Imperial

Chairman's letter to stakeholders

The 2019 financial year was undeniably a landmark year for Imperial Logistics as a listed company, and my first year as chairman saw significant changes and strategic progress across the group against a challenging trading backdrop. The year presented the board and management with both arduous circumstances and immense opportunity and I am pleased to report that, collectively, the business and its people have risen to the tough tasks at hand.

Displaying courage and empathy, leadership has navigated an extraordinary amount of change, faced economic headwinds head on, made difficult and bold decisions, and achieved considerable strategic clarity and focus. The diverse composition of the board – and its resultant ability to demonstrate both foresight and insight – has been invaluable and I wish to thank my fellow board members for their ongoing support.

Stronger and better positioned to grow as an international business

With two-thirds of its operations positioned outside of South Africa, Imperial Logistics is now an international business and remains in the top 30 logistics providers in the world. It is capable of significant cash generation that allows it to pay a stable dividend, and it has headroom to grow. Over the past year, we re-centred our strategy on Africa, where our opportunities are greatest and our competitive advantages are strongest. Rigorous realignment of our business has created a group that is stronger and better positioned to withstand economic challenges and to capitalise on compelling opportunities for sustainable revenue growth and enhanced profitability.

Turning to the year, the material macroeconomic and socio-political factors affecting South Africa are well known, and covered elsewhere in our report. In this volatile environment, reduced volumes and competitive and client pressures took their toll on our operations. The socioeconomic backdrop of our African Regions business showed general improvement, but Africa is anything but homogenous and mixed trading conditions across the continent remained the reality. On balance, our unrivalled positions in key markets and defensive industries supported a good performance in the region. In the International business, certain sectors came under pressure with the threat of US tariffs resulting in reduced exports, and declining manufacturing, industrial production and business confidence. In the UK, Brexit increased economic and political uncertainty and continued to depress consumer demand and activity.

The economic deterioration in South Africa and Europe made it clear that our businesses there would need to be pruned back to recover profitability and ensure new growth. The consequent business rationalisation and restructuring in both regions had an immeasurable impact on many of our people's lives. As difficult as the decision to close the consumer packaged goods (CPG) business in South Africa has been, the management team is to be commended for acting decisively – as soon as it became clear that the business would not be able to generate sufficient future revenue to meet the cost of its capital demands, management sought the board's approval to exit this business. The effort made to accommodate as many people as possible and minimise all but the unavoidable retrenchments, and to retain key clients under a sustainable commercial model, demonstrates the responsibility shown in this regard.

Importantly, these changes were achieved without compromising progress on our refocused strategy. We are already experiencing the benefits of simplifying and aligning our organisational structure to deliver on our strategy, with the reorganisation of the operating model to support growth and competitiveness through dedicated commercial and operational focus. As an indicator of the value proposition we offer to our employees, the board is pleased with the calibre of senior managers that have been appointed – both from within our businesses and industry experts from outside. As the new structure settles, we are seeing greater collaboration across the group within our chosen industries, underpinned by an emphasis on our "ONE Imperial – one business, one brand" approach.

The board is pleased to see the benefits of the restructuring already beginning to filter through our operations. This is evident in new contract gains and renewals across our regions. We expect the significant cost reductions and exit from unprofitable businesses and contracts already achieved and ongoing – and the disposal of businesses that are non-core to our strategy under consideration – to bear fruit in our next set of results and support an improving trend in the years ahead.

Demonstrating real accountability

A key premise of the unbundling rationale was that it would offer investors greater insight into Imperial Logistics' business and provide an opportunity to participate directly in its growth story. We have simplified and deepened the disclosure of our financial performance, according to our core capabilities and industries per region. Over the past 12 months we believe we have demonstrated our commitment to transparency and the scrutiny and accountability it invites. Specifically, we have increased the board's engagement with shareholders by way of a governance roadshow, and appreciated the comments, questions and counsel we received which has already resulted in key changes.

