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Edited Transcript of IPL.J earnings conference call or presentation 25-Feb-20 8:00am GMT

Half Year 2020 Imperial Logistics Ltd Earnings Call

Bedfordview Mar 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Imperial Logistics Ltd earnings conference call or presentation Tuesday, February 25, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Esha Mansingh

Imperial Logistics Limited - IR & Communications Executive

* Hakan Bicil

Imperial Logistics Limited - CEO of International

* J. George De Beer

Imperial Logistics Limited - CFO & Executive Director

* Johan A. Truter

Imperial Logistics Limited - CEO of African Regions

* Mohammed Akoojee

Imperial Logistics Limited - CEO & Executive Director

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Conference Call Participants

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* Michael Shawn Jacks

BofA Merrill Lynch, Research Division - Director and Head of SA Research & Industrials

* Ross D. Krige

JP Morgan Chase & Co, Research Division - Analyst

* Mike Brown

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Presentation

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Mike Brown, [1]

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All right. Good morning, ladies and gentlemen. I'm Mike Brown from the Investment Analysts Society. We're being hosted this morning by the Imperial Group for their interim results, the 6 months ended 31st December. This is a group that does a -- provides outsourced contract logistics, freight management and distribution services across the world. They -- as we know, they're something of a rand hedge because of their global -- the companies they operate in and the revenue they bring in globally. About a ZAR 10 billion company, been listed since 1987, and of course, we are here today about the results with the -- now that we have the discontinuation of Motus and some of the CPG businesses in Imperial. So there's lots to talk about.

I'd like, on behalf of the Society, to thank Imperial for hosting us this morning. And we will always very much value these presentations for what is quite a substantial and complex group. But it does help us, as analysts, to get these presentations and to get a chance to network with management.

So on behalf of the Society, I'd like to thank Imperial, and to invite Mohammed Akoojee, as the CEO, to do the presentation. Thank you, Mohammed.

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [2]

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Thank you, Mike. Good morning, everybody, and good morning to everybody on the webcast. A special welcome to Bridget, our non-Executive Director. And we've also got our ExCo here today in full force. So what I can't answer, I'm sure they will be able to answer.

Let's get straight then into it. That's the agenda for this morning. As usual, a brief overview, the operating context. I'll do a bit of the operations review. And then I'll hand over to George to do the financials. And I'll come back to the strategy and the prospects for the next 6 months.

So if you look at last year, we unbundled Motus, plus we discontinued CPG. The only relevant measure of our performance in these set of results is our continuing performance. And throughout the presentation, that's what I'm going to deal with. We will touch on CPG and where we are with that. But in terms of the business's performance, and going forward, continuing operations is the way to understand these numbers.

So if you look at the key numbers, our revenue was flat. That is slightly misleading because last year, we did have the inland waterway shipping business that had to deal with low water levels. So we had increased revenue last year, but we also had increased subcontracted costs. And I'll get to the detail of that when I get to the divisions because there's some interesting underlying revenue trends that are coming. But we translated that into good operating revenue -- operating profit growth and operating profit was up 9%. And that's a function of effective cost management, rationalization and a lot of the hard work that was done in 2019, coming through at ZAR 1.6 billion. And that comes through to the margin. So despite having a flat top line, our margins still went up from 5.9% to 6.4%, which was quite pleasing. And they're translated into headline earnings per share growth and earnings per share growth of 10% and 12%, respectively.

We'll be paying a dividend of ZAR 1.67 per share to our shareholders. It's up 15% from the previous half. Our cash conversion was good. Our returns were slightly hampered by a poor second half last year. You'll remember, we had the #1 source in our results in H2 last year, and this is a 12-month rolling ROIC. So I'd expect that to be better, come F2020 for the full year. Our net debt-to-EBITDA is up. George will go through the detail of that. But we did have, obviously, some cash outflows from CPG and the closure relating to that. Plus, we had to spend some CapEx on the back of new contract gains, which was quite good for us. As you can see there, we won new business of ZAR 5.8 billion on an annualized basis for the 6 months. And we have managed to hold on to 80% of our existing business. Now that's very encouraging in the current environment that's highly competitive and where everybody is under pressure. That means we are relevant to our clients and we're out there winning new business. So that's a very important indication of the health of the business.

Just in terms of a brief overview. As I said, we had good performances across the 3 regions in terms of operating profit performance, despite really challenging trading conditions. Throughout our businesses, we had to deal with various things, particularly in South Africa, and I'll get to the detail of that. Volumes in our existing client base were well down, particularly in the industrial sector, so sector like cement and steel. In our European business, we saw automotive volumes significantly down at 20 years lows and the chemical market was also depressed. So despite volumes in the existing business under pressure across South Africa and our European business, we still managed to generate a good profit growth.

As I said earlier on, these results certainly benefited from new contract gains and the cost-cutting and rationalization we did in last year's financial year. And we had a fantastic performance from our health care business in Africa regions.

So on the face of it, our Africa business only showed about 7% operating profit growth. But our market access business, where we act as a distributor for multinationals, that was actually up 20%. And I'll get to the detail of that later on.

I think these results demonstrate the strength of our South African business, with CPG out, to be able to grow top line. And revenue in this market, I believe, is a fantastic performance for South Africa. And it shows the resilience of this business, that it's able to still deliver and still win new work and still generate profit in a very difficult economic climate. And now with CPG gone, I think that's becoming a lot more clear in a trend in our business.

The Africa Regions business had to deal with mixed trading conditions across the markets. We had difficult conditions in markets like Namibia and Kenya. But then, we were able to make that up by very good performances in West Africa in our Imres business, which is our sourcing business on the health care side, had a fantastic 6 months.

Europe was hard, as I said, in terms of the automotive and chemical market. But with the great action plans we had there, we were able to win new business and ensure operating profit growth.

So if you look at our revenue, 70% is generated outside of South Africa, and about 64% of our operating profit is also generated outside South Africa. So we are beneficiaries of a weaker currency.

In terms of balance sheet, despite our net debt-to-EBITDA moving up to 2x, it's still comfortable and we've still got sufficient headroom in terms of our existing facilities, and George will cover that in more detail. But we still can fund our organic and acquisitive growth going forward.

Our net working capital is in line with the guidance we've given the market. And then as I said earlier on, we had to spend some CapEx, the 6 months, on the back of those new contract gains.

IFRS 16. George will go in detail. Bottom line, it had an impact of about ZAR 400 million negative on our equity and very little impact on the bottom line in terms of EPS. But George has got some good slides later on to cover that.

I'm also very pleased on the progress we've made on our strategy. We've now exited CPG. It's done. We exited it in November. The closure costs that are reported to the market at the end of June last year are unchanged. But we had to incur some cash outflow flowing from that. So we made the provision that we had to provide for onerous leases and contracts, et cetera, but then the cash flow to flow in the 6 months. And that impacted negatively on our cash flow. But we won't see that continuing in the second half. So there will be no further trading losses to be incurred, and no cash outflow further in CPG. So that's done.

