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Imperial Holdings - 2018 Annual General Meeting Statement
Imperial Holdings Limited
Incorporated in the Republic of South Africa
Registration number: 1946/021048/06
ISIN: ZAE000067211
JSE Share code: IPL
(“Imperial Holdings”)
Imperial Holdings Limited - 2018 Annual General Meeting Statement
Introduction
The 2018 Imperial Integrated Annual Report and the 2018 Annual Financial
Statements were made available to shareholders on 27 September 2018. These
reports seek to provide stakeholders with insight into the final steps taken to
ensure two clearly positioned, self-sufficiently resourced, well-governed
independent businesses - Imperial Logistics and Motus Holdings (“Motus”).
With the separation of the Imperial Group into Imperial Logistics and Motus
pending only shareholder approval, we are pleased to report that the culmination
of the far-reaching changes to the portfolios, strategies, structures and
management of each of Imperial’s businesses, which we set out to achieve a few
years ago, has been reached, and Imperial Logistics and Motus compare in every
way to the governance, executive, operating, control and reporting standards of
major public companies.
As is customary at this time, we provide shareholders with an update on
developments during the first quarter of the current financial year.
Progress on the unbundling of Motus
The relevant documentation relating to the unbundling of Motus was made available
to shareholders on 27 September 2018. The final outstanding matters relating to
the proposed unbundling of Motus are nearing conclusion, as set out below:
• Debt syndication process and arranging required for the refinancing of
existing facilities have been completed. As reported previously, both
entities will have sufficient capacity and liquidity to pursue their
individual growth strategies;
• The buy-back of the preference shares was completed on 15 October 2018;
• Imperial Holdings’ employees were appropriately accommodated at Imperial
Logistics or Motus and have been transferred accordingly;
• The boards and sub-committees have been appropriately constituted for
Imperial Logistics and Motus; and
• The shareholder vote on 30 October 2018 remains the only outstanding
material criteria for the implementation of the unbundling. Should the
unbundling be approved at the general meeting, Motus will be listed
separately on the JSE on 22 November 2018 under the ticker code ‘MTH’ and
Imperial Holdings will undergo a name change to Imperial Logistics under
the current ticker code ‘IPL’ once the unbundling becomes unconditional.
Environment/operating context
Conditions in Imperial’s operating markets remain mixed.
South Africa
The South African economy is in a technical recession with most sectors under
pressure. High unemployment, negative economic growth, VAT increases, fuel price
increases and static household income are weighing down on consumer demand and
affordability. The ongoing challenging trading conditions have been exacerbated
by a prolonged volatile Rand, largely driven by external factors relating to
emerging markets, poor economic data, policy and political concerns and more
recently, US Dollar strength mainly influenced by the US Federal Bank hiking
interest rates and the movement of trade flows from equity markets into US
government bonds.
The impact of this lacklustre trading environment on Imperial Logistics’
revenues, approximately 32% of which is generated in South Africa, was reduced
volumes and competitive and client pressures, particularly in the manufacturing
and consumer businesses. Despite a challenging trading environment our gain rate
on new contracts and renewal rates on existing contracts remain high, with an
encouraging pipeline of new opportunities. We continue focusing on rationalising
our operations thereby taking out inefficiencies, complexity and cost to counter
the negative impact of the economy.
The impact on the revenues of Motus, approximately 69% of which is generated in
South Africa, is a highly competitive vehicle market where national vehicle unit
sales as reported by NAAMSA decreased 1% in the 3 months to the end of September
2018 compared to the previous period. The trend of consumers trading down to
entry level models is continuing. Our market share remained stable compared to
the prior period at 19.5%.
African Regions
The gradually improving domestic demand has enhanced economic prospects in most
countries in sub-Saharan Africa. Our positioning as mainly a distributor of
pharmaceuticals and consumer packed goods (CPG) in the African Regions has
therefore stood us in good stead. A slow economic recovery in Kenya post the
elections has depressed consumer demand and increased competition in the market
has negatively impacted our performance in this market. Imres is performing
better than the prior period and has a strong order book. Our businesses in
Nigeria and Mozambique performed well.
Europe, United Kingdom and Australia
In Europe, certain sectors in which we operate remain under pressure, e.g.