After less than 75% of our shareholders voted in favour of the implementation of our remuneration policy at the 2018 annual general meeting (AGM), our remuneration committee engaged with stakeholders and conducted a detailed review of the group's remuneration policy and the implementation thereof. This process emphasised the importance of fair and transparent remuneration policies and practices at all levels of the organisation, based on the achievement of clear performance goals and consistent long-term strategic decision-making. We have since made a number of material changes to the group's remuneration policy and the way we implement it.

The remuneration policy is now better aligned with the interests of shareholders and executives, and its implementation to current best practice, including enhanced remuneration disclosures. We have replaced the annual deferred bonus plan which had no performance conditions, with the conditional share plan which has performance conditions that incentivise long-term sustainable performance; amended all long-term incentive scheme rules to include the reduction or forfeiture of scheme benefits in certain conditions; revised executive short-term incentive conditions; and introduced minimum shareholding requirements for executives and prescribed officers to be phased in over five years.

The board insists that remuneration be linked to measurable results. We will therefore ensure implementation of management's commitment to systematically develop and introduce relevant and robust key performance indicators (KPIs), to align management scorecards and incentives with delivery of strategic objectives. This is already the case with transformation in South Africa, with the group chief executive officer (CEO) and group chief financial officer's (CFO's) KPIs, where 10% of their incentive package is allocated to transformation progress for F2020 and the South Africa divisional CEO's KPIs will include 30% for B-BBEE performance. KPIs under development will prioritise leveraging capabilities, cross-selling across regions and other commercial measures to drive increased competitiveness in all operations to deliver a "ONE Imperial" positioning in terms of our industry verticals, as well as relevant measures for employee engagement and return on investment in innovation.

Our commitment to transparency, a rigorous risk management mitigation approach and a detailed strategic assessment have also informed our decision to close our CPG business, in which deteriorating circumstances made viable turnaround strategies impossible to achieve. The board has further commissioned an independent analysis of.the strategies, events and changing circumstances over the years since this business had started to show distress. This is not intended to be an inquisition but rather an opportunity to learn lessons that will be particularly valuable in an operating context where unexpected economic risks continue to threaten the structural stability of our markets.

Closing CPG has left us stronger and able to operate profitably in a very challenging market. It has served as a reminder that short-term remedies do not necessarily ensure long-term sustainability. The challenges Imperial Logistics faced in South Africa and in Europe in the past year indicate no significant recovery in the near future, making it essential that we anticipate the potential impacts more precisely and mitigate them more completely. As a board we will continue to support management in carefully assessing the performance and strategic relevance of both existing businesses and any future acquisitions, particularly in these challenging market conditions, to ensure that all businesses are value-accretive.

Serving an emerging Africa

South Africa's economic weakness is somewhat atypical for Africa where many of our key markets still record healthy growth opportunities, particularly in our chosen industries. This confirms the credibility of our strategic emphasis on Africa, where we are accelerating our growth by adding new capabilities and entering new industry verticals in more regions. At its core, logistics link people with opportunities in the most efficient and cost-effective manner possible. Nowhere is logistics needed more than in Africa.

Our strategy and focus place Imperial Logistics at the centre of a socioeconomic movement for Africa's advancement. Logistics services do not only create new value by providing essential services to clients, they are also key in unlocking inherent value. We offer our multinational clients a gateway to African consumers, no matter how remote, and also provide Africans with access to global products – helping to integrate Africa into the global economy. With that integration comes the economic opportunities that are already helping to relieve poverty and improving the quality of lives across the continent. Education, healthcare, gender equity – these all follow where economic development opens markets for social development. Here too, growth can create life-changing opportunities for those who are marginalised. We are proud to contribute to the distribution of opportunity, more equity and, hopefully, greater social justice in Africa.

Our African strategy does impact our ambitions for our businesses outside the continent. It requires that our international operations be aligned to effectively and efficiently complement the services we offer to clients within the continent and with its international trading partners. We will therefore invest in capabilities outside Africa that support the growth of our target industry verticals in Africa – mainly healthcare, consumer, chemicals, industrial and automotive. These investments will allow us to leverage expansion opportunities with multinational clients that recognise us as emerging market or specific industry specialists that are well-placed to support them in expanding into new emerging markets. Our International portfolio is accordingly under review which will result in further disposals of non-core business – some such as shipping are more urgent than others. These disposals will result in additional capital for us to invest in strategic acquisitions such as investment in international freight management capabilities, which will allow us to truly be the gateway to Africa.

