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CEO’s 2016 AGM Statement
Imperial Holdings Limited
Incorporated in the Republic of South Africa
Registration number: 1946/021048/06
ISIN: ZAE000067211
JSE Share code: IPL
(“Imperial”)
CEO’S 2016 AGM STATEMENT
Introduction
The 2016 Imperial Integrated Annual Report, the 2016 Imperial Sustainable
Development Report and the 2016 Annual Financial Statements were made available
to shareholders on the 29th September 2016.
Together these documents provide extensive information on past performance,
current operations and the strategic intent of Imperial Holdings.
Strategy and Structure
An important emphasis of the 2016 Integrated Annual Report, was that Imperial
operates in two very different sectors of mobility, namely Vehicles and
Logistics. While a superficial view might suggest otherwise, a thorough
analysis of each sector reveals very different strategic, financial,
organisational and managerial determinants of success, and very few operational
synergies between these sectors. This prompted the decision to consolidate and
integrate Imperial’s activities within two large, increasingly self-sufficient
divisions.
Since the 1st July 2016, the start of the current financial year, Imperial’s
entire logistics interests are being managed by one CEO and board as one
division named Imperial Logistics, comprising three sub-divisions: South Africa;
Africa Regions; and International.
Concurrently, work commenced on the consolidation and integration of Imperial’s
entire vehicle interests to be managed from 1st January 2017 by one CEO and board
as one division named Motus Corporation, comprising two sub-divisions: Imports,
Retail, Rental and Aftermarket Parts; and Motor Related Financial Services.
The objective of this restructuring is to create value through intra-divisional
efficiencies and collaboration, and to deeper penetrate the supply chains in
both sectors through better co-ordinated and competitive value propositions to
clients.
While the restructuring may complicate sub-divisional comparisons against past
performance in the medium term, we are committed to disclosure that enables
shareholders to analyse and fairly value their investment.
Environment
Shareholders are well aware of the global, regional and local factors
contributing to generally lacklustre economic growth. In recent times, and in
many of the jurisdictions in which Imperial trades, political developments have
exacerbated the unpredictability of trading conditions and the volatility of
currencies. With 56% of its 2017 forecast revenues generated in South Africa,
33% in the European Union, Australia and South America, and 11% in sub Saharan
Africa north of South Africa, Imperial is affected by these uncontrollable
events.
More specific uncontrollable events directly influencing Imperial’s businesses
in the first quarter of the 2017 financial year were: subdued consumer goods and
commodity volumes; currency movements; a 14.3% decline in NAAMSA’s reported new
vehicle sales in the nine months to September; and low water levels on the Rhine
and Rio Parana.
The current situation in South Africa warrants specific comment. The most
recent downgrade of the 2016 GDP forecast to 0.5% is in large part attributable
to avoidable local factors. Business and consumer confidence is being eroded by
serious political interference in the workings of core public institutions and
state owned enterprises. Such activity is being conducted with appalling self-
interest, impunity and duplicity, at the expense of national priorities such as
economic growth, fiscal rectitude, policy certainty, unemployment and poverty
alleviation, crime prevention and the funding of universities.
On behalf of all Imperial stakeholders, we are engaging with patriotic leaders
of integrity in government, business, labour and civil society, to eliminate
unconstitutional behaviour and corruption, and to marshal the considerable
resources of our country in pursuit of inclusive growth and urgent national
priorities, not least the preservation of our investment grade status.
Against this background we update shareholders on our current situation and
outlook.
Group Portfolio
We remain intent on releasing capital, and sharpening executive focus, by
disposing of non-core, strategically misaligned, underperforming or low return
on effort assets.
Since year end we acquired a 95% interest in Palletways Group Limited for R3.0
billion and we disposed of Mix Telematics for R474 million, and 51% of the C2
Computers Group for R55 million. The disposal of non-strategic properties is
underway with R1.4 billion planned to be realised in the current financial year.
The disposal of Regent for a purchase consideration of R2.2 billion is still
subject to regulatory approval. The Competition Commission has recommended that
the transaction be prohibited, on what the parties believe to be incorrect
assumptions. It is now eight months since the transaction was concluded between
the parties and the Competitions Commission commenced its investigation.
Discussions are currently underway to determine the timeframe for evaluation of
the transaction by the Competitions Tribunal, which rules on all large
transactions.
The proceeds of disposals will be used to reduce debt until redeployed in
accordance with our unchanged investment thesis:
- We will continue to dispose of non-core, strategically misaligned,
underperforming or low return on effort assets.
