Barloworld Limited: Leading Brands

Barloworld is an industrial processing, distribution and service Company which distributes leading international brands. In our OEM businesses we provide integrated rental, fleet management and product support through offering flexible, value adding, and innovative business solutions to our customers backed by leading global brands. The brands we represent on behalf of our principals include Caterpillar, Avis, Budget, Mercedes-Benz, Toyota, Volkswagen, Audi, BMW, Ford, Mazda, among others. The divisions of the Group comprise Equipment (earthmoving equipment and power systems), Automotive (car rental, motor retail, fleet services, used vehicles and disposal solutions), Logistics (logistics management and supply chain optimisation) and consumer industries (Ingrain — starch and glucose).

Barloworld has a proven track record of long-term relationships with global principals and customers. We have an ability to develop and grow businesses in multiple geographies including challenging territories with high growth prospects. One of our core competencies is an ability to leverage systems and best practices across our chosen business segments. As an organisation we are committed to sustainable development and playing a leading role in empowerment and transformation. The Company was founded in 1902 and currently has operations in 16 countries around the world.

The Group's core divisions comprise of:

EQUIPMENT
Earthmoving equipment and power systems

AUTOMOTIVE
Car rental, motor retail, fleet services, used vehicles and disposal solutions

LOGISTICS
Logistics management and supply chain optimisation

CONSUMER INDUSTRIES
Starch and glucose

GROUP REVIEW

Going into 2020, our focus was on the delivery of our strategy and the achievements of the ambitious targets we set for ourselves, as well as ensuring the complete adoption of the Active Shareholder Model. Though we anticipated that we were going into a year with continued macroeconomic challenges, the onset of the novel coronavirus pandemic (COVID-19) and the ensuing economic impact, was something no one could have predicted. Barloworld, like many other corporations in South Africa and globally, had to navigate this challenging and uncertain reality.

The constrained consumer demand that was experienced in 2019 continued during the year. The onset of the global COVID-19 pandemic in our geographies started impacting trading in March 2020 triggered by trade restrictions, lockdowns and travel restrictions that resulted in negative knock-on effects in the trading environment. The Group's performance during the year was resilient, reflecting the difficult trading environment and the challenges faced by our businesses with the Equipment divisions performing much better than anticipated.

The Group revenue decreased by 17% to R49.7 billion (2019: R60.2 billion) with the operating margin declining from 6.6% to 4.1%. The operating profit for the Group of R1.8 billion was 54% down on prior year (2019: R3.9 billion), negatively impacted by lower revenues and higher costs.

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 (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 and 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 double its 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.

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.

The board and management remain committed to the prudent implementation of the Group strategy and resource allocation through the set strategic levers:

1. Fix, restructure or exit businesses that do not meet the Group's portfolio criteria;
2. Optimise existing businesses that meet the Group's portfolio guardrails to achieve full potential;
3. Implement an active shareholder operating model; and
4. Pursue programmatic acquisitive growth in line with the revised strategy, focused on adding high growth, cash generative businesses to the portfolio.

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 re-assess 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 focussed 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 Mongolian Caterpillar dealership 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 the Tongaat Hulett Starch and subsequent rebranding of the business to Ingrain positions Barloworld for growth in a consumer driven demand market whilst remaining focussed 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, 70 employees have tested positive for the virus, 536 have recovered while 70 are in the process of recovering. Regrettably, there have been six deaths 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 lock-downs 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, whilst 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 mediumto long-term strength of the organisation.

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 programs 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.

CONTINUING OPERATIONS

Group revenue for the period decreased by 17% to R49.7 billion (2019: R60.2 billion). Equipment southern Africa's (snA) revenue declined by 14% against the prior year but strong against our initial re-forecast resulting largely from comparatively good mining machine sales and resilient aftermarket activity levels. Despite the COVID-19 pandemic and geopolitical challenges Equipment Eurasia's revenue increased by 22% benefiting from strong levels of mining activity, particularly in the gold sector. The Automotive division's revenue, excluding NMI-DSM now equity accounted, was down 15% with declines across all business units as COVID-19 and economic pressures impacted discretionary spending coupled with lower fleet utilisation in the Car Rental business. Strong used vehicle sales volumes post lockdown trade restrictions was achieved and margins in this segment are being maintained. Cash generation was supported by the disposal of properties to Khula Sizwe as well as fleet disposals in the Rental and Fleet businesses. In Logistics, revenue declined by 25% against the prior year on the back of the non-renewal of contracts and the contraction of the Transport and Supply Chain markets resulting from weaker demand for goods and services. The weakening South African Rand (ZAR) resulted in an increase in revenue of R1.3 billion (2.8%) with the bulk of the increase in the Equipment businesses.

