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IMPERIAL LOGISTICS LIMITED - Pre Closed Period Briefing to Annual Investor Day and Trading Update

Release Date: 03/06/2019 07:30
Code(s): IPL     PDF:  
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Pre Closed Period Briefing to Annual Investor Day and Trading Update

Imperial Logistics Limited
(Incorporated in the Republic of South Africa)
Registration number: 1946/021048/06
ISIN: ZAE000067211
Share code: IPL
(“Imperial Logistics” or “Company” or “Group”)

Pre Closed Period Briefing to Annual Investor Day and Trading Update


As published on 28 February 2019, Imperial Logistics’ half year revenue
from continuing operations (excluding businesses held for sale) grew by
6% to R26.6 billion and operating profit of R1.3 billion was in line
with the 6 months to 31 December 2017.

Imperial Logistics’ management team will today host members of the
investment community at its Annual Investor Day in Johannesburg. The
following update will be provided during the event and the
presentation in support of the event will be available on the
company’s website The event will also be
screened live via a webcast

Operational performance and context

Imperial Logistics delivered an unsatisfactory performance for the 9
months to 31 March 2019, primarily in our South African and International
divisions, impacted negatively by challenging economic conditions and
costs   associated    with  significant    business   restructuring   and
rationalisation.    Revenue   from   continuing   operations   (excluding
businesses held for sale) for the 9 months increased and operating profit
declined compared to the prior comparative period.

Despite mixed trading conditions across regions, Imperial Logistics’
renewal rate across its divisions on existing contracts remains in excess
of 90%, with an encouraging pipeline of new opportunities and supported
by an excellent new contract gain rate. New business revenue of
approximately R5.2 billion was secured during the past 12 months, the
full benefit of which should be realised in the 2020 financial year as
contracts were concluded at various times during the period.

   a. South Africa
Persistently poor economic conditions and ongoing economic uncertainty
negatively impacted Imperial Logistics’ performance in South Africa
which will generate approximately 30% of Group revenue in the current
financial year.

Alongside margin pressures from customers and principals, high
unemployment, low economic growth, tax rate increases, static household
income and load shedding continue to weigh down on trading conditions
and sentiment. While the South African elections were concluded smoothly
and Mr Cyril Ramaphosa has been officially inaugurated as president, and
despite the improvement in business sentiment, we are of the view that
it will take some time before the economy benefits from any fundamental
policy reforms or shows real GDP growth.

In this context, the South African division delivered an unsatisfactory
performance, reducing revenue and operating profit during the period.
Performance was negatively impacted by exceptionally low volumes across
all   industries,  particularly   in   the  consumer,   healthcare   and
construction businesses. This was partly offset by stronger performances
from the commodities, and fuel and gas businesses. Despite the
challenging trading environment, this division renewed over 90% of its
contracts albeit at lower margins.

   b. African Regions
Firming commodity prices, strengthening currencies, gradually improving
domestic demand and some policy reforms improved economic prospects in
most countries in sub-Saharan Africa. Our primary positioning as a
healthcare and consumer distributor has therefore stood us in good stead
in the rest of Africa where approximately 23% of Group revenue will be
generated in the 12 months to June 2019.

Factors negatively impacting performance during the period include
subdued growth and increased parallel imports of pharmaceuticals in
Kenya, the economic recession in Namibia and the ongoing economic crisis
in Zimbabwe where inbound consumer goods volumes and outbound commodities
volumes are significantly lower than the prior period.

Notwithstanding   this,   African   Regions   delivered   an   excellent
performance, increasing revenue and operating profit, supported by good
results in its healthcare and consumer businesses. Significant new
contract gains, including signing our first pharmaceutical client for
our multi market distributor model (simplified solutions in healthcare),
contributed positively.

   c. International
Imperial Logistics’ operations outside the African continent will
generate approximately 47% of Group revenue. Economic activity in Europe,
specifically Germany, continued to slow in the second half of FY 2019
with volumes in our key sectors (automotive, chemicals, steel) under
pressure. The low unemployment rate has compounded the difficulty of
finding and retaining skilled people, which has increased our cost base
and impacted margins.

