Chief Executive Officer's review

"Motus rebounded stronger and faster than expected after the initial hard COVID-19 lockdowns, to record robust results for the first full year of trading during the pandemic. This was due to the agility of the management teams, resilience of the Group's integrated business model, and support from suppliers, customers and funders."

Osman Arbee

Chief Executive Officer

Adapting to a new reality

A year ago, the world grappled with what the 'new normal' might look like. We were hopeful that within a year we would get there, and that certainty would be restored. We now know that this pandemic comes in waves with variants that are more vicious and that the virus spreads even faster, even as the vaccine penetration delinks infection from severity. Alongside the escalation of related systemic risks like socio-economic imbalances and climate change, this global public health crisis has shown that it will take years to recover from the economic damage done.

At Motus, we chose to not only rely on the pre-COVID-19 situation returning to assist in improving trading conditions. Our results reflect that the Group's disciplined action plan, implemented more than a year ago, is working effectively. It has been underpinned by agile and entrepreneurial management, the resilience of our integrated business model, acute focus on the basics of managing costs and cash flows, and agile adaption to changes in the way customers behave; attributes which assisted us in achieving excellent results this year. These excellent results were supported by consumers returning to dealerships and stores, and financial institutions continuing to fund vehicle purchases. We continue to actively protect the health and safety of our employees and customers, with the implications of COVID-19 ever present.

Our approach has kept us nimble in an unpredictable environment that demands hands-on day to day business decisions. It allowed us to respond to the major slowdown in the economy, a disrupted work environment, and erratic supply of inventory. Our size, industry expertise, and cash position gave us the agility to capture opportunities – we could sell inventory and convert it into cash at a profit. We built our disciplined, back-to-basics plan into our systems and culture, and that rigour has become a competitive advantage that will outlast the pandemic.

Our action plan is not only about financial rigour and operational efficiencies. ESG imperatives have been central to our priorities over the past financial year. Surviving this very challenging period is as much about shareholder value as it is about our ability to be a meaningful contributor of value to all our stakeholders. We remain committed to high ESG standards, despite the current economic challenges, the need for Environmental processes, Social responsibility and good Governance are more critical now than ever before, so that we continue to build a sustainable business.

Variable rates of recovery

Adopting the COVID-19 action plans demanded tough decisions, especially when we had to cancel leases, reduce operational and capital expenditure, and reduce headcount. But these hard choices did soften the impact of the crisis on our operations. Today, most of our businesses are trading at between 80% and 100% of pre-pandemic levels, in the context of low economic growth and interrupted supply of new vehicles restricting recovery. Aftermarket Parts benefitted from pent-up demand that built up over the lockdown period and, while this has now worked its way through the system and normalised, the pandemic has not reduced the need for aftermarket parts, and the demand for affordable, high-quality automotive parts is growing.

The outlier in our stable is, of course, the vehicle rental business, which is operating at 50% of pre-pandemic levels, given the significant decline in local and international travel. However, the Group's integrated business model and the agility it affords us will enable us to support the further recovery of this business. We are also using the opportunity of the weak vehicle rental market to implement innovative system improvements that will improve our customer service offering and differentiate us from competitors when business recovers.

The trading conditions across our markets also reflect variable economic recovery rates and expectations for the year ahead. In South Africa, naamsa reported that new vehicle sales volumes improved by 1% to 445 319 in 2021 despite 25 485 fewer rental vehicles sold. Vehicle sales are estimated at 450 000 to 470 000 for the 2022 financial year. While the South African economy showed remarkable resilience in the first half of 2021, unrest and high unemployment are expected to dampen economic recovery.

The UK economy has benefitted from an effective vaccination programme and the impact of Brexit has not significantly hampered the economy. Australia has implemented decisive policies to boost economic recovery, but the impact of current lockdowns and vehicle shortages will adversely affect the economy and our business for the first half of the 2022 financial year.

The global shortages of semi-conductor chips will impact vehicle production for the next six months, which will, in turn, impact vehicle sales negatively across all our markets. However, the financial impact on Motus remains uncertain as individual OEMs will be affected differently.


