STRATEGY AND ANALYSIS, ORGANISATIONAL PROFILE, REPORT PARAMETERS

  • 1.1 Statement from the most senior decision-maker of the organization.

    Integrated Report 2012 - Chairman’s letter
    Integrated Report 2012 - Q&A with chief executive
    Integrated Report 2012 - Human resources, strategy and sustainability director’s report

    Chief executive overview

    Clive ThomsonBarloworld is 110 years old this year which underscores our belief that a sustainable organisation is created through integrated and coordinated activities addressing economic, environmental and social aspects.

    The group’s value-based management approach entrenches long-term value creation, highlights the interdependent nature of stakeholder interests and requires inclusive management and reporting. Engaging with stakeholders enables us to identify their needs, interests and what constitutes value for them. This distils, in part, the material issues for the group and directs group focus. Barloworld actively engages its stakeholders across the group and has recently assigned responsibility for coordinating and reporting stakeholder activities to a senior executive. In addition, an executive director has responsibility for stakeholder engagement at board level. A group stakeholder policy codifies the group’s approach.

    Robust strategic planning and risk-identification processes highlight areas for attention which are incorporated into management activities. These also identify strategic opportunities which are pursued. Sustainable development has been identified as a strategic focus area for the group as have financial returns and profitable growth. We have focussed on all these aspects in the year and made good progress. They will continue to receive attention in the year ahead.

    Climate change and environmental considerations remain central components of the group’s ethos of responsible corporate citizenship. Mindful of the environmental consequences of our activities, the group is committed to conducting its operations in an environmentally responsible manner and delivering integrated customer solutions that help our customers to achieve their own objectives in minimising environmental impacts.

    The group continues to focus on reducing its consumption of natural resources, particularly energy generated from fossil fuels, water, and reducing greenhouse gas emissions. This includes a focus on improving non-renewable energy and emissions efficiency improvement and setting aspirational targets in this regard. Water recycling initiatives are designed to minimise consumption and save costs.

    Our value-based management approach and organisational sustainability is underscored by our commitment to:

    Ensuring our customers’ success by providing the integrated and environmentally sound solutions they require to remain competitive and meet their own sustainability objectives
    Always acting in the best interests of our principals and representing them in a way that ensures their success and reflects their sustainable development objectives
    Providing a safe and healthy workplace for employees where all have equal opportunity, are inspired to fulfil their ambitions and be proud ambassadors of Barloworld
    Delivering top-quartile returns on average through the cycle by responsible business practices
    Achieving top-quartile growth in stakeholder returns over five years to September 2015 by identifying profitable growth opportunities and executing our strategic plans
    Engaging our stakeholders and being a responsible corporate citizen for all of them, including the communities in which we operate, and contributing to their social and economic development.

    I believe the enduring competitiveness of Barloworld and its ability to create sustained value for all stakeholders is founded in these commitments. We will continue to manage the group accordingly.

    Clive Thomson
    Chief executive

    10 December 2012

  • 1.2 Description of key impacts, risks, and opportunities

    Integrated Report 2012 - About Barloworld - Business overview
    Integrated Report 2012 - Leadership perspective - Statement of total value added
    Integrated Report 2012 - An integrated stategic approach - Strategic framework
    Integrated Report 2012 - An integrated stategic approach - Stakeholder engagement
    Integrated Report 2012 - An integrated stategic approach - Risk management
    Integrated Report 2012 - An integrated stategic approach - Responsible supply chain
    Integrated Report 2012 - Divisional reviews - Equipment
    Integrated Report 2012 - Divisional reviews - Automotive and Logistics
    Integrated Report 2012 - Divisional reviews - Handling
    Integrated Report 2012 - Divisional reviews - Corporate
    Integrated Report 2012 - Creating value - Our people
    Integrated Report 2012 - Creating value - Empowerment and tranformation
    Integrated Report 2012 - Creating value - Environment: Identified material aspects
    Integrated Report 2012 - Environment: Identified material aspects - 2012 Barloworld Investor CDP
    Integrated Report 2012 - Environment: Identified material aspects - 2012 Barloworld Water CDP
    Integrated Report 2012 - Creating value - Barloworld Siyakhula
    Integrated Report 2012 - Creating value - Corproate social investment
    Annual general meeting document 2012 - Corporate governance report - Risk management
    Consolidated annual financial statement 2012 - Note 32.2

    Key impacts

    Barloworld’s Value-based Management approach encompasses responsible citizenship and long-term value creation for all stakeholders. Through this approach, economic, environmental, and social issues are managed in an integrated manner, supported by a strong governance environment and underpinned by the group’s worldwide code of conduct. The group considers these issues in the context of its strategic plan, strategic focus areas, associated risks and resulting opportunities, and manages them in a balanced and integrated manner.