On the positive side, we retained 1,800 of our staff in that business. And then there was some stuff that was transferred with the sale of the Cold business. But very importantly, we kept 80% of our contracts on the ambient side. That is fantastic because we were able to convince the clients that, stay with Imperial and move them into a new dedicated model, where we came up with a solution for them, and managed to retain those clients and keep that revenue, which is a very -- an upside from the closure of this because when we went through this process, we were not really sure how that would turn out. So it turned out actually quite positively.

We are on track in terms of selling our shipping business in Europe and Paraguay, and we're targeting to conclude that by the end of June. Obviously, subject to regulatory approvals, it could extend it beyond that. So that remains on track.

We've done 4 great acquisitions in the 6 months in our African Regions business. All of them talked to our strategy of building a gateway into Africa. The one expands our consumer footprint in West Africa, other one expands our pharmaceutical footprint in Southern Africa, MDS expands our freight management capabilities in Nigeria, and the Axis Group extends our sourcing and procurement capability into other industries, where we are very strong in health care through Imres. But now we've expanded that sourcing and procurement capability in other industries. So 4 great acquisitions that will make a meaningful impact going forward. We spent about ZAR 600 million on that. But that is not in these numbers that happened post [in here] except for Axis Group.

We continue looking for opportunities in the air/ocean space. I'll cover that later why that's so important for us. And we're busy with that. And then we've also started an innovation fund where we are looking to invest in disruption in technology that allows our business to mitigate some of the risks that that pose. And I'll -- I've got more detail later on, on that but that's quite an exciting development in our business.

If you look at Imperial, in terms of the capabilities that we have, which is a very important slide, that's because this is how we make money. We offer these services to our clients. And we've changed this. We've moved from a regional reporting more to a capability service-offering reporting, so that the market can understand how do we actually make money. So if you look at market access, this is where we take stock ownership of the product, and actually sell the product on behalf of multinationals into Nigeria, into Ghana and across many, many countries in Africa. And you can see how material that business has become in the mix. So it's about 22% of our revenue. But from a profit point of view, it's even bigger than now our contract logistics business. So it's now about 30% of Imperial, as profit is made out of acting as a distributor or market access partner for multinationals in FMCG and pharmaceuticals in Africa.

Our freight management business is -- that's where we started out as a logistics company, doing basic transport. And that is obviously a very big business in South Africa as well as in Europe. And this is where we move the product on behalf of our clients with a truck, with a -- using somebody else's truck, with a ship, using somebody else's ship. We're not in air and ocean in terms of some of our competitors. And that is a capability that's missing, which is something we want to get into. And that's part of our strategy. And then contract logistics also showed a good performance in over the last 3 years.

So that's the 3-year trend of Imperial's performance without CPG. And if you consider the economy that we had to deal with in South Africa and Europe, I think the growth trend is, for me, very interesting and exciting. And I think we want to build on from this.

Let's get to operating context, which I think you guys know probably a bit more about better than me. And you all know it's very tough out there. So yes. So our businesses were all exposed to all the stuff you read in the newspaper, very depressed economies, and trading conditions across all our markets were really challenging. I don't expect a recovery in the short term. So we expect, over the next 6 months, to still experience the headwinds of what we experienced in these set of results.

There are some new challenges that always pop up. And coronavirus is now on the horizon -- or not on the horizon, but is starting to impact. We haven't seen the impact of corona on our businesses in South Africa and in Africa. But we are starting to see some stock shortages of product in our chemical and automotive businesses in Europe, which is obviously impacting production plants, where we are a logistics provider. But at this stage, it's difficult to quantify it. But that is another challenge that we've got to deal with in these 6 months, potentially.

Yes, we did a lot of good work last year in terms of rationalization and cost cutting. And we would not have been able to deliver these set of numbers if we didn't do that. And the timing of that was perfect because we were entering into a very difficult time, as I said in the last set of results that we reported, and we acted quickly on that. And we won new business, which supported some of the volume declines that we had across the business.

South Africa, we saw exceptionally low volumes in our health care business and in our industrial side of the business, where volumes like cement and steel and those type of products were significantly down. Consumer was not bad but it was still down, but not as much as some of those other sectors. And then we had also to deal with load shedding because our clients were impacted by that. And that impacted on our volumes.

We are still seeing margin pressure on our contract renewals. And this is a function of the market. When there is a low growth market and the market is not growing, everybody is fighting for the same pile of business. So you've got to be very sharp on your pricing. And your clients expect it to be, because they also have got challenges in their business. So we are seeing that on renewals. We are having to give away some margin. But fortunately, in a portfolio like ours, where we've got so many contracts and so many businesses, we're able to ride that quite well. And I'll show you the South African performance later in detail to demonstrate that and in Europe.

And in the new business, as I said, we won about ZAR 2 billion of new business annualized in the South African business in the last 6 months. And we've got a very good pipeline of new opportunities. And that's a function of us benefiting also from a difficult market. Because what you see in difficult markets, clients want to take out cost from their supply chain. They want to outsource and focus on their core business. And that creates opportunity in the market. And that's where we can win new business.

In Africa -- or Rest of Africa. The -- we had mixed trading conditions, as I said. We had some difficult conditions to deal with in Namibia. The Zimbabwe economic pressures did hurt our cross-border business. And then Kenya, we had -- the market is becoming competitive. And also the economic recovery there has not been as positive as we would have hoped. And that has impacted our business. That's on the negatives. And the positives, we had a very good performance in our West Africa business on the health care side. And Imres had a record order book during this period and delivered on that, and had a fantastic result. And that boosted our performance in these 6 months.

As I said earlier on the Eurozone and U.K. stuff, all the data is out there for you to see, what's going on in these sectors where we were a big player in sectors like steel, chemical and automotive. And trading conditions in Germany continue to deteriorate in our sectors. So what has held up the economy there is the consumer market, but we don't play there. We're much more exposed to Germany industrial and manufacturing. And going to read the data on what's going on there, it's not good.

Brexit, although it's now been decided or it's done, they still overhang in terms of how actually that's going to pan out. And that creates uncertainty, which is depressing consumer demand and activity. And that's an ongoing risk to Palletways. But Palletways did have a very good performance in the 6 months, but largely due to management actions to sort out some of the imbalances that I mentioned that we were dealing with in the last set of results. But again, great new business gains, ZAR 2.2 billion of annualized revenue that we won there.

So you can see the trend. Existing business, under pressure from a margin point of view. Existing business, under pressure from a volume point of view. And that is macro. But we're not doing -- we're not sitting on our heels. We're going out there, winning new business to counter that. And we're managing our businesses tightly, so that we can generate the profits that we're generating.

This is a very nice overview of the South African, African Regions and International performance. You can see our revenue in South Africa was up. So was operating profit. Our margins came down slightly, but it's for the reasons I've mentioned earlier on, around contract renewals. Return on capital at 10% above WACC, which is what we target to get to. Just remember, I said the return on capital for the group and, particularly, ILI, is being depressed by a weak second half of last year. That's a 12-month rolling number.