Deepening our legitimacy

The group's legitimacy as a well-governed multinational group and ethical corporate citizen, in our industries, markets and regions, is fundamental to our reputation among multinational clients, and our other stakeholders alike. It is therefore the premise for our intention to grow and unlock value, and as such it is an explicit strategic aspiration. Our progress in this regard was recognised in the year, with Imperial Logistics named as one of the top 100 Best Emerging Markets performers by international rating and research agency, Vigeo Eiris. Their evaluation assesses the integration of social, environmental and governance factors with strategy, operations and management - focusing on promoting economic performance, responsible investment and sustainable value creation.

Legitimacy firstly demands that we maintain our credentials as an industry leader, by providing solutions to complex challenges for our clients that are delivered with consistent excellence. This guards our leading positions and reputation in each of our regions: as a leading logistics provider across the entire supply chain in South Africa; as a leading distributor of pharmaceuticals and consumer goods in Southern, East and West Africa; and as a service provider with a proven ability to meet the highest standards in exacting industry sectors, such as automotive and chemicals, in advanced and emerging markets. Imperial Logistics' legitimacy is also underpinned by the immeasurable impact that the business has on the lives of thousands of people through its distribution of essential healthcare and food-related products, mainly in Africa. The group's positions also depend on driving innovation as a critical enabler of our competitiveness, our relevance to our clients and our ability to continually improve and harness disruptive technologies and ways of doing things. Our new innovation fund will enable us to invest effectively in high-potential start-up projects within the supply chain and to commercialise leading logistics technologies.

Grounded in the highest standards of corporate and operational governance, our legitimacy extends to demonstrable corporate citizenship in all its many aspects – actively overseen by our vigorous social, ethics and sustainability committee, and covered in detail in our sustainable development reports. In summary, our responsible and sustainable business approach is rooted in what matters to our wide range of stakeholders. Our commitment to sustainability recognises the interconnected nature of our business, the economy, the environment and society. Over the past year, we continued to integrate environmental, social and governance considerations into our daily operations to ensure sustainable management with a long-term vision.

Furthermore our belief is that ethical conduct, which is at the core of corporate citizenship, is a value enabler as much as it is a protector. As a business that operates in multiple countries in Africa, Imperial Logistics unequivocally condemns the recent outbreaks of violence against foreign nationals, women and children across South Africa as acts that are contrary to the principles and ideals of African solidarity, and are completely against our business values as a responsible corporate citizen.

The board leads from the front in ensuring ethical conduct in all our operations and our stance is uncompromising: we choose to do ethical business even at the cost of competitiveness, especially given our exposure to markets where corruption is prevalent. Our processes are robust, starting with recruitment and due diligence, and including regular internal and client audits as well as a whistle-blowing hotline for the anonymous reporting of unethical incidents. We have zero tolerance for unethical behaviour and have the processes in place to discourage, identify and prosecute wrongdoing.

Besides the array of legislation with which we comply across many jurisdictions, as an international company we aim to apply consistently high standards across our operations that go beyond compliance. The primary policy mechanism that gives expression to this commitment is the group's Code of Conduct, which takes into account the 10 principles of the United Nations Global Compact, the Universal Declaration of Human Rights, the eight core work standards of the International Labour Organization (ILO), the ILO's declaration of principles about multinational enterprises and social policy (MNE Declaration), the OECD principles for multinational enterprises and the Responsible Care^® Global Charter 4. The code covers conflicts of interest, anti-corruption, fair competition, anti-money laundering and anti-terrorism, the handling of company assets and data protection and security, among other imperatives. It also highlights the importance we place on the health and safety of our employees and managing our environmental impact.

