Chief executive's review
|ROE (%)||ROIC (%)||Free cash (Rbn)||HEPS growth (%)||Total dividend per share (cents)|
|Disposal of Equipment Iberia generates R2.5 billion in cash||Logistics turnaround
|Record Equipment Russia
Dominic Sewela, Chief executive
One Barloworld strategy
– a year of delivery
It has been at least 20 months since we embarked on the redefinition of our One Barloworld strategy. In the 2017 report we outlined our key strategic levers and change journey. In the year under review we have continued to make good progress in driving execution and implementation of this strategy. As with any change process this has not been without challenges, however, I am pleased that the momentum has been created, and with further management and executive capacity built into the organisation we will consolidate on the gains we have made while continuing to pursue our ambitious goal of achieving maximum intrinsic value.
As part of our "Fix" strategy we successfully disposed of the Equipment Iberia business in June 2018 and the bulk of the proceeds were received in the year. Through focused execution we achieved significant turnaround of the Logistics business, which has been one of the highlights in meeting the set returns milestones for the business.
Equipment Southern Africa and Automotive divisions were the "Optimise" focus, with the operational transformation project in the Equipment business continuing, while Motor Retail continued to review its dealer network and cost structures. We have also advanced the review on the optimal deployment of capital in the Leasing business and the exploration of various funding options to enhance return on capital of our rental assets.
The role of the centre also underwent a major shift and evolution with the adoption of a more active operating model, applying the principles of managing for value, an active shareholder model. This has begun to instil focus on value creation through the structured assessment of opportunities, optimal resource allocation (capital, talent and operating costs), and robust business performance management.
To further enhance its foundational capabilities the group is developing and rolling out a group process optimisation methodology, the Barloworld Business System, which will be supported by process automation capabilities to enable consistent value delivery to customers, institute smarter and simpler ways of working and driving focus on work that matters; while creating a work environment in which our people can focus on meaningful and fulfilling work, relieving them of unnecessary tasks that are inherently wasteful and non-value enhancing.
Aligned to the strategy of maximising the value derived from the use of all our assets, the corporate centre relocated to new premises in November 2018, to make way for the redevelopment of the Barlow Park precinct that will commence mid-2019.
Managing for value to drive performance
Notwithstanding the headwinds we have prevailed to produce a solid performance and our fixing and optimisation initiatives have also enabled us to weather the vagaries of our dynamic environment. Our operations experienced difficult trading and economic conditions, however, the robust earnings growth was supported by Equipment Russia, the turnaround of the Logistics business and the strong associate income from the Bartrac joint venture in the Katanga region of the DRC. The performance of Equipment Southern Africa and Automotive were satisfactory in a challenging economic cycle.
Revenue was up 2% to R63.4 billion, with operating profit up 7.9% to R4.4 billion. We generated headline earnings from continuing operations of 1 151 cents per ordinary share which represented a 176 cents (18%) increase on last year. Total headline earnings per ordinary share including the discontinued Equipment Iberia operations of 1 192 cents represented a 309 cents per ordinary share (35%) improvement on the 883 cents last year.
We are progressing well in improving our return on invested capital (ROIC) which was at 12.3% for the year (2017: 11.2%) and a return on equity of 11.4% (2017: 10.5%). The continued improvement of these key metrics remains a key focus area for the group.
Equipment Southern Africa
Performance was driven primarily by higher equipment sales (up 21%) in South Africa, Mozambique and Zambia; and rental revenues (up 25%) increasing overall revenue by 8%, with operating profit in line with the previous year. The sales mix, exchange rate impact and investment in operational and digital transformation marginally reduced the margin to 9.1% (2017: 9.7%), however, the performance from our Bartrac JV in the Katanga province of the Democratic Republic of Congo (DRC) was impressive, increasing by 159% to R251 million (2017: R97 million) as a result of sustained copper and cobalt prices. We had taken the decision to invest in Angolan US Dollar linked bonds to hedge against the Kwanza devaluation in Angola, and while the government in that territory has taken steps to reform its economy and restore economic stability the scrapping of the local currency peg to the US Dollar in January 2018 resulted in a 76% devaluation of the Kwanza to September. At September 2018, our investment in US Dollar linked bonds totalled $64.3 million and we decreased the trapped in-country Kwanza cash balance by $20 million to $9.9 million at September 2018 with the bulk remitted to repay the holding company in the United Kingdom (UK).
