OPERATIONAL REVIEW Operational profile Barloworld Automotive provides a range of integrated motor vehicle usage solutions through the successful operation of complementary business units. Car rental operates Avis short-term vehicle rental throughout southern Africa. Motor retail operates leading motor vehicle franchise dealerships in South Africa representing passenger, light, medium and heavy commercial brands. Also included are coachwork repair centres, motor vehicle finance, insurance and related products and services. In Botswana and Australia, passenger and light commercial brands are represented and motor vehicle finance, insurance and related products and services are provided.

Fleet services provides long-term rental and value-added services to operators of passenger and commercial vehicles in South Africa, Botswana, Lesotho, Mozambique, Namibia and Swaziland under the Avis brand. Barloworld Automotive holds a 50% share in the sole importer and distributor of Subaru vehicles in southern Africa.

	Areas of operation   – car rental:  Southern Africa and Scandinavia  – motor retail:  Southern Africa and Australia  – Fleet services:  Southern Africa  – importation     and distribution:  Southern Africa
Martin Laubscher (49) Chief executive officer: Automotive BAcc, BCompt (Hons), CTA, MCom (Business Management) 22 years’ service

* For Leasing southern Africa, operating profit before interest paid is R293 million (2008: R215 million) resulting in total divisional operating profit before interest of R838 million (2008: R670 million). Net operating assets after deducting interest-bearing borrowings. 

Overview
The automotive industry continued to decline during our financial year. New car sales in southern Africa, as reported by NAAMSA, declined by 30%; and the overall used vehicle market continued to be depressed with an estimated 300 used vehicle sites closing during the last 24 months. This decline has been driven by stricter lending criteria imposed by financial institutions and a distressed consumer environment. In Australia the new vehicle market contracted by 14% during our financial year.

SAVRALA statistics showed the car rental market declining by some 5% during our financial year, driven primarily by declining international visitor numbers. The corporate and local leisure markets were also impacted as businesses and consumers contained discretionary expenditure.

Despite the difficult trading environment, the division improved its operating profit, in local currency, across all continuing operations. Revenue was R17.0 billion and operating profit R703 million. Operating profit margin improved to 4.1%. Included in the operating profit is R135 million in interest paid in respect of Avis Fleet Services. Reclassifying this amount results in an operating profit of R838 million and an operating margin of 4.9%.

Aligned with the group’s focus areas, the division continued to create stakeholder value through five strategic themes.

Providing customers with a range of integrated motor vehicle usage solutions to fulfil their specific requirements remains the cornerstone of the division’s offering. Such solutions include the products and services of our individual business units, namely car rental, motor retail and fleet services, as well as the unique combination of these products and services for customers who require aspects from our various business units in a seamless combination, effectively and efficiently provided by a single supplier.

An ongoing commitment and focus on employees, through the implementation of employee value creation initiatives, continues to enhance value creation across all business units in the division. Our approach recognises the important role of every employee, and institutionalises initiatives and structures aimed at developing, harnessing and directing collective employee wisdom towards achieving our overall objectives. Specific focus areas cover talent attraction and retention, and include an extensive commitment to training, development and attractive employment conditions.

Complementing the group’s commitment to empowerment, transformation and sustainable development, the division aggressively pursued various initiatives during the year. In South Africa these were in the context of the DTI’s BBBEE scorecard and underscore the division’s commitment to ensuring its operations reflect the societies in which they operate. We attained the following ratings in our significant local operations: Avis Rent a Car South Africa – Level 2, Motor Retail South Africa – Level 3; and Avis Fleet Services – Level 4.

During the year, Avis Rent a Car South Africa achieved CarbonNeutral® accreditation, for the offset of its internal fuel and energy usage CO₂ emissions. In addition, the business continued to invest in water collection, filtration and recycling facilities at its three main depots in Johannesburg, Durban and Cape Town.

Financial returns remained the core focus during the year. As usual, optimising business unit performance included maximising both inter- and intra-business unit synergies, as well as the implementation of tight performance targets and objectives. Such targets and objectives included being cash positive, optimising vehicle fleet utilisation, reducing working capital, improving asset turn, managing expenses and controlling interest costs. By working closely together our South African business units optimise the opportunities for internal value creation through sourcing, service, repair and maintenance as well as maximising the commercial benefits arising from the significant number of quality used vehicles that are a consequence of the automotive division’s activities. Synergies for the Australian and Scandinavian operations are achieved through skills and business practice transfer between the motor retail and car rental operations respectively.

Quality of earnings and growth are addressed under the theme of profitable growth. Various opportunities to grow the division’s offering within southern Africa are currently under consideration. The 50% joint venture, with Toyota Tsusho Corporation, in respect of the Subaru business, is settling well. The disposal of the Scandinavian car rental operations will improve the division’s overall quality of earnings, and release capital for alternate growth opportunities.

