, chemicals and construction industries, experienced declining volumes, industrial action in our customer base, and a competitive market. These factors depressed both revenue growth and operating margins.

The consumer logistics businesses showed good revenue and operating profit growth, mainly due to the acquisition of Pharmed and a turnaround at Imperial Cold Logistics. The market however remains depressed by lacklustre volume growth, mainly in our manufacturing client base.

The division’s businesses in Africa beyond South Africa delivered strong growth, mainly due to the acquisitions of Imres and Ecohealth. Turnover and operating profit grew by 84% and 91% respectively. The FMCG distributorship business performed satisfactorily due to growing consumer demand and the addition of new principals. The component of the Imperial Health Sciences to the north saw excellent volume growth and performed in line with expectations. Ecohealth, a distributor of pharmaceutical products in Nigeria and Ghana acquired in March 2014, is performing in line with expectations despite tougher trading conditions arising from political uncertainty and a lower oil price, which has resulted inter alia in a weaker Naira.

Imres, acquired effective 1 September 2014, had an excellent four months and is performing to expectation. Imres is a wholesaler of pharmaceutical and medical supplies to its client base, which includes NGOs, hospitals and retailers. Imres adds sourcing and procurement capabilities to Imperial’s service offering, while presenting the potential to leverage Imperial’s existing network and capabilities on the African continent.

MDS, a logistics company in Nigeria in which we have a 49% equity interest, contributed to earnings growth and continues to perform well.

The division incurred net capital expenditure of R441 million (2014: R454 million), to fund replacement and expansion of fleet and facilities.

Our full year guidance for the Logistics Africa division is unchanged: we expect real growth of revenues with operating profit growing at a higher rate.

LOGISTICS INTERNATIONAL

Profitability declined as this division experienced muted activity levels in most sectors of European logistics. The translation effects of an average weaker Rand exchange rate to the Euro enhanced the performance in Rands.

Transport volumes across the German inland shipping industry were down and freight rates were under pressure. Against this backdrop, Imperial’s shipping business performed satisfactorily. The contract in South America, which commenced in February 2014, is performing in line with expectations and contributed positively for the period.

Lehnkering, which houses the non-shipping chemical logistics activities, including warehousing, road transport and contract chemical manufacturing services, experienced challenging conditions. Adverse weather in the USA and lower volumes in the European contract chemical manufacturing business impacted negatively on its performance.

Panopa, which provides parts distribution and in-plant logistics services to automotive, machinery and steel manufacturers, had a difficult six months. Despite good revenue growth resulting from new contract gains, margins were depressed by high start-up costs and operational inefficiencies on a new project.

Neska, the terminal operator, had a poor six months. Activity levels declined, particularly at paper and steel terminals. Performance was also undermined by the container terminal in Krefeld, which is operating well below capacity.

Divisional net capital expenditure of R614 million (2014: R643 million) was incurred during the period. The majority of this was spent on the expansion in South America where a further two convoys were commissioned in support of a 10 year contract. We now have a total of four convoys (four push boats and 48 barges) operating on the Rio Parana, transporting iron ore from Brazil to a steel mill in Argentina.

In view of the developments described above, our full year guidance for the Logistics International division has changed: we now expect real growth of revenues with operating profit in line with 2014.

VEHICLE IMPORT, DISTRIBUTION AND DEALERSHIPS

The Vehicle Import, Distribution and Dealerships division is primarily an exclusive importer of 16 automotive and industrial vehicle brands (including Hyundai, Kia, Renault, Mitsubishi and Crown forklifts) and a distributor through 126 owned and 113 franchised dealerships, including six in Australia.

As predicted, the division faced extremely difficult trading conditions during the half year. Firstly, the cost of new inventory escalated with the weakening of the Rand plus the additional expense of increasing forward cover to mitigate the uncertainty of further Rand volatility. Secondly, pricing power (and therefore margin) was eroded by the relative competitive position of local Original Equipment Manufacturers (OEMs) who, as local manufacturers, enjoy the duty, rebate and cash benefits of the government’s Automotive Production and Development Programme (APDP) and as exporters enjoy foreign currency inflows. The result was a decline in unit volumes on the comparable period much greater than anticipated, particularly in the last three months of the reporting period.

Although the division’s South African new vehicle registrations as reported to NAAMSA were 11% higher, growth was boosted by the inclusion of Renault for a full six months compared to one month in the comparable period. Excluding Renault, unit sales were down 9%.

Moderate growth was experienced in pre-owned vehicle sales. Annuity revenue streams generated from after-sales parts and service grew strongly with revenue from the rendering of services up 16% for the period. The growing vehicle parc of our imported brands is delivering good levels of after-market activity for its dealerships.

Although the Australian business improved its performance from the comparable period, the business continues to produce inadequate returns on capital. New vehicle sales increased 12% and pre-owned vehicles decreased 4%.

The industrial products and services business performed satisfactorily despite a declining forklift market and lower demand from the mining sector.

