Overview of results

Imperial produced a good first half performance in its 2014 financial year. The portfolio of businesses within the group proved to be resilient and performed according to expectations amid challenging trading conditions in South Africa and Europe.

Revenue was 13% higher at R51,4 billion and operating profit increased by 8% to R3,2 billion. The annualised return on average equity of the group was 21% and the balance sheet remains healthy with a net debt to equity ratio (excluding preference shares) of 62%.

Diluted core EPS was up by 10% to 915 cents per share. HEPS growth is lower than core earnings per share growth mainly due to the R70 million once-off impact of the charge for amending the conversion profile of the deferred ordinary shares issued to Ukhamba and the amortisation of intangible assets arising on business combinations.

Operating profit from foreign operations has grown to R712 million, and now comprises 22% of group operating profit, while foreign turnover of R16,7 billion has increased from 29% to 33% of group turnover. Operating profit derived from African operations outside of South Africa increased by 31% to R240 million.

In line with our strategy of focusing on our core industries namely, logistics, distribution of products, automotive retailing and financial services, the group clusters its businesses into three main pillars as follows:

R’million	H1 2014			H1 2013		% change
Logistics
Revenue	20 005			15 888		26
Operating profit	1 062			708		50
Operating margin (%)	5,3			4,5
Automotive and Industrial
Revenue	30 897			28 693		8
Operating profit	1 674			1 798		(7)
Operating margin (%)	5,4			6,3
Financial Services
Revenue	2 055			2 165		(5)
Operating profit	543			491		11
Operating margin (%)	26,4			22,7

Performance of the various divisions within each pillar is outlined below:

Logistics

The Logistics pillar produced an excellent first half result with revenue and operating profit growth of 26% and 50% respectively.

Despite a sluggish South African economy, the Africa Logistics division performed well. The benefits of the rationalisation which was completed in the second half of the prior financial year, contract gains and recent acquisitions contributed to the strong performance. The comparative period also includes the negative impact of the transport workers’ strike in South Africa.

The logistics businesses in the rest of Africa, including CIC (involved in the distribution of FMCG products) and Imperial Health Sciences (providing logistics services to the pharmaceutical and consumer health industries), had an excellent six months increasing the operating profit from the rest of the African continent by 54%. The minority interest in MDS contributed to earnings growth.

The International Logistics division performed satisfactorily in an environment where activity levels in some of its core markets were under pressure and was assisted by the translation effects of a weaker Rand.

Automotive and Industrial

The Automotive and Industrial pillar performed satisfactorily under challenging trading conditions. Revenue in this pillar was up 8% and operating profit reduced by 7%. This pillar houses the following divisions:

Distribution, Retail and Allied Services – is involved in importation, distribution and retail activities for vehicles and industrial products, and includes six dealerships in Australia.

Automotive Retail – includes the dealership franchisee activities on behalf of locally based OEMs, Beekman Canopies, Jurgens Caravans and the 32 truck and van dealerships in the United Kingdom.

Other Segments – includes the other motor vehicle value chain activities being Autoparts and Car Rental. The Tourism business and NAC (both recently disposed of) were included in this segment until the date of their disposals.

The Distribution, Retail and Allied Services division faced difficult trading conditions and was under pressure during the period. A significant weakening in the currency, a slowdown in passenger car sales and a more competitive market impacted on volumes and margins during the period. Revenue was up 3% and operating profit was down 19%.

The Automotive Retail division, which represents products of locally based OEMs and is therefore not involved in the importation of vehicles, had an excellent six months, with revenue and operating profit up 20% and 26% respectively. This division benefited from its strong commercial vehicle operations and from Orwell in the UK, which was acquired in the second half of the prior year.

The Autoparts business, which forms a valuable part of our motor value chain, includes Midas, Alert Engine Parts, Turbo Exchange and Afintapart. Midas and Alert Engine Parts performed satisfactorily in a competitive and mature market. Revenue and operating profit were up 9% and 8% respectively.

The Car Rental business continues to face tough trading conditions. Revenue days declined by 5% as a result of a strategy to improve the overall mix in the business, while revenue per day increased by 4%. Utilisation was slightly down compared to the prior period and the average fleet size was 3% lower, which assisted the returns achieved by the business. Auto Pedigree had an excellent six months, as management actions to improve unit sales continue to deliver the desired results. The panelshop business was negatively influenced by strike action. Revenue and operating profit were up 9% and 8%.

Financial Services

The Financial Services pillar delivered a good result, achieving operating profit growth of 11%.

Due to the exit from certain non-performing classes of business, revenue in the Insurance division reduced by 10%. The underwriting margin improved from 7,2% to 9,2%. This performance was good considering the tough underwriting conditions experienced by the industry during the period. Investment income was higher than in the prior period, due to equity markets being more favourable. The life assurance unit continues to perform well.

Operating profit from other financial services, which is mainly represented by LiquidCapital grew by 7%. Growth was negatively impacted by more conservative impairment provisions in the vehicle financing joint ventures in line with expectations and current market conditions.