African Regions. There's a base issue, where we reported Resolve had a big contract that it delivered on in the previous half. If you take that out, the business grew double digits. So I'm very comfortable that, although we didn't meet our target of low double-digit growth for Africa, there was a once-off that we reported last year. And that we didn't repeat because it's project work, that is, ad hoc work that's -- it's not as annuity type business. So that did impact the year-on-year performance. So if you take that out, it actually had double-digit growth and fantastic margins and also great returns on capital of 16%. It's our highest return on capital business.

And in International, while revenue was down, also because of base effects from the low water levels. And just to explain this maybe, so what happens is when there's low water levels, our revenue goes up because we've got to use more ships to transport the same amount of volume. But your cost also go up. So you don't make more money. Your revenue just goes up and then your costs go up the same rate. So if you take out the effect of that, we did have about 3% top line growth in Europe in a declining economy or declining market where we play. But then the benefits of all the cost-cutting that we did translate that into a fantastic 13% growth in our business. Our margins are around 4.8%. I always said, this business could get to around 4.5% margin. And that's a very good margin for a developed market in the area we play in. And good returns on capital. There, obviously, our cost of capital are a lot lower. And there, we target to get to WACC plus 2%. So certainly in line with our expectation.

This is a very important slide because it talks to the diversity of this business. And it talks to some of the resilience that you've seen in these numbers. And I'll start with the industry first. So if you look at our business in South Africa, and I'll start there first, we are a broad logistics business across many sectors. We play a key role in the SA economy across consumer, across health care, across industrial products, chemicals as well. We also -- it's much smaller in South Africa but we also play in the automotive space. So we're not exposed to one particular area. And that's why we're able to deliver results in difficult conditions, because you represent a broader economy. And if mining is down or consumer is down, we're not only exposed to that. And that is a differentiator in Imperial.

If you go to the African Regions business, you can see strong focus on health care and pharma. And that is because that's where we want to focus for now. Those are going to be sustainable, fast-growing and defensive industries. And you're seeing the resilience of that, to grow the market access business 20% in a difficult Africa environment, talks to our strategy of focusing on those industries.

And then if you go to our International business, still, in my view, too exposed to the low growth decline in German manufacturing. And that's why we're aligning that portfolio to diversify it away from those industries and then get into growth industries and leverage our expertise in these industries in Europe to support our trade flows and our supply chain into and out of Africa.

So the plan there is to change the mix in that business. And because we've got such a strong Africa business in industries that we are not in, in Europe, we can leverage that. And that's why I want to get into air and ocean that could change that mix.

So you can see what a -- from a regional point of view, from an industry point of view and a client point of view, this is a very broad and diversified business. And then if you go to our capabilities, yes, we don't have air and ocean, but we have everything else from there. We are a strong play in freight management across all 3 markets. So we can get products of our clients to where they need to get to, using our assets or other people's assets. We're strong in contract logistics, not as strong in South -- in African Regions, but certainly, a very important capability in terms of our service offering in the South African and International markets. When you can't just do freight management, you've got to also offer warehousing and distribution services. So we can offer that.

And then our key differentiator is our market access business. This is a key differentiator in Imperial's armor when we're going to talk to a client. Because in addition to doing the movement of the goods through freight management, the contract logistics, in terms of warehousing and supply chain management, we can also take the principles of the clients' products and take it to market. And we go to 50,000 points of sale in Nigeria. We go to over 4,000 points of sale in Kenya. So that combination of logistics and market access is a competitive advantage because nobody's got that in Africa, and hence, our strategy of gateway to Africa, which I'll come back to later on.

And when we have air and ocean in that, we'll just complement that entire service offering in terms of positioning Imperial as an end-to-end service provider to our clients.

Back to the numbers. That is the South African performance since December '15 to December '19 on revenue. And you can see, without CPG, how this business has performed in revenue in a declining economy. So this vindicates the decision to exit that business, because that was dragging us down. And if you -- we can't give you another 2 years of operating profit. Unfortunately, the accountants say they were challenged because you have to go back and adjust for IFRS 16. And we could only go back to December '17. But still, if you look at it over 3 years, in December -- okay, 2 years, '17, '18, '19, we've grown this business in a very difficult economy. And I'm not going to go through the detail. I've covered a lot of the reasons for why South Africa delivered that result. But it's a very interesting trend to look at our business without CPG in there and it talks to our resilience.

If you go to the African Regions business, as I said, there were base effects. That was also in the contract logistics side. Remember, we had a big contract there where we were distributing goods, warehousing product on the back of aid contract -- on the back of global aid organizations. But that volume has gone now. And that was in the base. So if you take that out, the market access business, our core business, which is what we want to grow in Africa, was up 20%. And that's a fantastic performance, particularly on the health care side.

So while that does look like flat revenue, there are moving parts to it that affect that. Like I said, the contract logistics part of it was a big, big part of it. You can see, it was over 6 -- it was close to ZAR 600 million of revenue. It's down now to ZAR 300 million. And similarly, on the manage -- on the freight management side, that was a big part. But if you look at the trend of our market access business, and that is where we want to grow, it's on the right path.

Europe. There's a similar trend in that, holding our own in difficult economic conditions and markets. But also if you compare what we've achieved now to '17, we've actually shown growth and increasing margin through all the cost-cutting and the good work that has been done by our team there.

Just on Palletways. So Palletways had a number of challenges. You will recall from the last year's results, where we had network imbalances. We didn't have members in certain areas because members were falling over because of the tough economy, where to get our pricing right there. I'm pleased to report back, that has all resulted in a very good year-on-year performance in Palletways. And the business, despite having a mediocre top line, but you will expect that in the economic conditions, it's operating -- it had very good operating profit growth in these results. And that you can see in our freight management increase. But our shipping business also held its own and produced a very credible performance, both Germany and in -- or both Europe and in Paraguay.

As I said, if you exclude the impact of the low water levels, we actually had 3% growth in Europe terms in this business. And that's just the results in rands. We don't have to go through that. The rand was pretty stable, on average, over the last 6 months. So we didn't get any benefit from that or any negative from that.

So if you look at the group and the divisional operating margins. I showed you the capability margins. This is now looking at the regions again. South Africa, slight decline. But I believe they -- those margins could get back to those -- to around the 7.9%. Because when you win new contracts, I think it's important to understand, you don't just get those contracts profitable on Day 1. It takes 6 to 12 months to get a contract going because there's CapEx to invest in, there's certain once-off costs initially to set up contracts. And even though we've moved contracts from CPG to our dedicated contracts business, there's still cost to be incurred.

So while we've had good top line growth from those new business gains and the CPG business, that didn't translate into profit immediately. But that will come. But volumes are under pressure, so you've got to keep remembering that.

Good margin uptick in African Regions. That's largely on the back of a very good performance in our health care business. And our margins in International were much, much better because we sorted out our Palletways problems, and we also took out a lot of cost in that business. And that translated into more than 0.5% margin uptick in our numbers.

Returns on capital, they don't look fantastic relative to our WACC. But as I said, expect an improvements coming through into H2 because we still got the overhang of H2 of the previous year in these numbers. And those are target returns, WACC plus 3% for South Africa, African Regions, and we're almost at those numbers, and also in International, WACC plus 2%. So despite the overhang from H2, we will manage to get close to our target turnover rates. And I expect to meet those, come financial year 2020.

