Industrial brand management giant Barloworld has posted a 1% gain in revenue for the year ended September 30, attributing overall earnings of R62.7-billion to resilient performances from its automotive and equipment businesses, which buffered the company from headwinds emerging out of the embattled commodities sectors – among its most important markets.

The JSE-listed company, which declared an 8% year-on-year dividend lift to 345c for the 12 months, on Monday said higher revenues in the automotive and logistics businesses, offset by reduced revenue from its Equipment Southern Africa, Equipment Russia and Equipment Iberia subsidiaries, drove a 4% year-on-year increase in operating profit to R3.95-billion.

The weakening rand, meanwhile, increased revenue for the year by R995-million, contributing to an 8% gain in headline earnings per share (HEPS) to 926c for the year.

The HEPS and operating profit, however, excluded the impact of a R251-million charge related to the close-out of a 2008 broad-based black economic-empowerment (BBBEE) transaction, which comprised largely share-based payment charges.

In terms of the transaction, the company issued 1.59-million shares to participants on November 5 at an agreed price of R179.69 apiece, generating proceeds of R285.8-million.

To further the objective of increasing black ownership in Barloworld, the company issued 450 000 additional shares to the participants at a subscription price equal to par value of 5c a share.

The total cost to shareholders of these amendments was R204.9-million.

HEPS including the BBBEE charge were 814c apiece, compared with 857c in 2014.

SEGMENTAL REVIEW
CEO Clive Thomson told shareholders that revenue from Barloworld’s Equipment Southern Africa business dropped 3% year-on-year to R20.3-billion, primarily as a result of the slowdown in mining and contract mining equipment demand.

After-sales revenue remained resilient, increasing by 12% to R10.1-billion and represented 50% of the business’s total revenue, he added.

“Despite the slowdown in the mining sector, Equipment Southern Africa delivered a resilient performance, with operating profit of R1.89-billion for the year, with the growth in aftermarket activity continuing to contribute positively to its results,” he commented.

Thomson added that activity levels in the Power Systems business in South Africa and Mozambique were “well ahead” of last year, while activity in
Angola was adversely impacted by the decline in the oil price.

Revenue from the Equipment Russia business, meanwhile, decreased by 26% to $280-million, as a result of weak commodity prices and slowing economic growth.

After-sales revenue continued strongly, however, and represented 61% of the business’s total revenue, compared with 46% in 2014.

Operating profit for this division of $32-million was below the prior year, but showed a “significant” improvement in the second half of the year.

Elsewhere, Barloworld’s Equipment Iberia subsidiary benefited from an improving macroeconomic environment in Spain and Portugal, generating revenue of €274-million, which was slightly below the prior year.

“This comes as the construction sector lags the broader economic recovery; however, revenues from this business’s Power Systems division continued positively,” he remarked.

Thomson added that a highlight for the current year was the return to profitability in Iberia for the first time since 2008. The business generated an operating profit of €5-million compared with a loss of €11.8-million in the prior financial period.

Revenue from the group’s handling business increased 5% year-on-year to R2-billion, mainly owing to the inclusion of Metso equipment sales.

Agriculture equipment sales in South Africa were, meanwhile, negatively impacted by the extended drought and customer financing delays.

The business generated an operating profit of R6-million, which was “well down” on the R55-million achieved in 2014.

“Trading conditions in our Russian Agriculture business, meanwhile, deteriorated in the current year, following the collapse of the Russian rouble. A decision was taken to dispose of this business and a sales transaction was concluded at the end of September,” he said.

Boosting overall earnings, Barloworld’s automotive division lifted revenue by 7% year-on-year to R28.7-billion, while marginally increasing operating profit to
R1.52-million.

Driven by a strong growth in used-vehicle sales, together with a 5.9% growth in rental days and a 3.5% increase in rental revenue a day, Barloworld’s car rental business lifted revenue 15% year-on-year to R5.2-billion for the year.

This business also benefited from 75% average fleet utilisation for the 12 months.

“The integration of the Budget brand from March 1 has contributed positively to growth in the Avis Budget market share, particularly in the local and foreign inbound segments, lifting operating profit by 1% to R471-million,” Thomson maintained.

Operating profit by the motor retail business declined 10% year-on-year to R486-million for the 12 months, mainly owing to new-vehicle margin pressures and higher-than-normal sales in the prior year, generated by the introduction of a new model range from the Mercedes-Benz franchise.

The company’s Avis Fleet business increased revenue 8.9% to R3.4-billion for the year, with operating profit increasing by 2.3% to R572-million, while Barloworld’s Logistics subsidiary showed a 3% growth in revenue to R4.5-million.

“Operating profit from the Logistics business of R159-million was 30% up on last year, with the disposals of the lossmaking operations in Spain and Germany at the back end of the year benefiting the freight management and services segment in the last quarter.

“The mobile crane business was launched during the year and we acquired the remaining 74.9% shareholding in the Re-environmental solutions company for R73-million, which has subsequently been rebranded SmartMatta,” he held.

Subsequent to year-end, Barloworld formed a strategic partnership with supply-chain planning software solutions LLamasoft, which included a transaction to dispose of its supply-chain software division to LLamasoft, while gaining
access to a wider range of advanced supply-chain design and analysis tools.

The conditions precedent to the transaction were expected to be completed by the end of November.

OUTLOOK
Barloworld expected mining unit sales from its Equipment Southern Africa business to remain under pressure as the major mining companies continued to minimise their capital expenditure, stating that the business was “taking steps” to ensure tight control over the cost base.

“Our business model has, however, proven to be resilient in the current environment, underpinned by strong aftermarket growth, and we expect this to remain so going forward,” Thomson assured.

The order book at the end of September of R1.7-billion was slightly down on the comparative order book of R1.9-billion at the end of September 2014.

Barloworld added that the ongoing recovery of the Spanish economy and the political stability that was likely following the year-end general election should have a positive impact on future public works spending, which would benefit the company’s Equipment Iberia business.

“While Spain currently has one of the fastest-growing economies in the Eurozone, this is yet to fully translate into increased activity levels in the
construction industry.

“We believe the current cost structure is appropriate to position the business for future growth and any increase in activity levels will have a direct positive impact on profitability,” said Thomson.

Meanwhile, while noting that the Russian economy was in recession and suffering from current low commodity prices, Barloworld’s order book in that market at the end of September remained firm, at $27.7-million.

Additional contracts signed in October amounting to $31-million would provide some positive momentum going into the 2016 financial year.

The group, meanwhile, expect drought conditions to continue to impact agriculture demand in South Africa, having negative knock-on effects on the local handling business.

On the automotive side, South African new-vehicle sales were likely to maintain the current negative trend into next year, while consumer confidence levels were likely to remain low and be exacerbated by projected interest rate hikes.

“The weakening rand should also translate into higher new-vehicle price inflation. This is likely to impact our motor retail business. However, this
will be mitigated by growing aftermarket and used vehicle sales,” advanced Thomson.

Car rental would, meanwhile, continue to benefit from the addition of the budget brand, particularly as inbound tourism was stimulated by a weak rand, while Avis Fleet expected a stable performance in the year ahead.

In the logistics supply-chain management business, the group was likely to see the positive full-year earnings impact of new contracts awarded during the year, while the disposals of the lossmaking logistics operations in Spain and Germany towards the end of this financial year would ensure an improved result in the freight management and services business in the coming year.

“While trading conditions remain challenging in certain of our businesses, we are taking appropriate strategic and operational steps which will position the group to make solid progress in the year ahead,” he concluded.