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Investing in integrated customer solutions
Geographic spread provided resilience in a tough mining climate.
* B-BBEE rating for South Africa only. Financial highlights
EQUIPMENT Southern Africa Market overview Low confidence and reduced overall value of the mining industry continued into 2014 and the slump in demand for commodities, driven by China and Europe, put pressure on customers who cut back on costs and concentrated their budgets on operational improvements rather than capital expenditure. Although this cost-cutting impacted our mining business, our customers’ focus on improved operational efficiencies resulted in increased parts sales which offset the decline in machine sales. Protracted labour unrest in the mining and engineering sectors in the South African market has contributed to the uncertainty in the industry. Government’s predicted capital expenditure on infrastructure did not materialise to the extent anticipated but we continue to see local contractors busy with private work, reflecting growth in the construction industry. Business overview Barloworld Equipment southern Africa’s vision is to be the market leader by providing customers with the lowest total owning and operating cost over the life of the machine. We have four strategic imperatives which will enable us to achieve our vision: building a high-performing organisation, delivering customer satisfaction, driving market leadership and thus creating shareholder value. Business model
Our alignment with our principal, Caterpillar, involves mutual understanding and respect, flexibility and focus on common goals. Various long-term initiatives are in progress to drive market leadership through improvement in machine and parts sales and service levels. Our business in Botswana celebrated its 50th anniversary in 2014, and our businesses in Zambia, Angola, Mozambique and Malawi celebrated 20 years of business in Barloworld. Successful integration of EMPR which delivered well ahead of acquisition expectations. Aftermarket and strong rental growth underpin overall solid performance. Performance overview Despite a very tough economic environment characterised by volatile commodity prices globally and labour unrest in South Africa, Barloworld Equipment southern Africa delivered a solid performance in the year ending September 2014. Revenue increased by 9.3% to R20.9 billion (2013: R19.1 billion). Operating profit for the period improved by 17.3% to R1 968 billion (2013: R1 678 billion) driven mainly by stronger machine, parts and maintenance and repair contracts performance. This was underpinned by strong rental growth as well as growth in the active machine population and consequently the aftersales business. The EMPR business achieved strong performance driven by deliveries to Moolmans, Kumba Iron Ore in the Northern Cape, Swakop Uranium in Namibia, and First Quantum Minerals (FQM) in Zambia and continues to contribute at a higher level than anticipated at acquisition. Income from associates and joint ventures delivered profit growth of 24% over last year. Slow economic growth in China had an unfavourable impact on commodities, with the tough environment resulting in capex reduction by customers and a lack of investment appetite. This has, however, created opportunities for other solutions, resulting in the growth of the rental business. Factors that have led to the slowdown in growth in the mining sector in southern Africa will continue to have a negative impact on the mining industry in 2015, with growth, albeit at a modest rate, expected to improve from 2016 onwards. Mining 2014 has been an exciting year for our EMPR business as we started the process of entrenching this product line into our existing mining business. The highlight of the year has been the continued delivery of two large build projects, namely Husab mine in Namibia and Sentinel mine in Zambia. Both projects are well on track towards completion on time, within budget and with a lost-time injury free record. All equipment is set to be commissioned at FQM’s Sentinel project in Zambia by the end of 2014 at a contract value of US$120 million. Barloworld Equipment is working closely with FQM to support its operations through the supply of parts, technical service representatives, field service support as well as a parts and service support facility close to the site. Delivery of equipment to the Husab site of Swakop Uranium began in August 2013 and we aim to complete commissioning by December 2014. Field service support and training and a Barloworld Equipment parts and service support facility will be provided on site. Financial results achieved during the year from the EMPR business unit exceeded original expectations. This was driven by the extraordinary effort of all our employees involved in this newly acquired business. The first two years have laid a solid foundation for the future with the continued focus on building a solid pipeline of key critical skills. We are well positioned to take full advantage of opportunities resulting from an upturn in the mining industry in the medium term. Construction, rental and used equipment A remarkable 200% increase in the total market demand for construction equipment since 2010 has driven the sustained growth that we continue to enjoy in our construction business despite strong competition and the continued lack of major capital projects throughout southern Africa. Our complementary Metso crushing and screening equipment business continued to deliver solid performance despite this subdued environment. This business will be incorporated in the Handling business unit in the new financial year. Rental and used equipment remain attractive alternatives to new sales, particularly in South Africa, and this aspect of the integrated business enjoyed another good year with rental and used assets seeing 46% growth in operating profit. The Cat Certified Used product offering continues to be an attractive alternative to new products, with over 400 machines delivered into the southern Africa market. Power The market for Power in southern Africa remains competitive with South Africa largely a standby power market; however, Angola and Mozambique are growing opportunities where we are enhancing our sales and product support to be able to further realise these opportunities. We have invested in additional skills and systems in our electric power and onshore oil and gas centre of excellence to be able to undertake solutions projects in southern Africa. Significant projects won include the supply of 16 MAK marine engines to SAS to power their eight new Transnet tugs, the gas-fired plant for Bio2Watt plus a standby power plant for a large financial institution in Mozambique. Our Boksburg rental depot achieved the coveted Caterpillar five-star rating and we opened a new rental depot in Cape Town. We reduced our stock levels to be in line with new targets. Opportunities continue to grow with increasing urbanisation, GDP growth, electrification, gas exploitation and general development in the southern African region. Large upcoming energy projects related to gas in Mozambique, oil in Angola, and in time, well-stimulation in South Africa, provide an exciting future. Investing for future growth People Human resources is aligned to the Caterpillar Across the Table initiative with plans to improve capabilities and the positioning of human resources to ensure realisation of business goals; a clear recruitment, selection and on-boarding process; alignment of job grades to remuneration and benefits; the development of leadership competence; management development