Management report

Divisional review - Automotive retail
Automotive retail

 

   

Highlights

  • Excellent operating performance – operating proit up 44%
  • Substantially improved operating margin
  • Excellent asset management
  • Level 4 BEE rating for major brands – Mercedes-Benz, Volkswagen and Toyota as well as Jurgens Ci and Beekman Canopies
  • Jurgens Ci and Beekman Canopies performed well

Philip Michaux
CEO of Automotive Retail
 
     
   

Divisional overview

The automotive retail division comprises 111 dealerships in South Africa and the United Kingdom, the Beekman Canopies and Jurgens Ci operations. It employs 6 364 people.

 

Operating units

South African dealerships

  • Activities span the sale of new and used motor vehicles with related financial services, sale of parts and vehicle servicing, with a workforce of 4 445
  • 86 franchised dealers cover all major OEM brands – Alfa/Fiat, Audi, BMW, Chevrolet, Chrysler, Dodge, Ford, Freightliner, FUSO, Hino, Honda, Hyundai, Isuzu, Jaguar, Jeep, Land Rover, Lexus, MAN, Mazda, Mercedes-Benz, Mini, Mitsubishi, Nissan, Opel, Renault, Suzuki, Toyota, UD Trucks, Volkswagen and Volvo
  • Within this dealership base are 16 stand-alone commercial vehicle dealerships

United Kingdom dealerships

  • Activities span the sale of new and used commercial vehicles and vans with related financial services, parts and servicing, with a team of 860
  • 25 franchised dealers cover major brands:
    > Medium, heavy and extra-heavy commercial vehicles – DAF, Hino and MAN (service only)
    > Light commercial vehicles – Ford, Isuzu, Nissan and Volkswagen.

Non-Original Equipment Manufacturers (Non-OEM)

Beekman Canopies
  • Leader in fibreglass canopies and related products for over 30 years with one of the widest ranges, including luxury and steel canopies
  • One of two major canopy manufacturers in South Africa
  • Main production facility in Bellville, Cape Town. Second production facility at the Jurgens plant in Ga-Rankuwa.
  • The Beekman operations employ 197 full-time staff.
Jurgens Ci
  • Jurgens Ci is the only large-scale caravan manufacturer in South Africa. It also manufactures luggage trailers, off-road trailers, canvas tents and fibreglass canopies. The business is supported by a robust parts and accessory business which imports camping-related products, distributed through its independent dealer network
  • Major brands include Jurgens, Jurgens Safari, Sprite, Gypsy, Howling Moon, WJ Motor Homes and Campworld
  • Independent dealer network consists of 35 dealers under the Campworld banner
  • Manufacturing operations are in Ga-Rankuwa with the canvas operation in Pinetown
  • A subsidiary in Australia produces Jurgens caravans from kits exported by Jurgens South Africa
  • The Jurgens division employs 862 people.

Market conditions

Conditions were better in the motor industry in the year to June 2011 compared to the prior period. The exceptional rate of growth recorded in the new car market in the past 18 months is now slowing as replacement demand has largely been met. Inflation risks and potential interest rate hikes could pose headwinds although bank-approval rates for finance applications continue to improve.

While better pricing and value have been key drivers of new vehicle sales, similar trends have not been evident in the used car market, which has been sluggish in recent months.

The rising price of fuel is also playing a role in vehicle purchasing decisions, and transport costs will increasingly become a factor for Gauteng residents when tolls are introduced to local freeways.

Results

      2011  
Rm  
2010  
Rm  
Change  
%  
H2 2011  
Rm  
H2 2010  
Rm  
Change  
% on  
H2 2010  
H1 2011  
Rm  
Change  
% H2 on  
H1 2011  
Revenue       17 150   15 543   10,3   8 628   7 829   10,2   8 522   1,2  
Operating profit       497   345   44,1   280   176   59,1   217   29,0  
Operating margin (%)      2,9   2,2     3,2   2,2     2,5    

The above table excludes contributions from the sale of financial services products that are of an annuity nature, i.e. results derived from JV alliances with financial institutions are excluded. These results are now reported under the newly created financial services division. Comparatives have been re-presented. 

The division produced excellent growth in operating profit for the year, reflecting the benefits of right-sizing operations in prior years and the buoyant new vehicle market over the past 12 months. The operating margin improved strongly to 2,9% from 2,2% in the prior year and 2,5% in the first half of F2011.

