Q&A with the chief executive

It is our people who engineer our success. Key highlights Revenue up by 11% to R65 102 million Operating profit up by 18% to R3 527 million Profit before exceptional items up 20% to R2 538 million HEPS up by 26% to 860 cents Cash generated from operations of R4 263 million (2012: R43 million utilised) Return on net operating assets of 18.6% (2012: 18.8%) Total dividend per share up 27%

The group has delivered very pleasing results in the face of challenging trading conditions, particularly in the mining sector.

We have remained focused on delivering on our strategy as expressed in our core strategic themes, namely: integrated customer solutions, people, sustainable development, empowerment and transformation, financial returns and profitable growth. We continue to make progress in each of these areas.

Barloworld has recovered well from the global financial crisis to deliver excellent results in 2011 and 2012. Has this performance been impacted by the more muted economic conditions, in South Africa in particular, in 2013?

I am pleased to report that the group has continued its positive momentum, notwithstanding a challenging global mining environment and a slowing South African economy, to produce another year of strong double digit growth in revenues and earnings.

All our key businesses contributed to this performance, indicating that good progress is being made in each of our strategic growth segments – mining, infrastructure, power, agriculture, automotive and logistics.

We also successfully integrated the recent acquisitions of the legacy Bucyrus distribution businesses and executed on a number of other important strategic transactions which will position the group well for the future.

The group has made good progress to date on its five-year Vision 2015³. With only two more years left in this period, are you starting to think about your goals beyond 2015?

Barloworld’s Vision 2015³ aims to deliver significant incremental value for all stakeholders through 2015 and we are currently on track to achieve the specific targets we have set.

Our Global Leaders Conference in March 2013, attended by 180 Barloworld leaders from across the group, provided a critical forum to assess the impact of changing external environments and emerging megatrends and to map out a strategic framework for our future success.

While our senior management teams recommitted their focus on our existing strategic growth segments, we also recognised the need to challenge our businesses to deliver innovation and continuous improvement that meets the evolving needs of our customers in order to retain their loyalty and grow our market leadership position.

It is our people who engineer our success on a day-to-day basis and we launched a new people management framework at the conference, an Integrated Employee Value Model (IEVM). This balances our existing High Performing Organisation methodology, which identifies the business processes that must be in place to enable our employees to excel in their jobs, with a new Employee Value Proposition (EVP) that aims to attract, engage and retain top calibre employees. The approach is currently being rolled out in all our divisions and is essentially about creating a win-win situation for employees and the company.

Our people focus is being complemented by a new financial model which is designed to help our leaders identify the most important value drivers in their businesses. It assists management teams in developing meaningful financial and operational targets, measures progress in improving financial returns and models future value creation over the strategic plan period. This model will assist us to deliver maximum sustainable value creation for all stakeholders in support of our 2015³ vision.

The Bucyrus Russia equipment distribution and support business was acquired for R420 million and followed the acquisition of the Bucyrus southern Africa business last year. Have these delivered to expectation and how have they impacted the Equipment division result?

The Bucyrus acquisition in southern Africa, now referred to as Extended Mining Product Range (EMPR), has performed well notwithstanding the general slowdown in mining capital expenditure. It contributed R2.7 billion to overall Equipment revenues at a higher than expected margin on the back of strong aftermarket sales.

As a result, EMPR southern Africa has been earnings accretive to the group in its first full year of operation. We were also awarded two significant tenders for EMPR equipment from Swakop Uranium in Namibia and First Quantum Minerals in Zambia that will underpin revenues into our 2014 financial year.

The EMPR business in Russia has performed in line with expectations to date. There is a significant long-term opportunity in underground longwall applications in the coal mining sector.

The integration of significant numbers of new Bucyrus people, an unfamiliar product line-up using different technologies as well as new systems and processes, has been well handled by the Equipment division.

We are well placed to achieve significant further growth over the coming years particularly once Caterpillar componentry has been fully integrated into the product range.

Infrastructure and Power are two of your growth segments that look particularly promising in your fast developing sub-Sahara African territories. What progress is being made in these areas?

Despite the continued slow implementation of the planned infrastructure development in South Africa, our construction business improved in 2013 from a low base. Our other African territories, Angola in particular, contributed to this performance. The rental business also showed pleasing growth as customers continue to seek innovative funding solutions for their equipment needs.