for sales and service employees; and regular updating and communication of human resources policies. Employee value model The Integrated Employee Value Model (IEVM) is being embedded into the business to ensure employees are inspired, committed, aligned, empowered and results-driven. At the core of our Employee Value Proposition is our commitment to continue investing in our people through learning and development programmes aimed at improving individual performance standards and competency levels. We manage, measure and review personal growth against defined targets and goals, which ensures that each of our employees is enabled to create value and to help achieve the business strategy. Our focus is on building sustainable competence and strengthening our leadership pipeline for future business needs. Leadership development We believe that leaders have a direct impact on employee engagement. As a result, we focus on developing and equipping our leaders at all levels with tools and skills to ensure that they cascade the company vision and strategy with insight, inspiration and exemplary behaviour. Every leader in our business is held accountable for ensuring that his or her team has clear direction and understanding of their role to create sustainable value for all our stakeholders. We are a major contributor to skills development in our industry and have trained more than 600 learners from all our southern African territories. A strong succession plan supported by a formal middle management excellence programme is being built. Talent management At Barloworld Equipment, performance management is a priority. Employee performance is formally reviewed at least twice a year and line managers are trained to conduct formal performance appraisals in a way that drives employee engagement and improved performance. The CEO annual Intellectual Capital Review (ICR) is conducted to assess the talent pipeline and to identify high-potential individuals, based on performance. The ICR process is also used to agree progressive action plans to close any talent gaps that may have been identified during the year under review. The ICR process is also used to develop succession plans for critical roles and to ensure that the high-potential candidates are placed on an appropriate career path in line with their aspirations, interests and our business needs. Skills development We strive for continuous improvement, innovative problem solving, shared learning and increased team performance. Through collaboration tools and networks, innovation teams and information-sharing sessions (business meetings), we involve our employees as part of business decision-making to ensure that we tap into the collective wisdom of teams. Barloworld Equipment has been formally recognised by the Manufacturing, Engineering and Related Services Sector Education and Training Authority (merSETA) as a major contributor to skills development in our industry. We have trained almost 600 learners from all our southern African territories in our Technical Academy over the year and carried out over 700 assessments. Some 1 250 customer employees have also received training at the academy this year. Health and safety Safety is one of our core values. Our aim is to run an injury-free operation and we are currently rolling out a behaviour-based care (BPC) programme at our main campus (Isando) and we expect this intervention to have a positive impact on safety. The programme will be extended to Middelburg in the 2015 financial year. We are proud to have received the OHSAS 18001 certification for the Isando campus in 2014. The Middelburg campus is already OHSAS 18001 certified. Regrettably, one of our employees was tragically killed in a motor vehicle accident. Our deepest sympathies and condolences go to the family, friends and colleagues. To minimise the risk of vehicle-related incidents, we have:
Profitable growth Barloworld Equipment has embarked on Caterpillar’s dealer growth and profitability (DGAP) project, which aims to identify opportunities for profitable growth in our machine and parts sales. Caterpillar has found that globally there is a significant opportunity, and an increasing need, to improve profitable growth across its dealer network. Barloworld Equipment’s profitability depends on growing our aftersales market as well as growing our machine sales to drive the aftersales business. To realise profitable growth across our region, we will be implementing specific commercial plans for improving market share as follows:
Integrated customer solutions
We are making good progress in providing technology-enabled solutions to further enhance our customer value proposition. Customer value proposition A key focus of our growth and profitability strategy has been the implementation of a three-tier coverage model. This entails maintaining customer relationships through parts and service sales representatives (PSSRs), internal sales representatives (ISRs) and direct marketing to ensure that no owner or potential owner of a Cat machine is left uncovered. The ISR programme is a new initiative which initially involved intensive training for 13 ISRs who were allocated to customers across our territories. ISRs can cover more customers over a wider distance due to their central location and use of technology. The ISR programme is starting to yield early results, particularly in parts sales. We anticipate that this will provide a competitive advantage in the future by enabling us to build relationships with customers we were not reaching previously. Technology solutions Barloworld Equipment is driving technological advancements which form an integral part of the Cat Equipment Management Solutions (EM Solutions), a comprehensive remote monitoring and asset management service that allows us to standardise our service to customers. This technology allows us to receive information and make recommendations that ensure that customers’ machines are more productive, maintaining our reputation as trusted advisers and thus driving customer loyalty. Being one of the forerunners to market with leading-edge technology solutions, Barloworld Equipment is demonstrating that we have not only the vision, but the capability to fulfil that vision, creating a better and more rewarding future for our industry. Sustainable development Corporate social investment The drive to engage in CSI projects that add value to both the communities within which we operate and our regional operations is making a difference. Barloworld Equipment has developed a CSI operational framework to provide guidance and encourage employee volunteerism. Our SED/CSI total spend to date is almost R2.5 million with our main focus areas being education, health and environmental stewardship. Ethics and compliance At Barloworld Equipment, our intention is to conduct business in an ethical manner and our employees are exposed to our ethics policies on an ongoing basis. We are currently exposing our suppliers to our ethics and supplier Code of Conduct and running a comprehensive ethics and legal compliance programme in all territories. Responsible value chain In pursuit of the Barloworld campaign “Change Makes a World of Difference” we held a series of workshops with our suppliers to provide an understanding of the key imperatives of our procurement strategy including black economic empowerment, transformation, health and safety, anti-corruption, responsible sourcing, and enterprise and supplier development. We recognise that through strategic partnerships with our suppliers we are able to add value to their businesses as well as enhance the quality of the service they deliver