COVID-19 and its implications for people, markets and countries the world over, must be among the most formidable challenges any of us have ever encountered. Our people and our company have responded with integrity, agility and an unbreakable entrepreneurial spirit, in an unprecedented and difficult trading environment.
Osman Arbee
Chief Executive Officer
However, our integrated and diverse business model once again buffered us against the impact of the declining trading conditions in the economies in which we operate. Consumers continue to buy down and our comprehensive product offering meets their needs for more affordable cars. Our unit volumes dropped only 1% during this period when the market declined by between 6% and 13%, reflecting the resilience our product mix provides. Entry-level vehicles, small to medium SUVs and crossovers performed particularly well.
In early 2020, the Asian operations triggered alarms of what was to come. Though nothing could prepare us for the devastation that COVID-19 would leave in its wake, it did not catch us entirely off-guard.
While public health experts tracked the spread of the virus and governments desperately attempted to stop it, only the most pessimistic economists predicted the depth to which COVID-19 would erode the global economy. South Africa was not spared from the economic crisis, suffice to say that new vehicle sales in South Africa dropped 98% in April 2020 and 65% in May 2020. The economy was brought to a virtual standstill.
In South Africa, President Cyril Ramaphosa locked down all but essential services from 27 March to 12 May 2020. Our dealerships, stores, head offices and distribution centres were all closed. A quota of 30% of the industry could return to work from 12 May, 60% from 25 May and by 8 June 2020 everybody could be back at their businesses. However, vehicle licence and registration offices remained closed until the first week of June 2020, which held back sales in May 2020.
The UK lockdown started four days before South Africa, by which time the crisis had already brought the UK to a standstill. While sales offices were shut, workshops were allowed to remain open. However, with no new vehicle sales and many customers too anxious to leave their homes, it was only the workshops for commercial vehicles that were allowed to operate. The UK government allowed all showrooms and workshops to reopen on 1 June 2020.
Our businesses in Australia remained open, but sales and servicing were depressed.
Planning, which started well before the announcement of the lockdown, allowed us to protect the company and our people. We needed to do three things: we had to keep our people safe, manage costs and preserve cash resources. We had to adapt to the 'new normal' before we knew what it would look like.
The business is structured around large trading volumes and a significant portion of our cost base includes property and people-related costs that take time to structurally reduce and rightsize. During the first month of lockdown, it was difficult to reduce the cost base significantly. We also had to accept that we could not escape taking tough decisions during this time of hardship. Our team, suppliers and shareholders would have to sacrifice income and unfortunately jobs would be lost.
We established a Crisis Committee at the beginning of the crisis. Its mandate was to:
We reviewed all costs critically and imposed cost reductions across all categories. For payroll-related costs we implemented group-wide salary cuts for non-executive directors, directors and employees earning above R250 000 per annum; no salary inflationary increases for the 2021 financial year; we assisted employees with government relief funds wherever possible; and, as a last resort, we rationalised our workforce through short time, early retirements, voluntary and compulsory retrenchments. We postponed non-committed and non-critical capital expenditure, negotiated rental deferments with landlords, refocused advertising strategies, cancelled the interim dividend to shareholders and suspended the share buy-back programme.
The capital allocation strategy had to be refocused with head office taking control of all capital expenditure. We further engaged with OEMs, suppliers and funders for assistance.
Debt management was a key focus since the lockdown, as funders grew wary of the potential impact a prolonged lockdown would have on our ability to service debt commitments. Agreements with funders require us to maintain net debt to EBITDA below three times, while EBITDA to net interest must be kept above three times. As a precaution, we negotiated a relaxation on bank covenants with funders to ensure access to all banking facilities.
The negotiated bank covenants required EBITDA to net interest above 2,5 times and net debt to EBITDA below 4,5 times until 31 December 2020. The short-term conditions are: no major business acquisitions; no major expansionary capital expenditure; and no share buy-backs and dividend payments. We ended the financial year well within the original bank covenant levels with significant headroom. As a result of strong trading cash inflows during and after the lockdown, we remained within the original bank covenants' requirements.