Okay. I'll hand over to George now to take you through IFRS 16 and all the exciting stuff. George, over to you.

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J. George De Beer, Imperial Logistics Limited - CFO & Executive Director [3]

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Thanks, Mohammed. Good morning, everyone. I think before I get into the results, I would like to spend a few minutes just with accounting elephant in the room of IFRS 16. A lot of effort has gone in to go through the full impact over the last 18 months, where we had to adopt the fully retrospective approach effective 1 July this financial year. But that -- what it will mean is we would have to restate our 2018 balance sheet as well as the movement for 2019 and the movement for 2020.

Going through the process, we had to evaluate more than 3,300 leases. And that, to be on in country, in local currencies, local interest rates. So a mammoth effort has been put in all the financial teams globally. And for that, I have to thank them. And the final learning where, as we indicated previously, the impact on the results or net earnings will be immaterial. But there was a lot of optics that we'll have to deal with throughout the financials.

Obviously, we will exclude all the short-term leases, less than 12 months, as well as all immaterial assets. That's around about in the regions of ZAR 100,000, translating into [rough] currencies, which we will be excluding. The impact on day 1 during 2018 will mean a negative diluted equity of ZAR 400 million, largely resulting of interest in the prior periods as well as foreign currency translation reserves.

And then the rising asset of -- to the value of ZAR 5.3 billion. The profile of that asset, as noted previously, is 65% of various properties. 26% of that relates to transport fleet, 8% is warehousing equipment and 1% motor vehicles.

Obviously, the big change where in the previous, on IAS 17, we had resmoothing over the period of leases. That had to be unwound as well. But that was not a big reversal in the prior year numbers. And then we authorize a net tax asset of ZAR 115 million. The profit and loss impact, and I'll go through some of the key metrics on the next slide, is that we had to -- the lease rental expense of ZAR 936 million, it's excluded from EBITDA. We raised our interest expense and the lease payments become part of financing activities.

If we look at the key major impacts that we see through our business is the EBITDA increased by 46%, which is the reallocation of lease payments between depreciation of around ZAR 800 million, interest of ZAR 125 million, and the lease payments become part of operating cash flow. So excluding out of operating cash flows and into the net financing cash flows. To note, debt funding cash flows includes CPG, exit lease of ZAR 295 million, which was a once-off in this period.

The impact on net debt is severe. It's a large lease portion. So that we increased our debt net by 70%. ROIC, negative impact of 17%. But then, also reducing our WACC overall by 16%. And this is a key metric that we'll have to do, of course, going forward. I will, for the next few reporting periods, continuously have and give guidance in terms of the with and withouts, but also at a stage where we can converge. But I think it's also very important when we get to my debt slide. And that is for all our bank covenants, IFRS 16 is excluded. And with that reason, I will continue to give the market guidance on both the with and the withouts.

If we then get into our profit and loss, or income statement from continuing operations, I believe this is a very good set of results. These are very tough times in all economies in which we operate, and achieving a 9% operating growth is really a good performance. And that was very largely assisted by the significant rationalization and cost-cuttings that we had to do and taking some pains in the prior year, a strong performance from our health care business in African Regions, and also greatly assisted by the shipping business as well as the Palletways performance in the 6 months.

If you look at our repayments of our goodwill and disposal of businesses, there's some small movements. So we had a small ZAR 6 million repayment of goodwill. There was some cost of ZAR 10 million associated with this on disposals. And then we had a recovery of ZAR 8 million on some debt that was previously paid. The amortization of intangibles, as indicated previously, there is a runoff, the cost 11% down year-on-year. But remember, as we go through new acquisitions, that number, again, over time, will increase. But for the time being, the trend is a downward movement.

And then we had some costs associated with the acquisition of business in African Regions to a value of ZAR 14 million. And then very importantly, I think our treasury management was excellent in the 6 months, resulting in a small ForEx gain of ZAR 18 million compared to a loss of ZAR 23 million in the prior period.

Looking at our net financing costs, increase year-on-year of 13%. But you will recall in the base in prior year, we had a once-off gain of ZAR 63 million on the settlement of the preference shares. Our tax rate increased by 21% of cost in the P&L. And that was largely -- or just some of deferred tax assets in loss making entities that we did not raise the deferred tax assets. And we also had some nondeductible expenses on the business acquisition disposal costs.

The discontinuance of the CPG in the current period is ZAR 283 million. And that compares, obviously, the prior period that the unbundling of notice of ZAR 5.2 billion as well as CPG restated and discontinued from prior 6 months to the value of ZAR 80 million.

Just looking at our financial position. No material movement of property, plant & equipment. Our transport fleet increased by the acquisition of new contracts, some buses that we had to acquire on the Lowveld Bus acquisition and supporting all our new contract gains. And we see [seminal] working capital, as Mohammed indicated. With these new contracts, we have to invest in working capital. We have to invest in CapEx. We just spent ZAR 480 million in these 6 months on expansion CapEx to support new contracts. And then we had our normal fleet replacement programs, offset by depreciation in this period. We did dispose a small associate of South Africa in this period, resulting in the movement in our engagement in our associates. And then our net working capital increased by 54% from 30th of June. This largely resulted in new contract gains, our increased sales volumes in African Regions. And to be quite clear, this is still in line with our guidance to the market of 4% to 5% of a 12 months revenue on an average basis.

But also you'll recall seasonally, year-on-year, this simply is normally a high working capital period. And that typically reduces as we get to December.

If you look at our net interest-bearing borrowings profile, our bank debt increased by 29%, largely supported by cash inflow from operations of ZAR 2.6 billion. And then we utilized cash in working capital of ZAR 1.1 billion. We paid our finance cost of ZAR 422 million. We paid a tax of ZAR 261 million. We had a CapEx of ZAR 815 million, of which, ZAR 478 million, as I said, was related to expansion CapEx. We did some share buybacks to the value of ZAR 225 million, and we paid dividends of ZAR 282 million.

And then very importantly, under the lease obligations, the lease payments of EUR ZAR 1.1 billion is resulting in that movement on the lease obligations. Total equity, flat from June. We did recognize ZAR 458 million of comprehensive income, which is offset by dividends paid of ZAR 282 million and a share [repurchase] of ZAR 158 million and/or share-based equity charges, and also some transactions where we acquired some minorities for ZAR 26 million out of equity.

Moving on cash flow from operating activities. Cash generated by operations of ZAR 2.7 billion, negative impacted of once-off by the CPG. This continues, where we had trades still fall another 5 months until we exited all operations. That's a negative of ZAR 307 million. And that will not recur again. Because all business have now ceased. So there will be no further trading losses out of the CPG discontinuance.

Our net working capital, as I said, mainly supporting new contract gains as well as increased sales volumes in African Regions, resulting in higher stock levels and remaining our working capital guidance between 4% and 5% of revenue on a 12-month running basis.

Looking at H1 cash flow summary. Our capital expenditure, as I said, ZAR 815 million, of which ZAR 478 million was expansion CapEx. We had some payouts on the acquisition of the Axis Group, net of cost, of ZAR 75 million. The repayment of these operating cash as you'll see now on the face of the cash flow statement under finance activities, ZAR 1.1 billion. And other finance activities mainly comprises ZAR 80 million, of which -- for which we used to buy a subsidy minorities in 2 of our businesses.