In the United Kingdom (UK), the ongoing Brexit uncertainties are
depressing consumer demand and activity, impacting our member network
in Palletways negatively. We are however making good progress in
appointing additional members and changing our pricing model to address
the increased costs caused by the network imbalances reported in H1

The International division delivered a disappointing performance
hampered by reduced volumes, once-off costs associated with the material
business restructuring (c.€7 million), the once-off impact of the
implementation of WLTP (operating profit impact of c.€4 million) that
resulted in significantly lower vehicle production volumes in the
automotive business, and depressed profitability in Palletways.

Portfolio restructuring and rationalisation
As previously communicated, each division remains focussed on the
rationalisation of their portfolios and improving efficiencies,
significantly removing costs to date, and the benefits of which will be
fully realised in the 2020 financial year. The extent of these efforts
have been significant in the South African and International divisions,
the progress of which is outlined below:

   a. South Africa
Given the increasingly competitive and challenging economic conditions
in South Africa, we intensified our efforts to restructure and
rationalise our operations in FY2019 through exiting unprofitable
contracts, consolidating operations and properties, and reducing fleet
and overheads.

As part of this process and after numerous turnaround and cost cutting
initiatives that have been implemented, the Consumer Packaged Goods
(“CPG”) business (c. 20% of South African revenue) continues to be loss-
making. We have therefore decided to further rationalise this business
by exiting and selling assets while aiming to retain key contracts and
accommodate these in other business units under a different commercial

This significant step does not represent our exit from the consumer
industry vertical in South Africa, but only the rationalisation of the
multi-principal distribution capability that has become unviable.

The rationalisation of CPG will result in an impairment of between R1.0
billion and R1.4 billion post-tax (including retrenchments and exit of
leases) and CPG will consequently be classified as a discontinued
operation for the financial year ending 30 June 2019. We are currently
in discussions with key stakeholders to find the most effective and
appropriate solutions for existing staff, clients and contracts - during
which we will make every effort to minimise the impact on our staff and
clients. A further update will be provided to the market in our financial
year 2019 annual results.

Excluding the CPG business, the South African division has grown
operating profit by 5% over the last 3 years, achieving an ROIC of 16%
despite a low-growth environment. Furthermore, the South African
business removed c.R140 million (excluding CPG) of fixed overhead costs
which results in a once-off cost impact of c.R25 million in this
financial year.

   b. International
Through a significant rationalisation and cost reduction process, our
International division extracted c.€15 million (per annum) of fixed
overhead costs, which results in a once-off cost impact of c.€7 million
in this financial year.

Strategy update

  a. Simplifying our strategic positioning

As we continued our efforts to further rationalise and strategically
align our portfolio post the unbundling of Motus Holdings Limited
(“Motus”), we also undertook a strategic evaluation process with the aim
of simplifying our strategic positioning.

As such, the core strategic focus of Imperial Logistics is to leverage
our competitive advantages through growing and expanding our African
Regions business and leveraging our capabilities mainly in the
healthcare, consumer, chemicals, industrial and automotive industry
verticals in other emerging and selected developed markets (driven by
capabilities, scale benefits and client relationships), and positioning
Imperial Logistics as the ‘gateway to Africa’ in the medium term through
offering an integrated logistics and market access service offering in
Africa to our clients.

Furthermore, positioning Imperial Logistics as a distributor with
associated logistics service offerings will provide cross-selling
opportunities across targeted regions and capabilities. This also makes
Imperial Logistics an attractive partner, especially given our unique
African Regions network.