The above strategic themes are cascaded into all business units and their collective efforts in this regard aggregate to the overall success of the division.

Comprehensive structures exist throughout the division and its business units in terms of which business risks are regularly reviewed and appropriate measures adopted to address or mitigate such risks. These risks are comprehensively covered and addressed in the division’s strategic initiatives.

In our continuing operations we achieved new and used vehicle retail sales of 78 479 units, against the previous year’s 85 934 units. Car rental days in southern Africa declined to 4.8 million compared with the previous year’s 5.3 million. At year end a total of 130 363 vehicles were under finance and maintenance contracts compared to 122 419 units last year.

The South African motor retail operations increased their market share, while our fleet services operations secured new business opportunities and increased their total fleet under management.

The Avis Rent a Car operation in southern Africa experienced a decline in revenue and rental days, however improved utilisation, stringent cost control, slightly firmer rates and a much improved used vehicle profit contribution improved the result.

The motor retail business in southern Africa has performed well in difficult market conditions while a continued focus on used vehicles and after sales opportunities supported the result.

Avis Fleet Services did well in securing new business opportunities and in growing its fleets, assisted by strong demand for its products and services. An improved used car performance supported overall profit improvement.

The Subaru importation and distribution business, a 50% joint venture with Toyota Tsusho Corporation, was negatively affected by a weaker rand.

Car rental
Southern Africa
Avis Rent a Car southern Africa operates short-term car rental from over 110 customer service centres throughout southern Africa, and is focused on the tourism, corporate, local and replacement market segments. A peak fleet of some 19 700 vehicles is operated. The operations in South Africa, Botswana, Lesotho, Mozambique, Namibia and Swaziland are owned, while the remainder are sub-licensed. Avis Point-to- Point is a chauffeur-driven inner-city transfer service. Avis Van Rental operates a sub-licensee network in South Africa. Avis Coach Charter operates as a sub-licensee and is well positioned in the luxury coach market, while Zeda Car Sales disposes of ex-rental vehicles into the trade and to retail customers.

Despite firmer rates, revenue declined marginally as a result of lower rental days. Rental volumes declined by 8% and the average fleet was reduced by 12% positively impacting on utilisation. Market share of rental days in the region showed some contraction.

Consistent with the division, focus areas in the year ahead include growing market share, improving asset turn, reducing working capital, optimising vehicle fleets and utilisation, controlling interest costs, containing expenses and exceeding customer expectations. Empowerment and transformation will continue to be addressed and employee value creation initiatives, particularly skills development and retention, will be emphasised.

Scandinavia (Shown as discontinued)
The group remains committed to the ongoing process of securing a buyer for this business, and is engaged in ongoing discussions with interested parties.

In the Scandinavian operations, total rental days only declined by 4.6% to 3.4 million days notwithstanding a decrease of 6.4% in rental transactions. The business has been re-aligned to cater for the current lower activity levels. The Norwegian operations produced a result ahead of the prior year; and the Budget network across all three countries continued to grow revenue and produced an improved result, despite the difficult market conditions.

Motor retail
Southern Africa
Motor Retail Southern Africa operates 46 leading motor vehicle franchise dealerships (including joint ventures) in South Africa and Botswana. Motor Retail is well positioned in the current tough economic environment, performed well and improved market share.

Despite a declining interest rate environment, new vehicle sales further declined during the year in line with market trends as a consequence of continued constrained consumer spending, more stringent lending criteria and generally weak economic fundamentals. A consistent focus on improving asset turn, containing costs, and reducing working capital while focusing on our customers, ensured that the business has weathered these conditions and managed to improve its market share. A total of 45 807 new and used retail units were sold in 2009.

During our financial year the NAAMSA southern Africa new vehicle market was 368 453 units of which 79.5% were dealer sales. Botswana had a consistent year with no market decline evident, despite the continued influx of cheap ‘grey imports’. In accordance with our strategy of “Fewer, Bigger, Better” dealerships we continued to make investments in well located, world-class facilities. Major new facilities were completed for Barloworld City Johannesburg (General Motors), Barloworld City Truck Centre (General Motors) in City Deep Gauteng, Barloworld Toyota Middelburg, John Williams Commercial (Mercedes-Benz) Bloemfontein, and John Williams Motors (Mercedes-Benz) Ficksburg which relocated to Ladybrand. Other significant new and renovated facilities include Barloworld Toyota Pretoria East Automark and Barloworld Toyota Tygervalley. In partnership with the Maponya Group, Barloworld was awarded the Toyota and Volkswagen franchises for the greater Soweto area. Trading is expected to commence during 2010. We have exited Armstrong Ford in Rosettenville and Johannesburg, as well as Toyota in Sandton.