The division produced a historic stellar performance in our 20 years of operating in Russia driven by strong machine sales which included the delivery of the package deals to Polyus Gold, Norilsk Nickel and NordGold that were highlighted in the September 2017 firm order book. Revenue was up 57% in US Dollar terms, with aftermarket increasing by 11%. Operating profit for the year was up 41%. The operating margin of 10.2% was down on the 11.3% achieved last year due to the increase of large mining machines in the sales mix.
The imposition of increased import tariffs on US sourced machines in early August did not significantly impact the current year's performance, and it is pleasing that our competitive edge in customer support and proximity has allowed us to remain the preferred choice for our large customers. Testament to that are the additional firm orders that we received post the year end. The divisional ROIC for Russia of 20.4% (2017: 18.4%) was the highest return performance in the group.
The division has faced some headwinds but produced a satisfactory result amid challenging conditions with low consumer confidence and constrained disposable income. Revenue for the year was 5.6% down on the previous year and an operating profit 2.6% lower than 2017. Operating margin increased from 5.5% to 5.7% in the current year. ROIC for the year of 12.4% was down on last year's 13.1% due to the lower operating result.
Car Rental revenue for the year was 1.3% up on last year mainly as a result of increased rental days and rate per day, but negatively impacted by lower used vehicle revenue. For the year operating profit reduced by 4.6% due to lower used vehicle profitability.
Avis Fleet revenue declined by 6.9% as a result of lower leasing revenues in some of the key contracts. Operating profit improved by 3.2% on last year mainly driven by increased used vehicle contribution.
In Motor Trading revenue was impacted by dealership closures and disposals in the prior and current year, as well as the implementation of the agency model in Mercedes-Benz (Passenger) during the reporting period with revenue at 7.5% below the prior year. Operating profit for the year was 7.1% below last year with the premium brands showing reduced profitability. As part of the ongoing review of the dealership portfolio, the N4 Witbank Jaguar Land Rover dealership was closed at the end of July.
Significant turnaround was achieved with the division producing good results and increased returns; and while revenue for the year decreased by 4%, mainly due to the subdued economy and a rationalised customer portfolio in Supply Chain Management, Transport revenue was 6% up on the prior year.
The business had a positive uplift in all key metrics with operating profit of R262 million significantly ahead (160%) of the R101 million generated last year, driven by the operational and cost benefits arising from the turnaround initiatives implemented in 2017. This result was achieved despite a restructuring charge of R12.5 million and sub-optimal performance in the KLL and SmartMatta operations. The division generated a ROIC of 8.7% compared to 2.5% last year, within the set target range in the turnaround process.
Our focus on optimal capital deployment continues and we have started to deliver on the planned circa R8.0 billion capital release programme with R2.5 billion from the Iberia exit already received.
With good balance sheet management, low debt and cash on hand we have the ability to look at growth opportunities that fit our capabilities. We are hard at work in investigating acquisitions and adjacent growth opportunities that we are targeting to bed down by September 2019.
In the event that allocation of capital has not materialised, the group will give consideration to a share buy-back or a special dividend to ensure optimal shareholder value creation.
Instilling high-performance culture
One of the key levers to successfully deliver on our strategy is engendering a high performance culture, and to that effect 2018 was a year for us to consolidate, create capacity, redefine our people management strategy and roll-out new practices, including our One Barloworld Integrated Talent Framework. Key to this has been to develop a talent pool with executional ability, with diversity and inclusion as a critical element to nurturing a rich, innovative and embracive culture.
Great strides have been made during the reporting year to align the group's reward and remuneration practices, instilling a pay-for-performance philosophy through sound performance optimisation principles, supported by the development of a leadership competency framework that will allow for individuals and teams to play their part in realising our ambition.
