INTEGRATED ANNUAL REPORT 2011 GRI RESPONSES  

Finance director’s review

DG Wilson Summary

> HEPS from continuing operations increased by 120% to 465 cents (2010: 212 cents).
> The continued focus on cash flow resulted in a net inflow for the year of R946 million (2010: R2 286 million)
> The long-term debt maturity profile at 30 September 2011 was 76% (2010: 61%).
> The company’s credit rating of A+ was re-affirmed by Fitch Ratings and the outlook was upgraded from Negative
to Stable.
> Net debt of R4 489 million at 30 September 2011 is at the lowest level in the past decade.

DG Wilson

Finance director
14 November 2011
 

Group financial review

Revenue for the year increased by 22% to R49.8 billion. Improved trading conditions in the mining sector resulted in a 50% increase in revenue earned in Equipment southern Africa. The consolidation of the Russian equipment business, following the acquisition of the remaining 50% effective 1 October 2010, contributed revenue of R2.5 billion.

Earnings before interest, taxation, depreciation and amortisation (EBITDA) increased by 20% to R3 993 million while operating profit rose by 51% to R2 289 million. Operating profit of R1 435 million for the second half of 2011 was R581 million (68%) up on the profit earned in the first half. Operating profit in Equipment southern Africa increased by 69% to R1 228 million. The Russian equipment business delivered an excellent result, contributing R226 million to the group’s operating profit in the first year of consolidation. The Automotive and Logistics division performed well in a competitive trading environment, holding operating profit steady at R911 million for the year. The Handling division recorded a pleasing turnaround while trading conditions in Equipment Iberia remained difficult. Redundancy and restructuring charges of R71 million were incurred this year (2010: R59 million), principally in Spain. The increase in the company’s share price since September 2010 resulted in an increased charge of R33 million in respect of the provision required for cash-settled Share Appreciation Rights previously awarded to employees.

The total negative fair value adjustments on financial instruments of R65 million (2010: R89 million) mainly comprised the cost of forward points in foreign exchange contracts.

Net finance costs decreased by R32 million to R693 million due to lower short-term borrowing rates and reduced average debt.

Exceptional gains of R62 million mainly comprise the impact of writing up the existing 50% interest in the Russian business in terms of IFRS 3 Business Combinations (R64 million), profits on disposals of properties (R214 million), reduced by goodwill impairments of R211 million.

Taxation, before Secondary Tax on Companies (STC), increased by 179% to R566 million. The effective taxation rate (excluding STC, prior year taxation and taxation on exceptional items) was 34.2% (2010: 33.8%). The tax rate was adversely impacted by the decision not to increase the deferred tax asset in Spain.

Income from associates rose by R55 million to R71 million, mainly as a result of the increased contribution from the Democratic Republic of Congo equipment joint venture.

The non-controlling interest in the current year’s earnings includes R15 million, representing the dividends paid to the holders of 14 485 013 ordinary shares in terms of the BEE transaction concluded in 2008. These shares are not included in issued shares for purposes of calculating headline earnings per share (HEPS).

Summarised statement of cash flows

  2011
Rm
  2010
Rm
 
Operating cash flows before working capital 4 528   3 599  
(Increase) decrease in working capital (27)   1 069  
Net investment in leasing assets and vehicle rental fleet (1 397)   (1 056)  
Cash generated from operations 3 104   3 612  
Other net operating cash flows (1 189)   (1 047)  
Dividends paid (including non-controlling interest) (257)   (223)  
Cash retained from operating activities 1 658   2 342  
Net cash used in investing activities (712)   (56)  
Net cash inflow 946   2 286  

Improved trading conditions in the mining sector resulted in a 50% increase in revenue earned in Equipment southern Africa.

HEPS from continuing operations increased by 120% to 465 cents (2010: 212 cents). Group HEPS increased by 172% to 465 cents from 171 cents in 2010.

Cash flow

The continued focus on cash flow resulted in a net inflow for the year of R946 million (2010: R2 286 million). Working capital increased by a modest R27 million following a reduction of R1 069 million in 2010. Notwithstanding the substantial growth achieved in the southern African equipment business, working capital decreased by R100 million in the year due to increased payables.