New passenger car sales in the division rose 24%, in line with growth in this segment of the vehicle market. There was a notable shift in the mix to entry-level vehicles, reflecting continued pressure on consumer debt levels and disposable income. As a result, the mid-priced and luxury vehicle markets were less buoyant.

The narrowing gap between new and used vehicle prices affected used vehicle sales, with volumes flat year on year in a generally sluggish market.

The commercial vehicle market also improved during the period, with a 11% rise in unit sales across all brands mirroring increased activity, particularly in the logistics and construction sectors, although the latter is still at a low level of activity.

Current trends indicate that passenger and light commercial vehicle volumes will continue to improve for the rest of the calendar year, albeit at a slower growth rate.

In the UK, the truck dealerships have settled down after rationalisation and cost reductions in the prior period. The business performed ahead of expectations despite a market that remained depressed.

Beekman Canopies’ performed well, with sales up on last year. Sales volumes at Jurgens Ci also improved markedly. Initiatives are under way to increase throughput in this division by cross-marketing.

Key financial indicators for the automotive retail division

       Growth  
%  
2011  
Rm  
2010  
Rm  
Revenue       10   17 150   15 543  
Profit from operations       44   497   345  
Operating margin (%)        2,9   2,2  
Net operating assets       (1)  2 631   2 668  
Revenue to net operating assets (times)        6,5   5,8  
Revenue relating to sales of goods to inventory (times)        7,4   7,7  
Weighted average invested capital         2 924   3 099  
Return on Invested Capital (%)        12,2   7,5  
Weighted average cost of Capital (%)        9,7   10,1  
Net capital expenditure       (4)  78   81  
Number of new and used vehicles sold         49 143   44 766  
Number of new vehicles sold         30 563   25 641  
Number of used vehicles sold         18 580   19 125  
Number of employees       3   6 364   6 153  
Number of dealerships         113   109  

Risks and opportunities

Risks
 
   
Opportunities
 
 
  • Interest rate increases
  • Low economic and employment growth
  • Declining consumer spend and credit appetite
  • Increase in infrastructure costs
  • Lack of credit availability
     
  • Supported by well-known brands
  • Growing middle class in South Africa
  • Group business and improved intergroup synergies
  • Expand camping-related product sales in SA
  • Acceptance of Jurgens products in the Australian market
  • Growth in sale of vehicles to full maintenance lease business

Skills development and transformation

  • Automotive Retail supports the Imperial management development programme, with over 100 of its employees having completed this training to date
  • Apprentice training is critical to the continued success of this division – currently over 380 apprentices are working in divisional dealerships. Initiatives to improve the quality of industry training and the number of apprentices are detailed in the sustainability report
  • Individual dealerships also support their respective franchise training requirements, including product training as well as job-specific skills training.

Most of our franchises have a BEE rating of level 4, a commendable achievement given that the bulk of their expenditure is with OEMs. Good progress has been made with transformation, an area that has received much focus in recent years.

Strategic objectives

The division’s strategy is to capitalise on opportunities presented by the existing dealer network. Given the strength of the Imperial brand, 43 dealerships were rebranded to reflect the group identity during the year. Dealerships in turn will focus on maximising returns on invested capital through performance targets and continued cost management. Beekman Canopies is focusing on the Gauteng market to improve its share to more appropriate levels. Jurgens is investigating opportunities in camping-related accessories, the potential of expanding its dealer network and better utilisation of its steelworks plant.

Some of the key strategic targets include:
  • Being the industry leader in financial performance – return on invested capital and operating margins
  • Achieving market share growth
  • Retaining good working relationship with OEMs
  • Improve used to new vehicle sales ratio to target of 0,7:1
  • Continue apprentice programmes to ensure quality supply of technicians
  • Move to single dealer management system to achieve economies of scale and improve reporting
  • Increase parts and accessory sales in Jurgens
  • Beekman to improve distribution model.

Outlook

Key macro and performance drivers

Macro drivers
 
   
Performance drivers
 
 
  • GDP growth
  • Availability of bank finance
  • Interest rates
  • New vehicle supply and pricing
  • Exchange rates
  • Fuel price
     
  • New vehicle sales – fleet and full maintenance leasing
  • Sale of value added products
  • Customer service index
  • Cost control and efficiencies
  • Asset management

Conditions in the vehicle market are likely to moderate in the remainder of 2011 and into 2012. With a streamlined network of dealerships and a well-balanced portfolio, the focus will be on organic growth and optimising synergies between the key components of vehicle sales, related financial services and parts and service. While the vehicle market’s rate of growth is expected to slow somewhat, this division is well positioned to take advantage of any growth opportunities presented by the market.