Overview
Barloworld Equipment has responded decisively to the economic downturn by improving market penetration, preserving cash and reducing expenses, at the same time continuing to focus on developing skills and operational systems in readiness for the upturn. This robust response, coupled with a buoyant order book at the start of the review period, has resulted in the equipment division achieving an extremely pleasing result.

This success was achieved with a high level of support from Caterpillar in line with our collaborative Common Goals strategy.

Southern Africa
Country and market diversity, the flexibility of our integrated solutions model, and the large installed machine population requiring equipment management solutions helped southern Africa to perform well despite extremely difficult trading conditions in all its market sectors.

We remained committed to attaining our five year Vision: Through market leadership and empowered people deliver customer solutions that will double our active machine population by 2010. The essential components of this vision, “market leadership”, “empowered people” and delivering “customer solutions” are the cornerstones of our business strategy.

The first half of the year was characterised by the delivery of a strong mining order book, together with robust growth in Angola and buoyancy in the construction sector. While activity levels declined in the second half of the year, Barloworld Equipment’s strategy of delivering integrated customer solutions resulted in improved market share and continued market leadership in several product families across mining and construction. These
include off highway trucks, wheel loaders, tracked and wheeled dozers, graders, medium-size excavators and backhoe loaders.

The year ended with our South Africa business showing resilience, Angola slowing due to the lower oil price, and Botswana and Zambia improving due to renewed activity in diamonds and copper. Namibia continued to record pleasing results.

Our after sales solutions strategy paid dividends as key customers capitalised on Barloworld Equipment’s cost effective equipment management offerings and our parts and logistics infrastructure was upgraded to meet increasing demand for parts and service.

Cash preservation remained a priority and all non essential capital projects were deferred with the exception of the Technical Training Centre in Isando, which was completed in October 2009.

An initiative set up in close collaboration with Caterpillar assisted our marketing and sales teams in disposing of excess machine inventory resulting from the reduction in long lead times in the previous year. For certain models inventory is now depleted and for the first time in 18 months we are placing new orders on Caterpillar.

A “War on Waste” campaign was launched in our southern African operations utilising the Caterpillar Production System (CPS), designed to eliminate waste such as idle time, rework and excess inventory. This has resulted in savings of more than R50 million over the year and our “War on Waste” model has been adopted by Caterpillar as a best practice scenario for other dealers.

Mining
The southern African mining industry has been severely impacted by the dramatic reduction in demand for commodities. Barloworld Equipment, however, benefited from a strong order book at the start of the period.

Our involvement in a wide spread of commodities and geographies has also cushioned us from the full effect of the mining slump, with demand for both coal and iron ore remaining buoyant.

Copper, diamond and platinum mines were under severe pressure in the first half of the financial year due to the decline in the commodity price. Other than the platinum price, which remains depressed, we have seen an increase in the prices of other commodities and expect this trend to continue. Our joint venture in the DRC, Congo Equipment, once again made a healthy profit in its second year of business.

Our maintenance and repair contracts (MARCs) continued to produce good returns despite production cutbacks, indicating an ongoing need for comprehensive cost effective solutions to sustain mining fleet productivity.

In line with our strategy to retain skills in preparation for the upturn, a project to redeploy employees to other sites across our territories as mines scaled down operations has been successful.

Our drive to expand our role in the mining value chain included additional focus on supporting our Atlas Copco drill population and the successful expansion of our Metso offering into mobile mining crushing and screening. Barloworld Equipment is one of the biggest Metso dealers in the world and our Metso mobile
mining range will be further extended in the coming year.

Development of Vale’s Moatize coking coal mine in Mozambique, the biggest new coal mining venture in the southern hemisphere, commences in 2010. The award of the mining fleet, a record order for Barloworld Equipment, indicates our ability to meet the needs of international Caterpillar Alliance customers. Our partnerships with all the major South African mining houses also remain strong despite the downturn.

Construction
The South African construction industry was buoyant on the back of major infrastructure development projects in the first half of the year. While high profile projects such as the Gauteng Freeway Improvement Programme (GFIP), the Gautrain Rapid Rail Link and the Rea Vaya Bus Rapid Transit (BRT) system are deadline driven, others have slowed and the industry is expected
to decline further in 2010.

In Angola the decline in the oil price resulted in the deferment of government-funded infrastructure projects and a slowdown in the construction market in the second half of the year. Major projects are continuing, albeit at a slower pace than anticipated, and activity is expected to pick up in the 2010 calendar year.

Rental and used
Our integrated new, used and rental solutions model helped us to improve our market leadership position, enabling customers to remain loyal to the Cat brand while tailoring their needs in the economic downturn.

Rental continued to produce profits, due to our strategy of focusing on long-term rentals of large machines in high utilisation applications. However the results were adversely affected by the decline in demand in the second half and we curtailed our investment in new rental units.