It is important to draw shareholders’ attention to the fact that the historic high margins of this division were achieved through the convergence of specific positive economic, consumer, currency and industry circumstances which are unlikely to occur in the future. Expected operating margins in future are likely to be closer to those of the current financial year than to the average of the past five financial years. Moreover profits will decline in periods when the Rand depreciation rate relative to the currencies in which we import vehicles is higher than the rate of South African new vehicle inflation.

Divisional net capital expenditure reduced by 42% to R273 million (2014: R471 million) as a result of a lower investment in properties compared to the comparable period.

In view of the current unit volume trend, our full year guidance for the Vehicle Import, Distribution and Dealerships division has changed: we expect real growth of revenues with operating profit well below 2014.

VEHICLE RETAIL, RENTAL AND AFTERMARKET PARTS

The Vehicle Retail, Rental and Aftermarket Parts division includes: 86 passenger vehicle dealerships franchising the products of 16 locally based OEM’s; 20 commercial vehicle dealerships representing 12 brands in South Africa; 55 commercial vehicle dealerships and workshops in the United Kingdom; Car Rental (comprising Europcar and Tempest); Auto Pedigree, the pre-owned vehicle retailer; and Aftermarket Parts (comprising Midas, Alert Engine Parts and Turbo Exchange).

The division delivered good growth of revenue and operating profit in the period. In South Africa, the division retailed 15 611 (2014: 16 760) new and 16 249 (2014: 15 790) pre-owned vehicles during the period. Despite subdued unit sales, passenger vehicle revenue grew due to an improved sales mix and new vehicle price inflation. The latter influenced customers towards pre-owned vehicles, which experienced moderate growth. Good expense management and a well streamlined network of dealerships resulted in operating profit growth higher than revenue in the passenger vehicle business.

The South African medium and heavy commercial vehicle market, where we are mostly represented, experienced challenging trading conditions. As a result, both revenue and operating profit in the local commercial vehicle business declined on the comparable period.

The commercial vehicle division in the United Kingdom continues to perform well and good growth in unit sales was achieved. The results were enhanced by the recent acquisition of S&B Commercials, a Mercedes Benz commercial vehicle dealer, acquired effective 1 September 2014. The translation effects of a weaker Rand exchange rate assisted the growth in Rands.

After sales parts and service revenue grew 14% (9% ex UK). Parts revenue growth resulted from both price and volume increases. The significant increase in new vehicle sales over the last few years bodes well for the future after sales parts and services revenue of the division.

The car rental business experienced a difficult six months with lower volumes in most segments. Revenue days declined mainly as a result of the decision to improve the overall sales mix. Utilisation was down on the comparable period and the average fleet size was 12% lower.

Operating margins declined as a result of reduced revenue and utilisation.

Unit sales at Auto Pedigree declined from the comparable period as banks tightened credit approval rates to consumers in lower income segments. Increased reconditioning costs depressed operating margins. New business gains in the panel business fell short of expectation, resulting in an unsatisfactory performance for the year.

The Aftermarket Parts business performed in line with the comparable period in a competitive and mature market. Price increases as a result of the weakening in the currency assisted revenue growth.

Divisional net capital expenditure of R766 million was incurred (2014: R746 million) largely on the car rental fleet and on property development in the vehicle retail businesses.

Our full year guidance for the Vehicle Retail, Rental and Aftermarket Parts division is unchanged: we expect real growth of revenue and operating profit.

FINANCIAL SERVICES

The Financial Services division provides: maintenance and warranty products associated with the automotive market through LiquidCapital; insurance products and services with a bias towards the vehicle market through Regent; and vehicle leasing through Imperial Fleet Management and Ariva.

Motor Related Financial Services (largely LiquidCapital) grew operating profit by 9%, despite more conservative impairment provisions in the vehicle financing alliances and the impact on the maintenance funds of higher parts costs resulting from the weaker currency. The advances generated through the alliances with financial institutions grew encouragingly, as did the funds held under service, maintenance, roadside assistance and warranty plans. Innovative new products, improved retention and penetration rates in our sales channels also contributed positively to the growth in these businesses, providing valuable annuity earnings to underpin future profits.

Volumes in Imperial Fleet Management continue improving with new contract gains. Ariva, a private leasing joint venture, had a difficult six months as new business volumes declined in a tighter credit environment.

Insurance underwriting conditions in the short-term motor industry were more favourable than the comparable period, when weather related claims were higher. This, together with Regent’s decision to focus on its core markets and distribution channels, increased underwriting profit by 20% with underwriting margins improving from 9,2% to 11,0%. Revenue growth was muted as a result of flat vehicle sales and more conservative motor underwriting. Regent Life performed as expected, with underwriting profit up 6% for the period. The individual life business in South Africa continues to grow steadily with revenue growth of 12%. Regional business beyond South Africa remains a meaningful contributor to the division. Equity markets were less favourable when compared to the comparable period, which led to lower investment returns on prudent equity positions.

Net capital expenditure in this division relates mainly to vehicles for hire. In the current period, a net R636 million was invested in the fleet, compared to R72 million in the comparable period when certain of these vehicles were leased through one of our banking alliances.

Our full year guidance for the Financial Services division is unchanged: we expect single digit growth of revenue and operating profit.