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 customers. Our German shipping
operations are being negatively impacted by significantly lower water levels on
the River Rhine for a prolonged period (lowest levels in history), resulting
from hot weather conditions since July 2018. The implementation of the Worldwide
Harmonised Light Vehicle Test Procedure (WLTP) has resulted in significantly
lower vehicle production volumes in Logistics International’s automotive
business. This is a once-off impact with a recovery in production volumes
expected from Q2 F2019.
In the United Kingdom (UK), depressed economic conditions are negatively
impacting Palletways’ members resulting in increased support, costs and
underperformance of own depots. The passenger vehicle market in the UK is also
being depressed by the uncertainties arising from Brexit. Latest forecasts
indicate an overall decline in the UK vehicle market in the 2018 calendar year.
WLTP has reduced sales volumes in the passenger business, which was partially
mitigated by switching between brands.
The Australian new vehicle market is steady but remains fragmented yet
competitive, which places pressure on margins.
To counter the negative impact of the trading environment both businesses are
rationalising structures and reducing costs.
Operational performance
The following are the most noteworthy developments of the first quarter of
financial year 2019:
• Imperial Logistics performed satisfactorily in mixed trading conditions.
Performance was negatively impacted mainly by depressed consumer demand and
lower volumes in South Africa, significantly lower water levels on the River
Rhine impacting the German shipping operations, and the once-off impact WLTP
that resulted in substantially lower vehicle production volumes in the
automotive business in Logistics International. The Africa Regions sub-
division performed well.
• Motus performed satisfactorily in a depressed market. This was mainly due
to competitive vehicle pricing and high volumes in entry level and small
SUV vehicle sales in South Africa as consumers continue to trade down from
luxury vehicle brands, and despite some pressure on importer volumes.
Favourable forward cover to the end of April 2019 at exchange rates of
R13.13/$ and R15.93/€ position us well in H2 F2019. The financial services
and aftermarket parts segments provide annuity income streams that are less
impacted by depressed market conditions in vehicle retail. The prior year
acquisitions in the UK, Australia and Taiwan continue to contribute
positively to revenue and operating profit.
BBBEE deal
Given the complexity and size relating to the disposal of 30% of Imperial Logistics
South Africa to a BBBEE partner, and which was therefore taking substantially
longer than previously anticipated, a smaller transaction constituting only the
energy, mining and chemicals businesses in Imperial Logistics South Africa (ILSA)
is being pursued. As such, a newly incorporated entity (“NewCo”) will be formed
which will be the holder of the Tanker Services Food & Chemicals and TankerServices
Fuel & Gas business units within Imperial Logistics South Africa Group (Pty)
Limited and Imperial KWS Logistics (Pty) Limited, a subsidiary of ILSA (annual
turnover of approximately R3.5 billion).
Afropulse Group (Pty) Limited, a black woman-owned business, has been confirmed
as the strategic BBBEE partner in the deal, and will subscribe for 25% of the
issued share capital in NewCo for a cash consideration of R200 million. The core
capability of the NewCo post the acquisition of the Imperial Newco Business Units
is bulk road transportation management of liquids, gases, powders, ores and grains
with road tankers and tippers, which requires specialised assets and skills. The
commercial terms and funding of the transaction have been confirmed but are subject
to conditions precedent usual for a transaction of this nature. We anticipate the
transaction to be implemented by the end of Q3 F2019.
Strategic priorities
As we are set to conclude the multifaceted restructuring of Imperial with the
separate listings of its two businesses, management in both businesses are
cognisant that delivering on their stated strategic objectives and showing
improving financial performance should be top of mind. In order to achieve this,
the strategic priorities for each business are clear and articulated below:
Imperial Logistics:
1. In South Africa, the business is well-positioned to retain and expand
contracts with existing clients through customisation, innovation and
service excellence; enhance B-BBEE credentials, accelerated employment
equity and enterprise and supplier development, in order to underpin and
enhance market leadership; and to exit unviable contracts and operations.
2. In the African Regions, the business is well positioned to deliver on its
strategic objectives through targeting strategic growth opportunities to
complement and grow its exiting footprint in healthcare and consumer packed
goods (“CPG”); to leverage its unique ability to provide brand owners with
access to fragmented markets through integrated solutions, unrivalled scale
and multi-regional distribution; to expand its managed solutions offerings;
and becoming the single strategic partner to multi-national clients.