Barloworld Power made good progress notwithstanding reduced demand from the mining sector. We continue to invest in skills and build capacity that will enable us to capitalise on the long-term growth opportunities in southern Africa in the various power segments including electric power generation, marine, petroleum and rail.

The Equipment business has endured a number of tough years in Spain. Has this trend continued and do you see any improvement on the horizon?

The economic environment remains challenging in Spain, but there are early signs that we are through the worst and the Spanish economy may start growing slowly into 2014. Despite the tough external environment, the management team has made excellent progress during the year with a turnaround from an operating loss of €13.3 million in 2012 to a small loss of €1.3 million in the current period.

This improvement has been achieved through firm cost control, the benefits of restructuring undertaken in prior years, together with a continued good performance in power systems.

The business generated positive cash flows of €28 million, as asset efficiency and tight working capital management remained a key focus.

The downsizing over the past few years means that the business is well positioned to return to solid levels of profitability as economic conditions improve and the equipment industry recovers to more normalised levels.

How has the slowdown in the global mining sector, particularly coal mining, impacted your Russian business in the current year?

While there has certainly been an impact, the slowdown in the coal segment has been compensated to some extent by growth in deliveries to gold, diamond and nickel customers. The EMPR business also made a solid contribution to another good result for our Russian Equipment business.

This young company has shown the increasing maturity of its business model as lower mining machine sales have been compensated by growth in aftermarket parts and service revenues. The construction and power segments also held up well.

We are continuing to invest in new and expanded facilities as well as skills development across Siberia and the Russian Far East to position the business to capitalise on the long-term growth we expect in these markets.

Following the sale of most of its international businesses, the Handling division is now largely an Africa-focused business. What are the reasons for this shift in strategy?

We have followed the disposals of our materials handling operation in the United States of America and UK in 2012 with the sale of our Belgian operation this year and are pursuing the sale of The Netherlands business. This continues our strategy of allocating capital to those geographies and businesses where we are likely to earn the best long-term financial returns.

The business is now well positioned to focus on its growth strategy for sales and support of its materials handling and agricultural brands in southern Africa. We see significant potential for growth particularly in the markets of Mozambique, Angola and Zambia.

All business units within the Automotive and Logistics division performed well notwithstanding the pressure on the South African consumer. To what do you attribute this strong showing and what synergies exist between the various businesses?

The division produced another record result this year with revenues up 17% to R34.4 billion and operating profits of R1.5 billion, some 28% ahead of last year. Importantly, all of the business units contributed well to this overall performance.

Each operation has a clear strategy and a focused, independent management team responsible for all aspects of their respective business. However, synergies are also achieved by optimising inter-business unit revenues, use of common technologies such as online used vehicle disposal platforms and shared functional resources to improve efficiencies and drive cost savings.

The Motor Retail business delivered a very pleasing result with good new and used vehicle sales as well as improved aftermarket activity. The business continues to benefit from the “Fewer, Bigger, Better” approach towards retail dealership sites which has maximised value creation from a limited number of well-located leading retail operations.

Car Rental delivered a significant year-on-year improvement, with car rental volumes up and a small increase in rate per day.

Fleet Services demonstrated very strong growth and bedded down the fleet management contract award by the City of Johannesburg early in the year.

Logistics continued its strong turnaround to improve operating profit by 38% assisted by a number of niche acquisitions during the year.

The division as a whole improved overall margins and financial returns and is well placed to continue this momentum in the year ahead.

There appears to have been considerable corporate activity in your logistics business. What have been the key initiatives in the current year and what does the future hold?

A number of acquisitions were made in the current financial year. We finalised the acquisition of the 25% minority in Logistics Africa, while the Logistics dedicated transport business concluded a merger with Manline Logistics to form Barloworld Transport Solutions (BWTS). BWTS in turn acquired an abnormal load transport business which has synergies with our Equipment operations. This provides exciting short and medium-term growth potential for our road transport business across southern Africa. Barloworld Logistics has also acquired a 25% stake in re-, one of South Africa’s leading environmental waste management businesses.

Logistics continues to focus its efforts on the African continent and has successfully renewed a number of long-term contracts expiring in the current financial year.

New clients and further work from existing clients has been secured through the refocused business development team and a broadened range of services on offer.

A decision was taken to exit the loss making airfreight business in the Far East and the transaction was concluded effective 1 November 2013.

All the above initiatives position the business well for future growth and enhanced financial returns.

What other strategic developments have taken place during the year?