to us. These workshops have been well attended and the common feedback from suppliers is an appreciation of being engaged and kept up to date on developments within Barloworld Equipment. Environment We continue to roll out various energy and water-saving initiatives aimed at addressing our aspirational targets and achieving strategic objectives. Our initiatives include, inter alia, the installation of online real-time electricity and water meters, timers and occupancy sensors, efficient external and internal lighting, heat pumps, hydroboils, solar geysers, renewable solar voltaic energy for signage, water recycling plants, water harvesting tanks and waste recycling facilities. Our significant component rebuild and remanufacture facilities and activities underpin our commitment in this regard and also support our product lifecycle and waste initiatives. Caterpillar’s commitment to sustainability enhances our ability to provide products and solutions that assist our customers to achieve their own sustainable development objectives. Empowerment and transformation Preliminary report indicates a Level 2 B-BBEE rating, allowing us to sustain our competitive advantage. We have also seen a significant improvement in our employment equity rating, with more black women appointed at executive, senior and middle management levels. Gender representation on our board has improved and we have increased the number of employees with disabilities from 15 in 2012 to 73 in 2014. Outlook From a growth perspective, the African story is a good one with a positive medium-term outlook and we are well placed, operating in diversified regions with many and varied commodities. We look forward to seizing opportunities in both the mining and infrastructure sectors. The mining industry is facing difficult conditions in the short term, particularly in the gold and platinum sectors. Little growth in output is expected as weaker prices, elevated costs and declining ore grades discourage production. However, increased demand for southern African coal and iron ore will encourage greater production for export as well as domestic consumption. With the ongoing reduced capital expenditure by most mining houses, opportunities continue to arise in the contract mining sector and the rental offering to this market remains an attractive alternative to purchasing new equipment. In mining, the EMPR business gives us the opportunity to harvest significant new sales and after-sales business. In South Africa, one of the biggest challenges and opportunities will revolve around upgrading existing infrastructure. The optimistic outlook for construction in southern Africa continues, driven by projects in infrastructure development, water, hydro-electric power and rail. The emerging middle class, coupled with urbanisation and industrialisation, has created a demand for improved infrastructure and service delivery. However, the affordability of infrastructure continues to be a major issue as governments strive to shift the cost burden to end users, whose income is already squeezed by the rising cost of living. Cities will continue to drive economic activity as urbanisation increases, but many green field projects are still in the development and approval stages and yet to be released. We have also identified significant opportunities in the construction after-sales market. Various coverage models have been implemented to capture this opportunity in the coming years, including internal sales representatives and enhanced direct marketing campaigns. The outlook for the rental and used business remains extremely positive and we are expecting pleasing growth in the year to come from this channel. While the Equipment southern Africa firm order book at September 2014 of R1.9 billion is down on the R3.5 billion at September 2013 this reduction is partly reflective of the shortening lead times for machine orders placed on Caterpillar; currently around 20 weeks for mining equipment. Our 2015 revenue outlook range for equipment southern Africa is R20.0 billion to R22.0 billion compared to revenues of R20.9 billion in 2014.
Pleasing performance notwithstanding the impact of geopolitical uncertainty and mining slowdown. Russia Market overview The Russian economic environment remains uncertain due to the weakening oil price and negative political sentiment driven by the Ukraine crisis. A quick and decisive resolution to the crisis would go a long way in returning stability to the region and give momentum to mending the relationship between Russia and the West. Internally, Russia remains politically very stable with the current government receiving some of the highest popular support ratings on record. Closer economic relations are being established with the BRICS countries, especially China. A landmark 30-year gas supply agreement has been signed with China, giving the green light to the substantial and potentially lucrative Power of Siberia pipeline system linking the vast gas fields in eastern Siberia with China. Although our customers are naturally worried about the current situation and its impact on uninterrupted customer support, there is surprisingly little negative sentiment towards us, Caterpillar and other western suppliers. We remain positive that in the medium term the current political crisis will be resolved and business will recover and grow. Business overview Our business model is currently undergoing a subtle transformation with greater emphasis placed on development of technology-enabled solutions. We are establishing a technology centre of excellence in Novosibirsk to offer customised solutions to specific customer needs across all segments, including mining. Best-in-class applications from Caterpillar as well as third-party vendors will be sourced. Most of our technology-enabled solutions are not equipment brand-specific and will allow us to penetrate customers with non-Cat fleets. Aftermarket business continued to increase during 2014 despite the significant decline in prime product sales, a sign of maturity considering the youth of our dealership. The new Extended Mining Product Range (EMPR) has also demonstrated excellent growth in parts and service revenues over the prior year. Performance overview Our revenue was down by 23% on the prior year (US$383 million vs US$498 million in 2013) due to the continued decline in mining, the Ukraine crisis and a lack of large infrastructure projects in our dealership territory. Despite weaker top-line performance, we managed to achieve US$40 million in operating profit (2013: US$43 million), a respectable result under the circumstances that was driven by tight cost controls and realising efficiencies. In mining, the coal segment remained severely depressed. Customers in the Kuzbass region remain loyal to local competitors due to entrenched fleets and pressure to purchase domestic product. However, we secured the start-up fleet for the Tiger’s Realm Amaan North greenfield coking coal project in the Chukotka region on the basis of strong relationships and a comprehensive offer of Cat equipment, finance, tooling, infrastructure and technical support. The gold segment continued to perform relatively well despite lower commodity prices. Alrosa, Russia’s leading diamond producer, has also contributed strongly to both our new equipment and after-market mining revenues. The construction sector has not shown improvement over 2014 due to a lack of federal finance following the efforts to complete the Sochi Olympics infrastructure, coupled with the weaker rouble reducing price competitiveness in the short term. We anticipate a turnaround as the Power of Siberia project gets off the ground. Following our rental fleet investment over the last two financial years, the power division continues to show significant growth in rental revenue. This segment is now the major contributor to the profitability of our power business. Overall prime product sales were below expectation across both the electric power and oil and gas segments. Investing in future growth We are actively partnering with Caterpillar to achieve our common goals set in the Across the Table initiative. These include:
We continue to improve our facility infrastructure, with the Kemerovo facility already operational and Magadan and Norilsk targeted for completion in 2015. Our Novosibirsk and Irkutsk facilities have achieved the maximum 5-star contamination control rating from Caterpillar. With regard to our people, we will focus on strengthening customer service through the introduction of formal customer experience management practices. At the same time, a culture of safety continues to be entrenched in all levels of the business. Dedicated leadership training programmes have been developed and will be actioned in 2015 for middle management and high-potential employees. Sustainable development remains central to our long-term success and we will continue to focus on related initiatives which include leveraging our component rebuild and remanufacturing capabilities, our ‘green’ building programme, and providing leading products and solutions to our customers. We continue to modernise and improve our IT systems supporting the business. A business intelligence and budgeting tool has been implemented to allow for better and quicker analysis of our key performance indicators. In addition, a warehouse management system incorporating the latest developments in warehouse control and inventory management has been put in place in our Novosibirsk distribution hub in partnership with Barloworld Logistics. Outlook We are forecasting pressured revenues into 2015, followed by recovery in 2016 as the mining cycle starts to turn. The timing and magnitude of the potential decline and subsequent recovery will depend on resolution of the Ukraine crisis and global demand for commodities. Excellent efforts have been made during 2014 to reduce working capital and the same vigorous focus will continue into the year ahead. We are projecting the business to be cash flow positive in 2015. We are actively growing our capabilities in the areas of technology and equipment management in order to capture technology-related revenues as well as business from mining customers who are currently purchasing competitive products. Our long-term success is dependent on the global commodity market, timing of the start-up of green field mining projects, availability of finance to the Russian mining houses and government programmes to fund construction in the regions. In 2015 we are planning to capitalise fully on the Power of Siberia opportunity, although strong competition is expected. We will focus on profitable growth of the after-market opportunity through improved customer service, strict quality control and focused marketing support from our principals. The Equipment Russia firm order book of US$14 million at September 2014 is well down on the prior year, however, there remain a number of major projects currently under discussion for both Caterpillar legacy and EMPR products. In addition, there are orders of US$17 million carried forward from the EMPR acquisition for delivery in 2015. The 2015 revenue outlook range for Equipment Russia is US$350 million to US$400 million compared to revenues of US$383 million in 2014.
Improving macro-economic outlook but construction sector remains subdued. Iberia Market overview We operated within a Spanish macro-economic environment showing greater stability, and signs of a long- awaited economic recovery are beginning to show. However, we continue to live with the effects of a prolonged economic downturn in Portugal. Indicators show some respite from the prolonged recession experienced in the region. Unemployment is reducing and the banking sector is improving, leading to a return of economic confidence despite ongoing concerns over the sustainability of the recovery in Europe as a whole. The recovery, primarily driven through the export and retail sectors, has not yet had any significant impact on the key public works and construction segments. The region still faces the effects of the prolonged recession. Business overview We continued to focus on our vision of being recognised by our customers as the market leader in providing integrated solutions for Caterpillar products, rental and product support. This has led us to be well aligned with the requirements of Caterpillar’s Across the Table initiatives for dealers. We have also been recognised by Caterpillar through the award of gold status for Service Excellence for the fourth consecutive year in Spain and for the first time in Portugal, as well as maintaining platinum status for Marine Service, as well as Excellence in Service Training. These accolades are reflected in our customer loyalty and satisfaction levels, which exceed those of our competitors and other Caterpillar dealers in the Europe Africa Middle East (EAME) region. We continue to lead the industry in overall market participation, with strong focus on delivering solutions to our customers wherever they are, working in partnership with our fellow Barloworld companies. Performance overview Despite the stabilising macro-economic environment, revenue was lower on a year-on-year basis due to the absence of large package deals delivered in the prior year. Revenue of €290 million for the Iberian business was 21% lower than 2013. Mining activity in the region was mixed, with coal mining in Spain continuing low levels of activity due to mining subsidy cuts, while copper mining in Spain and Portugal was more buoyant. While there were no significant equipment deliveries following the equipment shipped in the prior year, sustained copper production drove product support activity consistent with the prior year. The construction segment remained muted, with heavy construction continuing to feel the lack of public investment expenditure which has prevailed for the last five years and light construction absorbing existing equipment capacity in the region. Development of the group’s capability and market participation with the supply of equipment to non-traditional markets such as quarries, industry, agriculture and forestry, saw steady advancement. A slowdown in both the regional and international used market affected the level of used equipment sales, albeit at more robust margins, while rental revenue increased following implementation of the final phase of fleet reconfiguration. The Power Systems business saw a year-on-year reduction in prime product revenue, affected by the non-recurrence of large critical power deals delivered in the prior year as well as long lead times from customers to close project details. The local markets continued to experience low levels of activity and ongoing changes in legislation around co-generation plants dampened the Spanish renewable power sector in particular. The second phase of a large financial institution’s critical power project was delivered, as were some key marine and petroleum orders. The increase in non-productive technician costs following the
return of a large group of technicians from international
secondments pushed overall gross margins lower than the
prior year. Operating expenses were down on the prior
year, despite the prior year including an enforced one-year
temporary salary decrease in the Spanish business.