Earnings per share

1 153 cents
per share
(2020: 165 cents per share)

 599%


Return on invested capital

14,8% (2020: 6,4%)

Net debt to equity

28% (2020: 60%)

Growth from 2019 to 2021
2021 
Rm 
2020 
Rm 
Growth 2021 
on 2020 
2019
Rm
Growth 2021
on 2019
%
Total revenue*  87 205  73 417  19  79 711 
Import and Distribution  19 683  17 411  13  18 949 
Retail and Rental  70 962  59 898  18  65 041 
Financial Services  2 019  2 173  (7) 2 172  (7)
Aftermarket Parts  7 295  6 050  21  6 442  13 
Total operating profit*  3 795  2 136  78  3 620 
Import and Distribution  912  827  10  810  13 
Retail and Rental  1 757  332  >100  1 578  11 
Financial Services  904  931  (3) 937  (4)
Aftermarket Parts  559  322  74  496  13 
Profit before tax*  2 860  541  >100  2 610  10 

* Includes Head Office and Eliminations.

The results for the year reflect strong strategic and operational achievements, based on resilient financial performance in a challenging and continuously evolving environment. We are encouraged by the solid performance that the Group's diversified business model provides, given the uncertainties in the markets in which we operate.

Our debt, excluding floorplan and IFRS 16 debt, decreased by R3,3 billion primarily due to the lower working capital and vehicles for hire levels and was further positively impacted by the profits generated and no dividend being paid in September 2020. ROIC increased to 14,8% (2020: 6,4%) mainly due to improved profitability and lower average invested capital while WACC decreased to 9,5% (2020: 9,8%) primarily due to the lower cost of debt and lower average invested capital. We have sufficient cash available and a strong balance sheet which will allow us to invest in strategic growth initiatives and consider share buy-backs as the opportunities arise.

Digital opportunities

The initial lockdown periods immediately before the period under review demanded operational changes that continue to benefit Motus. The digital shift customers made during the lockdowns to a greater degree of online vehicle shopping has now become the norm. This change demands new digital solutions without compromising on cybersecurity. Over the year, we accelerated our IT and innovation plans and implemented associated governance and risk management measures.

The changes we are making to our IT systems are not restricted to improvements in security of infrastructure and software applications. Various initiatives are underway to improve business operations and the customer's experience and the way in which they interact with us, such as our car rental customers who will soon experience quicker, more convenient, and safer service from the new bookings to payment system being introduced. Other areas of our business will benefit from the deployment of new enterprise resource planning (ERP) systems.

Virtual showrooms are highly unlikely to fully replace the in-person vehicle buying experience. Customers will still want to inspect the vehicle and develop a relationship with the dealership that will maintain their vehicle in what is for many, one of the most significant purchases of their lives. Sales agents will still need to get into the vehicle with buyers to introduce them to the features and functions of their new vehicles. Many of the regulations governing ownership of vehicles still demand ink on paper, and it will be a long time before robots replace humans in serving customers.

However, we recognise that online browsing has replaced weekend window shopping. We are responding to this emerging vehicle buying experience by introducing multiple digital marketing and digital showroom entry points. Our customers can go straight to a specific brand's website, or they can start at our recently launched motus.cars platform and narrow their search from there. We designed an online presence to get vehicles on buyers' shortlists and attract them to our showrooms. Once in the showroom, we can solve financing problems in ways online traders cannot and supplement the transactions with add-ons that tailor the vehicle to the specific needs of the customer. Our dealerships, which are in prominent locations in growing areas, will continue to differentiate us.

In the process, we learnt that speed is of the essence. The time it used to take us to value customers' trade-ins sometimes cost us the business, as buyers have grown accustomed to instant online responses. To leapfrog legacy technology, we bought the getWorth business, sourced the right software, and are rolling it out to our dealerships. Rather than relying on a manual and business instincts, our dealers will soon use algorithms and the data we provide to value vehicles quickly and accurately and minimise the risk of overpaying for trade-in vehicles.

