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Johannesburg - In South Africa, the source of 66% of Imperial's revenue, external conditions as they affected its businesses in the past four months were largely unchanged from that of the second quarter of the calendar year, Imperial Holdings [JSE:IPL] said in a Sens statement on Tuesday.
The South African economy continues to falter with 2014 gross domestic product (GDP) growth now estimated by the International Monetary Fund (IMF) to be 1.4%.
"Much of this lacklustre performance is directly attributable to local structural factors well known to shareholders and unlikely to change in the medium term. As many of these factors place lower income households under severe stress, it is reasonable to assume that the private consumption expenditure of middle to upper income consumers to whom the Imperial group markets directly, will be well above the 2% forecast for the country and not as parlous as some suggest," according to Imperial.
"The prospect of a sovereign rating downgrade, which could have severe consequences for South Africa, has been mitigated by Finance Minister Nhlanhla Nene's excellent first medium term budget. The willingness of his cabinet colleagues to support the necessary austerity must now be tested."
Although economic growth in most of the sub-Saharan markets in which Imperial operates is higher than South Africa, their potential is being suppressed variously by socio-political tensions, religious extremism and public health issues. To date none of these have affected Imperial's businesses. Over the past six months the German economy has progressively underperformed expectations.
Eurozone economic growth was a mere 0.1% in the second quarter, with the September Eurozone Purchasing Managers Index (PMI) at its lowest level this year. Germany's quarterly growth fell to just 0.2%, down from 0.8% in the first quarter.
"It is difficult to accurately apportion the decline in the German economy to general Eurozone weakness, slowing growth in China, or Russian sanctions. It is clear, however, that these operating conditions are below the assumptions on which our budgeting was based and rather than the mild economic recovery that was anticipated, we are seeing static or declining activity in most of our European operations," said Imperial.
Other than in sub-Saharan Africa, slow growth in all of the industries and regions in which Imperial operates has led to challenging trading conditions as competitors fight to retain market share.
"Logistics contracts are hard won and retained, and with few exceptions, the sales and margins of vehicle and financial services businesses are under pressure," said Imperial.
Divisional performance
Logistics Africa
Logistics Africa's previously reported 2014 revenue and operating profit was R22bn and R1.3bn respectively. In South Africa this division continues to benefit from its favourable market position as provider of end to end logistical solutions.
"Scale and capabilities enable us to compete effectively for new contracts in an environment where volumes are generally under pressure and counterparties are demanding service delivery excellence at the lowest price. For the year to date our business gains exceed losses. In Africa we continue to develop our relevance as an end to end provider of FMCG and pharmaceutical logistical services in Sadec, East Africa and West Africa, establishing our footprint and entrenching our position with our principals," said Imperial.
"Although all acquisitions are performing to expectation, we are acutely aware of the triple risks of fast growth, in Africa, through acquisition, and a major short term focus is the creation of a robust control environment encompassing structures, systems, processes and people."
On October 23 the acquisition of 70% of Imres was concluded effective September 1, for a purchase consideration of €46m. The expected annualised revenue of R850m from this wholesaler of pharmaceutical and medical supplies to NGOs, hospitals and retailers brings to approximately R9bn the annualised revenue from Imperial's non-South African logistics business, most of which has been established since 2012.
"Our guidance on our Logistics Africa division is unchanged: We expect real growth of revenues with operating profit growing at a higher rate," said Imperial.
Logistics International
As for Logistics International, the previously reported 2014 revenue and operating profit for this division was R19bn and R1.0bn respectively.
"The deterioration of the German economy has been unexpected. Although our businesses have high barriers to entry arising from specialised technical expertise in inland waterway shipping, contract logistics and container port operations, we are not immune to a general downturn in economic activity in an already slow growth environment," said Imperial.
"Volumes and rates are under pressure, but we remain committed to our capital expenditure, mainly on asset renewal, but also on the increased capacity of our South American contract, which is performing in line with expectations. Our guidance on our Logistics International division has changed: We continue to expect real growth of revenues in euros, but with operating profit growing at a lower rate."
Vehicle import, distribution and dealerships
The vehicle import, distribution and dealerships division's previously reported 2014 revenue and operating profit was R27bn and R1.5bn respectively.
"The impact of sharp currency movements on the sales, margin, inventory and profitability of this division has frequently been explained. As previously cautioned, and notwithstanding substantial mitigating action, a further weakening of the rand since the 2014 year end has delayed slightly the recovery of retail pricing and volumes to the desired levels," said Imperial.