    Key impacts and areas of value creation are economic, environmental and social as set out below.

    Economic

    Stakeholder value added

    The group understands the direct and indirect economic value it generates for its stakeholders through its commercial activities and is committed to long-term value creation. The group’s statement of total value added reflects direct economic value created for stakeholders. Indirect value creation includes employee spending, providing products and services, enhancing the image and reputation of areas in which we operate, and job creation that reduces demand on the fiscus and enables resources to be redirected into other areas. In addition, the group’s enterprise development initiatives, channelled through Barloworld Siyakhula, support the creation of small and medium enterprises.  The group also has a corporate social investment programme through which social economic development investments are made.

    Environmental

    Integrated Customer Solutions

    We understand the environmental impact of our activities. These arise from our internal operations as well as from our products, services and customer solutions. Material areas of impact are the consumption of non-renewable fossil fuels and associated greenhouse gas emissions. Water consumption is also an area of focus although the group’s activities are not water intensive, and water is used and discharged in the areas of operation and not transported to other destinations. Supported by our principals, we are committed to providing globally competitive products and services that enable customers to achieve their sustainability objectives, which seek to minimise energy consumption and emissions, and gain competitive advantage. We offer skills development programmes to our customers that assist them in the safe and sustainable operation of plant, equipment and vehicles which we provide to them.

    Energy efficiency and GHG emissions

    Measurements have been put in place and targets set to underscore our commitment to improving efficiencies in fuel and electricity consumption and resulting GHG emissions. Innovative products and services are being developed to assist the group and its customers in their quest for environmental sustainability. The group utilises the skills and resources at our Power operations to assist in identifying and maximizing efficiency opportunities internally within the group. Our stance with regard to responsible energy consumption is incorporated in our Climate Change and Environmental group policy documents.

    Water use

    We recognise that water is a scarce resource and have implemented conservation measures that include water harvesting, recycling and economy of use initiatives.

    Materials and waste

    Our initiatives around materials and waste focus on recycling, certified waste disposal, extending the useful life of plant and equipment as well as remanufacture and rebuilding components.

    Biodiversity

    The group recognises its role and responsibilities in this regard although the predominantly urban locations of our operations do not impact directly on protected areas or on fauna, flora or ecosystems considered to be in any way endangered, rare or threatened.

    Social

    We appreciate the role, responsibilities and impacts of being a responsible corporate citizen. Our employees are central to our value-creation capabilities and we strive to become an employer of choice to attract and retain the talent required to execute our strategies and achieve our goals. We are committed to empowerment and transformation and believe that our profile should reflect those of the societies in which we operate. Our activities are guided by our Code of Ethics and Worldwide Code of Conduct which underpin how we conduct ourselves both inside the company and with our external stakeholders and, ensures respect for human rights. We operate in an environment of good corporate governance and commit time and resources to ensure compliance.

    Elements of our approach to our social role include:

    Employees

    Our employee value creation approach focuses on safety, health, and skills development and fair reward for all employees. We can only realise our growth opportunities through our people, 20153…..driven by you.

    Human rights

    Our Code of Ethics, Worldwide Code of Conduct, and our ethics and compliance programme prohibit the abuse of human rights by the group and its employees, its service providers and principals.

    Equality, empowerment and transformation

    Barloworld believes that employment equity is therefore not only a moral and human right imperative; but it is a pre-condition for the achievement of sustainable development, economic growth and equality that reflects the demographics of the countries in which we operate. Barloworld has taken pro-active measures to develop and harness an inclusive and diverse workforce that is free from unfair discrimination and is reasonably demographically representative.

    At Barloworld, empowerment and transformation forms one of our six strategic focus areas.  Barloworld believes that empowerment and transformation affects every aspect of our business.  The South African divisions of Barloworld are aligned to the structure set out by the Department of Trade and Industry (dti’s) broad – based black economic empowerment (B-BBEE) scorecard.

    Corporate social investment

    Our corporate social investment programmes focus mainly on education, health and welfare, and the environment, and in South Africa are designed to empower previously disadvantaged individuals and uplift communities. These programmes are complemented by a fund to develop small and medium enterprises in South Africa.

    Group risks

    Identifying risks and opportunities through a robust and systematic process is central to our strategic planning process. A comprehensive risk management policy is in effect throughout the group and is complemented by the Barloworld Limited Risk Management Philosophy.