For us, digitisation is about enabling trade. Our investment in getWorth and the latest software will allow us to realise our ambition to be as good at trading pre-owned vehicles as we are at selling new and pre-owned vehicles. We need to buy pre-owned vehicles much faster. We have already reached the point where we are nearly selling one pre-owned vehicle for every new vehicle. Digitisation of the process will allow us to reduce the risk of inaccurate pre-owned vehicle valuations.

Managing priorities

As previously mentioned, we have had to be exceptionally focused to remain sustainable through the first year of the COVID-19 crisis. We pursue our priorities, which remain largely unchanged, with discipline, vigour, and urgency.

Resilience
Resilience
circle
1.
Sustain capital management discipline.
2.
Leverage competitive advantages to diversify and grow earnings streams.
3.
Accelerate the implementation of new ways of working and maintain agility to grow the business.
Relevance
Relevance
circle
1.
Deliver exceptional value to customers as their needs change.
2.
Remain the strategic partner of choice for OEMs and suppliers.
3.
Be an employer of choice in the automotive industry.
4.
Innovate practically and proactively.
5.
Use technology to sustain the business.
Responsibility
Responsibility
circle
1.
Demonstrate best-in-class governance.
2.
Proactively manage the ESG consequences of our activities.
3.
Consistently deliver on stakeholder expectations to protect our reputation.

For full detail on our material priorities.

Opportunities for growth

Part of our COVID-19 experience was to learn to find opportunities in a severely challenging environment. The implementation of the multi-franchise model was one such opportunity. Several of our dealerships were struggling to match their potential, even before the pandemic hit. We realised that combining multiple dealerships in single locations would 'sweat' our assets and improve dealership profitability. With the support of the OEMs, we introduced a number of multi-franchise dealerships sites which allowed us to convert loss making sites to profitable sites.

To date:

  • We achieved significant savings and secured profitability by establishing multi-franchise dealerships in Bedfordview, Klerksdorp, and Rustenburg during the year.
  • Over 40 dealers are now housed inside multi-franchise dealership footprints.
  • A new multi-franchise dealership in Menlyn will combine seven brands. This dealership will represent the Group's single biggest multi-franchise dealership site.
  • We adopted a more generic approach in our dealership designs. Where, in the past, buildings were designed to reflect brand identities, the new approach allows greater flexibility while reducing costs.

Beyond organic growth, we are also in continuous discussions with OEMs to expand the brands we represent. COVID-19 and its associated challenges overtook some of those discussions over the past year. However, we are considering additional distribution agreements. We also continue to buy out franchisees where possible. We bought the remaining 40% of Motus Vehicles Distributor (formerly Renault South Africa) from Renault France and concluded a 10-year exclusive distribution agreement for South Africa and neighbouring territories. This acquisition will allow us to enhance operational synergies and unlock value within the Group's integrated business model.

We are currently conducting a due diligence study in anticipation of an acquisition in Europe in the aftermarket parts distribution sector. The business has a large warehouse from where we will distribute a comprehensive range of replacement automotive parts to 60 countries. It is highly reputable and benefits from a professional management team with many years of industry experience. This transaction will significantly increase our reach into the European parts market, assist with utilising our Asian infrastructure for the supply of parts, and continue to support the integrated business model. Other acquisitions are being pursued locally and internationally.

Over the past year, the Financial Services business has lived up to its promise of providing annuity income when profits from vehicle and parts sales slowed down. It has once again proved its ability to protect shareholder value and demonstrated the importance of innovation when existing avenues of growth were curbed. Opportunities for new joint ventures with financial institutions are continuing and we will see new sales opportunities in the 2022 financial year. Financial Services relied on Motus' well-established and methodical innovation centre to drive exciting new opportunities, described in more detail in our Chief Innovation Officer's review.

Suffice for me to highlight our firm belief that innovation needs to grow from our workforce on the ground as much as it flows from top management. Equally, we recognise that continuous incremental improvement is at least as important as breakthrough discoveries. Our innovation focus also ensures that we give due attention to improving the systems that underpin the development of new products and services that forge our differentiation.