Group

The group operating margin reduced from 6,5% to 6,2%. This was mainly caused by the reduced margins experienced in the Automotive and Industrial pillar. The Distribution, Retail and Allied Services division achieved an operating margin of 7,0% against 8,8% in the prior period. This decline was caused by lower volume throughput and the weakening of the Rand in a softening new car market that is more competitive. The Automotive Retail division improved its margin to 2,9%. The margin in the Logistics pillar improved strongly from 4,5% to 5,3%. This was primarily due to an excellent performance in the Africa Logistics division. The comparative period includes the negative impact of the transport workers’ strike in South Africa. Operating margins in the International Logistics division increased from 4,3% to 4,6% in Euros.

In aggregate, the group’s operating profit grew by 8% and diluted core earnings per share (diluted core EPS) increased by 10%. In the prior years, the deferred ordinary shares owned by Ukhamba Holdings were included in diluted earnings per share but excluded from the basic earnings per share computations. The conversion terms of the deferred ordinary shares are now fixed over the next 12 years with no variations. These shares are therefore now included in the basic earnings per share computations, but not in the comparative period. As a result, diluted core earnings per share, and not basic core earnings per share is comparable with the prior period.

Basic and diluted core EPS are calculated by eliminating the after tax effects of the amortisation of intangible assets arising on business combinations, the charge for amending the conversion profile of the deferred ordinary shares issued to Ukhamba and the once-off impact of the future obligations of an onerous contract in International Logistics.

Net finance costs increased by 16% to R420 million on higher debt levels. Despite the higher net finance costs, interest covered by operating profit remains healthy at 7,5 times (2012: 8,1 times).

Income from associates contributed R18 million (2012: R3 million). Mix Telematics, in which Imperial holds a 25% interest performed well and contributed R13 million. MDS Logistics, a Nigerian logistics business in which the group recently acquired a 49% shareholding, is performing in line with expectations and contributed R11 million for the period.

The group benefited from a lower effective tax rate of 26,5% compared to 28,3% in the prior period. This was mainly due to CGT on Regent’s investment portfolios and the sale of the tourism business, which is at a lower rate than normal tax and a reversal of a prior year over provision of R29 million.

Share of earnings attributable to minorities reduced from R208 million to R197 million. This was mainly due to lower profits from the Distribution, Retail and Allied Services division, where the most significant minorities participate in the group’s profits.

The table below summarises the reconciliation from attributable earnings to headline and core earnings:

R’million	% change		December 2013			December 2012
Earnings attributable to Imperial shareholders	10		1 734			1 580
Profit on disposal of assets			(73)			(28)
Exceptional items			(87)			9
Realised gain on disposal of available-for-sale investments						(10)
Remeasurement included in associates and JVs			9			12
Tax effects of remeasurements			21			28
Other			1			6
Headline earnings	1		1 605			1 597
Amortisation of intangibles			147			110
Business acquisition costs			8			5
Future obligations under an onerous contract			29
Charge for amending conversion profile of deferred ordinary shares			70
Other adjustments			2
Tax effects			(51)			(34)
Core Earnings	8		1 810			1 678

Financial position

Total assets increased by 17% to R56 billion (2012: R48 billion) due to acquisitions, translation effects of a weaker Rand, organic growth and expansion of existing businesses.

Intangible assets rose to R5,7 billion from R4,4 billion mainly as a result of the acquisitions of RTT (now Imperial Health Sciences), Renault SA, Orwell in the UK, as well as translation effects of a weaker Rand.

Property, plant and equipment increased to R10 billion (2012: R8,5 billion) as we invested in our businesses to maintain current levels of activity and expanded where necessary, and due to translation effects of a weaker Rand.

Investment in associates increased to R1,2 billion (2012: R902 million) mainly due to the acquisition of 49% of MDS Logistics, a Nigerian logistics business, providing integrated supply chain and logistics solutions. This increase was offset by Renault SA, which ceased being an associate with the acquisition of a further 11% equity to make it a subsidiary of the group.

Net working capital increased by 47% from the prior period due to acquisitions, foreign exchange translation differences and a more normalised inventory position in the Automotive Retail, and Distribution, Retail and Allied Services divisions compared to the prior period. Due to supply disruptions experienced by our principals in Korea, our inventory levels were low at the end of December 2012. We are now adequately stocked in both the Automotive Retail and Distribution, Retail and Allied Services divisions. As a result, our net working capital turn on a 12-month rolling basis reduced to 12,0 times from 15,7 times in the prior period.

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 R419 million accounted for in the statement of comprehensive income.

Net debt to equity (excluding preference shares) at 62% was higher than the prior period (52%). This was mainly due to acquisitions, expansion of the existing businesses and a higher level of working capital when compared to the prior period. Translation of our foreign debt due to a weaker Rand also impacted on our debt level at year end. The current net debt level still leaves significant room for further expansion of the group.

A new seven-year floating rate bond (IPL 8) amounting to R1,5 billion was issued in South Africa during the period to refinance shorter-term debt. As a result, the maturity profile on our outstanding debt was lengthened and it provides us with more flexibility and capacity in our shorter term facilities. The group’s liquidity position is strong with R3,2 billion in unutilised facilities (excluding asset-based finance facilities).

