Chairman and Chief Executive's report

Overview

Revenue from continuing operations to March of R29.9 billion was 5% up on 2013 while operating profit of R1 639 million was R255 million (18%) ahead of last year. This resulted in an improved operating margin of 5.5% (1H’13: 4.8%) for the six months.

The group generated total headline earnings per share (HEPS) of 336 cents (including 20 cents from discontinued operations) which exceeded the prior year by 10%.

Our Australian motor retail interests were disposed of in two separate transactions for a total of R1.3 billion and are disclosed as discontinued operations in the results for the period, with comparatives restated accordingly.

HEPS from continuing operations of 316 cents exceeded the restated continuing HEPS for 2013 of 291 cents per share by 9%.

A dividend of 106 cents per share was declared compared to 96 cents last year, an increase of 10%.

Operational review

Equipment and Handling

Equipment southern Africa

As reported in our outlook at the end of last year, mining in southern Africa remains challenging with the major mining companies continuing to cut or defer capital expenditure. However, we continue to service the large existing population of Caterpillar equipment which has led to ongoing growth in our aftermarket revenues.

We have seen some improvement in our construction business in South Africa particularly with the mid-tier contractors although the projects are of smaller scale and shorter duration.

The division generated revenue to March of R9.6 billion compared to R9 billion in the prior year. The bulk of the increase came from the extended mining product range (EMPR) which increased current year revenue by R391 million (27%) driven by deliveries to Swakop Uranium in Namibia and First Quantum Minerals (FQM) in Zambia, together with a rise in after-sales revenues.

Operating profit to March of R768 million exceeded the prior year by R114 million (17%) with an improved operating margin of 8% compared to 7.2% last year.

The firm order book at March stood at R2.8 billion which was below the September reported level of R3.5 billion following the commencement of deliveries to the Swakop Uranium and FQM Kulumbila projects. Contract mining activity has however increased of late with a number of projects awaiting confirmation.

Income from associates for the first half increased by 51%.

Equipment Iberia

While there are signs of an improvement in the overall economy in Iberia, the construction industry is not yet showing signs of recovery. Year to date revenue of R2 277 million (€152 million) was well down on the previous year of R2 464 million (€215 million) which included the two large package deals to EPSA and Victorino Alonso.

The business generated an operating loss of R32 million (€2 million) compared to a loss of R5 million (€0.4 million) last year. The result was impacted by reduced volumes, increased fixed costs as prior year salary decreases were reinstated and a reduction in the number of service technicians earning revenue on projects outside Iberia.

The March firm order book of €42 million is down on the prior year €49 million with power representing 81% of this book.

Equipment Russia

The deteriorating situation in Ukraine continues to take its toll on the Russian economy with the rouble weakening in the period and the outlook for economic growth continuing to decline.

The limited economic sanctions announced by both the United States and the European Union while impacting certain designated individuals and entities in Russia have thus far not had any significant direct impact on our business, our customers, or the banking and financial sector in Russia.

Our operations have however been negatively impacted by lower activity in the mining sector as a result of reduced commodity prices and curtailment of spend on mine expansions and new projects.

Revenue to March of R1 929 million ($183.7 million) was 11.8% below the prior year driven by lower mining sales into Siberia and the Russian Far East.

Operating profit for the first half of R156 million ($14.7 million) compares to R157 million ($17.8 million) in 2013.

The firm order book at March of $36.5 million is down on the September 2013 book of $40.4 million however there remain a number of projects under discussion which have the potential to benefit revenues in the second half.

Handling

Revenue to March of R947 million was well down on last year which included The Netherlands and Belgium businesses. The Handling Belgium business was sold in May 2013, while the disposal of the Netherlands business was concluded in December.

Handling SA revenue was slightly below last year with slower new and rental sales, while Agriculture SA revenue of R432 million was 7% up.

Operating profit to March of R31 million compares to R36 million profit in 2013 which included profits from Belgium and The Netherlands.

Automotive and Logistics

The division successfully exited the Australian motor retail operations with the sale of the Ferntree Gully dealership in November 2013 and the sale of the remainder of the business effective 31 March 2014. Total disposal proceeds of R1.3 billion were generated and the majority of this was received after the half year end on 1 April 2014. A profit on disposal of R370 million was recorded on the combined transactions. The segment has consequently been reflected as discontinued in the period with the prior year restated on a comparable basis.

The Automotive and Logistics division generated revenue of R15.1 billion from continuing operations for the six months to March which is R1.6 billion (11%) up on last year’s comparable revenue of R13.6 billion. All the business units have shown good revenue growth in the current year.

Operating profit to March of R775 million (excluding motor retail Australia) exceeded the previous year by R159 million (26%) with the divisional operating margin improving to 5.1% (1H’13: 4.5%).

Including Australia the division produced an operating profit of R861 million for the six months to March, up 29% on the prior period.

Car rental

Revenue for the six months to March of R2.1 billion exceeded the prior period by R134 million (7%) due to improvements in rental days of 11% and revenue per day of 2%. Fleet utilisation for the period reached 76% with volume increases in most segments.