Managing emerging risk

The health and safety of our workforce and customers has been our key focus and greatest risk throughout the year. In addition, the COVID-19 pandemic continued to disrupt international supply lines which posed a significant risk to our ability to supply customer demand for vehicles and parts. A close focus on cash flow allowed us to be agile in responding when supplies became available. Our long-standing relationships with suppliers further ameliorated this risk.

The past year has also highlighted the importance of IT in identifying risks and pursuing material priorities. A close focus on larger volumes of information, combined with deep industry expertise, allowed us to anticipate and manage most risks. Our integrated business model, the resilience of the Aftermarket Parts business, and the annuity income from our Financial Services business allowed us to produce a sustainable result for the future. We often gain on some of our businesses what we lose on others. We felt vulnerable when COVID-19 presented us with a black swan event in last year's lockdown. Still, our diverse income streams, COVID-19 action plan, and built-in resilience soon restored our confidence and ability to produce great financial results for the year.

Managing regulatory change

Most of the regulatory risks we identified a year ago have been well managed. We introduced new products and processes in response to the Competition Commission's Automotive Aftermarket Guidelines (also known as Right to Repair). Extensive work was done to ensure that our systems, as well as those of our partners in the financial services industry, comply with the Protection of Personal Information Act (POPIA). Certain provisions of the Administrative Adjudication of Road Traffic Offences (AARTO) came into effect on 1 July 2021, with the remaining provisions being phased in with full implementation targeted for July 2022.

We participate in the regulatory consultation processes that precede the enactment of regulations, directly and through our membership on a number of industry forums. And, where questions remain, as is the case with AARTO's impact on fleet owners, we will continue to explore solutions through industry bodies like the Road Freight Association and SAVRALA. We spent the past financial year preparing for the changes that these new regulations will introduce in our industry and are confident that we have mitigated the related risks and, where possible, leveraged associated opportunities.

"Aligned to our values to support actions which make a tangible impact in communities, Motus committed R5 million to food and medical relief efforts in the KwaZulu-Natal province to ensure that the community received the desperately needed supplies of necessities."

Accelerating ESG

The recent unrest that occurred, mainly in KwaZulu-Natal and parts of Gauteng, resulted in widespread looting and vandalism, causing significant damage to property, assets, business continuity and livelihoods across various parts of the country. Although our Group did not suffer significant direct losses, we are negatively impacted by the damage caused to the economy. As with COVID-19, the health and safety of our workforce and customers came first and we are pleased to report that none of our staff and customers were injured during the unrest and our affected businesses were operational within ten days.

Aligned to our values to support actions which make a tangible impact in communities, Motus committed R5 million to food and medical relief efforts in KwaZulu-Natal to ensure that the community received the desperately needed supplies of necessities.

As a society, we must renew our commitment to the Constitution and accelerate our programmes to change the inequality that both COVID-19 and the unrest highlighted. We must accelerate the pace of transformation if we are ever to live in a just and safe environment. Though transformation is a national ambition, we recognise that its success depends on the commitment of individuals and the culture in our workplaces. Motus will not fail in that responsibility. Transformation is more than an ambition; it is a measured goal throughout Motus. All CEOs and senior business leaders are responsible for meeting broad-based black economic empowerment (B-BBEE) targets. Our remuneration policy stipulates that up to 20% of their short-term incentive payments are linked to these targets.

"We remain committed to delivering growth in operating and financial results for the year to June 2022, provided there are no further stringent lockdowns, severe vehicle inventory shortages from OEMs, or further social unrest in South Africa."


South African black representation (%) 2021 2020
Top management 36 30
Senior management 53 40
Middle management 47 45
Junior management 68 65
Total employees 73 73

We have identified a number of senior and middle management positions across various businesses earmarked for black professionals in the medium term, ensuring a succession pipeline for future senior management positions when they become available. During the year, we appointed people from designated groups into a number of key senior roles across the Group. Already, five people from designated groups serve on the Motus executive committee (42%).