A provision of The balance sheet remained well controlled with working capital, rental fleet investments and capital expenditure managed. We continued with the realignment of the branch network which included completion of the new facility in Barcelona and ongoing construction of new facilities in Seville. Investing for future growth We are confident of returning the Iberian business to profitability in the short term by maintaining our industry-leading position in equipment sales and product support, continued margin development and protection, restructuring to contain and reduce costs, and strong alignment with Caterpillar’s Across the Table initiative. Stakeholder engagement continues to play a vital role in the Equipment Iberia business. Customer satisfaction and loyalty measures have been maintained at near-record highs as key account management and market focus programmes, accompanied by high service levels, form part of day-to-day operations. We have continued to drive extensive engagement with our principals in all areas of the business and we are making good progress on governance, ethics and compliance and sustainability requirements which include energy efficiency, water stewardship, responsible waste management and leading customer solutions. The Barloworld Worldwide Code of Conduct remains integral in driving ethical behaviour across the organisation. Despite the challenging environment, we recognise that our employees are essential to the success of our business. We actively pursue gender equality and progress equal leadership and development opportunities despite the low employee turnover ratios experienced in the region. The Integrated Employee Value Model continues to be rolled out as a cornerstone of our employee value proposition. Profitable growth of the Spanish and Portuguese businesses will continue to be driven by focus on our vision and the further expansion of our products and services to recognised key accounts, as well as capitalising on the opportunity that has been identified in the Power Systems business. Expanding and profiting from our hard-won footprint in non-traditional market segments will remain a key area in our Equipment business, while the continued turnaround and alignment with Caterpillar’s rental and used initiatives is expected to offer additional growth and synergies. Strategic plan finalised with Caterpillar to grow electric power, marine, petroleum and industrial segments in Spain, Portugal, southern Africa and Russia. Our established capabilities in delivering world-class power systems product offerings and equipment management solutions give us a significant lead on competitors. Capitalising on this will require an investment in skills and services to ensure alignment with Caterpillar’s growth strategy. In a positive step forward, we have been selected as one of three pilot dealers for Caterpillar-branded propulsion systems, following their acquisition of Berg Propulsion in 2013. Our commitment to create a sustainable organisation continues unabated. Our effective employee health and safety programmes and quality processes have resulted in a reduction in workplace accidents, excellence in external health and safety audits and the retention of two separate ISO ratings for processes and sustainability. Outlook The short to medium-term outlook for the region remains mixed with continued market uncertainty around the strength of the European Union’s financial recovery and growth prospects, balanced against rising confidence levels in Spain and lingering issues clouding the Portuguese macro-economic picture. Our focus will remain on maintaining our leading position in our traditional markets while continuing to build on gains made in identified non-traditional market segments. We also look to leverage our market-leading position in our Power Systems business, specifically in the Marine segment, to achieve product support growth. Our work during the year has resulted in a number of after-sales opportunities coming to fruition in the rail and petroleum segments. We will continue to grow our technology-enabled product support solutions offering and optimise market coverage for our excellent service capabilities. The combination of our used and rental businesses into a single organisation has now been completed and we will look to maximise the synergies inherent in this integration while utilising our internally generated brands and routes to market to increase market coverage at low cost. The workforce restructure at the end of 2014 is expected to reduce the division’s overhead structure by approximately €7.4 million in the coming year. The Iberian Equipment order book at September 2014 of €33 million is down on the prior year, however, the anticipated slow recovery in EU construction sector means that our 2015 revenue outlook range is €290 million to €315 million compared to revenues of €290 million in 2014.
Agriculture South Africa delivered record sales with strong growth in higher technology sectors. HANDLING Market overview Trading conditions in the Lift-truck business in South Africa have been challenging, with the market dropping approximately 20% in 2014. In agriculture, the commercial maize crop is expected to be a record 14 million tons, contributing to decreased commodity prices, depressed cash flow for farmers, and thus pressure on new equipment sales. Business overview The Handling business has focused on redefining its Customer Value Proposition by looking at integrated offerings and reinforcing alignment with principals. Despite difficult trading conditions, customer relationships have been well maintained. Performance overview We have grown our market share in a declining Lift-truck market. Despite Lift-truck sales declining by 3%, operating profit improved by 17% as a result of improved after-market performance. In agriculture, we successfully implemented key growth strategies in high-technology market segments, which contributed to overall revenue growth. Despite the market decline and termination of the CLAAS business in September 2013, our agriculture revenue increased by 12% and operating profit by 22%. Massey Ferguson tractor and Challenger sales grew by 29% and 60%, respectively. Revenue from the SEM Wheel Loader business decreased mainly due to slow market activity and halted production of the 668 model. With more than 450 units in the market, parts revenue increased by 88% and is contributing well to overall profitability. Revenue in the relatively young Mozambique Handling business doubled and a modest operating profit was secured. In Russia, we have grown our share of the tractor market in Siberia under difficult circumstances, but operating losses continued. Outlook In 2015 we plan further expansion of product lines and service offerings in the Lift-truck and SEM businesses and focus will remain on developing parts, service and customer support. Some market growth is anticipated for high-technology agriculture mechanisation equipment. Large-scale farming is changing with increased demand for mechanisation, technology solutions and precision farming systems and we will harness these opportunities. We plan to establish a technology business unit to develop integrated customer solutions to improve productivity and efficiencies for these large operations. Our 2015 revenue outlook range for the Handling division is R2.0 billion to R2.4 billion compared to revenues of R1.93 billion in 2014.
