Chief executive's review
Dominic Sewela, Chief executive
2017 marked the 115th year of Barloworld's existence; a year of change and transition as we focused on how to ensure our continued existence for more years to come. It is a privilege to have been given the opportunity to lead the organisation into the future since my February 2017 appointment as chief executive of the group.
Barloworld is one of a handful of companies that have remained listed on the Johannesburg Securities Exchange for over seven decades and this is testament to the strong and dedicated leadership, management teams and people who have seen the organisation through the cycles and upheavals that we have gone through as a company. We are focused on building on this foundation.
The combination of an increasingly volatile global and local operating context, together with our conviction that there is further scope to unlock and maximise the latent potential of Barloworld, saw a review of our strategy and portfolio of businesses.
Central to that exercise was defining in explicit terms what winning is for Barloworld; doubling our intrinsic value every four years and minimum return on equity (ROE) of 15%; maximising value and ensuring that we meet the interests and expectations of all our key stakeholders. Importantly, we have assessed what it would take to attain this goal and the extent of change this requires.
We have a clear view of the group's long-term strategy and path towards this ambition, ratified by the Barloworld board with an executive team that is committed to driving this bold goal forward. My role as chief executive with the executive team as we embark on this journey of change has been to define the following:
- The governing objective and ultimate measure of success for Barloworld
- The agenda for value enhancement
- Clear standards and processes by which to allocate appropriate resources
- Monitoring and managing performance at every stage of progress.
Assessing our ability to win and competitiveness
We have assessed the full potential of the organisation in terms of financial performance and understand the gap towards our value maximisation ambition; and have unpacked these value gaps across all the businesses to have a more granular and fact-based perspective of their market attractiveness and ability to win.
In light of the variations in our portfolio's abilities we have adopted a focused approach outlining key strategic imperatives and work continues in respect of all four areas identified in the group strategy, namely:
- Fix – The board has taken the decision to continue with the disposal of Equipment Iberia. The turnaround within the Logistics business is ongoing and progress on the exit of the Middle East Logistics operations is advancing well with several offers being negotiated. All options remain under consideration as we continue to closely monitor the performance of the business against this plan.
- Optimise – Equipment southern Africa has commenced the roll out of the operational transformation project, while Motor Trading has completed the bulk of the work around the restructuring contemplated through various dealership closures and further cost rationalisations.
- Grow – Steady progress is being made in assessing countercyclical opportunities that offer synergies to the group and with our strong cash position the drive will be to deploy capital to an emerging market mining territory where we can best harness our core competence, and pursuing adjacency opportunities within the automotive space.
- Active shareholder model – The group has adopted an approach of managing for intrinsic value which focuses on value creation through the structured assessment of opportunities, a strong focus on resource allocation (capital, talent and operating costs) and robust business performance management. The roll out of this programme is continuing. Good progress has been made on the project for the redevelopment of the Barlow Park property with legal agreements with co-investors now in place.
Critical to managing for value we are making the following fundamental changes:
- Setting clear metrics and redefining value creation to ensure alignment with the desired performance with focus on return on invested capital (ROIC); economic profit (EP); and free cash flow
- Carrying out notable structural changes that address our cost base and driving simple, efficient and effective processes
- Driving a high performance culture that prioritises actions that are value adding coupled with agility and focus in decision making and delivery
- Enabling the change with a review of talent management, performance management, remuneration and reward philosophy to drive the appropriate behaviour and foster individual and collective accountability
- Streamlining group and governance processes to optimise management time
- Clearly defining the role and value add from the corporate centre which includes a more active operating model
- Defining an enterprise value-focused culture linked to the ambition and deployment of talent.
We moved swiftly to implement our medium-term strategy to fix and optimise underperforming businesses, and these actions have started to bear fruit as we see the benefits thereof in our positive performance in the 2017 financial year. Despite low business and consumer confidence levels, our group revenue of R62 billion and operating profit of R4.1 billion (from continuing operations) remained resilient at similar levels to the prior year.
Headline earnings per share of 975 cents (2016: 841 cents) from continuing operations was 16% up on last year. Moreover, the group generated a strong cash inflow before financing activities of R2.6 billion mainly driven by a R1.5 billion decrease in working capital and lower cash applied to investing activities. Net debt of R5.8 billion was R2.2 billion down on September 2016 net debt of R8.0 billion.
Our focus on returns delivered an improved position with an ROE from continuing operations of 10.5% compared to 9.3% in the prior year. A total dividend for the year of 390 cents per share was declared in respect of the current year's earnings (2016: 345 cents).
