Barloworld Limited: Leading Brands

Group chief executive officer's review 2020

The Group headline earnings per share (HEPS) was a (268) cents loss down on the prior year of 1 100 cents, however the normalised impact of headline earnings per share (Normalised HEPS), excluding the impact of IFRS 16, B-BBEE charges and the fair value on the USD deposits in the UK was a (30) cent loss down on prior year of 1 167 cents. Including these charges, the reported HEPS loss was (268) cents. Normalised HEPS was impacted by all operations performing at levels well below the prior year due to the COVID-19.

A return on invested capital (ROIC) of 1.0% was generated compared to 11.9% achieved in 2019 due to a reduction in operating profit.

DIVIDEND

Barloworld has met its solvency and liquidity obligations but given the current market conditions, the board took the important precautionary measure not to declare a final dividend payment for the year ended 30 September 2020. This position will be reviewed again at the interim period in 2021.

PROGRESS ON OUR STRATEGY

The Group aims to sustainably doubleits intrinsic value every four years, enabled by the managing-for-value operating model. Post the recent strategic review, the Group has positioned itself as an industrial processing, distribution and services company. In light of this the Group has set its vision to create enduring economic and social value for stakeholders by building businesses that serve industrial customers.

Our fundamental strategic levers - 'fix, optimise and grow' remain unchanged, though in response to the immediate challenges Barloworld faces, and to ensure the Group's legacy in the long term, we have honed our strategic focus, balancing short term decisions with long term thinking. While our goal remains the achievement of above-market growth and ROIC >13% with positive economic profits. We seek to create value by balancing our long term growth ambitions with focusing on achieving acceptable returns for our shareholders in the medium term. This will continue to be underpinned by our sustainable development framework and informed by the macro-environment, including the immediate to longer term impacts of the COVID-19 pandemic on societies and economies, and our strategic outlook.

* Excludes Equipment Mongolia acquisition

Our strategy, already in implementation, remains ambitious. It is achievable with an organisation-wide focus aligned with our longer-term vision, fine-tuned objectives, and certain execution elements being accelerated.

During the period, good progress was made in all areas of the strategy. The Group's strategy and clear set of guardrails (capital light, high growth, cash generative) remain relevant despite the ever-changing market conditions.

In terms of fix and optimise, we continued to reassess the performance of the businesses and identified opportunities to unlock value in the current environment. The quick implementation of austerity measures by management is expected to bolster performance in the short term and support results in the medium to long term. The review of the Automotive portfolio is ongoing amid the changing environment. The review has resulted in Car Rental and Avis Fleet being integrated into a single unit to ensure the realisation of benefits of scale between these two businesses and also address gaps in product portfolio driven through a single focused management team. Options around the optimal deployment of capital in Motor Retail remain under due consideration. The Group is also considering market conditions in the Logistics business and evaluating its future options around this business.

The active shareholder model, a key strategic lever to changing the nature of the Group's operating model is in place. With the reviewed head office costs the Group continues to drive certain elements centrally while employing a more flexible resource model and driven execution through utilising divisional resources more effectively. The redevelopment of Barlow Park at 180 Katherine Street precinct in Sandton is being reassessed in line with current market conditions.

In terms of growth, two acquisitions that are in line with the Group's strategy were closed on 1 September 2020 and 31 October 2020, respectively, and are being integrated into the Group. The Equipment Mongolia acquisition was concluded, and the transaction closed on 1 September 2020. The transaction was de-risked through a deferral of a large part of the premium being made contingent on certain future targets. The business will be integrated with the Russian business to form Barloworld Eurasia and managed under a single leadership team. The acquisition of Tongaat Hulett Starch (Ingrain) and subsequent rebranding of the business to Ingrain positions Barloworld for growth in a consumer driven demand market while remaining focused on business-to-business customers. The business will form a strong pillar in Consumer Industries. The transaction closed on 31 October 2020, just after the Group's year end. Taking into consideration the current fluid macroeconomic environment, we will continue to be disciplined and cautious in our approach to growth, while giving due consideration to the changed macroeconomic environment.

CARING FOR OUR EMPLOYEES

The health and safety of our employees, customers and communities remains of paramount importance to management and the board. The One Barloworld COVID-19 policy that is in place outlines various health and safety measures taken to mitigate the spread of COVID-19 in our operations across various geographies. Over and above ensuring that we adhere to all workplace regulations announced by the Governments of the countries we operate in, we implemented additional measures to assist employees navigate this uncertain, changing and stressful period. In addition, we ensured that there are adequate risk management processes and safety COVID-19 protocols at every division and business unit for dealing with employees that have now returned to work. As at 30 September 2020, 536 employees have recovered from the virus while 70 employees are in the process of recovering. Regrettably, there were six deaths during the period and the Company has provided support to the bereaved families and our people during this difficult time.

The relief through the Temporary Employer-Employee Relief Scheme/Unemployment Insurance Fund in South Africa was utilised to alleviate the financial impact of the COVID-19 on employees due to reduced salaries and/or where employees were required to take annual and unpaid leave during the extended lockdown period. A number of employee wellness focused initiatives were also undertaken to assist employees deal with the emotional and psychological impact of the various lockdowns and cost containment initiatives.