IFRS 16: Leases was adopted for the first time this current financial year and the modified retrospective approach was applied. The comparatives were therefore not restated. The impact of IFRS 16 on the Group's operating profit was an uplift of R147 million because we no longer record operating lease charges, but recognise interest charged and amortisation.

The operating profit for the Group of R1.8 billion was 54% down (2019: R3.9 billion), negatively impacted by lower revenues and higher operating costs. The Equipment snA operating profit was down 35% impacted by lower service labour recoveries, Khula Sizwe charges and once off retrenchment costs while gross margin remained in line with the prior year boosted by a stronger aftersales contribution. In USD terms Equipment Eurasia’s operating profit improved by 1.8% with continued cost containment and mix driving the sustained margin, showing resilience. Automotive’s operating profit was down by 83%, impacted by losses suffered as a result of trading and travel restrictions as well as once off operating costs. Logistics operating profit reduced to a loss of R153 million against a R38 million profit in the prior year. Cost containment through staff reductions, footprint rationalisation and fit for purpose operating models were key focus areas during the year with benefits expected to be realised in 2021. Corporate cost containment measures, driven largely by a headcount reduction and the reduction of consulting costs to key projects, were implemented to further curb costs. The Khula Sizwe operating profit excluding an R82 million B-BBEE charge was R168 million earned from the 57 properties purchased to date as part of the B-BBEE deal and rentals earned from divisions.

The South African Rand (ZAR) exchange movements have increased operating profit by 5.4% equalling R98 million from Equipment Eurasia. The Group operating margin of 4.1% is down on the prior year (2019: 6.6%) and net profit after tax has decreased by 211% to a R2.5 billion loss against the prior year R2.2 billion.

Losses from fair value adjustments on financial instruments totalled R340 million driven by negative currency movements and forward exchange contract cost impacting Equipment snA, of which R96 million related to RSA and R114 million related to the rest of Africa, which were further impacted by R187 million loss in the UK from the derecognition of the USD denominated cash deposits, realised in the income statement in September.

Losses from non-operating and capital items of R1.9 billion largely relate to the impairments taken in March against BZAMM, Car Rental and our investment in BHBW. To note the NMI-DSM investment impairment at March of R124 million was reversed in full however further impairments were taken in September relating to properties of R167 million and right of use assets of R40 million.

With the exclusion of IFRS16 we saw a reduction in the net finance costs in 2020 on the back of reduced interest rates in South Africa. Net finance costs of R1.1 billion (R0.9 billion) include IFRS 16 charges of R285 million together with Khula Sizwe external net finance charges of R82 million. Lower marginal rates in South Africa have provided some relief despite higher borrowings..

The effective tax rate before exceptional items and prior period adjustments was 251% (2019: 28%). The increase in the current year's tax rate is largely due to local currency profits in the offshore entities, Khula Sizwe capital gains taxes and IAS12.41 adjustments arising from the negative in country currency movements against the USD.

Joint ventures and associates generated losses of R48 million compared to the prior year's profits of R231 million. The BHBW joint venture contributed a loss of R58 million (September 2019: R24 million loss) and remains under pressure. Bartrac, our joint venture in the Katanga province of the DRC generated losses of R41 million (2019: R268 million profit). The DRC has seen some green shoots in activity levels over the last two months of the financial year against the losses of the first three quarters of the year. NMI-DSM contributed an impressive result of R52 million (noting that in 2019 NMI was a subsidiary for 11 months and generated profit after tax and 1 month associate income at September 2019 of R40 million).

RATIOS AND ROIC ^

Performance against metrics has generally been below prior year on the back of depressed trading results. Most of our businesses generated ROIC below the hurdle rates (and consequently generating negative economic profit) with the exception of the Eurasia division that has performed particularly well under the circumstances achieving a ROIC of 14.2% (Sept 2019: 17.3%).

CASH FLOWS

Net Cash retained from operating activities to September 2020 of R2.4 billion was marginally down on prior year (September 2019: R2.6 billion). Despite the decreased activity levels across the Group the working capital levels were well maintained largely due to a decrease in receivables as a result of accelerated collection and a decrease in business activity. Investments in leasing and the rental fleet have been well contained in the year resulting from lower demand in these businesses and the sale of excess vehicle capacity within the Car Rental business.

Net cash used in investment activities of R3.0 billion includes the Mongolia acquisition of R2.6 billion which when excluded was favourable compared to the prior period on the back of reduced capex investments as the Group focuses on cash containment and inflows from disposals in the year.