    This includes dedicated divisional risk assessment interventions at which internal audit and group risk management services are present. Risk management is incorporated into the group’s strategic planning process which ensures risks are appropriately addressed and related opportunities pursued. This is underscored by highlighting the strategic areas with which the relevant risks are associated and at all levels in the organisation, the strategic planning process requires that action plans are in place to appropriately address such risks. At group level these are reflected in the disclosed risk matrix.

    In line with international best practice, risks are assessed on their probability, severity and quality of the existing control environment. These measures result in residual risk scores that indicate the importance of the risk and facilitate assessing progress made in addressing identified risks. Through the risk and sustainability committee, the board determines the levels of risk tolerance for the group and also ensures that risk assessments are performed on a continual basis by formally reviewing the divisional and group risk registers twice a year. Group risks are disclosed to stakeholders by including a table of the group top risks in its annual integrated report to stakeholders.

    Risks are detailed, comprehensively assessed and managed through acceptance, transfer, avoidance or reduction measures. Details are recorded in divisional and group risk registers.

    Initiatives to address identified risks include the development and implementation of business continuity and disaster recovery plans for unscheduled events or occurrences. These plans include information technology and communications solutions as appropriate.

    While this planning is regularly reviewed at executive and board levels, internal audit also plays a significant role in reviewing processes, procedures and controls.

    BARLOWORLD GROUP TOP RISKS 2012 (in alphabetical order)
    Key risks
     
    Management response
    Acquisition underperformance

    The risk to future net cash flows from acquisitions failing to realise the projections upon which the initial purchase consideration was based may lead to value destruction for shareholders and a need to impair the related goodwill or assets.

      Acquisition risk

    A business acquisition policy and procedure is in place that sets out a structured approach and framework to be used when acquisitions are being made. This includes a pre-acquisition phase that includes the requirement to conduct a comprehensive strategic analysis of intended targets, development of acquisition criteria, both strategic and financial, and quantification of risk-adjusted value creation potential for the respective business unit and the group.
    The executive team of each business unit is responsible for ensuring that the policy and procedures are adhered to.
    Following acquisitions, planning and task teams are established to focus on the realisation and management of possible synergies.
    Climate change and environmental stewardship

    Barloworld considers a number of environmental related risks to its operations. These include climate change and related physical risks due to changing weather patterns; regulatory risks associated with greenhouse gas emissions; financial risks resulting from carbon taxes; operational risks due to constraints in energy supply and the availability of natural resources, such as water. The group identifies the predominant use of fossil-fuel based energy in its supply chain, operations, products and solutions as a risk to itself and its value chain.

      Environmental/operational/strategic/financial/ regulatory risk

    Minimise exposure through in-depth risk assessments and strategic responses. Ensure organisational resilience through aligned and integrated management activities and policies. These include:

    Implementation of non-renewable energy and greenhouse gas (scope 1 and scope 2) emissions efficiency improvement targets and focus on water stewardship.
    Association with leading principals, provision of products and solutions with reduced environmental footprint and which assist customers achieve their sustainable development objectives.
    Geographic and industry diversification.
    Competitor actions

    Competitor actions will erode our competitive position and have a significant impact on the value we create for shareholders.

      Competitor risk

    Continually reduce costs by focusing on operational efficiencies and staff training.
    Continually improve service and the provision of innovative solutions to customers.
    Develop key customer plans which contain all the information and strategies to satisfy the customer.
    Currency volatility

    Movement of currencies against one another, mainly the movement of other currencies against the rand which creates risks relative to the translation of non-rand profits, the marking-to-market of financial instruments taken out to hedge currency exposures and the cost of imports into South Africa.

      Financial risk

    The responsibility for monitoring and managing these risks is that of line management. A group treasury policy is in place which clearly sets out the philosophy of hedging and guideline parameters within which to operate and permissible financial instruments to be utilised.
    Preventive measures are implemented around determination of pricing mechanisms and structuring of commercial contracts to reduce the impact of any adverse currency fluctuations.
    Defined benefit scheme exposure

    One of the key risks for the UK’s defined benefit scheme over the past few years has been the reduced real yield on AA rated corporate bonds which is used to value the liabilities. In addition, increased life expectancy of members will have an adverse impact on the schemes’ funding position. Market volatility remains a risk, with 50% of the schemes’ assets invested in growth assets (largely equities), which includes a small (10%) diversification into absolute return funds. A deterioration in the funding level would require additional company contributions over and above the schemes’ current normal contribution rates.