Our Cat Certified Used (CCU) offering of ex-rental units received good market acceptance, providing effective competition to new low cost entrants into the market. We achieved healthy profits on sales of rental unit roll-outs.

Power
The transformation of our power business into a consolidated regional operation continued in anticipation of major opportunities across southern Africa. Plans are at an advanced stage to purchase the property adjoining our site in Boksburg, Gauteng, to facilitate expansion.

The ambitious growth plans for Barloworld Power have included the introduction of additional engineering skills, the development of relationships with state utilities and other Cat dealers with complementary capabilities, as well as process improvements to strengthen the foundations of the business.

The costs of the enhanced business model have impacted profit growth but this is seen as essential to the future success and market leadership of our power business.

Major projects we are tendering on in southern Africa include the new 25MW power station for Nampower at Walvis Bay, the Vale power station rental project linked to Moatize mine in Mozambique, and power for the Palanca Cement factory in Angola.

Transformation
Following the BBBEE transaction concluded by Barloworld Limited in 2008, Barloworld Equipment southern Africa (incorporating Barloworld Power) has improved its BEE scorecard. We have achieved Level 3 BBBEE status, thus enabling customers to claim 110% procurement expenditure with Barloworld Equipment.

We have made significant progress at a management level and our procurement practices have been overhauled in the past year, with associated benefits on the preferential procurement scorecard element.

Our well embedded enterprise development and socio economic development practices earned maximum points on the scorecard and the focus on employment equity continues aided by a strong development and training component.

Skills development
Barloworld Equipment is balancing prudent management of the economic trough with continued preparation to capitalise on the upturn that will follow. Southern Africa suffers a serious shortage of technical skills and we believe the long-term sustainability of our equipment management solutions for
customers and continued leadership in our markets depends on the continued development of our people.

To this end our R120 million investment in the Technical Training Centre on our Isando campus, together with the residential block to accommodate technical learners from all our territories, has come to fruition. The residential component, which can house up to 96 people, opened this year and is running at full capacity. The Technical Training Centre was officially opened on 29 October 2009 by Mr Jim Owens, Chairman and CEO of Caterpillar Inc. This unique facility is expected to deliver skills to 500 learners a year initially, ramping up to as many as 2 000, including employees of Barloworld Equipment, its customers and other African Caterpillar dealers.

Barloworld Equipment southern Africa trained approximately 400 learners during the past year.

The results of our pre-learnership bridging programme are evident in improved success rates for learners and the Accelerated Basic Classes (ABC) programme is ensuring that recruited artisans are quickly integrated into our business to add immediate value in our workshops and on customer sites.

Empowered leadership and the retention of key managerial skills are equally critical to our sustainability and our Leadership Development Centre in Sandton, which opened in 2008, continued to equip our managers to achieve optimum performance from their teams.

Outlook
Market conditions are expected to deteriorate further before starting to pick up in the latter part of 2010. We therefore anticipate a difficult year ahead, with after sales support for the established Cat machine and engine population expected to be an ongoing contributor of revenue.

Coal and iron ore have robust prospects, while demand for oil, copper and diamonds is likely to pick up in the coming year, driven by the pace of recovery in the global economy.

Some new mining projects are expected to come back on stream in 2010. The major expansion planned at Debswana’s Jwaneng mine, traditionally a Cat site,
numbers of Cat off-highway trucks.

Training has been highlighted as a critical success factor for Sasol’s planned Mafutha greenfield coal-to-liquids (CTL) plant and our unique capability to train customer employees puts us in a good position to secure the mining fleet for this project.

The mining sector has shown strong interest in the new Cat 793F 240-ton electric drive truck launched last year, adding another new dimension to our mining solutions capability.

Confidence levels in the South African construction sector are expected to remain depressed in the year ahead with recovery linked to further government spend.

Strong demand for electric power solutions in southern Africa will benefit us and our ongoing investment in the power business will establish Barloworld Equipment as a major player in an industry with excellent growth prospects.

While we expect further declines in new machine sales, in the year ahead, we are confident that our world class brands, integrated solutions strategy and comprehensive equipment management offerings will sustain our business and differentiate us from the competition.

Lead times from Caterpillar have eased considerably, with the result that inventory levels will be kept to a minimum in the year ahead, resulting in strong cash generation.

Our focus on partnerships with key customers will be supported by continued investment not only in skills but also in operational systems and process improvement.

Iberia
The effects of the global recession and a virtual standstill in the Spanish construction market have had a major impact on our Iberian business.

In Spain GDP contracted by 3.9%, infrastructure development ceased due to a lack of funding, and many of our major construction customers are looking outside the country for work. The slowdown in Portugal comes off an already low base and GDP declined another 3.7% in the past year.

As a consequence the total equipment market declined by 70% in Spain and 45% in Portugal.

However stringent cost reductions and restructuring have enabled us to generate a small profit in Iberia despite the extremely challenging conditions and our cost base is well positioned to take full advantage of the recovery.