Operating profit to March of R220 million was 35% up on the prior period with the operating margin showing a pleasing improvement from 8.2% in 1H’13 to 10.3% in the current year.

Motor retail

Motor Retail SA increased revenue by R1.1 billion (14%) to R9.3 billion mainly through a strong new vehicle sales performance in the Mercedes-Benz franchise and a positive growth in aftermarket.

Year to date operating profit of R235 million was 17% (R34 million) up on last year due to improved finance and insurance and aftermarket profitability.

South African consumer confidence levels remain low due to high levels of indebtedness and increased energy and transport costs exacerbated by a slowdown in bank lending to households. Based on the tepid growth prospects for the SA economy the motor industry is projecting a flat year for vehicle sales but in our view this is more likely to be slightly negative. Industry vehicle sales to March show a 3.4% decline on last year.

The newly acquired Toyota dealership in Kuruman has been successfully integrated from 10 March 2014.

Fleet services

Fleet services maintained its strong momentum and generated revenue of R1.5 billion which was 18% ahead of the previous period. Year to date operating profit of R264 million was up by 27% on 2013.

Logistics

Year to date March revenue of R2.2 billion exceeded the prior period by 3%. Operating profit to March of R56 million was 27% ahead of the prior period with the transport business producing the bulk of the profit. This was despite the impact of ongoing strike action in the platinum industry.

Supply Chain Management profitability was down due to lower gain shares on certain contracts as well as lower Barloworld Equipment volumes.

The international businesses generated slightly increased losses in the first half with Sea Air volumes well down due to a contract loss.

Funding

Group net debt increased by R3.6 billion from September 2013 to R11.2 billion at March 2014. This was at a similar level to March 2013. The bulk of the increase was driven by the seasonal increase in working capital which is expected to significantly reduce in the second half of this year.

The final proceeds on the disposal of the Australian motor retail interests of approximately R1.2 billion were received on 1 April 2014 which will further reduce net debt levels by year end.

Human resources, diversity and sustainable development

Tragically motor vehicle accidents resulted in one work-related fatality in the reporting period and another two subsequently. Steps have been taken to incorporate appropriate prevention measures in our ongoing safety awareness programmes.

The implementation of our renewed Employee Value Proposition enhances our position to attract, develop and retain the people and leadership required to implement our strategic objectives.

Our group-wide focus on diversity and inclusion resulted in the group retaining its broad-based black economic empowerment (B-BBEE) level 2 rating and our major South African business units achieving a level 2 or 3. We remain committed to being industry leaders in empowerment by aligning our transformation and B-BBEE strategy to the revised codes.

Expanding Logistics’ road transportation activities following acquisitions made last year contributed to increasing group energy consumption and greenhouse gas emissions by 55% and 41% respectively. This in turn adversely impacts the achievement of our related aspirational targets.

Changes in directorate

Hixonia Nyasulu retired by rotation from the board at the annual general meeting on 29 January 2014. We would like to thank her for her contribution over the past seven years.

Dr Alexander Landia joined the board as a non-executive director on 1 October 2013.

With effect from 19 March 2014 Ngozichukwuka (Ngozi) Edozien was appointed a non-executive director of the company and Dominic Sewela, Chief Executive of Barloworld Equipment southern Africa, was appointed as an executive director of the company.

Isaac Shongwe, currently Executive Director: Human Resources, Strategy and Sustainability, having served the group for more than nine years will relinquish his executive management responsibilities effective 31 May 2014. Mr Shongwe wishes to devote more time to his social and leadership activities including the African Leadership Initiative (ALI) which he founded in 2003. He has agreed to remain on the board of Barloworld Limited as a non-executive director effective 1 June 2014.

Outlook

The global economic recovery now appears to be led by the US and EU while China and the emerging market economies show signs of slowing.

The South African economy continues to suffer from the impact of the prolonged strike in the platinum sector which is diminishing growth prospects. Furthermore, high inflation levels would appear to make further interest rate hikes inevitable.

Equipment southern Africa traditionally generates a stronger second half performance which will include deliveries in respect of the major EMPR projects in this period. Aftermarket revenues are expected to generate continued growth.

While current economic indicators for Spain are turning positive we have yet to see this translate into improved machine industry sales. As a result, we are looking at taking further steps to reduce our cost base and position the business for future profitability.

The outlook for Equipment Russia is dependent on no further escalation in tensions between Russia, Ukraine, the EU and the United States.

Trading conditions for Power in southern Africa and Russia will remain muted while Iberia has a solid order book mainly in marine engines which will ensure growth on the prior year.

The order books for the Handling and Agriculture businesses in southern Africa are up which should add impetus for the balance of the year.

We expect the Automotive businesses to show continued growth while the Logistics business should deliver a stronger performance in the second half.

Overall the group is expected to produce a solid result for the full year and is well placed to benefit once the global mining cycle moves into a recovery phase.