The free cash flow for the period was positive at R575 million, however, excluding the Equipment Mongolia acquisition R2.6 billion, this is comparable to 2019's R3.1 billion.

FINANCIAL POSITION, GEARING AND LIQUIDITY

The Group's balance sheet as at 30 September 2020 remained strong considering the challenging environment. A robust and solid liquidity position with cash balance of R6.7 billion was maintained with the net debt position including the Equipment Mongolia acquisition, increasing marginally to R2.6 billion from R1.1 billion in 2019, due to an acquisition was made in 2020. The headroom on committed facilities remained substantial at R10.1 billion. These facilities exclude the ring fenced R5.4 billion of committed funding for the Tongaat Hulett Starch (now Ingrain SA) acquisition and therefore the total headroom as at 30 September 2020 amounted to R15.6 billion. The funding capacity of the Group remains healthy as management continues to focus on actively reviewing and monitoring all facilities on an ongoing basis and remain confident of the good liquidity position.

At the end of 30 September 2020, the Group's gearing levels increased and our financial position was well within our covenants. It is important to note that, in April 2020, the EBITDA to interest covenant was renegotiated from 3.5 times to 2.5 times based on an unpredictable future that was forecasted at the time. The Group not only met the renegotiated covenant but also remaining well within our old covenant targets even post acquisition of Equipment Mongolia. Management interventions during the lockdown period have sown positive results in managing our assets and liabilities.

 

Even after taking into account the acquisitions being progressed, we retain significant headroom within our covenants, with Net Debt to EBITDA remaining below 1.0 times, the target being below 3.0 times.

NORMALISED RETURNS

ROIC, EP and FCF are key performance measures for the Group. Performance during the period was significantly impacted by tough trading conditions.

 

AUTOMOTIVE AND LOGISTICS

 

The performance of the Automotive division is down on the prior year on a comparable basis. Revenue for the division, excluding NMI-DSM in the prior year, was down by 15% with declines across all business units as a result of economic pressures, further impacted by COVID-19. The ROIC ^ for the division was lower at 2.9% (2019: 13.2%) mainly due to operating losses suffered during the year. Cost containment through staff reductions and lease rationalisation were key focus areas in this challenging trading environment.

The successful integration of Automotive and Logistics with centralised shared services functions achieved savings of R79 million. Centralised Strategic Sourcing, now also a Centre of Excellence for the Group, realised savings of R88 million for the division. The Division's commitment to the implementation of BBS yielded fruit with value uplift in various value stream improvements and assisted in securing a contract renewal.

Tough decisions were made during the year to safeguard the sustainability of the Automotive and Logistics division, impacting estimated 22% of staff at a retrenchment costs of R89 million. Further cost containment measures included lease rationalisation, review of the network, leaner and fit for purpose head office structures and operating models.

MOTOR TRADING

Motor Trading's (excluding NMI-DSM, now an associate) revenue is down 15% due to the decline in the vehicle market, the impact of COVID-19 stages transitioning out of lockdown trade restrictions, consumer affordability and overall vehicle price increases. New vehicle sales performed in line with the represented overall market with the dealer market down 25%. From the month of June, activity levels bounced back, with strong used car sales and better than anticipated new car sales as demand improved due to relaxations in lockdown restrictions. The business recorded an operating loss of R12 million (2019: R561 million profit which included R125 million of NMI-DSM for 11 months).

CAR RENTAL

During the period, Car Rental activity was significantly impacted by the COVID-19 related trade restrictions and market consequences. Revenue was 18% down compared with the prior period due to the decline in rental bill days, whilst used car sales were very strong. Despite a slow increase in billed days in all segments, with exceptions of inbound, the car rental industry remains under significant pressure. The used vehicle market remained resilient, with margins holding up and one year old vehicles continuing to yield good returns. Operating profit was impacted by significant rental losses suffered since April on the back of limited local and international travel, costs incurred to re-align the cost structure and footprint as well as provision for expected credit losses. During the second half of 2020 the business realigned the cost structure and reviewed the footprint, closing down 28% of the branches, impacting more than 40% of the staff.

AVIS FLEET

The Avis Fleet revenue declined by 10% to R3.0 billion mainly due to lower leasing revenue as a result of large contracts lead out. Operating profit was down due to a reduction in used vehicle margin impacted by vehicle make and model, a material increase in provision for expected credit losses as well as once-off operating costs.