Very importantly, we are encouraged by our leverage. This is in terms of the bank covenants of 3.25x. End of December, we had it 2x, obviously, pushed out a little bit by ZAR 595 million that was a once-off that we had to incur as outflow for CPG. But one thing relating to provisions at year-end, but the reality comes when you actually start writing the checks. And I think that process, exceptionally well managed. The timing of it, exceptionally well managed. There are some of those leases would have had a 7-year time horizon. So for management to manage this process, getting it done in these 6 months, I think, was a fantastic effort and it's a once-off very clearly defined that there should not be a repeat of that.

Our debt capacity remains still between ZAR 3 billion and ZAR 5 billion, giving us significant headroom for Mohammed to grow the business on acquisitions, contract gains. And it does come at 8.5x, way above -- well above the covenant of 3x. I think it's important to note the Group's liquidity remains exceptionally strong, with ZAR 10.6 billion of unutilized bank facilities. 73% of the Group debt in long term, 49% at fixed rates, and all our current debt requirements are serviced by the banking market.

So how did we perform against our medium-term guidance? Looking at revenue, operating profit, Mohammed did give a lot of color around it. Yes, we did not achieve in our revenue for various reasons, but operating profit, in line with guidance. Our cash conversion, 72%, well in line with our guidance. Debt capacity, ZAR 3 billion to ZAR 5 billion. Our net debt to EBITDA, 2x, so well below the 2.5x that's our internal benchmark, not to stretch our balance sheet too far, so way above the covenants of 3.25x. ROIC of 10% versus a WACC of 8%, negatively impacted by the first half of this calendar year, which had a lot of once-off costs in there. Dividend, we did pay or declared a dividend of 45% of headline earnings, in line with guidance. And our net working capital, 4.9% of revenue, in line with our 4% to 5% of revenue guidance.

Thank you very much. I'll hand it back to Mohammed.

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [4]

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Thanks, George. If move on to strategy. And yes, George, we do want to grow the business. So if you look at our strategy, and we've been communicating this now for a few reporting periods, the big strategy is really to focus Imperial or position Imperial as a gateway to Africa. As I said earlier on, we've got our market access business that gives us a competitive advantage. And we want to position ourselves to our clients and our principals, that if they want to get their product into Africa, there's only one company they should think of, and that's Imperial. And if you combine our freight management business, our contract logistics business and our market access business, in terms of a service to our clients, we'll be able to offer an integrated solution to our clients into Africa.

Now we're not there yet. That is where we want to get to, but we've still got up where we have a lot of these things. So we want to focus on those 3 capabilities. We want to focus on 5 key industries that we're very strong in, health care and consumer, chemicals, industrial, automotive. I think very importantly, this business has historically been managed as a portfolio of businesses within regions. And we're changing that. We're now saying, let's leverage our capabilities across regions. And we have got deep capabilities and skills in certain sectors in Africa that we don't have in Europe, and vice versa. But we've got deep knowledge, client relationships, et cetera, in terms of how we can leverage that. And we're moving more into that and moving more towards being a client-driven organization, where we talk to our clients as one Imperial.

We want to align our International portfolio and growth opportunities to support our trade flows ex our supply chain into out of Africa. So yes, we're getting out of shipping because there is no link between shipping and our growth strategy for Africa. But there's absolutely opportunity for our growth -- for growth in automotive, in chemicals and industrial, because those are sectors that will also be fast-growing in Africa. And we've got a big business in Europe that has got client relationships, expertise and people. And we want to leverage that, and in time, expand our capabilities into Africa in terms of offering, what I said, an integrated logistics solution.

As I said earlier on, we are focusing on innovation and disruption. And that is something that requires a focus today because of disintermediation, et cetera. And we've set up a fund now with a partner to focus on investing in some of these technologies and disruption so that we can mitigate the risk of that.

So we are embarking on a journey, really, ladies and gentlemen, to transform Imperial from a regional portfolio of businesses to offer an integrated end-to-end services, which will position us with our clients well, because what do our clients want? They want simplicity. They want flexibility. And they want visibility. And if you take out our capabilities in market access, logistics, trade management, we can really deliver on a real end-to-end solution for our clients into Africa.

Just -- I mean these are things that you will know. But just to reflect on how big this opportunity is and what's the size of the prize, and when I look at these numbers, it makes me excited about the opportunities we have as Imperial to grow our business.

On the continent, we've got countries like Nigeria, we've got countries like Algeria, Egypt, Ethiopia. And look at the size of those populations. Those are big, big populations, similar to Pakistan, Vietnam. So in one continent, we've got a massive, massive base of people. And that's why our focus on consumer and health care stands us in good stead in terms of taking advantage of the growth opportunities with those kind of populations. And we're very well positioned in some of these markets already, like Nigeria, which is the #1 market in terms of size. We have a leading health care offering in that business. We've got a fantastic freight management and contract logistics business in MDS there. And we're building on our consumer platforms there as well.

We've just invested in Ghana in terms of expanding our pharmaceutical footprint there. So that's the size of the prize. It's huge. And it's going to require massive amounts of logistics expertise and what we do in terms of getting product to the end consumer. And we play there already. So it's about building on that.

I'm not going -- this is a busy slide, but the -- just to reiterate the point of the size of the prize again. If you look at how much Africa spends on pharmaceuticals, that's the global pharma market across the world, $19 billion. Compare that to some of the other emerging markets and developed markets. There is a long, long way to go before Africa even gets close to those. Nigeria spends $1 billion on pharmaceuticals as an economy. It's got 200 million people. South Africa spends $4 billion on pharmaceuticals, and with 50 million people. And we take product, what did I say, to 50,000 points of sale. And access to medicine, providing health care to that increasing consumer, is a massive growth potential. So we've got a long road here in terms of taking advantage. And Imperial's ideally positioned for that because that's our footprint.

This is now 1/3 of our business. It's no longer a small part of Imperial anymore. And in the areas in light blue, that is where we've got a physical presence in terms of being able to offer a route to market to our clients across Southern Africa, East Africa and in West Africa. The areas in dark blue is where we would use subcontractors or where we would use other people to distribute. But once you've got the key hubs in East and West and Southern Africa covered; then you can cover the rest of the markets by using subcontractors or using other people to distribute the product. But once you get the principal in the main market, then we can offer them that solution as well, which is what we call supply -- Simplified Solutions in Health care. We started that, where we now have recently won a contract for MDS, to not only -- MSD, sorry, to not only distribute their product in Kenya, but we are distributing that product across sub-Saharan Africa, either through our own network or through other people.