Focus areas in the year ahead include growing volumes, improving asset turn, maintaining working capital, controlling interest costs, containing expenses and exceeding customer expectations. Transformation and empowerment will continue to be addressed and employee value creation initiatives, particularly skills development and retention, will again be emphasised.

A total of eight dealerships fall into our NMI-DSM and Garden City Motors joint venture which principally covers the Mercedes- Benz, Chrysler and Mitsubishi brands, and also includes the Subaru brand.

Australia
Our Australian business operates some of the most modern dealership facilities in Australia, in Melbourne and Sydney. We retail new and used vehicles in the passenger and light commercial segments, as well as provide parts, servicing and finance & insurance related products. Barloworld Australia represents Holden, Mercedes-Benz, Smart, Suzuki and Volkswagen.

The Australian new vehicle market slowed during the period under review, resulting in a 14% decrease on the prior year. Despite this slowdown in market activity, the operations delivered a strong result, and significantly increased market share.

Material events during the year under review included the opening of a combined Mercedes-Benz and Volkswagen dealership in Melbourne in October 2008. This dealership has been constructed to very high levels of environmental probity, and is a proud example of Barloworld’s commitment to sustainability.

Barloworld is the largest Volkswagen dealer in Australia, the largest Holden dealer in Victoria, and one of the largest Mercedes-Benz dealers in Australia.

Fleet Services
Avis Fleet Services provides long-term rental and value added services to operators of passenger and commercial vehicles. Products and services include the administration of vehicle licensing, maintenance and fuel costs, the acceptance of maintenance and residual value risks, and vehicle sourcing and disposal services. The operation is headquartered in Johannesburg, with branches in Bloemfontein, Cape Town, Durban, George, Port Elizabeth and Pretoria. Regional operations are conducted in Botswana, Lesotho, Mozambique, Namibia and Swaziland. The fleet outsourcing agreement with the South African National Parks for the Kruger National Park was extended after a successful tender in 2008 to include all 21 national parks. This fleet was completely renewed in 2009, and operations continue in a black economic empowerment joint venture. The fleet outsourcing agreement with the Government of Lesotho was implemented during 2009.

Car Mall disposes of ex-fleet vehicles to the trade and to retail customers.

Avis Fleet Services grew its fleet under finance, maintenance and management contracts to a total of 130 363 vehicles. Profitability improved on the prior year, attributable to increased vehicles under management, higher termination penalties and an improved used vehicle contribution. Notwithstanding the depressed economic conditions and the tightening of available credit by major banks, the demand for the business’s products and services remained buoyant. During difficult economic times, companies seek improvements in fleet efficiency and cost control, and turn to expert service providers to assist them. New vehicle price inflation made used vehicles more attractive to consumers and demand during the year was consistently strong, delivering a contribution above the 2008 level. The operations continue to focus on the drivers of customer value, with specific attention to offering customers total fleet solutions, while progressing transformation and employee value creation initiatives, particularly skills development and retention. Robust management of maintenance expenditures and overhead costs remains a key focus area.

Importation and distribution
Subaru Southern Africa delivered 961 vehicles to its dealers during the year. A transaction, to sell a 50% stake in this business to Toyota Tsusho Corporation, was concluded on 1 November 2008. The Subaru brand has maintained a loyal customer base despite the difficult trading conditions. Currency volatility and lower volumes undermined profitability.

Stakeholder value creation
The creation of value for all stakeholders remains central to our business units’ activities. The emphasis is on sustained improvement in value created, driven by all employees through an integrated set of programmes and initiatives, continually monitored and assessed against implemented standards and measures. The division performed well in difficult economic circumstances.

We continue to create value for our principals and suppliers through investment in infrastructure and business systems, addressing brand exposure, as well as market shares and improving business performance. Their confidence in our ability continues to be reflected in new opportunities offered to represent their brands and their ongoing commitment to our operations.

Customer value remains central to the division’s success. This is evidenced by our sustained activity levels, increased market shares and independent monitoring. We continue to monitor and focus on customer satisfaction ratings, as we believe it is through exceeding customer expectations at every interface that we will achieve a sustainable competitive advantage and create superior value for our customers and other stakeholders.

Employee value creation recognises the important role of every employee and institutionalises initiatives and structures aimed at developing, harnessing and directing collective employee wisdom towards our value creation objectives. It also ensures that employees share in the value created. The Avis Brand Ambassador programme continues to empower employees and leaders, emphasising the crucial role of personal behaviour in our customers’ perception of the organisation and improving its value creation performance.

Our value creation for the communities in which we operate is a combination of indirect benefits from employment opportunities, rates and taxes paid, and development as well as direct benefits arising from the corporate social investment initiatives of the business units which include contributions of skills, resources and finance.

Black economic empowerment in
South Africa
Our South African car rental, motor retail and fleet service business units have achieved ratings of Level 4 or better on the DTI’s BBBEE scorecard, and are well positioned to sustain their ratings and achieve future group targets.