The final balance of R174 million owing from the disposal of the Scandinavian car rental business last year was received in December 2010 and the remaining 50% shareholding in the Russian equipment business was acquired for R361 million (US$52 million).

Financial position and debt

Total assets employed in the group increased by R5 242 million to R30 932 million. The increase was driven by the weaker rand (R1 625 million), the consolidation of equipment Russia (R1 104 million) and increased inventories and trade receivables (R3 423 million), up 33% on the back of higher activity levels.

Strong collections from customers – including contractual deposits on equipment sales in the closing days of the financial year and reduced short-term funding commitments – resulted in cash and cash equivalents increasing by R826 million to R2 754 million (2010: R1 928 million).

The weaker rand also increased shareholders’ funds by R1 048 million (2010: R820 million reduction).

Debt profile

  Debt
September
2011
Rm
  2012
Rm
  Redemption
2013
Rm
  2014
Rm
  2015
Onwards
Rm
 
South Africa 6 500   1 141   347   922   4 090  
Offshore 743   580   61   38   64  
Total 7 243   1 721   408   960   4 154  

Total interest-bearing debt at 30 September 2011 increased to R7 243 million (2010: R6 977 million).

Net interest-bearing debt at 30 September 2011 was reduced by R560 million to R4 489 million (2010: R5 049 million).

Further progress was made in our initiative to address the group’s funding maturity profile and to reduce the company’s reliance on short-term funding. Long-term debt raised during the year included three corporate bonds totalling R1 234 million (BAW9 to 11). The funds raised were utilised to repay the remaining balance outstanding in respect of corporate bond BAW1 (R1 270 million) which matured in July 2011. The long-term debt maturity profile at 30 September 2011 was 76% (2010: 61%).

In South Africa, short-term debt due for redemption in 2012 includes commercial paper (CP) totalling R800 million. The CP market has remained liquid during the current year and we expect to maintain our participation in this market. The company has unutilised borrowing facilities with domestic banks totalling R3 866 million at 30 September 2011. The offshore facilities include a syndicated loan (undrawn at September 2011) of £80 million (R1 002 million) and other unutilised bank lines totalling the equivalent of R1 569 million. We are well advanced to replace the £80 million syndicated loan with bilateral banking facilities of £100 million with maturity profiles of between four and five years.

Debt totalling R1 898 million at 30 September 2011 is subject to covenants in terms of loan agreements and no covenants were breached during the year.

The company’s credit rating of A+ was re-affirmed by Fitch Ratings in February 2011 and the outlook was upgraded from Negative to Stable.

Gearing in the three segments is:

Total debt to equity (%) Trading   Leasing   Car rental   Group
total debt
  Group
net debt
 
Target range 30 – 50   600 – 800   200 – 300          
Ratio at 30 September 2011 30   577   196   57   36  
Ratio at 30 September 2010 34   482   202   64   47  

The R79 million deposit in an interest-bearing account with a bank, which underpinned the security held by lenders to our Black Economic Empowerment partners, was repaid to the company in December 2010.

Accounting policies

The group adopted two amendments from the 2010 annual improvements project. IFRS 3 Business Combinations and IAS 27 Consolidated and Separate Financial Statements were adopted with effect from 1 October 2010 and did not have a significant impact on presentation, recognition or measurement for the group.

The comparative information has been amended to reflect the reclassification of interest paid in the leasing business from cost of sales to finance costs. The amendment results in more comparable information relative to the industry. Further details regarding restatements can be found in Note 34 to the consolidated annual financial statements on page 229.

Dividends

Dividends totalling 155 cents per share were declared in respect of this year’s earnings (2010: 75 cents). Dividends are payable on 18 100 902 of the shares issued in respect of the BEE transaction. The dividends declared this year are covered 2.8 times by headline earnings from continuing operations (2010: 2.6 times).

Going forward

Net debt of R4 489 million at 30 September 2011 is at the lowest level in the past decade, placing the company in a good position to pursue growth opportunities in its territories.

Some increase in debt is expected in 2012 from higher activity levels, particularly in Equipment southern Africa and Russia. A great deal of focus has been placed on improving financial returns in the group. In the current year our key Return on Equity ratio has substantially improved from 3.2% last year to 8.6%. This is an important step towards achieving our cost of equity target.