OPERATIONAL REVIEW Operational profile Barloworld Handling is the world’s largest independent Hyster lift truck dealer, offering our customers a full range of lift trucks and warehouse/handling equipment in the south-east United States of America, United Kingdom, including Northern Ireland, the Netherlands, Belgium and southern Africa. We have represented the market-leading Hyster brand for 80 years and have leveraged the strength of the brand by leading the market in the introduction of innovative solutions for our manufacturing and distribution industry customers’ materials handling needs.

Areas of operation – USA:  Hyster dealership: South Eastern United States  – Europe:  Hyster dealership: Belgium, The Netherlands and United Kingdom (including Northern Ireland)  – Southern Africa:  Hyster dealership: Angola, Botswana, Malawi, Mozambique, Namibia, South Africa, Zambia and Zimbabwe  Agricultural distribution Massey Ferguson and CLAAS: South Africa, Namibia, Botswana, Lesotho, Swaziland,  Mozambique

John Blackbeard (52) Chief executive officer: Handling BSc Eng (Hons) Dip Bus Man 13 years’ service

Overview
The lift truck industry has been severely affected by the worst recession in Europe and the USA in 80 years. The market declines that started in 2008 intensified in 2009, except in South Africa where the downturn has taken place mainly in the past year.

In all territories we focused strongly on cash and balance sheet management, expense reduction and growing revenue. The cost base has been decreased by £8 million across the business.

While employee numbers had to be reduced, human resources systems and practices have been overhauled and training continued to ensure future sustainability of the business.

Hyster’s new electric lift truck series was launched and this should boost sales in coming months. Sales of used lift trucks were strong in most of our territories with a new record level in the UK.

The Form the Future (FTF) project launched in 2008 to re-engineer our business systems and processes continued well. The sales module was launched in the USA in September 2009 and the new service model will be rolled out in 2010. These are being customised for introduction in our UK and other operations.

The Barloworld Handling SAP system has been rewritten as part of the FTF project, reducing repetition, margin for error and cost.

United Kingdom
The decline in demand that began in the second half of 2008 continued and the lift truck market contracted by 32%. Sales of counterbalance trucks, where we are traditionally stronger, declined by 40% from 15 303 units in 2008 to 9 163 units in 2009.

The sub 2 tonne portion of the market grew from 40% to 55% in line with a shift in focus from heavy to light industry, exacerbated by the shrinking market.

Both Barloworld Handling’s counterbalance and warehouse market share declined during the period.

The year ended with an operating loss of £4 million. However, it is pleasing to note that a breakeven result was achieved in August 2009 and a small profit in September 2009.

Net assets were reduced from £74 million to £65 million assisted by the sale of more than 4 300 used lift trucks in 2009, a record for Barloworld Handling. These units were supplied through rollouts from our long-term rental fleet, the reduction of our short-term rental fleet by almost 1 000 trucks, and the return of units from customers scaling down.

We opened new channels for used sales worldwide and achieved good results with web-based sales. We also launched a web-based catalogue to sell warehouse consumables and ancillary equipment.

While service volumes decreased in line with decreased market activity, we compensated somewhat with increased service margins.

The balance sheet has been cleaned up through stock reduction, strong focus on collecting debtors, and cash generation. More than 20 specific cost reduction activities were implemented, with an anticipated saving of £4 million annually.

United States of America
The market declined by 41% from 34 607 units to 20 267 units. Barloworld Handling’s total market share increased significantly, with a particularly pleasing improvement in the Florida region.

Our order book for new trucks grew by 18% in the past year and we sold 2 000 used trucks that were returned to us at the end of their long-term rental contracts or arose from the reduction in the size of our short-term rental fleet.

Despite this, we ended the year with an operating loss of US$5.9 million. Net assets declined from US$66 million to US$56 million.

Our margins improved in the last few months of the year, a positive indicator for 2010.

Our good safety record continued with an OSHA Incident Rate (OIR) of less than 3.0 in 2009. This is significant as many customers will only consider suppliers with favourable OIR rates.