- We will invest capital in South Africa to maintain the quality of our
assets and our market leadership in logistics and motor vehicles.
- We will invest capital in Africa, north of South Africa, primarily to
achieve our 2020 objective for the revenue and profits generated by
logistics in that region to equal that of our South African logistics
business, and secondarily to expand our vehicles and related businesses in
the region.
- We will invest capital generated from operations and from divestments to
grow our businesses beyond the continent, but with an emphasis on
logistics.
Divisional performance for the quarter to end September 2016
Imperial Logistics
Imperial’s previously reported 2016 revenue and operating profit from logistics
was R47.9 billion and R2.5 billion respectively. Early 2017 performance
highlights and full year guidance for the three sub-divisions is as follows.
South Africa
The sub division experienced difficult trading conditions with soft volumes in
consumer products and mining and manufacturing related logistics. Despite this,
revenue and operating profits are in line with expectations and last year.
For the year to June 2017, we expect revenue and operating profit growth from
this sub-division.
Africa Regions
The sub division experienced low consumer demand, rising inflation, and high
volatility and low liquidity of currencies. Revenue and operating profits are
currently below expectations and last year, due mainly to currency volatility.
For the year to June 2017, we expect a decline in revenue and operating profit
from this sub-division, attributable primarily to the impact of currency
movements.
International
The sub-division experienced significantly lower volumes and freight rates in
shipping and lower revenues in retail, consumer goods and chemicals, mitigated
slightly by higher revenues in automotive. Revenue and operating profit were
substantially below expectations but ahead of last year due to the Palletways
acquisition, effective 7th July and performing in line with expectations.
For the year to June 2017, we expect revenue and operating profit growth from
this sub-division, attributable solely to the acquisition of Palletways.
Motus
Imperial’s previously reported total 2016 revenue and operating profit from the
three vehicle sub-divisions was R69,5 billion and R2.8 billion respectively.
Early 2017 performance highlights and full year guidance for the two Motus sub-
divisions is as follows.
Import, Retail, Rental and Aftermarket Parts
The decline in the national passenger and commercial new vehicle markets for the
quarter to September 2016 as reported by NAAMSA has been 16.3% and 9.3%
respectively.
Despite lower unit volumes and revenues, the importers (mainly Hyundai, Renault
and Kia) experienced solid gross margins and operating profit as a result of
price increases, prudent hedging strategies and support from manufacturers.
Forward cover, implemented according to policy, extends to April 2017 at an
average rate of R15.2/$ and R16.8/€.
Passenger vehicle revenue and operating profit are in line with expectations but
slightly below the prior comparable period. Commercial vehicle retail unit
volumes are under serious pressure in South Africa but in line with expectations
in the UK although the Rand contribution has been depressed by the weakening of
the Pound Sterling. Service and parts performance was consistent with vehicle
sales.
Car rental revenues and operating profit are ahead of the comparable period,
depressed by high accident repair costs.
Aftermarket parts grew revenue and held operating profit on the prior comparable
period.
For the year to June 2017, we expect flat revenue and a decline in operating
profit from this sub-division.
Motor Related Financial Services
Notwithstanding management’s distraction by the sale process, Regent is
performing in line with expectations. Despite lower vehicle sales, Liquid
Capital is performing to expectations as a result of innovative new products and
annuity income from past sales.
Although we expect steady growth from motor related financial services and
products the impact of the disposal of Regent on second half revenue and
operating profit will depend on the timing and outcome of the Regulatory
decision. Accurate guidance for this division is therefore not possible.
Prospects
Over the past four months Imperial has registered steady progress towards the
strategic and operational objectives described in the 2016 Integrated Annual
Report, despite considerable pressure on revenue and margins, most particularly
in our logistics operations beyond Africa.
While we are confident of our ability to predict the performance of resources
under our control, we cannot escape the influence of uncontrollable factors –
economic growth and currency volatility being most significant, with the latter
depressing HEPS relative to operating profit.
At this stage our expectations for Imperial are unchanged. We anticipate single
digit revenue growth and a moderate decline in operating profit in continuing
operations for the year to June 2017. This outlook is subject to stable
currencies in the economies in which we operate, and South Africa retaining its
investment grade, the loss of which could create a variety of unpredictable
negative consequences.
We thank shareholders for their support and look forward to presenting our 2017
first half results on the 21st February 2017.
MARK J. LAMBERTI
1 November 2016
Sponsor:
Merrill Lynch South Africa (Pty) Limited
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