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AFE - AECI Limited - Reviewed condensed consolidated financial results for the

Release Date: 26/02/2008 07:05
Code(s): AFE
Wrap Text

AFE - AECI Limited - Reviewed condensed consolidated financial results for the year ended 31 December 2007 AECI LIMITED Incorporated in the Republic of South Africa (REGISTRATION NUMBER 1924/002590/06) SHARE CODE: AFE ISIN NO: ZAE000000220 REVIEWED CONDENSED CONSOLIDATED FINANCIAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 - Revenue +11% - Final dividend unchanged - R1,4b capital programme on track - Share buy-back announced INCOME STATEMENT % 2007 2006 change R millions R millions Continuing operations Revenue(2) +13 8 521 7 558 Net operating costs 7 764 6 510 Profit from operations -28 757 1 048 Creation of pension fund employer - 179 surplus account Release of provision for post- - 131 employment medical aid benefits Net income from pension fund employer 30 17 surplus account Net income from plan assets for post- 36 - employment liabilities 823 1 375
Fair value adjustments on derivative 5 11 instruments Financing costs (net of costs (159) (143) capitalised) Interest received 28 35 Income from associates and investments 12 7 709 1 285 Impairment of goodwill (20) (6) Other impairments and disposals 2 (15) Profit before tax 691 1 264 Tax (218) (339) Net profit from continuing operations 473 925 Net profit from discontinued (6) 28 operations Profit before tax 46 48 Closure costs (117) - Impairments and disposals 64 (6) Tax 1 (14) Net profit 467 953 Attributable to preference and (12) (37) minority shareholders Profit attributable to ordinary 455 916 shareholders Headline earnings are derived from: Profit attributable to ordinary 455 916 shareholders Impairment of goodwill 20 6 Other impairments and disposals before (66) 21 tax Tax effects of the above items (17) (1) Headline earnings 392 942 Per ordinary share (cents): Headline earnings -58 355 853 Diluted headline earnings(3) 352 842 Attributable earnings 412 829 Diluted attributable earnings(3) 408 819 Continuing earnings 417 804 Diluted continuing earnings(3) 414 794 Dividends declared +4 213 205 Dividends paid 213 185 Ordinary shares (millions)(4) - in issue 110 110 - weighted average number of shares 110 110 - diluted weighted average number of 111 112 shares(3) BALANCE SHEET at 31 December 2007 2006 R millions R millions Assets Non-current assets 3 558 3 478 Property, plant and equipment 1 568 1 580 Investment property 411 418 Goodwill 986 1 019 Pension fund surplus 226 196 Investments 124 119 Deferred tax 243 146 Current assets 4 699 4 317 Inventory 1 580 1 700 Accounts receivable 2 024 2 242 Assets classified as held for sale 667 Cash and cash equivalents 428 375
Total assets 8 257 7 795 Equity and liabilities Ordinary capital and reserves 3 788 3 595 Preference capital and minority interest in 141 132 subsidiaries Total shareholders` interest 3 929 3 727 Non-current liabilities 955 942 Deferred tax 78 35 Non-current borrowings 502 518 Non-current provisions 375 389 Current liabilities 3 373 3 126 Accounts payable 2 021 2 230 Current borrowings 927 797 Liabilities classified as held for sale 250 - Tax payable 175 99
Total equity and liabilities 8 257 7 795 INDUSTRY SEGMENT ANALYSIS Revenue Profit from Net assets operations
2007 2006 2007 2006 2007 2006 R millions R millions R millions Continuing operations Mining solutions 2 778 2 492 163 261 1 377 1 019 Specialty 5 618 4 629 570 511 2 833 2 354 chemicals Property 451 644 75 314 496 449 Group services, intergroup and (326) (207) (51) (38) (94) (166) other 8 521 7 558 757 1 048 4 612 3 656
Discontinued 2 807 2 654 50 54 353 1 073 operations Decorative 654 774 44 70 (5) 200 coatings Specialty 15 100 (3) (10) - 38 chemicals Specialty 2 138 1 780 9 (6) 358 835 fibres* 11 328 10 212 807 1 102 4 965 4 729 Net assets consist of property, plant, equipment, investment property and goodwill, inventory, accounts receivable less accountspayable. Assets in the property segment include land revaluation of R375 million (2006 - R405 million). The net assets of the specialty fibres segment in 2007 include assets, and directly related liabilities, classified as held for sale. CASH FLOW STATEMENT 2007 2006 R millions R millions Cash generated by operations 1 121 1 385 Dividends received 12 7 Financing costs (172) (150) Interest received 30 36 Taxes paid (196) (202) Changes in working capital (616) (259) Expenditure relating to non-current (67) (130) provisions Expenditure relating to restructuring (1) (13) Cash available from operating activities 111 674 Dividends paid (237) (206) Cash (applied