The Rand weakened since the beginning of the calendar year. However, we have bought forward exchange cover for Hyundai and Kia until the end of March 2021 at an average rate of R15,70 to the US Dollar and R16,80 to the Euro. Renault South Africa does not take forward cover, as Renault France shares in 50% of the net foreign currency movements.
While we were concerned about the availability of parts supply in February 2020, when Chinese suppliers were under threat of lockdown, these concerns were allayed when factories returned to full production during April 2020.
Our entrepreneurial and agile management teams responded with detailed business plans within two weeks of the announcement of the lockdown. Our customer-facing people shifted to online modes of operation to capture every business opportunity during the lockdown. Their success also speaks to the value of our recent investments in digital technology and online platforms.
The South African new vehicle market continues to be affected by the weak macroeconomic environment, lack of disposable income and consumer confidence. Industry margins will continue to underperform as consumers continue to delay purchases, trade down to cheaper vehicle models and place pressure on the quality of pre-owned vehicle supply. According to NAAMSA, South Africa retailed 441 586 units for the 12 months to 30 June 2020 (18,6% down from the prior year). At June 2020, our retail market share was 20,2% (June 2019: 18,9%). New vehicle sales for the 2019 calendar year of 536 626 units compared to management projections for the calendar year 2020 of between 350 000 to 380 000 vehicles, with growth from this low base projected at 420 000 to 440 000 vehicles in the calendar year 2021.
The UK new vehicle market has been negatively impacted by the crisis, resulting in weak business and consumer confidence and economic instability, further exacerbated by Brexit uncertainty. The market declined by 27% for the 12 months to June 2020. The passenger market was more negatively impacted than the commercial (trucking) markets. Since Motus is a large DAF commercial vehicle distributor, we maintain an advantageous position in the UK market as DAF vehicles are manufactured in the UK and has the leading commercial vehicle market share in the country.
The Australian automotive industry remains a highly competitive environment in a declining market reflecting the economic challenges, including tightening of lending, slow wage growth and the effects of extreme environmental disasters, including fires and floods. It has been further adversely impacted by the crisis and its dependence on the Chinese economy. The market declined by 14% for the 12 months to June 2020, with SUV vehicle models continuing to dominate the market.
Revenue
R73 417
million
(2019: R79 711 million)
Operating
profit
R2 136
million
(2019: R3 620 million)
Headline earnings
per share
296 cents
per share
(2019: 1 009 cents per share)
Free cash flow generated
from operations
R3 004
million
(2019: R3 061 million)
Net asset value
per share
6 653 cents
per share
(June 2019: 6 185 cents per share)
Net debt to EBITDA
(debt covenant)
2,2 times
(needs to be less than 3 times)
Earnings per share
165 cents
per share
(2019: 953 cents per share)
EBITDA to net interest
(debt covenant)
3,6 times
(needs to be more than 3 times)
Retail market
share in SA
20,2%
(June 2019: 18,9%)
We remained committed to enabling socioeconomic growth and making a difference in our communities throughout the pandemic. We have focused our attention on supporting those members of our society who are in the greatest distress. For them, our CSI programmes are more critical now than ever. Our support for libraries and medical clinics in the townships, youth development and road safety through school resource centres will remain priorities.
In South Africa, we contributed R4 million to the Solidarity Fund to assist with food and medical supplies to communities. Hyundai and KIA donated vehicles with Beekman canopies to Gift of the Givers, FoodForward South Africa, SANZAF, the Alexandra community, the Beeld Children's Fund and RADA. Mitsubishi assisted welfare organisations with the delivery of food to needy communities. Hyundai donated personal protective equipment (PPE) and sanitisation products to government hospitals. We assisted our African operations with PPE equipment and the UK business made vans available to assist with community projects.
We are well positioned to maintain our leading position in South Africa and to grow in selected international markets. Our strategic focus remains on deepening our competitiveness and relevance across the automotive value chain, by driving organic growth through optimisation, innovation and with selective bolt-on acquisitions.
Our short-term focus is to ensure the resilience of Motus in the volatile and uncertain environment resulting predominantly from the impact of COVID-19. Our long-term strategic priorities remain unchanged and are focused on ensuring we are the leading automotive group in South Africa, with a selected presence in the UK, Australia, South East Asia and Southern and East Africa.
