Chief Executive's review

CB Thomson Summary

> The group produced a strong performance for the 2011 financial year with HEPS from continuing operations up 120%.
> We acquired the remaining 50% of our Russian Caterpillar dealership for US$52 million (R361 million) and the business has delivered well ahead of expectations.
> We have entered into preliminary confidential discussions with Caterpillar for the possible acquisition of Bucyrus distribution rights in our existing dealership territories.
> We expect to be able to maintain the positive momentum into the new financial year.

CB Thomson
Chief executive
14 November 2011


The global demand for commodities, led by China, which started in the latter part of our 2010 financial year, continued strongly in the current year. While developed economies have shown little growth during the period, growth in emerging economies has been much stronger and resource intensive.

The group produced a very strong performance in the current year with operating profit of R2 289 million being up 51%. Headline earnings per share from continuing operations of 465 cents are 120% above the 212 cents earned in 2010. The total dividend for the year of 155 cents is 107% up on the prior year.

Strategic developments

Progress was made on a number of important strategic transactions which position the group for future growth and reallocate capital to higher returning businesses.

We acquired the remaining 50% of our Russian Caterpillar dealership for US$52 million (R361 million) effective 1 October 2010 and the business has delivered well ahead of expectations.

The disposal of car rental Scandinavia was successfully concluded with the receipt of the final balance owing of R174 million by mid-December 2010.

The sale of the loss-making Logistics African and Asian non-corporate trader businesses was completed on 28 February 2011. Following the transaction we took a decision effective 1 May to integrate our Automotive and Logistics divisions and this has progressed well.

The transaction between Caterpillar Inc. and Bucyrus International closed in July 2011. We have entered into preliminary confidential discussions with Caterpillar with a view to the possible acquisition of Bucyrus distribution rights and assets in our existing dealership territories. We are still in the early stages of this process and are not in a position to estimate with any accuracy how this could affect our future cash flows and profitability.

We launched our “20153 driven by you” vision and strategy at our global leaders meeting in March 2011. This outlines ambitious plans and targets to deliver significant value to all our stakeholders over the period to 2015.

Operational review


Southern Africa

The increased activity levels reported in the first half of the year, and driven mainly by mining and contract mining demand, accelerated in the second half of the year on the back of strong commodity prices. Revenue for the year of R12.6 billion was 50% up on 2010.

Due to a number of significant contract awards, the current year represented a record for the sale of large mining equipment which in unit sales surpassed the previous high set in 2008.

South Africa remains the largest source of revenue in the region based on coal and iron-ore mining. Mozambique has emerged as the second-largest contributor to revenue following the deliveries to Vale and contract miners for the Moatize and Riversdale coal projects, respectively. Zambia produced good revenue growth supported by strong global copper demand while revenue in Botswana more than doubled in response to improved diamond-mining activity. Revenue in Angola which declined significantly in 2010 showed a solid increase in the current year following recent government attempts to stimulate the economy through infrastructure development.

Progress was made on a number of important strategic transactions which position the group for future growth and reallocate capital to higher returning businesses.

The construction sector in South Africa remains subdued with some activity coming from public corporations such as Eskom and SANRAL as well as the mining sector.

The overall performance was boosted by good after-sales revenues. This contributed to a pleasing improvement in the operating margin for the year to 9.8% which was strongly up on the prior year (8.7%).


The sovereign debt crisis in the Eurozone and the fiscal austerity measures introduced in both Spain and Portugal to reduce their budget deficits have severely impacted these economies, in particular the investment in public works and construction.

(R million)

The Spanish economy has been in a state of limbo ahead of the general elections in November and, while the economy is not yet officially back in recession, domestic demand continues to decline. The equipment market in Spain has suffered a further decline in the current year and is estimated to have decreased by over 90% since 2007. Against this backdrop, Iberian revenue in Euro terms dropped by a further 6% in the current year.

Corrective action to further realign the cost base with lower activity levels was necessary in both Spain and Portugal with restructure costs of €7.5 million (R71 million) being incurred, including €0.6 million to rationalise the short-term rental business. The rental fleet (in particular the non-Caterpillar allied component) has also been dramatically reduced to ensure improved utilisation rates.

The management team has, however, produced some noteworthy successes. Importantly, our market share in Spain has been steadily rising on the back of the strength of our aftermarket support for customers and the durability of the Caterpillar machines.

While the firm order book at September 2011 of €250 million is significantly up, it includes two large package deals recently awarded and belies the general underlying market weakness. The power systems business in Iberia still shows life, particularly in the electric power generation segment, while the marine market has declined following cuts in government subsidies to the Spanish shipping industry.


The timing of the acquisition of the remaining 50% of the Russian operations proved opportune. Revenue for the year of US$374 million was 81% up on the prior year, being strongly driven by mining as well as a recovery in construction.

A pleasing aspect of the current year’s performance was the continued increase in parts revenue. Current year revenue was 45% ahead of the prior year (which, in turn, showed a similar increase in 2010).

(R million)

The success in growing the machine population in Russia would now appear to be driving profitability as this young dealership shows signs of the more mature Caterpillar business model.

The power business – which benefited from the introduction of new management – generated a significant increase in revenue driven by sales into the electric power and mining segments.

The total operating profit after amortisation of intangibles of US$32.8 million for the year was almost three times that generated in 2010, while the operating margin of 8.8% was a pleasing achievement for a dealership in the early stages of its development.

Automotive and Logistics

The newly combined division – which accounts for a sizeable part of total group revenue – generated an 8% revenue increase in the current year.

