Intense focus on cash flow and working capital management resulted in cash generated from operations increasing by 20%
CLIVE THOMSON Chief executive officer

Overview
The group’s performance this year was impacted by the global economic downturn which significantly impacted businesses in a number of markets and geographic regions, particularly outside of southern Africa.

As a consequence group operating profit was 25% lower than in 2008 and headline earnings per share from continuing operations, which was impacted by higher finance costs and financial instrument adjustments due to the stronger rand, declined by 43%.

However, intense focus on cash flow and working capital management resulted in cash generated from operations increasing by 20% and ensured that we reduced debt levels and strengthened the group balance sheet.

Decisive action was taken to realign our cost base with lower activity levels. While this unfortunately led to a number of retrenchments, particularly in our international operations, the actions taken will yield significant annualised cost savings going forward. We also focused on entrenching our positions of market leadership in many of our businesses through the downturn to ensure that we are well placed for long-term success as the global economy recovers.

Operational review
Equipment
The division entered the 2009 financial year with strong order books. In particular, the equipment southern Africa performance for the first half was influenced by the delivery of these orders which ensured record results to March. Activity in the second half was however below the first half and operating profit was slightly down on the record performance generated last year. We saw a dramatic reduction in revenue from Angola which had been one of the drivers of our first half performance. The strong rand also adversely impacted our results both on translation as well as the marking to market of forward exchange hedging contracts. The construction segment, which relies on infrastructure projects as well as contract mining, also lost steam in the second half.

We have nonetheless witnessed continued strong demand in mining from the coal and iron ore sectors. In Mozambique we were awarded a significant order for the supply of mining equipment for the Moatize coal project by the Brazilian mining company Vale which will start delivering in 2010.

Commodities such as diamonds and copper were badly impacted in the earlier part of our financial year but now appear to be exiting the doldrums and the prices of these commodities have shown some recovery in recent times.

The constraints encountered in South Africa in 2008 in respect of electric power capacity and the related outages were alleviated somewhat in 2009 mainly as result of the reduction in electricity demand from the mining and manufacturing sectors. We believe this respite to be temporary and forecast a recurrence of shortages once the South African real economy recovers.

Equipment SA carried higher levels of inventory both for the execution of their order book as well as a deliberate build up of engine units for dealing with the expected power shortages. In addition to this we saw dramatic reductions in lead times from Caterpillar which in some cases resulted in accelerated delivery
of machines in the order pipeline.

As a result, equipment SA experienced a working capital increase in the six months to March but by September this outflow was significantly reduced. We are forecasting further working capital reductions in 2010.

Our resolve to drive ahead the competitive advantage emanating from our skills development initiative continued in 2009. We believe that once the world economy recovers, the global skills shortage that we identified as a risk to our growth will continue. Our new Technical Training Centre in Isando was opened on 29 October 2009. This R120 million investment will form the focal point of all our future technical training and will generate the skills base for the upturn.

In Iberia the slowdown that started in early 2008 evolved into a complete collapse of the Spanish construction and public works sectors in 2009. The Spanish economy is forecasting a 3.8% decline in GDP growth for 2009 and this economy is now only anticipated to return to positive growth in 2011. In the face of these adverse market conditions our focus in Spain has been on reducing costs, and this has unfortunately meant a significant reduction in our workforce.

In addition to realigning the expense base, we have focused on generating positive cash flow from the Iberian operations. At March we reported positive cash flow of i51 million. This focus continued into the second half and by September, approximately i93 million cash had been generated.

The Russian economy suffered from the impacts of reduced oil prices and lower demand for commodities. GDP is expected to decline by between 7% and 8.5% in 2009 but economists are forecasting a recovery of 2.5 – 3% in 2010.

The Siberian business, which had shown a history of substantial growth since inception in 1998, was negatively impacted by these factors and revenue for the year declined by 40%. Significant reductions in activity levels were experienced in the construction, oil and gas and power segments.

We believe that the Siberian market is showing early signs of recovery and this is evidenced by the increased level of tendering that we are currently experiencing. Siberia is a geography rich in natural resources and we continue to view this region as a significant future growth opportunity for the group.

Automotive
The division continued to experience the difficult trading conditions reported last year. Industry figures show that new vehicle sales in South Africa declined by close to 30% in the nine months to September 2009 while similar statistics for Australia show a 14% decline.

Avis Rent a Car in southern Africa saw a slight decrease in revenue during the current year. The increase in rental rate per day was not sufficient to compensate for the 8% reduction in rental days. Profitability in the business was slightly up on the prior year due to improved fleet utilisation and strongly improved used vehicle profits. The reduction in the fleet size was a deliberate response to reduced activity levels and the group focus on cash flow. The fleet utilisation achieved as a consequence was well above industry norms.

Avis Fleet Services achieved a steady increase in revenue and grew their fleet under finance by just over 3%. The prevailing economic conditions have generated substantial opportunities to grow this business. Profitability for the year was significantly above the prior year due to better margins and some additional profit recognition on maintenance contracts.