Integrated business model delivers sustained value
* B-BBEE rating for South Africa only. Financial highlights
Automotive
Logistics
Business overview
Striving to be a recognised leader in providing integrated vehicle usage and logistics solutions. Market overview The division operates in markets that are influenced by interest rates, consumer and business confidence, trade flows and overall economic activity, all of which remained subdued during the financial year. The South African vehicle market saw a softening with new vehicle sales volumes lower in the financial year under review. In South Africa, new vehicle industry sales for the financial year declined by 2.8% due to weak consumer confidence, while the used vehicle market provided select opportunities as new vehicle prices increased. Statistics from the South African Vehicle Rental and Leasing Association (SAVRALA) showed the car rental market grew by 0.3%. Demand for outsourced vehicle management services and leasing remained robust. Certain sectors in the South African logistics industry are still trading below expectation, with others benefiting from an upturn in volumes and demand. Strike action in key sectors impacted negatively on the overall logistics market. Internationally, volumes remain unpredictable and the industry remains cautious in view of volatile economic markets and uncertainty surrounding a sustained recovery. In the context of this challenging environment, the overall division performed very well. The Automotive and Logistics division’s vision provides clear purpose and direction to the organisation: To be a recognised leading provider of integrated vehicle usage and logistics solutions by exceeding our stakeholders’ expectations at every interface. The division provides customers a range of integrated solutions from single-unit transactions to an overall solution, appropriate to the clients’ specific needs, complemented by Barloworld service excellence. Through a structured approach, the division ensures that each business unit applies best practice within its core businesses, a strong focus on operational excellence, and strives for a market-leading position in each key segment. In addition, this approach maximises the direct and indirect benefits that exist between the various business units through meeting customer needs. The divisional platform provides for leadership and guidance across key areas through process ownership and collective wisdom. Car Rental Avis Rent a Car operates short-term vehicle rental from over 190 customer service centres focused on the tourism, corporate, local and replacement market segments throughout southern Africa. At peak, the car rental fleet comprised some 27 100 vehicles. The operations in South Africa, Botswana, Lesotho, Mozambique, Namibia and Swaziland are company-owned and the remainder are sub-licensed. Avis Point 2 Point is a chauffeur-driven inner-city transfer service, while Avis Van Rental operates via a sub-licensee network in South Africa. Avis Car Sales disposes of ex-rental vehicles into the trade and to retail customers. Fleet Services Avis Fleet Services provides long-term rental vehicles and a range of fleet management services to operators of passenger and commercial vehicles in South Africa, Botswana, Ghana, Lesotho, Mozambique, Namibia and Swaziland. The business accepts residual value and maintenance risk on behalf of its leasing customers, while adding additional value through the design of customised fleet solutions, which include the leasing of fit-for-purpose vehicles, the administration of service and maintenance plans, vehicle licensing, managed maintenance services, fuel card services including billing, analysis, management and forensics, accident claims management, traffic fine and open-road tolling management, vehicle procurement and disposal. Motor Retail Motor Retail operates 43 leading motor vehicle franchise dealerships in South Africa and Botswana. Brands include Audi, BMW, Chrysler, Ford, General Motors, Jaguar Land Rover, Mazda, Mercedes-Benz, Toyota and Volkswagen. Products include the sale of new and used vehicles with supporting finance and insurance products, and aftermarket services including parts sales, service and coachworks repair centres. Complementing the dealer footprint, Barloworld Fleet Marketing develops and maintains strong relationships with key corporate customers requiring a range of ownership solutions. Logistics Barloworld Logistics is one of the leading logistics and supply chain management businesses in southern Africa with complementary operations in the United Arab Emirates, Iberia, Germany and the United Kingdom, employing some 3 800 staff across 100 offices. The integrated logistics solution offerings include supply-chain consulting and design, inventory management solutions, specialised transport and transportation management services, warehousing and distribution design and management, freight forwarding and clearing, and supply-chain software and planning. Through client collaboration, continual improvement and innovation, Barloworld Logistics delivers smart supply-chain solutions to customers. These solutions are aligned to drive business strategy and create a competitive advantage for clients. Depending on clients’ requirements, such solutions can be across the supply-chain in an integrated manner or components of complete solutions. In each of these supply-chain solution areas we provide the leadership, skills, methodologies, processes and tools necessary to consult, design, implement, operate or manage the solutions. Performance overview Revenue of R31.1 billion, and a record operating profit of R1 644 million resulted in an operating margin of 5.3% (2013: 4.6%). Employees grew to 11 203 permanent employees in 15 countries. The Automotive business units performed well ahead of expectations, while the good improvements made in the southern African Logistics business were impacted by losses in the international operations. The integrated model and approach sustained the improvements in margins. Divisional sales of new and used vehicles totalled 84 512 units, against the previous year’s 82 929 units. Avis Rent a Car grew rental days in southern Africa to 6.7 million (+ 9.9%) from 6.1 million in the previous year. This growth was achieved with well-controlled fleet utilisation of 76% across an average fleet of 23 890 vehicles. The average fleet increased by 9.1%, while revenue per day improved by 2.7% in a competitive trading environment. This resulted in revenue growing 11% to R4.5 billion, while operating profit grew 33% to R421 million, resulting in operating margin improving to 9.3% from 7.8% in the prior year. The continuous management of the business’ key value drivers, including revenue per day, fleet utilisation and holding cost per day as well as the exit of the coach charter operations at the end of 2013, led the overall improvement in performance. Our talent attraction, development and retention supports the “grow our own” approach by providing training in collaboration with leading academic institutions and industry authorities to ensure that we meet the skills requirements for the overall divisional growth. Avis Fleet Services’ operations continued to grow, with 307 456 vehicles under long-term finance and other management contracts at year-end compared to 277 164 vehicles in the previous year. The business delivered another record performance with operating