All aspects of BBBEE continue to receive attention. Avis Rent a Car South Africa focused on its management development programme and comprehensive leadership programmes while Motor Retail South Africa continued to invest in management development and technical training programmes.

In addition, we have a number of significant black economic empowerment joint ventures. These include our joint venture principally for the Mercedes-Benz operations in the greater Durban and Pietermaritzburg metropolitan areas in KwaZulu- Natal. Our NMI-DSM and Garden City Motors operation remains one of the leading empowerment initiatives in the industry.

Avis Fleet Services has two joint ventures in South Africa, PhakisaWorld Fleet Solutions which manages the fleets within the South African National Department of Transport stable and Vuswa Fleet Services which manages the SANPARKS fleet nationally. Avis Rent a Car also has a 49% stake in Sizwe car
rental.

Outlook
It is expected that the difficult industry conditions will continue into the second quarter of 2010 with some relief provided by the 2010 World Cup. Emphasis will be maintained on our five strategic focus areas of integrated customer solutions; employees; empowerment, transformation and sustainable development; financial returns and profitable growth. Particular attention will be directed at improving quality of earnings.

Overall, 2010 is expected to be a year of consolidation with a view to adding value for stakeholders through prudent business practices and conservative growth by accessing identified unique opportunities. Optimising the inherent synergies and benefits of our South African integrated motor vehicle usage solutions offering remains central to our strategy.

Various opportunities to grow our offering within southern Africa are currently under consideration.

All our business units will address expense management, controlling interest costs and exceeding our customers’ expectations. The South African car rental operations will pursue market share growth, maintaining fleet utilisation and optimising their asset base.

Our southern African motor retail operations are well positioned to benefit from an improving new vehicle market, and will continue their “Fewer, Bigger, Better” strategy coupled with pursuing efficiencies through the centralisation and coordination of common functions, improving asset turn and reducing working capital.

Our Australian motor retail operations, remain a well run focused business unit, and are expected to sustain the momentum created during the second half of 2009. Our fleet services business is expected to continue to benefit from current contracts and pursue attractive opportunities in the market.

Awards and recognition
External recognition for the value we create for our stakeholders includes:
Avis Rent a Car Southern Africa
• Sunday Times Brands and Branding independent survey: Best Car Rental Brand in South Africa for sixth consecutive year
Avis Rent a Car Norway
• Grand Travel Award: Best Car Rental Company for 14th consecutive year
Avis Rent a Car Sweden
• Grand Travel Award: Best Car Rental Company for 17th consecutive year
NMI-DSM (Black Economic Empowerment Joint Venture)
• NMI-DSM Mitsubishi: Mitsubishi Motors Brand Centre Award of the Year 2008 – fifth consecutive year
Motor Retail South Africa
• Barloworld Fleet Marketing: Toyota SA Status Club – Platinum Award
• Auto Atlantic Cape Town: 1st Place in the Mini World Challenge
• Auto Atlantic Cape Town: 1st Place in the National Technician Award
• Auto Atlantic Cape Town: Premier Manager Award BMW Premium Selection Metro Dealer
• Club Motors Pretoria: After-sales Excellence Award Metro Dealer
• John Williams Motors Passenger: Chrysler City Dealer of the Year
• Barloworld Armstrong Ford Pietermaritzburg: 1st Place in the National Master Technician Award
• Barloworld Armstrong Ford Pietermaritzburg: Best Service Manager in Category A
• Volkswagen South Africa: Dealer Group of the Year
• Barons Culemborg, Barons N1 City, Barons Volksway, Barons Southfleet: Club of Excellence Award
• Barons Culemborg: Best Volkswagen New Vehicle Department in Category A
• Barons Culemborg: Best Volkswagen New Vehicle Sales Executive in Category A
• Barons Culemborg: Best Volkswagen Mastercar Sales Executive in Category A
• Audi South Africa: Dealer Group of the Year
• Audi Centre Bruma: Best Audi Pre-Owned Sales Manager in Category 1
• Audi Centre Bruma: Best Audi New Vehicle Sales Manager in Category 1
• Audi Centre Cape Town: Best Audi New Vehicle Sales Executive Category 1
• Audi N1 City: 2nd Overall in Audi Awards of Distinction
Motor Retail Australia
• Barloworld Mercedes-Benz: Mercedes-Benz Australia Passenger Car Dealer of the Year 2008
• Barloworld Volkswagen Mascott: VW Australia Dealer of the Year 2008 – Central Region
Motor Retail Botswana
• Audi Gaborone: Best New Vehicle Sales Executive Category 3
Avis Fleet Services
• Professional Management Review (PMR): Diamond Arrow Award: Best Overall Fleet Management Company 2009, 2008, 2007
• Toyota SA Status Club and Hino Track Club – Platinum Award