So what's the short-term focus in terms of delivering on that? So what are -- how are we going to get there? What are we going to do about that? So I've shown you the big picture strategy in terms of gateway to Africa. I've given you a sense of this -- the size of the prize. So what are we going to do? So we're going to continue building on our existing and expanding to new capabilities. Like I just said, we've added now sourcing and procurement to other industries. We're very strong in health care on that. So that's expanding into a new capability that will help our market access business into and out of Africa. We want to invest in existing geographies. So in Ghana, we were in pharma. Now we are in consumer. And we will get into new geographies. So we will be looking at expanding our footprint into other geographies on the continent. That's in line with our capabilities, industries and clients. And I think very importantly, we're going to invest as well in technology enablement and industry and capability expertise.

In terms of playing a role as a route-to-market partner, your interaction with the front-end or the retail channel is very critical. And there's some interesting technologies that we can develop and advance in terms of making it more seamless and even taking our position to the next level in terms of integrating with it. So we're looking at investing in technology enablement in that business.

And then our International business, ex-shipping, as I said, will be largely a contract logistics business or great capabilities and with great client relationships that we would like to leverage into Africa. And we'll expand that business as well into new markets that support our trade flows and our supply chain into and out of Africa. Because remember, Africa still needs to get product from some way. It needs to be moved from Europe or from America or from Asia. And that's why the European business is an important part of that strategy because we want to build an air and ocean capability out of that. We've got a big contract logistics business. So a lot of product gets consolidated in Europe. And then from there, gets exported into Africa. So International is a key part of our strategy going forward in terms of our big plan to be the gateway to Africa for our clients. And then naturally, our people and innovation is going to be key enablers in terms of how we deliver on the strategy, and we're investing heavily in both.

So in this past year -- 6 months, we've acquired 4 businesses in exactly the areas that I've mentioned. We spent about ZAR 600 million there. Our Simplified Solutions in Healthcare is gaining traction. We've got a good pipeline of new opportunities there. We've landed our first client in terms of offering them a Pan-Africa solution, and now it's getting traction. Now we can go and show our clients how that model works, and that's so critical. And then we do want to get areas -- get into new areas like demand generation, like contract manufacturing is not what Schirm used to do, okay, in terms of chemicals. This is more contract-backing, et cetera, more value-added services that support our gateway to Africa in market access business. And then certainly, brand partnership services, we will also expand into.

We've added sourcing and procurement to other industries. And very importantly, we are going to expand our market access capability in South Africa. It's because of our strong logistics networks in South Africa, we want to go to market and talk to our clients about outsourcing certain parts of the route to market to us, leveraging off our existing logistics network and warehousing network, plus our capability in terms of understanding how to do that. So we will expand that business into South Africa as well.

And then obviously, we want to leverage best practice across our business and our technology. So people think when you're distributing pharmaceutical products in Nigeria or East Africa, it's operating in a very basic way. It's very, very -- we use technology massively in our business. We have data. We've got sales reps that walk around with iPads that's collecting data at the point of sale. And that information is very valuable in terms of how we use that information to grow our business. And investment in those processes, practices and technology is critical because there isn't a player in Africa that can offer a route-to-market across so many markets on the continent. Yes, there's local competitors in each market. But what Imperial offers that's different is we can offer a sub-Saharan solution, as I showed you.

And then very importantly, strategically aligning our International portfolio. We're not there yet. Shipping should be out of the system by the end of June 2020, subject to regulatory approvals. But then, we're going to utilize that capital to expand our business there to align with our growth strategy for Africa, and that priority is around air and ocean. As you can see, we're very, very strong on land-based freight management. Getting into air and ocean will unlock another level of growth and expertise for our business into Africa.

And then on innovation, as I said, we've established a partnership with Newtown. And we've committed $20 million, as Imperial, to fund new investments in this potential startup, but relevant to our supply chain. So it's dedicated, focused on logistics, supply chain, market access in terms of us being able to source opportunities in that space, and then invest in that and use it in the business. And we've had great activity over the last 6 months.

So that's our strategy. Obviously, part of our strategy is also to be socially responsible from a governance, environment and society, in general. We can make more -- we have more work to do here. I think there's significant scope for improvement in this area of our business, and we're now focusing on it. Imperial is a logistics player in a market access business. It can make a massive difference to the environment in terms of improving it, and people's lives in general. If we do not deliver that medicine to that pharmacy at the right point in time or to their hospital, somebody's life is being impacted by that. And that's a critical role we play in every -- in people's lives.

So if you look at us as a business in terms of transport, logistics and market access, we can improve people's lives. Our business is societally relevant. And we want to focus on 5 areas in terms of our ESG initiatives. That will be health care, education, road safety, waste management, and then skills and sport development is another area. So we've already started this, but we want to take it to the next level.

Some of the things we've done is we've started a project called Unjani many, many years ago, and we now have got 72 primary health care clinics across the country that are servicing about 1 million patients. So we want to expand this to get to 100. And this is really an important initiative as part of our health care strategy. Road safety is a big initiative, and we're doing a lot in that space.

And then with Motus, we've established our 43rd library a few weeks ago there. So as I said, education, health care, road safety, very important part of our societal relevance and a big part of what we're going to be investing in, in terms of our future.

And then we've also done work in line with our children's team because you can see health care, education, it's all to develop and look after the kids. We've also started an initiative in the SOS Children's Villages in Hungary.

We also in partnership, opened up a hospital with Tulsi Chanrai Foundation. And this is a first of its kind in Nigeria, where people are able to see again. And I'll tell you, the feeling or the emotion when you see somebody's eyesight returning, is unbelievable. So we are certainly doing a lot, not only in South Africa, as a logistics business. We are doing a lot in Europe. We are doing a lot in Africa, and we will do more. We're looking at a project in Kenya now, where we're going to be helping some kids there from a school point of view in terms of the UN.

So definitely, a big focus and theme of ours. We're becoming more targeted, and we're focusing on some of the areas where we can really make a difference as Imperial in terms of people's lives.

Looking forward to the next 6 months, as I said earlier on, we're not seeing the trading conditions getting any better. There's nothing that has happened in January and February that has changed the trend. In fact, there's more uncertainty in terms of global growth, particularly with the impact of corona and how that's going to impact supply chains. So it's as uncertain as ever. And I don't expect the market, certainly in the short-term, to abate the pressures we're feeling. But we still expect to show growth this year, single-digit revenue growth on -- for this financial year, low double-digit operating profit growth, which will translate into low double-digit, continuing HEPS and good free cash flow generation.

Our balance sheet remains in good shape. And we've got significant headroom in terms of capacity and liquidity to grow the business, both organically and acquisitively.

So we're on track to deliver what we told the market 6 months ago. We're not changing our guidance, but I think there are certain things we've got to the business, and certainly with some of the new contract gains there, we will counter some of the negatives we're feeling in the economy, and therefore, have stayed with our guidance of low double-digit growth. The balance sheet, yes, our debt did go up, but I'm not concerned by that because as George explained, we do have once-off effects there, like the cash outflows from CPG. And normally, our balance sheet in H1 is stretched for seasonal reasons. And our working capital in the first half, because of December, most of our CapEx is spent in the first half. So it is a seasonal thing that has happened previously. And I expect some of that to come back in the second half in '20. And I think we've signaled that by paying still 45% of our headline earnings per share in the dividend.

Thank you for your attention. We'll take questions.