profit improving by 16% to R559 million as a result of targeted fleet growth and a focus on enhancing operational efficiencies across all product lines. A diverse customer mix with a balanced geographical footprint in southern Africa and a sustained focus on cost efficiencies sustained the results Motor Retail southern Africa sold 58 253 new and used vehicles during the year compared to 57 868 units in the prior year. Aftermarket activity improved, resulting in a 15% increase in parts turnover, while service hours grew by 0.8%. The increased activity levels, coupled with the “Fewer, Bigger, Better” dealership approach, resulted in operating profit improving by 29% to R542 million from a growth in revenue of 9.8% to R19.2 billion. Major facility upgrades during the year included Barons VW branches in Bellville, Cape Town and Bruma in Johannesburg. The business has targeted specific expansion in support of the overall Automotive business model and during the year acquired Leach Toyota in Kuruman to support growth in a key mining node, and acquired a majority stake in one of the leading Jaguar Land Rover dealerships in South Africa. Logistics delivered an improved result with revenue stable at R4.4 billion and operating profit improving by 22% to R122 million, despite tough trading conditions in the international business units and after providing for certain costs in a key contract. The southern African business continued to build on the previous year’s performance and also benefited from a further number of strategic acquisitions during this financial year in support of the strategic growth imperative set for this business unit. Barloworld Transport performed well and continues to grow in support of the overall business strategy. During the year the business acquired a majority share in a complementary abnormal load transport business operating in the >80 ton market and diversified its specialised transport unit into sugar cane. The international business units continued to face difficult trading conditions. The sea-air transport and Spanish business units performed below expectations. Investing for future growth People Employee value model Employee value recognises the important role of every employee and institutionalises initiatives and structures aimed at developing, harnessing and directing collective employee wisdom towards our value creation objectives while ensuring that employees share in the value created. An integrated approach to good people management is entrenched throughout the division. We have made good progress in rolling out the IEVM which underpins the Employee Value Proposition, communication and human resources best practice. The recently completed Individual Perception Monitor (IPM) survey conducted across all operations validated this progress. High scores were achieved in areas of clear purpose and direction: employee engagement, confirming that the employees understand and support their unit’s vision and will strive to make the most of their talents to achieve agreed goals. Addressing feedback from the survey remains central to the process and particular emphasis in the year ahead will be placed on the “grow” element in support of further learning and personal development initiatives. Talent management and leadership development Talent attraction and development to meet skills requirements of the overall divisional growth prospects remain in focus. The division continued with rigorous training in support of both technical, management and leadership skills across all business units which are underpinned by our “grow our own” approach and fast-track development initiative. This training includes specific programmes presented in collaboration with leading South African universities, specific training programmes supported by the various industry training authorities, and in-house leadership and management development programmes. Health and safety We remain committed to a safe work environment. The LTIFR as reported, declined during the year. We will continue to focus on improving the ratio. Our motor retail, fleet services and car rental operations’ LTIFR do not include individuals sourced through temporary service providers. During the year the division suffered two work-related deaths on the roads of South Africa. We continue to proactively apply leading safety practices to ensure the well-being of our employees and customers. Profitable growthIn pursuing profitable growth, the division continued exploring opportunities in southern Africa. Our digital disposal solutions unit continues to leverage innovative systems and processes to optimise the quality of earnings through efficient used vehicle disposal and provides additional revenue growth opportunities. Avis Fleet Services entered into agreements to acquire a leasing business in Tanzania which will result in a fast-track entry into the market. Motor Retail acquired Leach Toyota in Kuruman and a controlling stake in Jaguar Land Rover N4. Barloworld Logistics acquired a majority share in extra-heavy abnormal load transport business through Barloworld Transport and further diversified its specialised transport business through a niche acquisition in the sugar cane market. Integrated customer solutions Providing customers with a range of integrated vehicle usage and logistics solutions to fulfil their specific requirements is the cornerstone of the divisional offering. Customer value proposition Our Automotive unit provides solutions to customers which include the products and services of our individual business units, as well as unique combinations of these products and services tailored to customers’ specific vehicle needs in a seamless combination, effectively and efficiently provided by a single supplier. This ranges from single-unit transactions through to management of large-scale fleets over an extended period focusing on utilisation, fleet availability and effective management of costs. Through client collaboration, continuous improvement and innovation, Barloworld Logistics delivers smart supply-chain solutions to customers. These solutions are aligned to drive business strategy and create a competitive advantage for clients. Depending on clients’ requirements, such solutions can be across the supply chain in an integrated manner or components of complete solutions. In each of these solution areas, we provide the leadership, skills, methodologies, processes and tools necessary to consult, design, implement, operate or manage the solutions. Customer value remains central to the division’s success and is reflected in our sustained activity levels, increased market share and independent monitoring showing improvements in customer engagement. We continue to monitor and focus on customer satisfaction ratings across all business units, as we believe it is through exceeding customer expectations, and meeting their changing needs, that we will achieve a sustainable competitive advantage and create superior value for them and other stakeholders. We continue to evaluate these changing requirements as part of our overall strategic plan and will continue to invest appropriately to meet these changes. Alignment with our principals We continue to create value for our principals and suppliers by investing in infrastructure and business systems, addressing brand exposure, market share and improving business performance. Their confidence in our ability is reflected in new opportunities offered