to)/retained from operating (126) 468 activities Cash generated by/(utilised) in investment 75 (618) activities Proceeds from disposal of investments and 37 3 businesses Proceeds from disposal of discontinued 751 - operations Investments (73) (199) Net capital expenditure (640) (422) Net cash utilised (51) (150) Cash effects of financing activities 122 99 Increase/(decrease) in cash and cash 71 (51) equivalents Cash and cash equivalents at the beginning 375 409 of the year Translation (loss)/gain on cash and cash (5) 17 equivalents Classifed as held for sale (13) - Cash and cash equivalents at the end of the 428 375 year STATEMENT OF CHANGES IN EQUITY 2007 2006 R millions R millions Net profit for the year 467 953 Dividends paid (237) (206) Revaluation of derivative instruments (1) 6 Foreign currency translation differences (8) 17 net of deferred tax Changes in the Group (17) 14 Other (2) 3 Net increase in equity for the year 202 787 Equity at the beginning of the year 3 727 2 940 Equity at the end of the year 3 929 3 727 Made up as follows: Issued ordinary capital 453 453 Non-distributable reserves 271 295 Surplus arising on revaluation of property, 243 261 plant and equipment Foreign currency translation reserve net of 17 20 deferred tax Retained earnings of associates 1 1 Other 10 13 Retained income 3 064 2 847 Preference capital 6 6 Minority interest 135 126 3 929 3 727 OTHER SALIENT FEATURES 2007 2006 R millions R millions
Capital expenditure - property, plant and 688 433 equipment - expansion 381 239 - replacement 307 194 Capital commitments 1 251 650 - contracted for 340 91 - not contracted for 911 559 Future rentals on property, plant and 253 290 equipment leased - payable within one year 77 65 - payable thereafter 176 225 Net contingent liabilities and guarantees 140 121 Net borrowings 1 001 940 Gearing (%) 25 25 Current assets to current liabilities 1,4 1,4 Net asset value per ordinary share (cents) 3 430 3 255 Depreciation - continuing operations 164 152 - discontinued operations 69 71 NOTES (1) Basis of preparation and accounting policies The condensed consolidated financial results have been prepared in accordance with the historic cost convention except for certain financial instruments which are stated at fair value. Accounting policies have been applied consistently by all entities in the Group and are consistent with those applied in the previous financial year. The condensed consolidated financial results comply with the Listings Requirements of the JSE Limited, International Financial Reporting Standards, the disclosure requirements of IAS 34 - Interim Financial Reporting and the South African Companies Act, 1973, as amended. (2) Includes foreign sales of R1 533 million (2006 - R1 271 million). (3) Calculated in accordance with IAS 33. The Company has purchased call options over AECI shares which will obviate the need for the Company to issue new shares in terms of the AECI share option s cheme. In practice therefore there will be no future dilution (4) Net of 10 311 120 (2006 - 10 311 120) treasury shares held by a subsidiary company. (5) Disposal groups and discontinued operations With effect from 1 October 2007 the entire interest in Dulux was sold for a consideration of R745 million and realised a profit of R394 million after tax. During the year the businesses of SANS Fibres wereeither discontinued or earmarked for future sale. Closure costs and impairments in respect of these businesses amounting to R358 million after tax have been charged against income in the year to31 December 2007. Dulux and SANS have been classified as discontinued operations and the comparative figures adjusted accordingly. (6) The auditors, KPMG Inc., have reviewed these condensed consolidated financial results. The auditors` unqualified review report is available for inspection at the Company`s registered office. (7) The condensed consolidated financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the consolidated annual financial statements for the year ended 31 December 2006. The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. COMMENTARY Performance Headline earnings of R392 million, equivalent to 355 cents per ordinary share, were 58 per cent lower than in 2006. The current year`s headline earnings are stated after charging R108 million after tax (R117 million before tax) in respect of closure costs at SANS Fibres (SANS). In 2006, the inclusion of R233 million after tax, following an agreement concluded with the AECI Pension Fund to create an employer surplus account, and a once-off profit of R223 million after tax on the sale of a surplus property at Milnerton, boosted