    The year-end valuation resulted in the deficit decreasing marginally to approximately £69 million, largely due to the assets performing ahead of expectations, but this was offset by a further reduction in real bond yields as compared to the September 2011 year-end.

      Market risk

    A suitably qualified representative board of trustees exists which, together with a separate investment sub-committee, is responsible for regularly evaluating the effectiveness of investment decisions. Professional investment advisors are used to assist in the management of the investment portfolios with a view to conservatively preserving and enhancing fund valuations. Complex investment risk models are run by the investment advisors and actuaries to assess optimum risk balance. The actuary also conducts a formal triennial valuation with six-monthly updates.
    Funding shortfalls are planned to be made up within sensible time frames via market-anticipated increased interest rates, positive returns on investments and additional contributions from the company agreed as part of a 10-year recovery plan to bring the fund back to full funding on an accounting basis.
    The defined benefit scheme in the UK was closed to new members in 2002 and benefits were changed to a CARE basis in 2006 to assist in managing future liabilities. The scheme is now mature with only minimal active membership following the disposal of Handling UK. All new employees in the UK are automatically enrolled in the UK’s defined contribution scheme.
    Dependence on principals and suppliers

    Some of the businesses in the group are dependent on a small number of principals and/or suppliers.

    Our success is therefore linked to their ongoing financial stability, the competitiveness and quality of their products and services and the availability of equipment to meet customers’ needs.

    In order to ensure sustainable value creation, we depend on suppliers of infrastructure in the countries in which we operate. Most of our businesses are dependent, inter alia, on reliable power and water supply and appropriate transport networks.

      Strategic risk

    Add value by giving constant feedback to our principals on market movements and product competitiveness.
    Continually improve/build our relationships with our principals and major suppliers and attempt to ensure that we are a preferred dealer/customer.
    Provide excellent customer service and lead in our markets.
    Build long-term partnerships with customers.
    Build relationships with local authorities.
    Align strategies and targets with those of our major principals as far as possible.
    Exposure to political risks, terrorism and crime in the countries in which we operate

    The group’s people and assets are spread through numerous countries around the world, while our activities are conducted in many more.

    The possibility exists that our people and assets, and the viability of the businesses, are exposed through acts of terrorism, political turmoil or crime in some of the regions in which the group operates, as well as in those that may be the subject of expansion.

    Business growth initiatives require that new markets and territories are the focus of our business expansion. These opportunities come with their own distinct risk exposures.

      Operational risk

    Minimise exposure in high-risk countries through in-depth risk assessments, coupled with the application of preventive and corrective risk management activities.
    Maintain flexible business models.
    Maintain business continuity plans that incorporate emergency response actions, crisis management and business recovery plans specific to the businesses and the respective territories in which the businesses operate.
    Exposure to significant customers and dependence on channels to market

    We are exposed to certain large customers and/or industries and well-established distribution and support channels may change or consolidate.

      Market risk

    Build long-term partnerships with customers.
    Develop customer solutions which differentiate and expand our offering from product-based businesses.
    Diversify customer base.
    Develop new channels.
    Occupational health and safety risks

    Barloworld’s key asset is its employees. The occupational health and safety risk is the likelihood of a person being harmed or suffering adverse health effects if exposed to a hazard in the workplace.

      Employee/operational/strategic risk

    Minimise exposure through in-depth risk assessments, coupled with the application of preventive and corrective risk management activities and policies.
    Training in accident prevention, accident response, emergency preparedness and the use of protective clothing and equipment, all with the aim of ensuring a safe workplace.
    Regulatory environment

    Many of the group’s activities are governed by regulations. Due to the complexity and changing nature of these regulations across the industries and geographical spectrum of the group’s activities, there are challenges in staying abreast of all developments and maintaining full compliance.

      Regulatory risk

    Management is responsible for the ongoing monitoring of all pending and actual changes to the group’s regulatory environment. Due to the large number of jurisdictions which govern the group’s activities, this monitoring occurs in each relevant country of operation.
    Where feasible, the group will comment on proposed changes to the regulatory environment that may adversely affect the group in a particular jurisdiction.
    Slowing of global economies

    The effect of the slowdown on our businesses, customers, suppliers and funders and the continued risk that funding constraints within the supply chains could result in a doubledip recession and/or impede growth. This, in turn, has lowered commodity prices and impacted mining company investments.

      Financial risk

    Inflationary pressures to be carefully monitored and managed, as appropriate, in each business.
    Reduce costs and improve operating efficiencies.
    Monitor our customers’ ability to spend and access credit.
    Reduce working capital, limit capital expenditure and improve cash flow.
    Secure adequate committed borrowing facilities.
    Strategic employee skills

    Barloworld’s key asset is the intellectual capacity and skills of its employees. This necessitates ongoing management of the challenges regarding recruitment, succession planning, skills retention and development.