The leasing business is a financing operation which requires substantial gearing to generate the return on equity that is commensurate with the risk. In the current climate, the impact of such gearing on our balance sheet is a constraining factor for growth notwithstanding the high returns earned.

Motor retail in southern Africa performed remarkably well given the difficult economic and industry factors that prevailed. Revenue including the NMI/DSM operations for the full year was slightly down on the prior year; however operating profits were 62% up. Improved profitability was a result of improved business processes and synergies, expense reductions and a strong used vehicle profit contribution. We believe that our “Fewer, Bigger, Better” philosophy is paying dividends in the current trading environment.

The Australian motor retail business generated revenue slightly up on the prior year, which would indicate an improved market share in a declining market. Profitability for the year was in line with the prior year following a vastly improved performance in the second half.

At the end of last financial year we announced our intention to dispose of our car rental business in Scandinavia. Subsequent to that interested parties have commenced due diligence reviews of our operations. While we do not at this stage have a firm offer we remain confident that the process is advanced and that the disposal should be concluded within the next 12 months.

We are extremely proud of what the automotive team has achieved in the current year and we remain confident that this division is well placed to excel when the economy turns.

Handling
Our handling businesses in the US, UK and Europe experienced difficult trading conditions during the current year. The US and the UK have been in recession for almost two years now and we incurred losses in both these regions. The southern African handling business started strongly but also experienced a decline in activity as the South African economy went into recession. The project to improve and standardise business processes and systems is progressing well and we expect to start reaping the efficiency benefits in the 2010 financial year.

Agriculture in South Africa experienced a slowdown in activity at the back end of the year as poor weather conditions and a stronger rand adversely impacted general sentiment in the farming sector. As a consequence, inventory levels are high, but should reduce to normalised levels by March 2010.

Logistics
The sharp decline in world trade negatively impacted our logistics operations worldwide and limited the contribution from the acquisitions made during the course of last year.

The African logistics business performed satisfactorily in difficult conditions. The focus on supply chain management would appear to be generating success and during the year we started up the Nike contract and have recently been awarded a significant contract with a leading furniture distributor.

The Middle East and Asian operations suffered from reduced volumes of up to 30% which impacted profitability, however the integration and restructuring of the acquisition is proceeding to plan. We continue to make losses in Europe but plans are in place to improve this position into 2010.

The logistics division exhibited good focus on asset management and despite adverse trading conditions managed to generate positive cash flow of just under R175 million.

Cash flow and balance sheet management
It became clear from the outset of the current financial year that increased focus on asset management and related cash flow was key to navigating the financial crisis. In particular working capital and capital expenditure management was essential to cash generation and the reduction of related debt levels. At March the group recorded a R777 million increase in working capital and a R535 million cash outflow before financing activities. In the second half we managed to reduce working capital by R1 659 million and ended the current financial year with a cash inflow before financing of R1 207 million.

The impact of the financial crisis on the banking and debt capital markets also consumed a great deal of management time and energy. The group focused on securing new long-term funding and terming out existing short-term facilities to extend the debt maturity profile through the crisis period. In September 2008 as part of the BBBEE transaction the group raised seven year bank funding of R1 207 million. In October 2008 the group raised a further R750 million through the issue of a seven year corporate bond in the South African debt capital market and in December 2008 the group signed a five year R700 million banking facility with one of the large local banks.

The South African debt represents 83% of the group’s total borrowings and for that reason most of the emphasis was placed on securing committed banking lines in the local market. While the group increased the size of its commercial paper programme to R3.5 billion, we have consistently only utilised approximately R2 billion. Although margin spreads increased during the year, we did not have any difficulty in successfully rolling our paper in this market.

We further ensured that a significant element of our overnight bank funding facilities is committed for at least 365 days to ensure liquidity in the event of unforeseen problems in the commercial paper market. At financial year end, due to our strong local cash position, the group was not utilising our overnight committed facilities.

With regard to offshore debt we identified the need to renew the £120 million syndicated facility in Barloworld Holdings PLC which had a maturity date of July 2010. In the prevailing market we believed it prudent to accelerate the renewal of this facility.

A new three year facility of £80 million was put in place at September 2009 which addressed our refinancing liquidity risk. At financial year end, due to strong offshore cash inflows, this new facility was not utilised.

In summary, the steps taken resulted in strong positive cash flows, reduced absolute debt levels and lengthened the maturity profile of our borrowings. This ensured that we maintained a strong balance sheet through the crisis and that we are well positioned to take advantage of growth opportunities as the external environment improves.

BEE and transformation
In line with our commitment to lead in empowerment and transformation, all of our South African divisions achieved an audited Level 4 or better rating in terms of the DTI’s BBBEE scorecard. Equipment, motor retail and handling exceeded target by achieving Level 3 while Avis Rent a Car achieved Level 2. These ratings are a source of competitive advantage as they allow our customers to claim 100% credit or more for their procurement spending with us for the purpose of their own BEE scorecards.