"In addition to the existing policy of covering forward on all orders placed, additional FEC's and hedging instruments are being used to mitigate the effect of currency movement further out. While these actions do not solve the fundamental problem of the currency impact on performance, they do provide extended 'line of sight' on profitability at any time."
Imperial's guidance on this division has changed. "Absent a marked deterioration of vehicle sales and including the full year effect of acquisitions, we anticipate good revenue growth, but a decline in operating income for the full year, resulting from reduced margins and operating profits in the first half and a recovery off a low base in the second half," said Imperial.
Vehicle retail, rental, aftermarket parts
The vehicle retail, rental and aftermarket parts division reported 2014 revenue and operating profit of R34bn and R1.6bn respectively. This division continues to make progress towards its strategic and operating objectives.
The passenger vehicle dealerships are performing in line with expectation, buoyed slightly by new vehicle launches, while pre-owned vehicle sales are increasing with the rising ratio of pre-owned to new vehicle sales typical at this point of the cycle.
Aftermarket parts are performing to expectation, while car rental and South African commercial vehicle dealerships are feeling the effects of the subdued economy.
"Our commercial vehicle dealerships in the United Kingdom are performing to expectation, augmented since September 1 by the acquisition of 100% of S&B Commercials for a purchase consideration of £9.0m. S&B Commercials is a Mercedes and Fuso commercial vehicle dealership chain located in North London, Hertfordshire and Essex," said Imperial.
"Our guidance on this division has changed: We expect real growth of revenue and operating profit for the year."
Financial services
The financial services division previously reported 2014 revenue and operating profit of R4.1bn and R1.1bn respectively. Regent Insurance is performing below expectation as a result of lower investment income and an unexpected R19m loss incurred on the write down of an investment in African Bank (JSE:ABL].
Notwithstanding the effect of lower vehicle sales, Liquid Capital is performing to expectations as a result of annuity income from previously sold products. Absent a deterioration of underwriting conditions and investment markets, the guidance on the financial services division is unchanged.
"We expect single digit growth of revenue and operating profit for the year," said Imperial.
Imperial Group
Imperial Group's previously reported 2014 revenue and operating profit was R103bn and R6.2bn respectively.
"As a group, over the past four months we have registered steady progress towards the strategic and operational objectives described in the annual reports. Our full year guidance is unchanged: We expect earnings in the current half to decline on the prior year as the currency impact on the vehicle import, distribution and dealership division flows through," said Imperial.
"In the absence of a marked deterioration of vehicle sales, this should right itself in the second half to produce earnings for the full year in line with 2014."
The South African economy continues to falter with 2014 gross domestic product (GDP) growth now estimated by the International Monetary Fund (IMF) to be 1.4%.
"Much of this lacklustre performance is directly attributable to local structural factors well known to shareholders and unlikely to change in the medium term. As many of these factors place lower income households under severe stress, it is reasonable to assume that the private consumption expenditure of middle to upper income consumers to whom the Imperial group markets directly, will be well above the 2% forecast for the country and not as parlous as some suggest," according to Imperial.
"The prospect of a sovereign rating downgrade, which could have severe consequences for South Africa, has been mitigated by Finance Minister Nhlanhla Nene's excellent first medium term budget. The willingness of his cabinet colleagues to support the necessary austerity must now be tested."
Although economic growth in most of the sub-Saharan markets in which Imperial operates is higher than South Africa, their potential is being suppressed variously by socio-political tensions, religious extremism and public health issues. To date none of these have affected Imperial's businesses. Over the past six months the German economy has progressively underperformed expectations.
Eurozone economic growth was a mere 0.1% in the second quarter, with the September Eurozone Purchasing Managers Index (PMI) at its lowest level this year. Germany's quarterly growth fell to just 0.2%, down from 0.8% in the first quarter.
"It is difficult to accurately apportion the decline in the German economy to general Eurozone weakness, slowing growth in China, or Russian sanctions. It is clear, however, that these operating conditions are below the assumptions on which our budgeting was based and rather than the mild economic recovery that was anticipated, we are seeing static or declining activity in most of our European operations," said Imperial.
Other than in sub-Saharan Africa, slow growth in all of the industries and regions in which Imperial operates has led to challenging trading conditions as competitors fight to retain market share.
"Logistics contracts are hard won and retained, and with few exceptions, the sales and margins of vehicle and financial services businesses are under pressure," said Imperial.
Divisional performance
Logistics Africa
Logistics Africa's previously reported 2014 revenue and operating profit was R22bn and R1.3bn respectively. In South Africa this division continues to benefit from its favourable market position as provider of end to end logistical solutions.