Car rental

Avis Rent a Car increased revenue by 4% compared to 2010, a year which included the FIFA World Cup™. Rental days increased by 2%, however, rental-related revenue was down by 3% as competition for market share intensified. Operating profit for the business was below the prior year due to the abnormal used-vehicle profits earned in 2010 ahead of the FIFA World Cup™. The second half of this year generated a pleasing operating profit slightly ahead of the same period in the prior year.

Motor retail

Revenue in Motor Retail southern Africa increased by 14%, in line with industry growth for new passenger car sales. Operating profit improved as a result of increased new vehicle sales and improved finance and insurance profitability.

Motor Retail Australia generated an operating profit of R100 million which was 22% up on 2010, notwithstanding industry sales in Australia being 4% down. Our Volkswagen dealerships, in particular, generated a strong performance.

Fleet services

Avis Fleet Services increased revenue by 15% by growing the fleet under management by 27% and the finance fleet by 4%. However, interest margins in the current low interest rate environment remained under pressure.


Logistics generated an operating profit of R27 million for the year compared to a profit of R10 million in 2010. The southern African business continued to be plagued by lower volumes in the building and construction industry, but saw some improvement in the mining, consumer goods and furniture segments. The international businesses generated some improvement in activity, but over-capacity in the airfreight market has resulted in a reduction in air rates, especially from Asia to Europe.


This has been a recovery year for the Handling businesses. Revenue for the year is well up on 2010 with the most notable growth in Belgium, The Netherlands as well as the SEM and agriculture businesses in southern Africa. Short-term hire revenue was 18% up on the prior year, with double-digit increases achieved in all territories.

The division returned to profitability in the current year, generating an operating profit of R72 million compared to a loss of R3 million in 2010. All territories except for the US and the nascent agriculture businesses in Mozambique and Siberia were profitable at the operating level. The South African agriculture business in particular generated strong growth in profitability, boosted by a 35% increase in equipment sales.

The group once again produced a positive inflow of funds for the year notwithstanding the payment to acquire the remaining 50% shareholding in the Russian equipment business.


The group once again produced a positive inflow of funds for the year of R946 million notwithstanding the payment of R361 million to acquire the 50% shareholding in the Russian equipment business and working capital demands in the wake of strong growth in our mining territories. Net debt of R4 489 million (2010: R5 049 million) is well below the prior year and the group’s financial position is strong.

The remaining balance outstanding on corporate bond BAW1 of R1 270 million was repaid in July 2011 and long-term debt at year-end comprises 76% of total debt. Cash and cash equivalents at 30 September 2011 were R2 754 million, R826 million higher than last year.

Sustainable development and transformation

In line with our integrated approach to creating value, we continue to entrench sustainable development in our strategic planning and value-creation activities.

Tragically there were two work-related fatalities during the year and several actions have already been taken to improve safety processes and training.

Our medium-term focus is on improving energy and emission efficiency as well as more efficient water consumption. In 2009 we set an aspirational target of a 12% non-renewable energy and greenhouse gas (GHG) emissions efficiency improvement by end 2014 off a 2009 baseline year. We have made good progress towards these goals with a 3% reduction in energy consumption and a 6% year-on-year reduction in GHG emissions.

Empowerment and Transformation is one of our key strategic focus areas and measureable annual targets have been put in place. In the annual assessment by Empowerdex and Financial Mail of South Africa’s Top Empowerment Companies, Barloworld currently leads the general industrial sector. In this regard, each of our South African business units has improved its B-BBEE score over 2010 and all of our South African businesses have now achieved a Level 2 rating, with the exception of one that retained their Level 3 rating. Barloworld Limited received an overall Level 2 rating from Empowerdex which improved from Level 3 last year.


The outlook will be affected by the ability of policy makers to find a solution to the Eurozone debt crisis and the restoration of financial stability in that region. It also requires the governments of developed economies managing and controlling their ballooning public debt levels.

Equipment southern Africa goes into the new financial year with a firm order book of R5.2 billion, mainly in mining and contract mining. While commodity prices have declined in recent months, we have not seen any slowdown in mining activity as prices remain at levels favourable for mining investment and production. The major challenge facing us will be securing the equipment in the wake of increasing Caterpillar lead times due to rising demand for mining equipment globally.

We are not forecasting any recovery in the Iberian machine industry in the year ahead but activity will be assisted by the commencement of deliveries in 2012 of the large package deals in our closing order book. Nonetheless, we are planning to take further action to align workforce levels with the current depressed state of the market. The overhead structure of the business has already been substantially reduced but requires further streamlining to position the business to return to acceptable levels of profitability once the market recovers.

In Russia, the firm order book is slightly down on the prior year but activity levels remain strong. While we are expecting continued growth in 2012, it will be at a slower rate than the current year.

Avis Rent a Car is expected to maintain the current momentum, despite the competitive trading environment. The business will continue to focus on improving rates, maintaining high fleet utilisation and maximising used-vehicle profits on ex-fleet vehicles.

The South African car market will continue to grow in 2012 albeit at a slower pace as the disposable income of households remains under strain. The weakening rand is likely to create some pressure on manufacturers to increase prices following the relative price stability in 2011. Our Australian business is expected to maintain its good performance.

Avis Fleet Services will see further growth in the fleet under maintenance as well as the finance fleet. There are currently a number of large tenders awaiting adjudication which could materially impact revenues.

Logistics is expected to benefit from the divisional integration and the internal focus on improving volumes and margins across all businesses.

Activity in the handling business in Europe and the US will be driven by economic growth in these regions. Recent economic data out of the US are mixed. The agriculture business in southern Africa should continue to benefit from strong food prices and we will continue to grow this business in other southern African countries as well as Russia.

We expect to be able to maintain the positive momentum into the new financial year. This will benefit trading in the first half of 2012, while growth in the second half will be slower due to the higher base. Overall we expect to make solid progress in the year ahead.