The Company's commitment to diversity and inclusion was acknowledged with three awards at the Gender Mainstreaming Awards 2020, namely, the overall Gender Mainstreaming Champions for 2020 for JSE listed companies, Investing in Young Women as well as Women Empowerment in the Workplace (JSE-listed companies as well as OVERALL winner in this category).

UPDATE ON COST-SAVING MEASURES

Tough decisions were made during the year, the most significant of which was the retrenchment process that, while necessary to safeguard the long term sustainability of the business, impacted our people, who are critical to our success. Given the harsh economic realities before the onset of COVID-19, we were already contemplating a retrenchment process as part of a range of austerity measures. The scale and timelines for its implementation were accelerated, however, due to the impact of COVID-19. Letting go of hard-working and dedicated employees was incredibly difficult. The retrenchment process, which included early retirement, cost the Group R289 million and resulted in approximately 2 644 headcount reduction.

The austerity measures and cost saving initiatives aimed at reducing and containing costs to preserve cash in the immediate year were implemented by the Group and resulted in a reduction in overhead costs of R691 million. These measures included a group-wide remuneration sacrifice plan and retirement fund payment holiday, implemented on 1 May 2020, retrenchments, the deferment of non-essential capex, a moratorium on external appointments, a reduction in operating costs, additional counter-measures to contain invested capital and other measures.

The board and management remain committed to the implementation of prudent measures aimed at reducing and containing costs to preserve cash while ensuring the medium to long term strength of the organisation.

CARING ABOUT CLIMATE CHANGE

Climate change is one of the defining issues of our time and we are on the edge of the precipice. Ecosystems as diverse as the Amazon rainforest and the Arctic tundra may be approaching thresholds of dramatic change through warming and water constraints. We believe it is incumbent on individuals and businesses to contribute to keeping greenhouse gas (GHG) emissions as low as possible. We have been steadily addressing our fossil fuel usage and greenhouse gas emissions over time as detailed on here and continue to offer our customers solutions aimed at reducing their GHG emissions. We remain committed to improving our internal energy and emissions efficiency.

COVID-19 SOCIAL RESPONSES

The board and management is committed to implementing meaningful interventions that transform our society by investing in initiatives that drive economic inclusion, social cohesion and build resilient communities. About 50% of the global socio-economic spend of R16 million was dedicated to the health and welfare responses resulting from our global COVID-19 pandemic. Furthermore, the Group provided relief funding support totalling R22 million to Supplier and Enterprise Development beneficiaries to sustain their businesses during the hard lockdown period of the pandemic which included a loan repayment holiday at 0% interest rate for the period of 6 months ending in September 2020.

FOCUSING ON SAFETY

At Barloworld, we actively promote health and safety with policies and practical programmes that help our people, suppliers and contractors safeguard themselves and their colleagues at all times. Tragically, there were two work-related fatalities within the Group's Logistics operation, both of which were motor vehicle accident related. Barloworld, extends its sincere condolences to the family, friends and colleagues of the deceased to whom we have offered support.

Our Group Lost-Time Injury Frequency Rate (LTIFR) for the period was 0.53. Our ongoing focus on safety across the Group is unrelenting and we continue to target zero harm. In all our territories we monitor the work environments in light of COVID-19 and endeavour to comply with regulations and guidelines in terms of return to work requirements, including screening, protective personal equipment and contact tracing. Health and safety incidents follow in-depth root cause analysis that inform preventative measures.

THE END OF AN ERA AND THE BEGINNING OF A NEW GOVERNANCE CHAPTER

We bade farewell to Advocate Dumisa Ntsebeza SC in February this year. Dumisa's leadership of the Barloworld board was infused with his unique brand of wisdom, insight and integrity. He guided us for 12 years and played a vital role in reshaping the Barloworld legacy with his determination to drive transformation at all levels and shape the Group into the values-driven organisation it is today. We are grateful for his courageous and dedicated steering of the Barloworld board.

The end of an era while always infused with sadness, signals new beginnings. We welcomed our new Chairperson of the board, Neo Phakama Dongwana this year. Neo made Barloworld history, becoming the first Black woman to take on this role. She has a longstanding history with Barloworld, having begun her tenure as a non-executive director of Barloworld in May 2012. Since then, she has chaired the risk and sustainability committee and the remuneration committee. She has also been a member of the social ethics and transformation committee (SETC) as well as the audit committee at different times during her tenure at Barloworld.

Neo has taken the helm at a time which is arguably one of the most challenging periods of a generation, in which the world has undergone profound changes as a result of the COVID-19 pandemic and the measures put in place to inhibit its spread. As the Barloworld Group deals with the staggering negative economic impact of this on the global economy, we appreciate Neo's clear vision, focus and determined leadership, which is grounded in teamwork and the 'One Barloworld' philosophy.

A NOTE OF APPRECIATION

I would like to thank the members of our board for their guidance and support in what has been an extremely challenging year. Their swift decision-making and management of critical issues and processes in a constantly shifting environment, has been invaluable.

The past few months have been characterised by upheaval and deep uncertainty and their strong leadership has been a source of strength for the Group. The strong leadership, resilience and tenacity of our management team is commendable. I am extremely proud of all of our employees and I salute them for the dedication and tenacity they have displayed under the most trying of circumstances. We have lost six of our own to COVID-19 and we send our deepest condolences to the friends and families of our beloved colleagues. They will never be forgotten.

DOMINIC SEWELA
Group chief executive officer