South Africa
Barloworld Handling in South Africa incorporates the Hyster lift truck dealership, a distributorship for the Massey Ferguson and CLAAS agricultural brands, and a new dealership for Chinese manufactured SEM construction equipment.

Handling
Following a small decline at the end of 2008, the South African lift truck market almost halved in 2009 from 7 238 units to 3 804 units.

While market share declined slightly, we grew service revenues and margins due to good customer service, which remains our key differentiator in South Africa.

We achieved a profit of R16 million, down on last year but pleasing in light of the pressure on margins for new and particularly used units.

A concerted cost cutting initiative resulted in a reduction of more than R5 million in operating expenses. Net assets rose from R175 million to R231 million, largely due to an increase in used truck stock that could not be sold profitably in the poor economic conditions.

We achieved a major breakthrough by securing the lift truck order for Unilever’s two new warehouses, the biggest of their kind in southern Africa. The order, involving 270 new lift trucks, is the largest single contract ever awarded to Barloworld Handling South Africa and has moved our South African operation into the world leading position in Hyster warehouse market share.

Short-term rental utilisation improved in the latter part of the year, indicating that the market is taking advantage of our integrated solutions business model to suit the economic climate.

Transformation
Barloworld Handling has improved its BBBEE rating from Level 4 to Level 3 in the Department of Trade & Industry’s BBBEE scorecard, thus allowing customers to claim 110% of their expenditure with the company.

We are particularly pleased with the improvement from 1.91 to 4.31 on the employment equity component of the scorecard and from 5.06 to 5.92 on skills development. Additional focus is being placed on these areas to ensure consistent progress.

Agriculture
The South African agricultural sector was depressed by lower global maize prices, the strong rand and unfavourable rainfall patterns.

As a result the market declined from 7 579 to 6 462 tractors, 350 to 311 combines and 604 to 328 balers. We lost market share in tractors, but improved our market share significantly in combines and balers.

Our Massey Ferguson and CLAAS tractor ranges are positioned at the higher end of the market and sales were lost to lower cost units in the tender tractor market.

Margins were affected by discounted sales to move unacceptably high stock levels. The high stock situation was compounded by late deliveries from the factories that arrived after the main sales season. Profit declined by 15% and the balance sheet remains overstocked.

Special focus has been placed on measurement and improvement of customer satisfaction levels. In parallel we have rolled out enhanced dealer development programmes, including implementation of the Mechplan software tool to assist customers with optimum application of mechanisation solutions.

Parts sales improved by 4% due to improved after sales support from our dealers.

SEM
Our dealership for entry level wheel loaders from Chinese manufacturer SEM has made a small profit in its first year of business, with excellent acceptance in the agricultural and light construction markets we have targeted. We have a good team in place to capitalise on the opportunities that will be created by the expansion of our SEM product range in South Africa in 2010.

Europe
The lift truck market in Belgium contracted by 38% from 10 322 units to 6 355 and in The Netherlands by 45% from 16 435 units to 9 066. Barloworld Handling’s market share declined in both countries, mainly due to a marked shift from counterbalance to warehouse units.

Despite the steep downturn we achieved a breakeven result in Belgium. Net assets climbed from i4 million to i15 million driven largely by the inclusion of trucks on our balance sheet that were previously on the funders’ balance sheet. However we made significant inroads into stock reduction.

In The Netherlands we finished the year with an operating profit of i0.7 million. Good progress has been made on the balance sheet, with net assets decreasing from i2.8 million to i2.6 million.

Overall we improved margins, helped by our product mix together with improved processes and systems implemented during the year. We also reduced operating expenses in both countries.

Focus was placed on assisting customers with solutions to excess production capacity during the downturn, thus promoting long term partnerships that will be mutually beneficial in future.

Integrated solutions
in all our territories we continued with a market segmentation drive to better understand customer requirements and provide appropriately tailored solutions.

Our major customers now have the option of a sophisticated suite of integrated solutions including new, used, short- and long-term rental, maintenance offerings and fleet management. Fleet management enables reporting on utilisation, preventative maintenance requirements and operator behaviour to optimise fleet performance.