"Scale and capabilities enable us to compete effectively for new contracts in an environment where volumes are generally under pressure and counterparties are demanding service delivery excellence at the lowest price. For the year to date our business gains exceed losses. In Africa we continue to develop our relevance as an end to end provider of FMCG and pharmaceutical logistical services in Sadec, East Africa and West Africa, establishing our footprint and entrenching our position with our principals," said Imperial.
"Although all acquisitions are performing to expectation, we are acutely aware of the triple risks of fast growth, in Africa, through acquisition, and a major short term focus is the creation of a robust control environment encompassing structures, systems, processes and people."
On October 23 the acquisition of 70% of Imres was concluded effective September 1, for a purchase consideration of €46m. The expected annualised revenue of R850m from this wholesaler of pharmaceutical and medical supplies to NGOs, hospitals and retailers brings to approximately R9bn the annualised revenue from Imperial's non-South African logistics business, most of which has been established since 2012.
"Our guidance on our Logistics Africa division is unchanged: We expect real growth of revenues with operating profit growing at a higher rate," said Imperial.
Logistics International
As for Logistics International, the previously reported 2014 revenue and operating profit for this division was R19bn and R1.0bn respectively.
"The deterioration of the German economy has been unexpected. Although our businesses have high barriers to entry arising from specialised technical expertise in inland waterway shipping, contract logistics and container port operations, we are not immune to a general downturn in economic activity in an already slow growth environment," said Imperial.
"Volumes and rates are under pressure, but we remain committed to our capital expenditure, mainly on asset renewal, but also on the increased capacity of our South American contract, which is performing in line with expectations. Our guidance on our Logistics International division has changed: We continue to expect real growth of revenues in euros, but with operating profit growing at a lower rate."
Vehicle import, distribution and dealerships
The vehicle import, distribution and dealerships division's previously reported 2014 revenue and operating profit was R27bn and R1.5bn respectively.
"The impact of sharp currency movements on the sales, margin, inventory and profitability of this division has frequently been explained. As previously cautioned, and notwithstanding substantial mitigating action, a further weakening of the rand since the 2014 year end has delayed slightly the recovery of retail pricing and volumes to the desired levels," said Imperial.
"In addition to the existing policy of covering forward on all orders placed, additional FEC's and hedging instruments are being used to mitigate the effect of currency movement further out. While these actions do not solve the fundamental problem of the currency impact on performance, they do provide extended 'line of sight' on profitability at any time."
Imperial's guidance on this division has changed. "Absent a marked deterioration of vehicle sales and including the full year effect of acquisitions, we anticipate good revenue growth, but a decline in operating income for the full year, resulting from reduced margins and operating profits in the first half and a recovery off a low base in the second half," said Imperial.
Vehicle retail, rental, aftermarket parts
The vehicle retail, rental and aftermarket parts division reported 2014 revenue and operating profit of R34bn and R1.6bn respectively. This division continues to make progress towards its strategic and operating objectives.
The passenger vehicle dealerships are performing in line with expectation, buoyed slightly by new vehicle launches, while pre-owned vehicle sales are increasing with the rising ratio of pre-owned to new vehicle sales typical at this point of the cycle.
Aftermarket parts are performing to expectation, while car rental and South African commercial vehicle dealerships are feeling the effects of the subdued economy.
"Our commercial vehicle dealerships in the United Kingdom are performing to expectation, augmented since September 1 by the acquisition of 100% of S&B Commercials for a purchase consideration of £9.0m. S&B Commercials is a Mercedes and Fuso commercial vehicle dealership chain located in North London, Hertfordshire and Essex," said Imperial.
"Our guidance on this division has changed: We expect real growth of revenue and operating profit for the year."
Financial services
The financial services division previously reported 2014 revenue and operating profit of R4.1bn and R1.1bn respectively. Regent Insurance is performing below expectation as a result of lower investment income and an unexpected R19m loss incurred on the write down of an investment in African Bank (JSE:ABL].
Notwithstanding the effect of lower vehicle sales, Liquid Capital is performing to expectations as a result of annuity income from previously sold products. Absent a deterioration of underwriting conditions and investment markets, the guidance on the financial services division is unchanged.
"We expect single digit growth of revenue and operating profit for the year," said Imperial.
Imperial Group
Imperial Group's previously reported 2014 revenue and operating profit was R103bn and R6.2bn respectively.
"As a group, over the past four months we have registered steady progress towards the strategic and operational objectives described in the annual reports. Our full year guidance is unchanged: We expect earnings in the current half to decline on the prior year as the currency impact on the vehicle import, distribution and dealership division flows through," said Imperial.
"In the absence of a marked deterioration of vehicle sales, this should right itself in the second half to produce earnings for the full year in line with 2014."