As a South African born group, a feature of our commitment to corporate citizenship is the moral and commercial imperative to accelerate our B-BBEE performance. We are pleased with the employment equity progress made over the past 12 months, specifically with the appointment of black and female executives and managers. Another highlight was the B-BBEE transaction concluded with the Afropulse Group – a wholly black women-owned business – to form Imperial Logistics Advance, which is well positioned to grow in the energy, mining and chemicals industries. We lead our industry as a transformed enterprise in South Africa and our 2019 B-BBEE scorecard is expected to achieve a Level 3 rating against the dti Codes and a Level 2 rating against the Road Freight Sector Codes. We will not rest on our laurels – we have a long way to go as an organisation and as a country to create an equitable and sustainable South Africa in which the black majority can participate meaningfully in the mainstream economy.

Ultimately what we do and how we do it, and the extent to which it deepens our legitimacy and advances our strategy to unlock value for all our stakeholders, rests with our over 27 000 employees. While the organisational effectiveness work of the past years has addressed some of the human resources needs of the group, more must be done to attract, develop and retain a diverse employee complement with the right skills and expertise needed to achieve our strategic aspirations. Our people strategy is being refined to position Imperial Logistics as an employer of choice in all our markets and we are working towards understanding what this means in each region. The board welcomed the appointment of a highly experienced group chief people officer, a member of the executive committee, who will drive the overarching people strategy and integration of world-class people policies and practices in the group.

More broadly, contributing to the wellbeing of the communities in the types of market in which we operate is equally imperative to corporate citizenship. Corporate social investment (CSI), including enterprise development, forms an integral part of our accountability and transformation programmes. Our new group-wide approach takes a more strategic approach to CSI and aims to deepen stakeholder trust, boost employee morale and attract talent.

Board matters

It is the board's priority to demonstrate independence, effectiveness and accountability, and I trust that our stakeholders will agree that we have not been found wanting in a year of being thoroughly tested. We are mindful of the ongoing need to ensure that board composition and succession is in line with strategically relevant skills and experience, race and gender diversity, and unbowed independence. Though the board has been largely stable since the unbundling, we are pleased to welcome two highly accomplished members to our board.

Bridget Radebe and Dirk Reich were appointed as independent non-executive directors on 1 September 2019. Bridget, a qualified chartered accountant, is the CFO of African Rainbow Capital and also serves on the board of Alexander Forbes Group, A2X and Colourfield Liability Solutions. She previously served as a partner at Deloitte, in which capacity she serviced JSE-listed clients including Imperial Holdings Limited. Dirk, a global logistics industry expert, holds an MBA and serves on the boards of DFDS, Skycell, Instafreight, Log-hub and IPT. He previously served as the CEO of Cargolux Airlines International, on the management board of Kuehne & Nagel and as a non-executive director on the board of Panalpina. In 2016, he founded R&R International Aviation which offers strategic advice in the fields of aviation, logistics and e-commerce in China.

Thembisa Skweyiya will be resigning from the board on 31 December 2019. The board thanks Thembisa for her many years of counsel and guidance in her capacity as non-executive director, and wishes her well. As previously announced, Marius Swanepoel retired as CEO of Imperial Logistics on 1 February 2019 and Mohammed Akoojee succeeded him on the same date. Marius continued to serve as an executive director until his retirement on 30 June 2019, and we thank him for his invaluable contribution to the business over many years.

Outlook and appreciation

The year saw Imperial Logistics' necessary alignment to a changing environment and was undertaken to ensure that the company not only survives but thrives in our new reality. We are already seeing the benefits of the changes we have made and our continued commitment to our strategic priorities will see this positive outlook extend over the years to come.

As I expressed at the outset, I owe tremendous gratitude to my fellow board members, and the incisive judgement and dedication they have shown throughout a momentous year. On behalf of the board I also extend my deep appreciation and gratitude to our shareholders, funders, clients and other key stakeholders for your patience and support. My thanks also to the management team and the people of Imperial Logistics around the world for their excellence, commitment and resilience. It was a year of extraordinary change leading up to the unbundling and thereafter, but you ensured that we ended far stronger than when we began.

Phumzile Langeni

Chairman