Equipment southern Africa performance showed resilience while strong mining and aftermarket in Equipment Russia drove the solid performance in that business. The discontinued Iberian Equipment operation is now held for sale. It was a record year for the Automotive division despite challenging market conditions with both revenue and operating profit exceeding 2016 levels. Despite an improvement in revenue, the loss of a major customer and once-off costs had a material negative impact on operating performance in our Logistics business.
Equipment southern Africa
Equipment southern Africa business benefited from improvement in mining and increased activity in our joint venture in the Katanga province of the Democratic Republic of Congo (DRC). The business transformation initiatives to optimise and streamline processes and address the cost base also contributed to overall positive performance.
The division saw a 12.6% improvement in operating profit, the operating margins increased from 8.5% to 9.8% and a pleasing performance in returns from 9.1% to 15.2%; this is despite a 1.4% decline in revenue from R18.5 billion to R18.3 billion. The stronger Rand compared to the prior year shaved R431 million off revenue for the year.
The Bartrac joint venture in the Katanga province of the DRC saw an increase from R13 million to R97 million as activity resumed at the Glencore Katanga Mine during the current year and improved commodity prices.
In August, Equipment southern Africa celebrated its 90th anniversary as a Caterpillar dealer. This coincided with the official opening of the new Caterpillar/Barloworld parts facility at Kempton Park which will further improve parts availability to our customers.
We will continue to monitor the discourse on the Mining Charter amid the policy uncertainty this has created. A resolution in this will encourage a more positive greenfield outlook.
Equipment Russia delivered excellent results driven by significant growth in aftermarket and equipment sales on the back of a buoyant mining environment particularly into opencast gold mining, some improvement in the macro-economic environment, stable oil prices and Rouble strengthening. Revenue of $385 million and operating profit of $43.7 million was 17.1% and 6.8% up in Dollar terms on prior year's results respectively, with a 16% growth in aftersales revenue.
The operating margin of 11.3% was down on the 12.4% achieved in 2016 mainly as a result of lower new machine margins.
The Automotive division delivered another record result with operating profit up 5.6% on prior year off a revenue growth of 0.5%, impacted by dealer network restructuring with the sale of one BMW dealership and closure of one BMW and three GM dealerships. If one excludes the closure and disposal of dealerships, revenue increased by 2.3% on prior year.
While the operating margin at 8.7% was slightly down on the prior year, impacted by higher parts and vehicle prices and increased damage cost, Car Rental increased rental days and rate per day with a strong used vehicle contribution. Operating profit of R562 million was 4.9% up on the R536 million and fleet utilisation for the year improved by 1% to 76%.
In Avis Fleet revenue for the year decreased by R71 million (1.9%) to R3.6 billion while operating profit increased by 11% to R621 million. The current year produced a much improved used vehicle margin compared to the prior year which was impacted by the disposal of the defleeted vehicles from the government of Lesotho contract. Consequently operating margin for the year increased to 17.4% compared to 15.4% in the prior year.
Motor Trading was impacted by a weaker new vehicle market, depressed consumer confidence, price increases and dealer network restructuring; however, the business benefited from cost alignment initiatives and good aftermarket revenues. Operating margin increased to 5.5% (2016: 5.3%).
The division continued to deliver an ROE and ROIC above the group hurdle rates and generated positive cash flow.
Revenue for the year of R6.2 billion was R415 million (7.2%) ahead of last year driven by the acquisitions of KLL and Aspen in January 2016, as well as the full impact of additional contracts within Supply Chain Management and Transport won last year.
The Logistics business was notably impacted by once-off items and losses in the KLL group and the focus for the management team is implementation of the turnaround strategy with structure changes and cost reduction initiatives, to simplify and streamline the organisation for greater efficiencies.
We also acquired the remaining minority share to increase our holding to 100% of Barloworld Transport, allowing for better integration of the transport business going forward, a process that has already commenced. We expect the full benefit of this turnaround in the 2018 financial year.
Our journey of change has been a challenging one considering the impact on our people in the various businesses and significant restructuring that has taken place. Open and transparent engagements with our people and union representatives have been critical; while this has not been without challenges and learnings, we enjoy sound relationships with our employees, notwithstanding the difficult nature of change.
We focused on education and change management in the organisation which we envisage will continue well into 2018 as we align our management teams and people on the new strategy.