      Employee risk

    Barloworld has a comprehensive employee approach and related set of initiatives to align employees with the strategy of the organisation.
    These identify and align all employee elements of a value-creating organisation to ensure sustainable intellectual capacity and value-creation competence.
    Through performance management systems, employees’ purpose, role, function and accountabilities are defined, and, using competency-based assessments, employees are regularly reviewed to ensure the appropriate skill sets are available to enable performance at optimum levels.
    Investments in training resources and facilities are continuing to assist and encourage employees to enhance their levels of competence and performance.
    An appropriate suite of reward and incentive schemes ensures recognition, value-creation for employees and retention of high-performing employees.

    Barloworld has identified risks and opportunities associated with climate change and associated financial implications. These, together with the group’s responses to the identified risks and opportunities, are disclosed in its response to both the Investor CDP 2012, and Water CDP 2012. In identifying sustainable development as a strategic focus area, the group acknowledges the significance of these risks and opportunities and includes them in its strategic planning process.

    Group opportunities

    Barloworld has identified the following growth industries as central to our strategy. Due to our strategic profile, the original equipment manufacturers (OEMs) and brands we represent, and our regions of activity, we are well positioned to realise opportunities in these growth industries:

    • Mining

    Driver: long-term emerging market urbanisation and industrialisation driving demand for commodities and increased levels of investment (regions: southern Africa and Russia)

    • Infrastructure

    Driver: infrastructure backlogs and rapid urbanisation in developing economies driving infrastructure investment (regions: southern Africa, Russia)

    • Power

    Driver: growth in electricity demand, global requirements in marine transport, petroleum and rail segments. (regions: southern Africa, Russia, Iberia)

    • Automotive

    Driver: increasing need for flexible motor vehicle usage solutions for private and corporate segments, and inbound tourism (regions: southern Africa, Australia)

    • Logistics

    Driver: growing trend to outsource supply chain management activities (regions: southern Africa, Middle East, Europe, China and United States of America)

    • Agriculture

    Driver: importance of food security, growing demand for bio-fuels. (regions: southern Africa, Russia)

    Barloworld strategic focus areas (SFA), top imperatives and key performance indicators for 20153:

     
    STRATEGIC FRAMEWORK
     
    TOP IMPERATIVES
    SFA
    Strategic intent
     
    Top imperatives and key performance
    indicators for 20153
    Integrated Customer Solutions Drive market leadership through competitive differentiation by accelerating the evolution of our business model from pure distribution to the provision of flexible, value-adding, integrated customer solutions  
    Market leadership in targeted segments through delivering integrated customer solutions
    People Value creation through and for employees by attracting, developing and retaining globally competitive people necessary to implement our integrated customer solutions strategy and meet our growth targets  
    Drive employee engagement: Individual Perception Monitor (IPM) overall score above 75% for all businesses
    People development and succession aligned with strategic growth priorities
    Leadership retention
    Provide a safe and healthy work environment
    Empowerment and transformation Enhanced competitiveness, credibility, legitimacy and reputation in the eyes of all stakeholders by leading in broad based empowerment and transformation  
    dti broad-based black economic empowerment (B-BBEE) Level 2 or 3 for each South African business unit
    Leadership position
    Drive gender equality, localisation, disabled employment and diversity across the group
    Sustainable development Develop products and services to capitalise on emerging sustainable business opportunities, realise cost savings though energy efficiency and other sustainable business practices, and enhance Barloworld’s reputation by leading in sustainable development  
    Aspirational target of 12% non-renewable energy and greenhouse gas (scope 1 and 2) emissions efficiency improvements by end 2014 (2009 baseline)
    Cumulative cost savings through sustainability initiatives
    Pursue emerging commercial opportunities
    Financial returns Achieve top-quartile financial returns as measured against peer groups in each of our chosen business segments  
    Top-quartile financial returns on average through the cycle (at or above our cost of equity, and measured against relevant peer groups in our chosen business segments)
    Achieve return on equity target (15%) by 2015
    Achieve return on net operating assets target (20%) by 2015
    Internal targets and hurdle rates set for all businesses
    Release capital from underperforming assets
    Profitable
    growth
    Achieve targeted compound growth in total shareholder return in the five years to September 2015  
    Top-quartile growth in total shareholder returns over five years to 2015
    Increase group operating profit by executing turnaround and growth strategies
    Execute identified growth projects for each division

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