Health and safety
It is important for Barloworld that our people are able to get back to their families safely every day and therefore we strive for a zero harm work environment where safety is paramount. Our focus on instilling a safety-conscious culture is unwavering. Despite this we tragically had two work-related fatalities during the year, one at Equipment Russia and another at Automotive. The group offered support to the bereaved families and we extend our sincere condolences for their loss. We continuously assess risk exposure and behaviours to inform awareness campaigns on health and safety in the workplace.
Licence to operate
We believe it is our role as a good corporate citizen to create value for all our stakeholders and part of this is the redress of the structural imbalances in the South African economy, not only for the long-term sustainability of the country, but also with a view to securing our ability to operate in an environment with social cohesion and stability. Barloworld is therefore aligned with the national development imperatives of advancing inclusive economic transformation and growth through the many initiatives we have in our corporate social investment as well as our enterprise and supplier development platforms.
Further to this, following consultation with both internal and external stakeholders, a broad-based black economic empowerment (B-BBEE) transaction was proposed and subsequently approved by the Barloworld board and the terms of the transaction were announced on 19 November 2018.
Key aspects of the structure are a Foundation, the participation of circa 1 800 junior to senior managers in a management trust, at least 14 000 employees in an employee trust and a black public scheme. We believe what is on offer is a transformative, sustainable and broad-based structure that is efficient in terms of limiting shareholder dilution, has longevity and permanency through the Foundation, while contributing to inclusive growth in the public participation. In line with driving a One Barloworld persona, it is important that our employee participation is inclusive across the different races in our organisation with the share issue based on the guidance of economically active population statistics of South Africa. The proposed transaction is subject to shareholder approval at the special general meeting scheduled for 14 February 2019.
We also continue to drive transformation and diversity within our supply chain in order to support the broader objectives of the company. We have engaged our various principals to advance the localisation objectives. The equity equivalent investment programme in partnership with the Department of Trade and Industry announced by Caterpillar is ongoing.
Our performance on environmental, social and governance (ESG) aspects remains important to Barloworld, and based on our public disclosures during 2018 the group remained a constituent of the FTSE/JSE Responsible Investment Index, FTSE4Good Index series and the Dow Jones Sustainability Emerging Markets Index.
Growth in the Chinese economy has moderated and is likely to remain under pressure as a result of the escalating trade dispute with the US.
The outlook for the South African economy has weakened with negative consumer and business confidence impacting local demand and a technical recession in the last half of 2018.
The outlook on commodities fundamentals, however, remains favourable which bodes well for our equipment businesses.
We expect top line uplift in Equipment Southern Africa with more positive sentiment on the Mining Charter likely to improve investment in existing mines and greenfield projects. Government's infrastructure fund should begin to yield benefits in 2020 for the construction sector. We are hoping for a positive outcome in the DRC elections in December 2018 as our customers continue to invest in that territory.
In spite of the Russia tariffs on US-sourced machines, we expect a strong result in Russia as, notwithstanding these tariffs, we secured additional orders post the reporting period from customers that are willing to pay the premium.
Logistics will consolidate the significant improvements made in 2018, to target reaching cost of funds by September 2019, and aim to exceed that in 2020. Thereafter the business will have earned the right to grow and be allocated capital.
Automotive is expected to face some headwinds in the coming year with a slow-growth economy, consumers strapped for disposable income, we therefore expect industry vehicle sales in 2019 to be flat or slightly down on the current year with Rand depreciation adding further pressure to the premium segment. Car Rental will be driven largely by inbound tourism and we have picked up momentum in the Leasing business with additional corporate contracts to make up for non-renewal of some key contracts in 2018.
In the next 18 to 24 months, while we continue to focus on driving our businesses to their full potential through the optimal allocation of capital and the execution of our medium-term strategy, we will take advantage of the strong foundation that has been set for us to pursue value-enhancing acquisitive growth opportunities that fit our capabilities and the optimisation of the group's capital structure.