results. In the current year, the Group earned R47 million income after tax on the assets created out of the pension fund surplus. If the effect of these transactions is excluded, headline earnings were R453 million, or 410 cents per share, compared with R487 million, or 441 cents per share, in 2006, a reduction of 7 per cent. Despite the reduction in profit, the directors are sufficiently confident about the future to maintain a final dividend of 141 cents per ordinary share. The dividend declaration is published in full elsewhere. Group revenue increased by 11 per cent in total in 2007 whilst revenue from continuing operations increased by 13 per cent, reflecting some pleasing growth in the mining and specialty chemicals sectors. However, with high oil prices impacting on oil-based raw material costs, extended commissioning of new detonator manufacturing equipment and intense competition in the shocktube market, margins were under pressure. The operating margin on continuing operations declined to 9 per cent from 14 per cent in 2006. African Explosives Limited (AEL) recorded strong growth in volumes and sales in the surface market sector in South Africa and its businesses in Africa. In South Africa, however, the narrow reef market was impacted severely by lower volumes and intense competition. The slower than planned ramp-up of the first phase of automated production of initiating systems at Modderfontein, owing to larger than expected inter-batch variations in the powder drying section of the plant, also contributed to AEL`s disappointing decline in trading profit. A technical solution to the plant problem has been found and production rates for the first phase of the automation project are expected to increase to full design capacity during the second and third quarters of 2008. Final completion and commissioning of the second phase of the project is underway and production is expected to increase to over 85 per cent of design capacity of 80 million detonators by the end of 2008. Chemical Services (Chemserve) recorded a creditable 13 per cent increase in trading profit in 2007. Organic growth accounted for virtually all of the improvement, with some contribution from two small acquisitions. Although the drop-off in certain manufacturing sectors had an adverse effect, Chemserve benefited from innovative vendor management in platinum, gold and base metal mining in Southern Africa; infrastructure development which created demand for construction chemicals and related products; and consumer-driven markets such as food, coatings, household and personal care products and some white goods. The year was significant in terms of Chemserve`s capital programme, with major projects underway for the construction and expansion of manufacturing capacity. Most of this is in the area of mining chemicals and it is expected that the investments will deliver significant benefits from 2009. After a record performance in 2006, the property activities managed by Heartland had a more subdued year and trading profits were R75 million, net of R83 million of remediation costs. Net cash outflow totalledR48 million after expenditure of R66 million on remediation and R70 million expenditure on infrastructure. Sales of 86 hectares of land were achieved in the year compared with 160 hectares in 2006. Disposal groups and discontinued operations AECI`s strategic focus is increasingly on the supply of specialty products and services, based on chemistry, to customers in the mining and manufacturing sectors in Africa and elsewhere. The decorative coatings business, trading as Dulux, targeting primarily the retail consumer market, was not well aligned with this strategy. Effective 1 October 2007, therefore, AECI agreed to sell the Dulux business to ICI plc for a cash consideration of R745 million which was received prior to the year end. The sale realised a profit after tax of R394 million, which is excluded from headline earnings. The polyester light decitex industrial (LDI) and heavy decitex industrial (HDI) businesses of SANS have been under severe pressure for some time owing to several factors. These include ongoing over-investment in polyester yarn plants (mainly in the Far East) resulting in surplus capacity and very low prices, and the lower cost base of manufacturers in the Far East. The highly competitive situation will not change. Furthermore, SANS` principal local customer for nylon HDI decided to exit this business. In this context, and after failing to find a partner or owner which could add value to these components, or to SANS` operation as a whole, the decision was taken to close these businesses at