We work with other industry role players in promoting B-BBEE. For example, we are working in partnership with Toyota to open a majority black-owned satellite dealership in Tembisa. Apart from a minority shareholding, Motus provides operational support and training. Our Import and Distribution business already has 30 independent black-owned Hyundai, Kia, Renault and Mitsubishi dealerships. And today, 42% of our Dealer Principals are black professionals. We also support other initiatives, like the Makhaya informal sector mechanics' project. Makhaya provides them with equipped workshops, technical support and business training.

We are committed to operating in an environmentally conscious and responsible manner and to support the economies and communities in which we operate. We work at continually improving the quality of our ESG data to support transparent reporting and better decision making, and to enable more robust target setting. Our guidelines and frameworks ensure that all businesses are aware of their responsibilities, and that ESG targets are included in the payment of short-term incentives.

There is increasing demand for electric and hybrid vehicles in markets beyond Africa, as stricter emission regulations, lower battery costs, and more widely available charging infrastructure create momentum in their development by OEMs and adoption by consumers. In the UK, we estimate that around 5% of our vehicle sales are electric and hybrid vehicles, supported by government subsidies and better charging infrastructure, while in Australia electric and hybrid vehicle sales are smaller.

Subsidies and tax incentives stimulate demand for electric and hybrid vehicles in those markets where governments have identified the switch to low/zero emission transport as priorities. That is not the case in South Africa. Here, the price difference between electric and hybrid vehicles, compared to conventional engines, remains prohibitive. In addition, long travel distances in South Africa and Australia pose practical challenges. The unreliability of South Africa's electricity supply represents a further obstacle.

In South Africa, support for electric and hybrid vehicle adoption comes from the South African Automotive Masterplan (2021 to 2035) implemented on 1 July 2021, which aims to stimulate and protect the local automotive manufacturing base for export purposes. The plan is focused on ensuring that South African automotive manufacturing plants adopt the technology to serve international markets. Naamsa is engaging with the Department of Trade, Industry and Competition (dtic) on an early review of the Automotive Masterplan. The aim will be to incorporate the latest global electric and hybrid vehicle developments, which have been accelerated by the COVID-19 crisis, so that the automotive industry can achieve the targets set out in the Masterplan.

Outlook and appreciation

As I alluded to at the outset of my review, even when the vaccination programme brings the ramifications of the COVID-19 crisis under control, the pandemic will leave a dramatically changed environment in its wake. Instead of waiting for the new normal, it is up to us to face reality and adjust our business models and create a new normal.

We have done just that. In the process, we have created competitive advantages through innovation, discipline, and agility – characteristics that we will continue to cultivate and protect, deliberately and methodically.

Our results also speak for themselves. We believe this report demonstrates that Motus has the agility, scope and means to respond effectively to challenges. We have learned to do more with less. While no one can predict what we will face in the new financial year, we are confident we have the people, support of our suppliers and funders, processes, product offerings, and the culture to respond effectively to both the emerging risks and opportunities.

Our integrated business model, and the Group's agile and entrepreneurial leadership, have allowed us to stabilise the business and generate outstanding financial results and significant cash flows in an unpredictable environment. We have scaled our business activities to adapt to the new economic circumstances in a sustainable and responsible manner. Trading in July and August 2021 has been positive, albeit marginally impacted by the shortage of new vehicles and civil unrest experienced in South Africa. We have sufficient cash available and a strong balance sheet to invest in strategic growth initiatives and will consider share buy-backs as the opportunities arise.

We remain committed to delivering growth in operating and financial results for the year to June 2022, provided there are no further stringent lockdowns, severe vehicle inventory shortages from OEMs, or further social unrest in South Africa. South Africa's socio-economic environment is a cause for grave concern and, importantly, a risk we will have to manage. Our unwavering commitment to ESG, within our sphere of control, will be a cornerstone of our approach.

We extend our deepest condolences to the families, friends and colleagues of the 27 Motus employees who sadly lost their lives in the financial year, 24 of whom succumbed to COVID-19.

We specifically thank the board members for their guidance during the year, the support from our suppliers and funders, and most importantly the support of each and every staff member that works at Motus to ensure that we continue to build a sustainable business while delivering exceptional results for the year.

Osman Arbee
Chief Executive Officer

20 September 2021