A significant reduction in operating expenditure was achieved and we decreased our staff complement by almost 25% through a combination of voluntary retrenchment, early retirement and temporary suspensions.

Cash was generated by a strong focus on working capital, rental fleet utilisation and deferral of planned facility upgrades.

However actions needed to maintain Caterpillar contamination control star ratings at all our facilities were continued in the interests of environmental sustainability. The completion of a 30 000m² display area is helping to attract customers to our flagship facility in Arganda, Madrid, and has improved our
competitive advantage.

Portugal and Spain have amongst the highest Cat market share in Europe and focus was placed on further improving market share by gaining new business in sectors less affected by the downturn. This was supported by the implementation of an electronic sales funnel management system, the first in Europe, that helped to improve discipline within the sales execution process and led to increased deal participation.

Construction
Focused marketing strategies yielded good results and we improved market share significantly.

Many Spanish customers are not buying new machines due to the uncertain future, lack of finance and undercutting of contract prices. In line with demand for solutions to assist through the downturn, we put a great deal of effort into meeting the needs of our large core customers and this should pay off when the recovery comes.

Early in the year we experienced some success in the sale of machines to Portuguese contractors working in Africa and eastern Europe, but the demand in those areas also declined in the second half.

Key account strategies contributed to pleasing improvements in market share in the Portuguese quarrying and public works segments. Construction in Portugal is 30% down on the previous year and public works remained depressed, although significant tender awards towards year end should lead to improved activity in 2010.

Rental and used
A lack of finance available to purchase machines boosted the rental market. The Spanish government has stimulated the economy through its Plan E expenditure plan focusing on small local public works, in turn positively impacting rental activity.

A complete overhaul of our rental business is starting to positively impact financial results and the new management team achieved a breakeven result in the last four months of the year. Caterpillar has recognised these efforts through various awards.

We were very successful in the sale of used machine stock created through reduction in our rental fleets, trade-ins and sourcing of used machines to meet special requests from customers. This resulted in us selling more used machines than most dealers in Europe.

Power systems
The marine engine order book remained firm in Spain and Portugal due to new ship building and pending work on large vessels. Fast ferries remained active, generating continued business, and we obtained some work on vessels outside our territory.

We increased product support market share in 2009, with demand remaining particularly strong for Power Systems after sales business.

Portugal has followed a successful diversification strategy with increased focus on retail and industrial power systems. Retail unit sales more than doubled and there was significant growth in the industrial segment, while activity was maintained in the utility power market.

Good progress has been made on the Euro 3000, the prototype locomotive engine being developed together with customers, and we won the tender for the first trial locomotive engines. This has the potential to generate further orders worth €90 million.

The Spanish Royal Decree regulating power production from renewable sources, launched in 2008, has borne fruit and we have orders for six cogeneration plants in progress. This has replaced part of the EPG business lost due to the economic climate.

Skills development
Strong focus on technical training continued and we are taking advantage of government aid programmes that enable us to retain our mechanics despite reduced work levels and therefore retain our critical skills base in preparation for the recovery.

Our Service Training Department in Spain received the Caterpillar Excellence Award for achieving a 3-Star rating in the Learning Capability Assessment Tool (LCAT) audit. This business is also recognised as one of Caterpillar’s most advanced dealers in Europe, Africa and the Middle East in Technician Career Development Planning, a programme involving thorough assessment of technicians followed by the implementation of individual training plans.

Outlook
The general consensus of our customers and market analysts is that Spain should begin to recover in the second half of 2010. It is expected that Portugal will show an earlier upturn given the public tender awards in late 2009.

We are determined to continue increasing market share and to this end are working hard to retain and improve customer partnerships through our integrated customer solutions approach.

Despite uncertainty on orders from the shipyards in the coming months, our power business is expected to remain at an acceptable level. Cogeneration plants ordered in 2009 will start to yield after sales. Some interesting projects are pending in niche markets such as standby applications for data centres in the banking sector and landfill gas production. These will be vigorously pursued.

Some competitors in the rental market have not survived the downturn and the opportunities are growing slowly for our revamped rental business. The new management is striving for continuous improvement in our customer service and this, together with the market perception of Cat as a superior rental offering, stands us in good stead for the coming year.

Siberia
Vostochnaya Technica (VT), the joint venture between Caterpillar dealers Barloworld Equipment and Wagner International in Siberia, was severely affected by the drop in commodity prices, particularly oil. A decline in all market segments resulted in a significant reduction in revenue and profitability for the year, however long-term growth prospects remain exciting.

Due to the strong mining order book at the beginning of the year, VT’s revenue decline was not as severe as the industry contraction. The mining segment maintained revenue at 2008 levels while construction and power were negatively impacted by the economic crisis.

The management team focused on expense control and cash generation, while striving to grow market share, particularly in mining.