While we have built a very credible motor retail business in Australia we are continually evaluating optimal capital allocation opportunities and took a decision to dispose of the Ferntree Gully motor dealership in Melbourne effective 31 October 2013.

This will facilitate the ongoing redeployment of capital into higher returning business opportunities.

How are you evolving your leadership structures to effectively deliver your strategy over the next 10 years?

Our organisational and management reporting structures need to continuously evolve in order to support the implementation of our strategies and the achievement of our vision to 2015 and beyond.

We announced some key leadership changes during the year to develop management and leadership; allocate resources to future growth segments and ensure appropriate management succession in our businesses.

On 1 October 2013 Peter Bulterman relinquished his position as CEO of Equipment southern Africa to take responsibility for the greater Equipment division including southern Africa, Iberia and Russia. Dominic Sewela has been promoted from chief operating officer to CEO of Equipment southern Africa.

John Blackbeard takes up the reins as CEO of the Global Power business across Iberia, Russia and southern Africa in addition to his current duties as CEO of the Handling division. This appointment will give us the impetus to build our focus on growing the Power business across all territories in the key segments of electric power, petroleum, marine and industrial.

After 111 years in business, the Barloworld group has proved it knows something about sustainability. But what does sustainability mean to the group today?

Our commitment is to provide sustainable value for all our stakeholders, including shareholders, customers, employees, principals, suppliers and the communities in which we operate.

Providing a safe and healthy work environment is central to our approach. While we continue our focus on safety, tragically, there were three work-related deaths all involving drivers who died in motor vehicle accidents during the year and a subsequent fatality in Equipment South Africa. We extend our condolences to their families and continue to implement measures to prevent such accidents in future.

Transformation and diversity remains a top priority in all our South African businesses, which have retained their industry leading positions at Level 2 or 3 in terms of the Department of Trade and Industry’s Broad-Based Black Economic Empowerment (B-BBEE) scorecard.

Our spend on training and skills development amounted to R120 million during the year to align with our focus on people excellence.

Looking outside the business to our communities, we contributed R17 million to socio-economic and corporate social investment initiatives.

We continue to focus on achieving our aspirational targets for 2014 in non-renewable energy consumption and greenhouse gas emissions (scope 1 and 2) efficiency improvements, as well as addressing water stewardship. While most of our businesses are on track to achieving our targets the acquisition of Manline impacted our fuel usage and emissions within our Automotive and Logistics division.

In terms of recycling, we continue to increase our machine and parts rebuild capacity to ensure second life capability for Cat earthmoving machines to reduce the use of non-renewable resources associated with the building of new machines.

Barloworld is proud to have been recognised on several indices associated with sustainable business practices. These include the Dow Jones Sustainability Emerging Markets Index, the Johannesburg Stock Exchange (JSE) Socially Responsible Investment (SRI) Index, and the CDP’s South African Carbon Performance Leadership Index.

How do you see the outlook for the Barloworld group?

First and foremost, we will continue to focus on organic growth and niche acquisitions across our key growth segments of mining, infrastructure, power, agriculture, automotive and logistics. We have become respected and sought after solutions providers in these sectors and are well positioned strategically to expand our influence across them all.

Mining is one of our major sources of revenue and we recognise that mining cycles are becoming shorter and less predictable. We anticipate that mining companies will be slow in committing to capital expenditure and new projects through 2014, with a recovery likely only commencing in 2015.

However, continued growth in construction, power, EMPR and after-sales revenues will all contribute to our performance in 2014 in southern Africa and Russia. We expect a slow recovery in Iberia in the year ahead.

While consumer demand is expected to remain constrained in South Africa, we believe our Automotive and Logistics division is well positioned to capitalise on recent project awards and acquisitions and another solid performance is expected.

Overall, the various strategic initiatives undertaken together with our focus on achieving ongoing operational efficiencies should ensure further progress in 2014.

Our leaders provide the direction and guidance and, importantly, instil passion and commitment in their teams. But it is our employees who deliver excellence in their day-to-day activities. Every employee of Barloworld has a role to play in our success, individually and as a team.

I wish to thank our management teams and all employees for their dedication to the job at hand, focus on adding value, and loyalty to the Barloworld group. Your efforts are sincerely appreciated.

We are fortunate to be led by a very experienced, capable and committed executive team, who have directed the achievement of excellent results in a difficult trading environment in 2013, and who are, as we speak, working hard to deliver another credible performance in 2014.

Clive Thomson
Chief executive