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Questions and Answers

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Michael Shawn Jacks, BofA Merrill Lynch, Research Division - Director and Head of SA Research & Industrials [1]

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Congrats on a robust set of results in a difficult environment. 3 questions from my side. The first one, just compared to the cost saving guidance of around ZAR 385 million that you gave last year. I just wanted to know how much of that has been realized in this first half. Second question, given that shipping, if all goes well, will be gone by the end of the year, how much did that contribute to group earnings in this half? And then lastly, historically, there's been some seasonality in the rest of Africa business. Can you just give some guidance in terms of what you expect that split to be in the second half? And I guess, in the context of the acquisitions that you've just concluded?

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [2]

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Yes. So the cost reductions we have realized, okay? So obviously, that was a full year number that we gave you so we should have realized half of that cost benefit in the first half. But Michael, like I said, you can't just take last year's number and add the cost benefit. As I said, volumes in the existing business were significantly down. Plus, we didn't retain 100% of our work. I gave you a number there. I said, we retain 80%. So while we had good new business revenue, there was also some business we've lost, plus we had the economic pressures. So the full benefit of the cost saving wouldn't be realized because of the macro factors that I mentioned. But if we didn't do that, then we could never have delivered this. So I think that's the important message is that, yes, we didn't realize the full benefit of it because some of that was eaten in terms of margins, we had to give up 3 new contracts, tough economies, volume declines, et cetera. So just to take last year's number and add the cost savings is not realistic because there's pluses and minuses.

On your second -- but we would have realized all the cost savings we set. I mean that was done. So it wasn't that we didn't achieve those. So your second question was?

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Michael Shawn Jacks, BofA Merrill Lynch, Research Division - Director and Head of SA Research & Industrials [3]

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On shipping.

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [4]

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Shipping?

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Michael Shawn Jacks, BofA Merrill Lynch, Research Division - Director and Head of SA Research & Industrials [5]

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Yes.

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [6]

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Yes. Shipping was sort of flat year-on-year. We don't give individual numbers on businesses below in our division. So I'm not going to give you a number, but the shipping performance was good. It was sort of flat to slightly up year-on-year.

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Unidentified Participant, [7]

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(inaudible)

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [8]

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Yes. It's difficult now because, like you said, we've got acquisitions coming in. But normally, our first half is better, [Johan]. First half is normally better than the second half. But obviously, we'll have second half, we'll have the benefit of the acquisitions coming through. So our -- this year, it will be totaled to be in the second half.

Yes, sir?

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Unidentified Analyst, [9]

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On Page 34, there's an item, contingencies of ZAR 394 million. There is an explanation on Page 36 for ZAR 107 million of that figure, but there's no further reference to the remaining ZAR 287 million contingency. Could you please tell me...

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [10]

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George?

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Unidentified Analyst, [11]

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Why there is the additional contingency?

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J. George De Beer, Imperial Logistics Limited - CFO & Executive Director [12]

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Yes. That would be largely supply guarantees that you give to clients.

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Unidentified Analyst, [13]

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Sorry. I didn't hear your answer.

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J. George De Beer, Imperial Logistics Limited - CFO & Executive Director [14]

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Supply guarantees to clients like the banks.

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [15]

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When we sell product on behalf of our clients, we've got to give supply guarantee. So that would be in that number. And that could be big.

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J. George De Beer, Imperial Logistics Limited - CFO & Executive Director [16]

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Yes.

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Unidentified Analyst, [17]

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And Mr. Akoojee, given that interest-bearing borrowings are up ZAR 1.1 billion, I'm still trying to grapple with that substantial number, given that revenue was flat. Property, plant and equipment has remained virtually unchanged. Inventories are virtually the same as at June. Cash resources are down ZAR 480 million. And finally, trade and other payables are down ZAR 1.5 billion.

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [18]

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Yes. So ...

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Unidentified Analyst, [19]

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What is the reason for the increase in interest-bearing borrowings?

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [20]

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The ZAR 600 million of that is CPG.

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J. George De Beer, Imperial Logistics Limited - CFO & Executive Director [21]

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Correct. Yes. That was -- That's the CPG exit, the cash flow impact of the discontinuance. We had a provision in 30 June. As you realize those provisions, that's a cash outflow and there were some trading losses. So we funded it to the tune of 600 -- ZAR 595 million. And then the investment in working capital on the new contract gains and the expansion CapEx. And then the rest of the investments would be pay the dividend...

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [22]

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We bought back shares of ZAR 225 million.

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J. George De Beer, Imperial Logistics Limited - CFO & Executive Director [23]

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Bought back shares, paid a dividend. So that resulted in this expense...

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Unidentified Analyst, [24]

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But buying back shares is not interest-bearing.

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J. George De Beer, Imperial Logistics Limited - CFO & Executive Director [25]

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Yes.

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [26]

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Well, it has have an impact on your cash flow. On your overall debt position. So ZAR 600 million of the ZAR 1.1 billion outflow was CPG, which is a once-off in terms of closing that business. We raised the provision, which is a non-cash flow item at the end of June. But now we have to settle those obligations, so that comes into your cash flow in this half. And then the other half is easily explained through CapEx because we won new business. We had growth in working capital because we did have top line growth in South Africa and we won new work in Europe. And then thirdly, as George mentioned -- what was the last point you made? That was working capital, CapEx and buybacks.

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J. George De Beer, Imperial Logistics Limited - CFO & Executive Director [27]

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Yes. Buybacks and we paid a dividend.

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [28]

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But as I said earlier on, that's a timing thing. We expect our debt levels now to get better because this 6 months, we should generate better cash because we won't have the overhang of CPG. It's done. No longer coming in. So that ZAR 600 million negative is not going to be in the second half. Then we're not going to spend the CapEx we did in the first half because we spend most of our CapEx in the first half. And normally, our working capital comes back in the second half. Normally, we have an outflow in the first half and then in the second half, it comes right. So I will expect our debt levels subject to [exitions] and those things to come back nicely in the second half.

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Unidentified Analyst, [29]

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I just have 2 questions. The first is on the -- if the sale of the shipping concludes, maybe you can chat us through how you're thinking about prioritizing the proceeds of between buybacks, acquisitions and debt?

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [30]

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So as I said to you, we want to grow the business. So obviously, initially, the proceeds will be used to repay debt, because we do have debt. But that will give us significant headroom to grow the business. And we'd like to redeploy that capital into areas like air and ocean, into our market access business in Africa and grow there. So I think the priority would be to use the capital for growing the business rather than doing share buybacks because there are good growth opportunities in Africa and certainly out of our air and ocean initiatives.

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Unidentified Analyst, [31]

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Okay. And just one on SA, can you give us a sense of what capacity utilization the fleets operate in it?

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [32]

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No. We don't have excess capacity now. I mean if we lose a contract or we have an issue, we defleet. So I wouldn't think there would be a significant amount of excess capacity in our fleets. And then remember, we flexed that by using the subcontractors because we've got access to probably around 2,000, 2,500 subcontracted vehicles. So we are able to utilize that to flex our capacity in terms of bringing in more subcontractors or utilizing our vehicles more, et cetera. So that gives us the flexibility.