the end of December 2007. An impairment chargeof R93 million after tax has been incurred in respect of these assets and is included in net profit from discontinued operations in the income statement. The nylon LDI and the polyethylene terephthalate (PET) polymer businesses were profitable in 2007 and their immediate outlook remains positive. However, AECI is actively engaging with several parties interested in purchasing the nylon LDI and PET businesses which have, therefore, been classified as assets held for sale. It is expected that the sale of these businesses will be completed within the next financial year. An impairment charge of R157 million after tax has been taken in 2007 to write down the assets of these businesses to their expected sale values. FINANCIAL Capital expenditure of R688 million included R381 million for expansion projects, mainly in respect of the major projects currently under construction at AEL and Chemserve. The capital expenditure was R455 million higher than the depreciation charge. Group working capital, including the working capital component of assets classified as held for sale, increased to R1 897 million, representing 17,8 per cent of annual sales (excluding businesses sold) compared with the corresponding figure of 17,1 per cent in 2006. Notwithstanding the receipt of the proceeds for the sale of the Dulux business, Group borrowings increased to R1 001 million from R940 million in 2006 reflecting the increased capital expenditure during the year. Cash interest cover returned to a more normal level of 7 times from the exceptionally high level of 13 times in 2006. Gearing remained at 25 per cent of shareholder funds, the same level as in December 2006. No repurchases of ordinary shares were undertaken during the year. However, the Board has taken the decision to buy back up to 5 per cent of the Group`s issued shares in the market as and when the market is favourable, as authorised at the 2006 Annual General Meeting (AGM). Authority is being sought at the AGM in May 2008 to repurchase up to a further 10 per cent. The impairments and disposals in the discontinued operations section of the income statement comprise mainly the profit on sale of Dulux of R394 million less the non-headline SANS impairment of R314 million. PORTFOLIO Reference has already been made to the disposal of Dulux and the closure of part of the SANS operations in December. The remainder of SANS` businesses are expected be sold in 2008. In terms of the agreement between SANS and its partner in the North Carolina, USA joint venture, SANS acquired the remaining 50 per cent of the shares it did not already own at a cost of R60 million during the year. This business is also expected to be sold during the course of 2008. Chemserve acquired two small local businesses during the year. OUTLOOK The trading outlook for 2008 appears challenging with the prospect of high oil prices, a higher interest rate environment, a weaker rand and uncertainty regarding power supply in South Africa. A weaker rand puts immediate pressure on the Group`s import costs but assists with exports. Inflationary pressures are evident in many countries. Therefore, pressure on margins is expected to continue. The Group will focus on containing operating costs and will seek to recover increased input costs in the market where possible. Apart from at SANS, the recent nationwide disruptions in electricity supply have had a limited impact on the Group`s manufacturing plants. However, the delivery of products to certain of the Group`s customers was adversely affected, particularly the mines. As part of the solution to assure a steady supply of power, the Group is currently investigating co-generation alternatives. AECI is well-positioned and well-funded to grow both organically and by acquisition. 2008 should see improved results compared to 2007, particularly from Chemserve and Heartland. Beyond 2008, the benefits of capital investments are expected to start delivering significantly improved results in 2009 and 2010. The condensed consolidated financial results were authorised for issue by the directors on 25 February 2008. Fani Titi Schalk Engelbrecht Chairman Chief executive Woodmead, Sandton 25 February 2008 Directorate: F Titi (Chairman) +, S Engelbrecht (Chief executive), F P P Baker, R M W Dunne*+,G N Edwards, Z Fuphe+, M J Leeming+, L M Nyhonyha+, A C Parker+, L C van Vught+, R A Williams* *British +Non-executive Company secretary: A Kennedy Date: 26/02/2008 07:05:07 Supplied by www.sharenet.co.za Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited (`JSE`). 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