This has been further enhanced with the introduction of an IT solution enabling customers to monitor their fleet performance via portals.

This tailored solutions capability has found particular favour with big customers such as Coca Cola, the Ministry of Defence, Diageo and BMW in the UK; Goodyear, Premier Beverage and Smart in the USA; and Unilever in South Africa, among others.

People
Employee numbers have been reduced by about 15% in the UK, the USA and Europe and we have taken advantage of government assisted programmes to manage excess staff in Europe. Internal road shows have been held to encourage employee engagement and retention. Head count was reduced by 7% in South Africa.

The extensive restructuring into customer focused regions in 2008 has been well embedded in the past year and is showing positive results. The new structure provides for more control at regional level, so that customers now have access to local decision making and problem solving.

In the UK a new operations director has been appointed and, reporting to him, six new regional managers empowered to make decisions on all aspects of customer solutions including new, used, rental and after sales service.

In the USA a similar restructure into four regions is proving successful. A new sales and marketing director is driving customer solutions focus with these regional structures. The appointment of an operations manager has strengthened the team in Belgium.

We have appointed a new group and UK human resources director with the brief to overhaul our HR systems and processes and improve organisational performance.

To this end, Watson Wyatt job grading was completed in all territories to ensure market related remuneration, in turn improving staff retention, motivation and succession planning.

Our Good People Management (GPM) initiative to improve employee ownership, commitment and job satisfaction has been rolled out throughout the business. A practical, easy to use balanced scorecard was introduced to manage performance and supervisors have been trained to conduct performance reviews.

In the USA the use of Idea Tracker software to incorporate employee input in decision making is resulting in a close knit team orientated approach that is contributing to our market share penetration.

Although we still have work to do in Europe, we have made pleasing progress on succession planning, our induction programme and HR reporting.

Our apprenticeship programmes are continuing in most territories to ensure we have the appropriate skills to meet demand for customer solutions in the upturn. In the UK Barloworld Handling is the only lift truck company running an apprenticeship programme. We maintained acceptable ratios of minority group employees in our ongoing drive to promote diversity in all our operations.

Outlook
Our markets are expected to remain generally flat in 2010, with cautious optimism for a turnaround in some areas. We are confident of an improved result on a foundation of stronger management and regional representation, focused market segmentation, tailored solutions offerings, empowered people and lower operating costs.

The roll-out of our Form the Future (FTF) business process re-engineering project into the US and UK, followed by South Africa and Europe, will provide better customer service, more efficient processes, improved sales and service and reduced cost. Total implementation will be completed by 2011.

Our joint projects with Hyster to improve product quality and reliability will further improve our competitiveness.

United Kingdom
There are small indicators of green shoots that point to a modest recovery in the second half of 2010. We anticipate a return to profitability by growing market share and aligning with the shift in the market from counterbalance to warehouse and smaller units. Hyster’s new electric range will help Barloworld Handling to compete more successfully in that segment of the market.

United States of America
A small improvement is expected in our markets in 2010. A decision by the NACCO Materials Handling Group to enable its lift truck products, Hyster and Yale, to be sold through the same dealers in the USA provides possible opportunities to improve our density.

Southern Africa
Some recovery in volumes is expected in the second half of 2010 and we expect further successes in our major customer business based on our integrated solutions offering. Our main strategic focus will be on growing our footprint into Africa. We will also take over the Angolan Hyster business, currently run by Barloworld Equipment, in 2010.

Southern Africa – Agriculture
The order book for new machines showed a small upward turn in the last three months of the year. Maize prices are expected to recover in 2010 and this should stimulate tractor sales. We are working with our principals to address our lack of a solution for the low cost end of the tractor market to improve our competitiveness.

Plans are in motion for aggressive growth of our agricultural footprint in southern Africa. An agreement will be signed soon in Mozambique and negotiations are in progress in several other countries.

Europe
While the market is expected to be flat in 2010, we are well positioned for growth in short-term rental and parts and will continue to focus on expansion in industries least affected by the recession. The launch of the Hyster electric truck range will start to produce benefits in The Netherlands in particular, where
60% of the counterbalance market comprises electric units.