LOGISTICS

Logistics revenue declined by 25% against the prior period on the back of the non-renewal of contracts and the contraction of the Transport and Supply Chain volumes resulting from weaker demand for goods and services under the current COVID-19 environment. In all business units, the inconsistency of volumes remained a challenge and pressure to reduce the cost to serve intensified. Logistics recorded an operating loss of R153 million against a R38 million operating profit in 2019 as a result of reduced revenue, once-off operating costs including retrenchment costs and repairs and maintenance costs stemming from an ageing fleet due to delayed decision of contract renewals.

Contract and customer retention was positive during the period with high retention and re-award rate in both Transport and Supply Chain. New awards in our Energy, Timber 24 and Freight Forward business units were secured during the second half of 2020. The sale of the Middle East and SmartMatta was successfully concluded during the period.

EQUIPMENT

 

Equipment southern Africa's performance was resilient in spite of the slowdown in trading activity. Revenue was 13.9% lower than 2019 at R17.6 billion. The reduction in revenue was also driven by low sales activity in Zambia due to curtailment of activity at a key customer site and the shortage of hard currency and/or letters of credit in Angola. The weaker ZAR to USD exchange rate contributed 2.7% improvement to the overall revenue because of the translation of the financial results for Rest of Africa operations reporting in dollar functional currency. Total machine sales were 15.8% down compared to the prior period, while aftermarket sales contracted by 11.5% year on year. While the earthmoving machine sales market in the region was down, a strong focus on increasing machine population saw our retail market share increase by 0.4 percentage points. Gross margin remained in line with the prior year boosted by a stronger aftersales contribution.

The operating profit at R1.2 billion (2019: R1.8 billion) was down on the prior period, resulting in an operating margin of 6.8% (2019: 9.0%). The reduction in operating profit was mainly driven by low sales activity, once off separation cost and Khula Sizwe charges. The negative impact on operating margin was partially offset by previously announced cost containment measures which saw our gross expenses reduce by 8.5% excluding once off separation cost and Khula Sizwe charges. EBITDA at R1.8 billion (2019: R2.4 billion) was 24% lower than the prior year while EBITDA margin at 10.3% (2019: 11.7%) was boosted by the impact of IFRS 16.

The steep currency devaluations mainly in Angola and Zambia resulted in an increase in the financial instrument charge amounting to R210 million (2019: R100 million) and had a negative impact on the effective tax rate due to IAS 12.41. Furthermore, the effective tax rate of 208% on a loss before profit was influenced by the withholding of tax on special dividends of USD 41.2 million declared out of retained earnings in Angola. The tax impact was partially offset by the decrease in deferred tax liability in Angola resulting from the change in the corporate tax rate from 30% to 25% during the reporting period. A loss on exceptional items of R898 million was realised mainly due to COVID-19 related impairment of goodwill and intangibles in Rest of Africa.

Bartrac, our Joint Venture in the Katanga province of the DRC, remained under pressure. The subdued performance was mainly influenced by operations at a key customer site being placed under care and maintenance and a slowdown in the customer market exposure diversification strategy due to COVID-19 disruptions. This resulted in a total share of associate loss of R39 million (2019: R249 million profit).

The focus on optimising working capital led to a reduction in invested capital at R9.2 billion (2019: R11.3 billion) and a very strong free cash generation of R3.4 billion (2019: R2.0 billion). The overall return on invested capital was lower at 3.8% (2019: 12.5%) due to lower net operating profit after tax.

The firm order book at the end of September 2020 remains strong at R2.3 billion (2019: 2.1 billion).

Equipment Eurasia represents our combined Russian and Mongolian Caterpillar operations. The Mongolia transaction closed on 1 September 2020, and the Eurasia numbers include one month of the Mongolian trading. The first month of trading produced a pleasing result and pending how the COVID-19 pandemic will evolve, we remain optimistic that this new acquisition will contribute positively to the overall Barloworld result. Russia produced good results for the period to September 2020 driven by an active mining industry, in particular, the gold sector. The impact of COVID-19, the slowdown in the coal segment as well as the overall economic impact due to the downturn in the oil price, stifled topline growth. The Rouble devaluation further impacted returns negatively. At a Eurasia level, revenue at USD467.0 million was up 8.0% on the prior period and operating profit at USD51.0 million was also up 1.8% however the operating margin dropped from 11.6% to 10.9% due to the change in the sales mix. Despite the drop in operating margin, the result is still industry leading due to continued cost containment and good margin realisation in both prime product and aftermarket. Aftermarket contribution remains healthy but was negatively impacted by the slowdown in the coal sector due to reduced thermal and coking coal prices. Operations generated positive cash flow driven by profitable results and working capital management. The Russian ROIC ^ of 14.0% was retained above the Group threshold of 13%, despite the negative impact of a deferred tax charge driven by the weakening of the Rouble. With respect to the COVID-19 pandemic, the division continues to implement the required safety measures and best practice as well as following the guidance issued by the respective country and regional authorities to protect the health and safety of employees. The total firm order book as at the end of September was USD105 million with further firm orders to the value of USD37 million secured after 30 September 2020.