to represent their brands and their ongoing commitment to our operations. Our approach to sustainable development ensures we entrench both our principals and Barloworld’s commitment to sustainable practices. Sustainable development Corporate social investment Value created for communities in which we operate is a combination of indirect benefits from employment opportunities, rates and taxes paid and development, as well as direct benefits arising from socio-economic development initiatives by the business units, which include contributing skills, resources and funding. Governance Our overall approach to good governance ensures that we meet the legitimate interests of all stakeholders, which is supported by the Barloworld Worldwide Code of Conduct and the ethics and compliance programme. Environment Sustainable development is integrated into our strategy and operations. These strategies and initiatives drive the development of products and services to capitalise on emerging sustainable business opportunities, realise cost savings through energy efficiency and other sustainable business practices, and enhance the division’s reputation and brands as leaders in sustainable development. Empowerment and transformation Consistent with the group’s approach, we remain committed to workplace diversity, empowerment and transformation. Entrenching these principles in the strategic and operational decision-making processes ensures that we achieve Level 3 or better ratings in the relevant South African B-BBEE scorecard. Supporting the division’s commitment to this very important matter are a range of programmes to promote ongoing change including: accountability at a senior management level, fast track development programmes and a range of “grow our own” initiatives. Gender, localisation and inclusion issues receive close focus in our operations outside South Africa. Financial returns Improving financial returns remained a core focus during the year. Optimising business unit performance included maximising both inter and intra-business unit synergies, as well as the implementation of tight performance targets and objectives. These included prudent capital allocation, optimising vehicle fleet utilisation, reducing working capital, improving asset turn, managing expenses and controlling interest costs. This has been supported by the roll-out of the group Integrated Financial Value Model to support capital allocation decisions and assist in guiding strategic thinking. Key decisions taken in optimising financial returns include the sale of the Logistics unit in the Far East, and the disposal of the Ferntree Gully motor dealership in Australia effective 31 October 2013. The remainder of the Australian motor retail operations were sold effective 31 March 2014, with the final proceeds being received on 1 April 2014. This transaction has resulted in much improved returns and was a key element in the division achieving its 20153 targets. Outlook The prolonged uncertainty in world markets remains an issue and the division will continue to prudently manage all aspects of the business. We will maintain emphasis on our six Strategic Focus Areas as outlined. Our strategic planning process supports prudent capital allocation in identified growth areas that exceed internal hurdle rates. With the various niche acquisitions made in this period we are well-positioned to strengthen our market position in the industries we operate in. Urbanisation is a key trend affecting all areas of the business and the division is considering various alternatives to deal with the consequences of changing customer needs and the further use of technology to sustain our efforts in this regard. Avis Fleet Services will continue to expand into select African markets, with operations in Zambia expected to commence in the next 12 months. The Logistics business is well positioned for growth, supported by a strong business development team that will deliver organic growth over time, complemented by targeted acquisitive growth opportunities, which meet strict criteria. This will include diversifying the supply-chain management operations, further strengthening our position in the market through Barloworld Transport and growing the environmental solutions segment. Other issues material to the future success of the division include repositioning the Car Rental business, and select expansion of the South African motor retail footprint to complement the divisional vehicle usage strategy. 2015 is expected to yield further growth in all business units. Optimising the inherent synergies and benefits of our South African integrated vehicle usage solutions offering remains central to our strategy. The Car Rental operations will focus on rental yields, maintaining high fleet utilisation and optimising their asset base. Additional products and services will be provided to cater for evolving customer needs. Our southern African Motor Retail operations will continue on a “Fewer, Bigger, Better” strategy, coupled with pursuing efficiencies through the centralisation and coordination of common functions, improving asset turn and reducing working capital. The renewal of certain contracts within Avis Fleet Services is critical in maintaining a leading market position for the business and we will continue to pursue attractive growth opportunities in various markets. Barloworld Logistics will address the profitability of the international operations. The 2015 revenue outlook range for the Automotive and Logistics division is R33.0 billion to R35.0 billion compared to revenues of R31.1 billion in 2014.
Corporate primarily comprises the operations of the headquarters and treasury in Johannesburg, the treasury in Maidenhead, United Kingdom, and the captive insurance company. While the group has a decentralised management philosophy, the corporate office creates value by providing a number of services to the operating units. These include internal audit, governance and company secretarial, investor relations, corporate communication, corporate finance, treasury and taxation, risk and legal, group strategy and sustainability, empowerment and transformation, human resources management, employee benefits, and facilities management. The corporate operating loss has reduced, mainly owing to lower charges and accruals for long-term incentives linked to the Barloworld share price; this has, however, been partially offset by a loss in the group’s insurance cell captive as a result of higher claims during the year. Consistent with group commitments and aspirational targets, corporate office strives to reduce its environmental footprint. The main initiatives in this regard include waste management, electricity-saving measures such as retro-fitting of energy-saving lighting and motion sensors linked to lights and air-conditioning units, as well as timer switches on water pumps. These efforts contributed to a 5% reduction in energy consumption and emissions.
* B-BBEE rating for South Africa only.
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In December 2012, a contract for the supply and commissioning of Cat mining equipment at the greenfield Husab mine,
was signed between Barloworld Namibia and Swakop Uranium.
Barloworld Agriculture has partnered with the University of Fort Hare in the Eastern Cape through the supply of farming
equipment for its training and research programmes.
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