Our performance in safety and environmental stewardship
Despite our ongoing strong focus on safety across the group, we regrettably had three tragic work-related fatalities during the year in our Logistics operations in unrelated incidents. We extend our sincere condolences to the bereaved families to whom we offered support. We continue to drive awareness of health and safety in the workplace. We implemented a review which included assessing all our sites for risk exposure, safety culture, behaviours and compliance, reviewing key performance indicators on safety and instituted a safety awareness campaign throughout our Logistics sites.
Sustainability plays a key role in how Barloworld does business and this is embedded in our practices and our values. As a result of the sustainability practices we have adopted over the years, we are a constituent of the Dow Jones Sustainability Emerging Markets Index, the FTSE/JSE Responsible Investment Top 30 Index and the FTSE4Good Emerging Index.
Our role in social development and diversity
Our active corporate citizenship through investment in the future is aligned to the UN Sustainable Development Goals and the national development priorities of the countries in which we operate.
We continue to engage emerging and black-owned service providers to drive diversity in our supply chain and provide them with access to the broader market through our enterprise and supplier development arm, Barloworld Siyakhula. Since inception in 2007 we have indirectly supported over 700 jobs and provided comprehensive assistance to 98 small and medium enterprises.
We have also engaged our various principals to advance the localisation of some of their products and services. The equity equivalent investment programme in partnership with the Department of Trade and Industry recently announced by Caterpillar will assist in increasing the local content in CAT equipment and supporting the national imperative of creating jobs and enhancing manufacturing capabilities; whilst assisting with our competitiveness in the market.
We have invested R18 million in 2017 in our social development focus areas and partnerships in education, youth development and empowerment, environment and conservation, health and welfare.
A critical component of our talent management is diversity and inclusion that will deliver on our strategic ambitions. We take a holistic view of diversity in all its facets from race, gender, age, religion and skills set. This comprehensive view, we believe, sets us apart from our peers. Our gender diversity target is to have 40% female representation by 2020 in all levels of our organisation and a workforce that is representative of the areas where we operate.
The South African economy is projected to grow by 1.1% in 2018. The markets, however, remain focused on the December 2017 ANC elective conference, the result of which could impact the sovereign rating, confidence levels as well as the value of the Rand.
The outlook for mining in Equipment southern Africa remains positive with demand for commodities and related commodity pricing holding up. With the firm order book growing to R2.9 billion (2016: R1.3 billion) we are forecasting mining unit sales and mining aftersales to show continued growth in 2018.
Equipment southern Africa has embarked on a number of cost-saving measures driven by achieving process efficiencies that will address weaknesses in the current IT environment, together with procurement-saving initiatives. The project will run into the 2020 financial year and will further improve the operating performance of the division.
The Russian economy is likely to show growth of just under 2% in 2017 with further growth improvement into 2018 expected. Our significant firm order book of $202 million (2016: $21 million) along with a number of other potential mining projects under discussion should ensure strong growth in machine revenue in the coming year.
In Car Rental we expect to see further growth in the foreign in-bound segment while the corporate and local leisure markets will remain subdued. Avis fleet will continue to benefit from retaining the existing customer portfolio and gain new business. The South African motor industry is going through a period of transition with the exit of GM from South Africa and dealer footprint realignments. The closure and disposal of the GM and BMW dealerships will reduce annualised revenue by close to R1.5 billion in 2018 with marginal impact at the operating level. We expect vehicle sales in 2018 to be in line with the current year and the premium market to remain challenging.
In early October, Logistics embarked on a turnaround strategy aimed at improving performance through operational efficiency, and to simplify and optimise the operating an organisational model. This initiative entails multiple initiatives of cost reduction and procurement savings with a focus on returning underperforming businesses to required performance targets. Logistics has been successful in securing a number of new contracts in the current year which will underpin further growth in 2018.
The group is making good progress in implementing its strategy to fix and optimise existing businesses. We ended the year in review with a strong positive cash generation and well-managed debt levels and going forward we are well placed to capitalise on acquisitive growth opportunities as they arise. The full benefit of initiatives progressed in the current year will continue to have a positive impact into 2018.
Vote of thanks
In conclusion, I would like to acknowledge my predecessor, Clive Thomson, for his wise counsel, who handed over a business that had shown resilience over the years, a strong balance sheet and a strong foundation of values on which my executive team and I are building.
It has been a year with both challenges and triumphs and I would like to thank my executive team for their continued and unwavering dedication and commitment; their ongoing support and advice; and the board for their counsel and oversight.
I look forward to our journey towards our ambition as we reimagine and redefine winning for Barloworld.
8 December 2017