The trend to buying down will continue as consumers remain financially stressed. However, our comprehensive product mix, brands and the excellent value our importer brands offer will continue to support our sales volumes during these financially difficult times.
We expect digital platforms and social media to retain much of their prominence. We intend to continue making the necessary investments in technology and IT solutions to maintain our competitive advantage.
We continue to pursue a multi-franchising model, which houses multiple dealerships at one address. This opens significant opportunities to capitalise on synergies and reduce operational costs. Given the unsurpassed scale of our operations and the fact that we own most of our premises, Motus is uniquely positioned to implement this global trend in South Africa.
Our value-creating priorities and strategic goals are:
Drive innovation through improved technology:
Deliver innovative mobility solutions to customers. Leverage existing and enter new strategic partnerships to deliver innovative value-added services, products and enhanced customer experiences.
Adapt to the changing trading environment:
Agile and entrepreneurial management in our response to disruption.
Ensure market leadership:
Grow market share and maintain competitiveness in our local and international markets.
Invest in human capital and change management:
Develop and empower leaders, improve practices and processes and ensure a strong focus on transformation and succession.
Deliver stakeholder value:
Enhance financial performance and achieve financial targets. Remain committed to socioeconomic growth, creating employment and contributing to our communities.
The economic crisis caused by COVID-19 has had a profound impact on the financial and trading results for the year. Special measures taken during this extraordinary time have ensured that the balance sheet and cash flow of the Group remain solid. Our people have responded with integrity, agility and an unbreakable entrepreneurial spirit, in what is an extremely difficult trading environment.
The challenges created by the crisis have created a new economic reality. Our revised short-term focus is to anticipate the 'new normal' that will exist after the devastating effects of COVID-19 and to scale our business activities accordingly and responsibly.
Despite a slow recovery in the economies in which we operate, through the swift and decisive actions taken by the management team, a sound balance sheet and strong cash flows, we anticipate much improved operating and financial results for the year ending June 2021 in the new environment in which we find ourselves, subject to stable currencies and no further total lockdowns.
The resumption of dividend payments will be reassessed during the 2021 financial year based on the trading results.
For the long term, we are positive about the growth trajectory and that the integrated and diverse business model will provide a solid platform to continue to build a resilient and sustainable business. This will allow us to execute and deliver on our planned strategies.
We are positive about our future and are invigorated by the challenge to find growth, while we continue to build the business with an agile, entrepreneurial and resilient management team.
The name 'Motus' means 'motion' in Latin and embodies our passion to move forward, to change and drive progress. Our new branding, created very cost-effectively within the Group, gives us an opportunity to refresh, reset, reinvigorate and reach the broader Motus community.
Even more importantly, we have learnt during this crisis that the character of our people, their integrity, resilience and entrepreneurial determination is our deepest source of strength. Our people will carry us through these tough times and are already setting us up to thrive in the post-pandemic environment. Their willingness to sacrifice and to work against enormous odds throughout the past three months was humbling and inspirational. We say thank you to each one of our staff members.
Our deepest condolences and sympathies to the family and friends of Yasmin Abbubakir, Peter Adams, Rimtautus Kalendauskas, Russell Mumford and Jabulani Sibiya who passed away during the crisis, and Pollen Teffo who passed away after an accident at one of our parts distribution centres in South Africa. The health and safety of our people remains a priority.
A special thank you to the accounting team under the leadership of Ockert Janse van Rensburg, our CFO, who worked long hours and under difficult circumstances during the lockdown to produce these financial reports.
In addition, I would like to thank the executive management team, the board members under the leadership of Graham Dempster, the funders, suppliers and stakeholders for their invaluable support during these times, without which we would not have survived the unprecedented crisis.
We say farewell to Phumzile Langeni as a non-executive director after working with us for over 19 years, firstly at the Imperial Holdings and lately on the Motus board. We wish her all the best in her future endeavours.
Welcome to the Motus of tomorrow, where leaders, innovators and customer champions drive forward thinking.
Chief Executive Officer
15 September 2020