CORPORATE

 

The Corporate Office primarily comprises the operations of the Group headquarters and treasury in Johannesburg, the treasury in Maidenhead (United Kingdom) and the captive insurance Company. Southern Africa's higher operating loss of R327 million (2019: R253 million) largely driven by lower rental income in Barloworld and investments in corporate affairs activities and other strategic projects. Strategic projects included the implementation of the Barloworld Business System across the Group and due diligence for the acquisition of the Ingrain SA. The UK operating loss of R115 million (2019: R156 million) was down on 2019 with the prior period including the once-off pre-tax R88 million (GBP4.7 million) charge to equalise guaranteed minimum pensions (GMP) within our historic UK defined benefit pension fund. This business also incurred due diligence costs for the acquisition of the Equipment Mongolia.

Similar to the operating divisions, various austerity measures were implemented to ensure fitness to support the Group while transitioning and ensuring long term sustainable value creation. The measures included a headcount reduction and containing consulting costs to key projects. Notably, the central treasury in South Africa maintained efficient funding rates for the Group.

KHULA SIZWE

 

Khula Sizwe operating profit was R83 million earned from the 57 properties purchased to date as part of the B-BBEE deal and rentals earned from divisions. The operating profit represents the net impact of the transaction on the Group (rental income earned from Barloworld companies) which was offset by an IFRS 2 charge of R85 million relating to the discounted share price offered to the Khula Sizwe shareholders.

BOARD CHANGES AND SUCCESSION PLANNING

On 30 September 2019 we announced the retirement of our Chairman Adv. Dumisa Ntsebeza with effect from 12 February 2020 and the appointment of Mrs Neo Dongwana as our new Chairperson with effect from 13 February 2020.

Mr Don Wilson retiring as the Acting Chief Financial Officer in February 2020.

The board congratulates Mrs Dongwana on her new appointment and thanks Adv. Ntsebeza and Mr Don Wilson for their valuable service and contribution to the board and Barloworld.

LOOKING AHEAD

The spread of the COVID-19 pandemic has had a crippling impact on economies and industries critical to our business performance. From the airline industry, to tourism, mining and supply chain sectors, the virus has caused ripple effects that we need to be fully prepared for and mitigate in the short, medium, and long term.

Notwithstanding the Group results achieved in the midst of unprecedented challenges, we expect to begin benefiting from the significant cost efficiencies and operational synergies in the short term from the Group-wide implemented austerity measures. In addition, the implementation of the Barloworld Business System across the Group, new ways of working, founded on lean principles and continuous improvement, position us well to continue to show resilience in the midst of volatile macroeconomic dynamics in the local and global economies.

Going forward, a strong balance sheet and a stable business platform are key strengths that will help the Group navigate the challenges. Business confidence in the regions where we operate has dropped and the Group expects the average consumer to remain under pressure, while the trading environment will be impacted by the lower outlook for recovery and growth. The board and management are focused on cash preservation, lowering operating costs in line with reduced activity levels and ensuring the business is well positioned for the recovery.

The current activity levels in our key markets are higher than initially anticipated as the shortterm recovery has been better than expected. This could change at short notice given the volatile environment and the Group remains alive to changes in the external environment. The acquisition of Ingrain (THS) is expected to provide a stable growing contribution to the Group's performance over the next 12 months and Mongolia will add additional revenues and further growth opportunities.

The Group will also continue on its strategic path to improve efficiencies and performance by adapting and transforming to align with the changing trading environment in line with our stated goals. The assessment of the long-term fundamentals of our businesses is a focus area in our ongoing portfolio review. The divisions will continue to focus on managing levers under their control, this includes prudent cost containment and preservation as well as the invested capital reduction in the short to medium term and until the operating environment improves. Ensuring that the Group's assets generate a return on invested capital above our stated target weighted average cost of a capital target of 13% remains imperative.

The board and management are committed to ensuring that all of the Group's re-opened operations are managed responsibly and in compliance with risk mitigating regulations.

Sandton 
30 November 2020

^

Certain information presented in this announcement is regarded as additional performance measures. These measures are not defined by IFRS, not uniformly defined or used by all entities and may not be comparable with similar labelled measures and disclosures provided by other entities. This information has been included to further illustrate the performance of the business and align with measures the board and management have selected to monitor performance against set targets. A disclosure document is included in the 2020 Annual Financial Statements and on the Company's website.