In this context, our key strategic priorities are simplified below:

   -   Continue to grow in Africa, adding new capabilities, entering new
       industry verticals and serving more countries/regions.
   -   Invest in capabilities outside Africa that support the growth of
       target industry verticals in Africa mainly healthcare, consumer,
       chemicals, industrial and automotive.                                                                     4
  -    Acquire, partner and/or build air and ocean (international) freight
       management capability as a basis for global coverage to support in
       and out of Africa flows in integrated logistics solutions.
  -    Enter select new emerging and developed markets with our
       differentiated capabilities and industry verticals.
  -    Expand our distributor capability geographically and add other
       existing and new capabilities to that market over time which will
       create cross-selling and up-selling opportunities.
  -    The Logistics International portfolio will be aligned to our
       strategic positioning and core competitive advantages. This could
       result in further disposals in this division in the short-to-medium
       term of non-core and low-return on effort businesses.
  -    Only acquisitions that enhance our key competitive advantages and
       strategic positioning, meet our financial hurdle rates and have a
       strong organic growth and cash flow profile will be considered.
  -    People, systems and strategic innovation remain core enablers to
       our strategy

  b. Simplifying our capability definition

To improve the understanding of our service offerings, our capabilities
have been redefined in terms industry-recognised terminology. Going
forward Imperial Logistics’ service offerings will be classified into
the following categories:

-  Freight management which entails the movement of goods on behalf of
   clients between specified sources and destinations; using different
   transportation modes (road, river, rail, air and ocean) and different
   transportation types
-  Contract logistics encompassing warehousing, distribution and
   synchronisation management provided as dedicated or multi-principal
   services; often incorporating professional and managed services and
   integrated with transportation management to evolve to achieving Lead-
   Logistics Provider status
-  Distributors where we take ownership of product inventory to provide
   our clients with unparalleled access to their end-consumers through
   an integrated logistics and sales service; leveraging sourcing,
   warehousing,   distribution,   synchronisation    and   transportation
   management as enablers. The distributor capability provides a more
   robust, value-enhancing service offering which creates a ‘stickiness’
   with our multi-national clients through adding associated logistics.

While Imperial Logistics’ primary market disclosure will remain regional
i.e. South Africa, African Regions and International, we will provide
secondary segmental disclosure which will be categorised according to
the above-mentioned capabilities in our 2019 annual results.

  c.     Industry verticals approach

Our current positioning is also focused on industry verticals to deliver
client-centric solutions, build credibility among clients and prove
industry expertise, which leverages our capabilities across regions. We
have identified healthcare, automotive, chemical, industrial and
consumer as our priority industry verticals given that the specialised
focus in each of these verticals are key differentiators for Imperial

Guidance and outlook

For the financial year to 30 June 2019, subject to stable currencies in
the economies in which we operate, we expect Imperial Logistics
continuing operations (excluding Motus and CPG as discontinued), to

   - Higher revenue than the prior year
   - Lower operating profit than the prior year, by weaker operational
     performance (in South Africa and International) and once-off costs
     associated with business rationalisation and restructure
   - Lower Headline Earnings per Share than the prior year, negatively
     impacted by weaker operational performance (in South Africa and
     International) and once-off costs associated with business
     rationalisation and restructure

Imperial Logistics’ liquidity position is strong with R9.5 billion of
unutilised banking facilities. 71% of the Group debt is long-term in
nature and 45% of the debt is at fixed rates. The Group’s blended cost
of debt is 5.5% (pre-tax).

The far-reaching benefits of the portfolio rationalisation and
organisational restructure that we undertook more than four years ago
and continue in FY 2019, new contract gains, removing and reducing
complexities and costs significantly in all businesses, and enhanced
strategic focus will be realised in the 2020 financial year.

Finally, we thank our shareholders for their ongoing support and patience
as we continue to execute on our urgent strategic deliverables to unlock
and deliver value for all our stakeholders.

The forecast financial information herein has not been reviewed or
reported on by Imperial Logistics’ auditors. The forward looking
information contained in this announcement contains the views and
forecasts of management at the time of publication.

3 June 2019


Sponsor: Merrill Lynch South Africa (Pty) Limited


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