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Unidentified Analyst, [33]

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And you said first year -- I mean first half CapEx was higher. Do you have guidance for the full year?

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [34]

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George?

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J. George De Beer, Imperial Logistics Limited - CFO & Executive Director [35]

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For the full year, we should be in terms of -- well, depends how you look at through depreciation. We always guided that we should be in line with normalized depreciation excluding IFRS 16. So we will be in excess of that because of the contract gains. We have 30% to 35% above the normal ZAR 1.1 billion of depreciation. But including IFRS 16 depreciation, we are below that number.

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Ross D. Krige, JP Morgan Chase & Co, Research Division - Analyst [36]

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Ross Krige from JPMorgan. Congrats on the resilient results.

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [37]

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Thank you.

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Ross D. Krige, JP Morgan Chase & Co, Research Division - Analyst [38]

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And just in the cost restructuring incurred -- sorry, the cost incurred in restructuring. What was the split of that in H1 and H2 in FY '19?

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [39]

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No. That was all in H2.

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Ross D. Krige, JP Morgan Chase & Co, Research Division - Analyst [40]

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All in H2. With the Resolve Africa one-off contract wins, will that be in the base or off the base in H2 '20?

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [41]

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Sorry. Say again?

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Ross D. Krige, JP Morgan Chase & Co, Research Division - Analyst [42]

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So you mentioned that the Resolve Africa, that those contract, that one-off contract...

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [43]

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Yes. That was only in H1 last year. It wasn't in H2.

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Ross D. Krige, JP Morgan Chase & Co, Research Division - Analyst [44]

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Perfect. And just one last question on South Africa. How do you see the competitive environment evolving? I mean clearly, it's very difficult. You guys have done well to catch up costs and be more competitive. Are you seeing competitors dropping out of market? Or how is that changing?

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [45]

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George?

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J. George De Beer, Imperial Logistics Limited - CFO & Executive Director [46]

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Not necessarily dropping out of the market. Some of the smaller players do. But it's above -- in terms of rates and margins and whatever. Very competitive. You're right.

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [47]

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Mark? There's a question.

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Unidentified Analyst, [48]

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It's Mark [Tamage] of HSBC Securities. Can you explain a bit more your market access strategy for French-speaking Africa? I believe your current operations, distributive maybe in English-speaking Africa. And there must be substantial opportunities in French-speaking countries?

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [49]

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Absolutely. Johan, you want to talk? Yes?

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Johan A. Truter, Imperial Logistics Limited - CEO of African Regions [50]

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So we've been trying to get into the French market for quite some time now. We've made offer on 2 acquisitions. We were outbid one by private equity and one by the Chinese at the time. So it's still a strategic area for us to expand in. We are in discussions with other players at the moment or even trying to go into that market from a bottom-up, a greenfield approach as we've done with [Garnar] before. So very much focus for us. We haven't got anything to announce yet, but our big focus was into French, and I'm actually focusing into North Africa as well.

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [51]

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Thanks, Johan. Webcast. Is there any questions?

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Esha Mansingh, Imperial Logistics Limited - IR & Communications Executive [52]

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Yes. There's 3 questions on the webcast. 2 from Nick Webster at HSBC. The first one is, can you remind me how Palletways specifically ties in with your gateway to Africa?

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [53]

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So Palletways is a very -- it's an asset-light player that plays in the 1 to 4 pallet market consolidation -- pallet consolidation market. And it plays a key role, I believe, in e-commerce, in terms of providing a service into the networks across Europe. Now the Palletways business model, in terms of providing that service, I believe we can utilize it in some of our markets in Africa, particularly in South Africa. And the other thing about Palletways is that if we get in air and ocean business and you combine Palletways with an air and ocean capability we have, we -- not many air and ocean players have got that capability in the 1 to 4 pallet consolidation market. So yes, it's not an Africa story in terms of us taking Palletways and doing that service in many of our markets.

I believe, in South Africa, there could be opportunity to do that, and we're looking at that. Because there's a big market, I believe, in South Africa where we can play that role of a consolidator of 1 to 4 pallets. But I think the big growth driver, Palletways, will be the value it will add to our air and ocean network. Hakan, maybe you want to add on that. I think you should.

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Hakan Bicil, Imperial Logistics Limited - CEO of International [54]

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I think important is to mention that with our gateway to Africa strategy, Palletways will be the upstream and downstream element, and will give us opportunities from a cost base to be to be a dominant player in the trade links into Africa and out of Africa. I think Palletways is the exact right fit, the complementary element, to our market access strategy and to have air and ocean to it. So I'm quite bullish we are in the fit to our strategy.

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Esha Mansingh, Imperial Logistics Limited - IR & Communications Executive [55]

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Okay. The second question from Nick, also relating to the cost savings that we addressed earlier. Do you expect a similar run rate of cost savings to be realized in H2? You referred to a number of once-off base effects that impacted top line in certain businesses in this period. Can you remind us if there's anything similar in H2 to consider?

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [56]

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Yes. So obviously, you can't cut costs too early as well because we've just been through a massive cost cutting. And our process is that we don't want to also cut ourselves too lean that when the market turns, that we don't -- so no, there isn't a cost-cutting plan of the magnitude that we did in H2 last year, but there's always stuff, so we're very cost-conscious in our business. We're always looking at ways to make ourselves more efficient, but not of the scale of the ZAR 400 million that we did in H2 last year. And once-offs. We had once-offs in H2 last year, but we're not expecting any once-offs in H2 this year, no.

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Esha Mansingh, Imperial Logistics Limited - IR & Communications Executive [57]

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And then just a final question from the webcast, from [Nipo] at 361 Asset Management relating to the disposal of shipping. Are you able to give any guidance on what you expect for proceeds? And why is it not a discontinued operation at this stage?

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [58]

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Yes. So we're not giving any guidance of proceeds. We're in a sales process and, obviously, we can't do that. It will just diminish our negotiation position. So we're not going to do that. But we can certainly tell you about discontinued operations just in terms of how it should meet the criteria.

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J. George De Beer, Imperial Logistics Limited - CFO & Executive Director [59]

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Yes. I mean obviously, there's certain criteria that needs to be met before you can classify as discontinued. And a big portion of that relates to the final decision related to the disposal. And we don't have that junctured in, as Mohammed said. We are [budget owning] the process. And as we go through final bidding offers, there will be -- to do the necessary approvals, and that will be the decision point to classify as discontinued.

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [60]

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No more questions?

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Mike Brown, [61]

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Can we just check if there's any questions on the conference call?

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [62]

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Oh, sorry. Yes.

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Operator [63]

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There are no questions from the line.

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Mohammed Akoojee, Imperial Logistics Limited - CEO & Executive Director [64]

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Okay. Last but not least, Nico is retiring, as you would have read in the announcement, after 26 years of loyal service to Imperial, Nico. And I'd just like to thank Nico valuable contribution over that period. It -- a lot of it, I must -- and a lot of it happened when I was a very young man. And under your stewardship, you certainly guided the business in a great space for us to take to the next level. So just like to bid farewell to Nico and congratulate him on a fantastic career at Imperial, and wish him all the best. And thank you, everybody.