3. In International, expanding capabilities into international freight
management to position the business as a tier 1 international logistics
player and achieve the appropriate rating versus international peers;
expanding specialised capabilities to strengthen client relationships in
specific market sectors, underpinned by a differentiated approach to
digitisation and innovation; seek opportunities to expand specialist
capabilities into developing markets in Europe and Asia; and strong focus
on improved returns through business and contract rationalisation,
capability alignment and reduced asset intensity.
Motus:
The key strategic focus is to deepen our competitiveness and relevance across the
integrated automotive value chain through maintaining and growing market share
and competitiveness in our local and international markets; driving organic
growth through optimisation and innovation; selective acquisitive growth outside
South Africa that complements the existing network and provide opportunities to
replicate aspects of the integrated business model in South Africa; drive
innovation by leveraging key strategic partnerships and entering into new
targeted partnerships to deliver innovative mobility solutions to customers; and
remaining the partner of choice for OEMs and business partners through
exceptional service and solutions.
Prospects
Despite operating in challenging trading conditions, both businesses are well
positioned to deal with the uncertainties, volatility and current ambiguous
environment. The balance sheets of both businesses remain strong and each will
have sufficient headroom in terms of capacity and liquidity based on the new
facilities put in place leading up to the unbundling. In Motus, favourable forward
cover rates will maintain its competitiveness in the South African vehicle market.
Appropriate foreign exchange risk management, exposure to defensive industries
and a capital light business model in the Logistics African Regions sub-division
positions Imperial Logistics well.
Imperial Logistics H1 F2019 outlook:
Given challenging trading conditions in South Africa and the once-off negative
impacts of the WLTP implementation and prolonged period of significantly low
water levels in the first quarter, it is anticipated that Imperial Logistics
will achieve revenue and operating profit for H1 F2019 in line with the prior
period and HEPS growth (before taking into account any costs relating to the
proposed unbundling and subject to stable currencies in the economies in which
we operate). In H1 F2018, Imperial Logistics recorded headline earnings of R469
million and HEPS of R2.41 per share.
Motus H1 F2019 outlook:
Notwithstanding a highly competitive vehicle market, and depressed consumer
demand and affordability in South Africa, Motus is anticipated to increase
revenue and operating profit in H1 F2019 with growth in HEPS compared to the
prior period (before taking into account any costs relating to the proposed
unbundling, including the IFRS 2 share based equity charge relating to the
deferred shares issued to Ukhamba). In H1 F2018, Motus recorded headline
earnings of R940 million and HEPS of R4.65 per share (based on 202 million
shares in issue on the same basis as disclosed for the 12 months to 30 June 2018
in the Motus Pre-Listing Statement).
Financial year 2019 outlook:
At this stage our expectations for Imperial Logistics’ and Motus’ performance in
F2019 are unchanged and subject to stable currencies in the economies in which
we operate, and we expect:
• A stronger second half performance from Imperial Logistics mainly due to
the once-off factors as highlighted above that impacted H1 2019;
• Imperial Logistics and Motus to grow revenues and operating profit in F2019;
and
• Growth in HEPS for Imperial Logistics (continuing operations) and Motus,
subject to any once-off costs relating to the proposed unbundling.
Board changes and appreciation
Messrs SP Kana, MV Moosa and A Tugendhaft will retire from the Board following
the board meeting on 30 October 2018.
The current deputy chairman, Mr A Tugendhaft, has served on the board and various
committees since 1998. During this time he provided invaluable advice and wisdom
to the board and management which saw the group grow to its present day size. He
will join the board of Motus on the unbundling.
Mr Moosa, served with distinction for the past 13 years, since his initial
appointment as representative of Lereko Mobility in 2005.
The current chairman, Mr SP Kana, joined the board in 2015 and has indicated that
his commitment to Imperial would end upon the culmination of the strategy of the
group in unbundling. He provided guidance and important leadership in the period
during which the business underwent significant restructuring and management
changes.
We thank Messrs Kana and Moosa for their contribution to the company and wish them
well in their future endeavours.
Finally, we thank our owners and funders for their continued support through the
years.
The financial information contained in this announcement is based on information
available at the time of publication and has not been reviewed or reported on by
Imperial’s auditors.
Bedfordview
30 October 2018
Sponsor:
Merrill Lynch South Africa (Pty) Limited
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