Each aspect of the BBBEE scorecard is being focused on with targets set by business units for all elements of the scorecard including skills development and employment equity. Achievement against targets forms part of divisional CEO scorecards and we have set our next objective for all SA divisions to achieve at least a Level 3 BEE rating by 2011.


Dumisa Ntsebeza, chairman and Clive Thomson, CEO of Barloworld with Jim Owens, chairman and CEO of Caterpillar at the official
opening of the Technical Training Centre in Isando.

Sustainable development
In accordance with our commitment to responsible corporate citizenship the environment, climate change and measurement of related aspects, including our carbon emissions, received increased focus during the year. One of the highlights was Avis Rent a Car South Africa achieving a CarbonNeutral® accreditation for the offset of their internal fuel and electricity usage CO₂ emissions.

We continue to adapt and refine our reporting systems for sustainability data and are allocating additional resources to managing and improving performance against sustainable development objectives. We are convinced that our competitive position will be enhanced as we proactively manage the environmental impact of our commercial activities, provide environmentally sensitive customer solutions and align with our principals’ sustainable development strategies and objectives.

We have identified a number of sustainability-related business opportunities allied to our existing core businesses, from power systems to logistics, and have initiated strategic projects to actively research and pursue these.

Strategic focus areas The group’s strategic framework outlines the five Strategic Focus Areas which the executive team will give priority attention to in order to ensure sustainable value creation for all stakeholders. Strategic focus areas: 1. I ntegrated customer Solutions     Accelerate evolution of our business model from pure distribution to the provision of flexible, value adding, integrated customer     solutions. These would include customised long-term maintenance and repair contracts, integrated rental, used and new     equipment and vehicle offerings, long-term fleet management solutions, turnkey power solutions in the electric power, marine     and petroleum segments and outsourced supply chain management and integrated logistics contracts. 2. People     Attract, develop and retain globally competitive people necessary to implement our integrated customer solutions strategy and     meet our growth targets. 3. Empowerment, transformation and sustainable development     Achieve a leadership position in empowerment and transformation by attaining an audited Level 3 BBBEE scorecard rating for     each of our South African business units by 2011. Sustainable development objectives include setting and measuring performance     against targets to reduce and minimise our carbon footprint as well as actively pursuing sustainability-related cost savings and     business opportunities allied to our core businesses. 4. Financial returns     Achieve top quintile financial returns as measured against peer groups in each of our chosen business segments. 5. Profitable growth     Achieve 20% compound annual growth in earnings and total shareholder return in the five years to 2014. In order to achieve this     a number of strategic projects have been initiated which aim to optimise opportunities in identified growth segments served by     our core businesses. Targeted growth segments include mining, infrastructure, power, agriculture, logistics and tourism.

Executive leadership
Isaac Shongwe succeeded Paul Stuiver as CEO of the logistics division on 1 January 2009. I would like to thank Paul for the excellent job he did in building our logistics division over a number of years.

The executive has moulded into a cohesive team focused on the key Strategic Focus Areas for the group. We have a good combination of experience and new blood which bodes well for the future.

I believe that the executive has shown strong leadership in the wake of the economic crisis and has responded quickly and decisively to the challenges experienced. The team is committed to delivering on our goals for 2010 and beyond and I would like to thank them and their respective management and employees for their commitment and resilience in the current year.

Outlook
Just over 12 months after the demise of Lehman Brothers, economists are now forecasting a recovery in the global real economy. It would appear that the emerging market economies have shown greater resilience and have been quicker to rebound from the global downturn. The expectation is that the major European economies will have emerged from the recession by year end while June may have been the last month of the US recession. The general expectation is that the developing economies will grow at a faster rate than the developed economies in the coming year.

The South African economy has shown growth of 0.9% in the third quarter after three consecutive quarters of contraction. While the expectation is that GDP will shrink by 2% in 2009, it would appear that the recession has bottomed. The South African Reserve Bank has cut interest rates by 500 bps since December 2008 and rates are currently back to levels last seen in June 2006. The South African consumer however remains relatively indebted and the decline in rates has yet to translate into increased consumer demand.

The recovery in world economic growth should result in an increase in the demand for commodities, while the prevailing low interest rate environment should favourably impact new mining projects. Nevertheless our mining order book going into 2010 is considerably lower than a year ago.

The South African economy will remain under pressure into the new year with the strong rand hampering the recovery. While public infrastructure projects ahead of the World Cup will underpin demand, we nonetheless expect the construction market in South Africa to remain slow.

In Iberia the construction sector will continue to be under pressure as the oversupply situation prevails in the residential market. The current expectation that the Spanish budget deficit will worsen to close to 12% of GDP in 2010 means that the government is unlikely to be able to fund increased spending on major public work projects.

The recession in Spain has been particularly harsh and current unemployment levels are approaching 19%. Spain is only forecast to exit the recession in late 2010 and we are therefore forecasting limited recovery in the coming year.