New business written by the Financial Services pillar resulted in insurance, investment, maintenance and warranty contracts growing to R4,1 billion, up 14% from the prior period (2012: R3,6 billion).

Cash flow

Cash generated by operations before capital expenditure on rental assets was 25% lower than the prior period, at R2,1 billion. After financing costs, tax payments and capital expenditure on rental assets, net cash flow from operating activities decreased to R587 million, down R514 million when compared to the prior period. This was mainly due to a higher absorption of cash by working capital, as our inventory position in the Distribution, Retail and Allied Services divisions increased to normalised levels. Capital expenditure on rental assets was lower than in the corresponding period.

Net replacement and expansion capital expenditure excluding car rental vehicles, was 47% higher than the prior period. The majority of capital expenditure was invested in the Logistics businesses to fund expansion and replacement of the respective fleets and expansion of facilities.

Under financing activities, a new bond amounting to R1,5 billion was issued and dividends paid increased by 20% to R1,1 billion.

Business conditions in Imperial’s markets

The new passenger vehicle market faced difficult trading conditions during the period, with the market in South Africa slightly down year on year for the six months. Inflationary pressures as a result of a weakening currency, the high base, lack of economic and employment growth all presented headwinds for the new car market. Industrial action in South Africa during the period also impacted volumes. The used car market improved during the period as a result of new vehicle price inflation. The medium and heavy commercial vehicle market performed well showing growth of 16% year on year.

Within the Africa Logistics division, trading conditions in the South African market remain challenging. The manufacturing sectors of the South African economy struggled to gain momentum and many segments of the retail sector experienced little or no growth. As a result, volumes remained subdued.

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

In Germany, we experienced tough market conditions, especially in December. The steel industry remains depressed and activity levels across our core markets, including shipping and chemicals were under pressure. We 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 autoparts industry remains competitive but stable.

Insurance underwriting conditions in the short-term industry continued to be challenging particularly due to hailstorms across Gauteng. The termination of certain loss-making books of business, however, contributed positively, resulting in our underwriting margins improving when compared to the prior period. Equity markets were favourable and investment returns higher.

Vehicle sales

In South Africa, the group sold 61 010 new vehicles, in line with the prior period and 34 038 used vehicles, an increase of 4%. The total national vehicle market was flat year on year for the six-month period to December 2013, according to NAAMSA.

The Australian and United Kingdom operations sold 5 490 new vehicles, which was in line with the prior period and 2 059 used vehicles, which was 7% lower.

Acquisitions and disposals during the period

Acquisitions

Renault

Imperial acquired a further 11% shareholding in Renault SA, thereby increasing our shareholding from 49% to 60%.

Ecohealth

During February, Imperial entered into an agreement, in terms of which it will acquire a 53% interest in a company called Ecohealth Limited, for a cash consideration of USD74 million. The acquisition is funded from Euro debt at a fixed interest rate of 2,4% p.a. Ecohealth is a leading distributor of pharmaceutical products (Ethical, Generics and Over the Counter (OTC)) in Nigeria. Based in Lagos, Nigeria, the company also has operations in Ghana and Dubai. The company partners with leading pharmaceutical companies to distribute, sell and market their products and has long-standing contracts with multinational pharmaceutical manufacturers.

Ecohealth has an annual turnover of approximately USD180 million. The company has a strong management team and sound organisational structures appropriate to pharmaceutical distribution. It distributes a significant proportion of the pharmaceuticals consumed throughout Nigeria, with a meaningful market share of the ethicals (branded products) market. It has an excellent distribution network supplying pharmaceutical products to 4 200 hospitals, 8 000 pharmacies and 2 000 clinics.

The transaction is in line with Imperial’s growth ambitions into the rest of Africa, i.e. focused on distribution of consumer goods and pharmaceutical products. It also complements Imperial’s recent acquisitions of 100% of RTT Health Sciences (now Imperial Health Sciences) and 49% of MDS Logistics both of which have expertise in warehousing and logistics solutions in the pharmaceutical industry. Ecohealth adds sales and marketing capabilities to Imperial’s service offering and will enable Imperial to offer an end-to-end capability to our customers in Nigeria’s fast-growing pharmaceutical sector. In 2012 pharmaceutical expenditure in Nigeria amounted to USD951 million and is forecast to grow at approximately 15% per annum over the next five years.

Through this transaction, Imperial has also secured a specialist management team which strengthens and complements the group’s existing skills set in the logistics industry in Nigeria.

Subsequent to the transaction the shareholding of Ecohealth will be:

The vendor has provided warranties which are customary for a transaction of this nature. The transaction includes put and call arrangements relating to the transfer of the remaining shares in the company over an extended period to the Imperial Group.

There are certain customary outstanding conditions precedent which are normal for an acquisition and the transaction will be effective once these conditions have been fulfilled.

Disposals

Tourism

The group continues to focus on the strategic fit and returns of its businesses. As a result, the Tourism division, which had become sub-scale in the context of the group, was sold to Cullinan Holdings Limited. The purchase price was settled by the issue of 81 818 181 shares in Cullinan Holdings, resulting in Imperial holding a 10% share of the JSE-listed Cullinan Holdings.