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AFE - AECI LIMITED - Reviewed condensed consolidated financial results for the
year ended 31 December 2008
AECI LIMITED
(Incorporated in the Republic of South Africa)
(Registration No. 1924/002590/06)
Share code: AFE ISIN No.: ZAE000000220
("AECI" or "the Company")
REVIEWED CONDENSED CONSOLIDATED FINANCIAL RESULTS FOR THE YEAR ENDED 31 DECEMBER
2008
Revenue from continuing operations +48% to R12,8 billion
Dividend for the year +8% to 231c (final = 141c)
Operating profit on continuing businesses +39%
HEPS +16% to 412c
Income statement
2008 2007
% R R
change millions millions
Continuing operations
Revenue(2) +48 12 849 8 710
Net operating costs 11 814 7 963
Profit from operations +39 1 035 747
Net (loss)/income from Pension Fund
employer surplus account (13) 30
Net (loss)/income from plan assets for
post-employment liabilities (57) 36
965 813
Fair value adjustments on derivative
instruments (16) 5
Interest paid (net of costs
capitalised) (233) (159)
Interest received 28 28
Income from associates and investments 13 12
757 699
Impairment of goodwill (42) (20)
Other impairments and disposals (4) (32)
Profit before tax 711 647
Tax (238) (246)
Net profit from continuing operations 473 401
Net (loss)/profit from discontinued
operations (94) 66
Profit before tax 154 56
Closure costs (204) (117)
Impairments and disposals (56) 98
Tax 12 29
Net profit 379 467
Attributable to preference and minority
shareholders 6 (12)
Profit attributable to ordinary
shareholders 385 455
Headline earnings are derived from:
Profit attributable to ordinary
shareholders 385 455
Impairment of goodwill 42 20
Other impairments and disposals before
tax 60 (66)
Surplus on disposal of property, plant
and equipment (38) *
Tax effects of the above items (6) (17)
Headline earnings 443 392
Per ordinary share (cents):
Headline earnings +16 412 355
Diluted headline earnings(3) 410 352
Attributable earnings 358 412
Diluted attributable earnings(3) 356 408
Continuing earnings 445 352
Diluted continuing earnings(3) 443 349
Dividends declared +8 231 213
Dividends paid 231 213
Ordinary shares (millions)(4)
- in issue 107 110
- weighted average number of shares 108 110
- diluted weighted average number of
shares(3) 108 111
*nominal amount
Balance sheet at 31 December 2008
2008 2007
R millions R millions
Assets
Non-current assets 4 510 3 557
Property, plant and equipment 2 431 1 567
Investment property 422 411
Goodwill 1 013 986
Pension Fund surplus 213 226
Investments 98 124
Deferred tax 333 243
Current assets 6 441 4 699
Inventory 2 795 1 580
Accounts receivable 3 188 2 024
Assets classified as held for sale 14 667
Cash and cash equivalents 444 428
Total assets 10 951 8 256
Equity and liabilities
Ordinary capital and reserves 3 852 3 788
Preference capital and minority interest in
subsidiaries 117 141
Total shareholders` interest 3 969 3 929
Non-current liabilities 2 385 954
Deferred tax 61 78
Non-current borrowings 1 745 502
Non-current provisions 579 374
Current liabilities 4 597 3 373
Accounts payable 3 225 2 021
Current borrowings 1 058 927
Liabilities classified as held for sale - 250
Tax payable 314 175
Total equity and liabilities 10 951 8 256
Industry segment analysis
Profit from
Revenue operations Net assets
2008 2007 2008 2007 2008 2007
R millions R millions R millions
Continuing
operations
Mining solutions 4 052 2 698 248 163 1 963 1 386
Specialty chemicals 8 434 5 618 851 570 3 992 2 824
Property 432 450 45 75 524 497
Specialty fibres 143
(USA) 282 189 49 (10) 184
Group services, (351) (245) (158) (51) (155) (94)
intergroup and
other
12 849 8 710 1 035 747 6 508 4 756
Discontinued
operations
Decorative coatings - 654 - 44 - (5)
Specialty chemicals - 15 - (3) - -
Specialty fibres 1 464 1 949 155 19 116 213
14 313 11 328 1 190 807 6 624 4 964
Net assets consist of property, plant, equipment, investment property and
goodwill, inventory, accounts receivable less accounts payable.
Cash flow statement
2008 2007
R millions R millions
Cash generated by operations 1 590 1 122
Dividends received 12 12
Financing costs (276) (173)
Interest received 30 30
Taxes paid (232) (196)
Changes in working capital (921) (601)
Expenditure relating to non-current provisions (71) (67)
Expenditure relating to
restructuring/retrenchments (103) (1)
Cash available from operating activities 29 126
Dividends paid (250) (237)
Cash applied to operating activities (221) (111)
Cash (utilised in)/generated by investment
activities (1 002) 74
Proceeds from disposal of investments and
businesses 23 17
Proceeds from disposal of discontinued
operations - 761
Investments (102) (59)
Net capital expenditure (923) (645)
Net cash utilised (1 223) (37)
Cash effects of financing activities 1 136 108
(Decrease)/increase in cash and cash
equivalents (87) 71
Cash and cash equivalents at the beginning of
the year 428 375
Translation gain/(loss) on cash and cash
equivalents 90 (5)
Classified as held for sale 13 (13)
Cash and cash equivalents at the end of the
year 444 428
Statement of changes in equity
2008 2007
R millions R millions
Net profit for the year 379 467
Dividends paid (250) (237)
Revaluation of derivative instruments 6 (1)
Foreign currency translation differences net
of deferred tax 146 (8)
Changes in the Group (3) (17)
Other * (2)
Net increase in equity for the year before
share repurchase 278 202
Share repurchase (238) -
Equity at the beginning of the year 3 929 3 727
Equity at the end of the year 3 969 3 929
Made up as follows:
Issued ordinary capital 215 453
Non-distributable reserves 427 271
Surplus arising on revaluation of property,
plant and equipment 240 243
Foreign currency translation reserve net of
deferred tax 138 17
Other 49 11
Retained income 3 210 3 064
Preference capital 6 6
Minority interest 111 135
3 969 3 929
*nominal amount
Other salient features
2008 2007
R millions R millions
Capital expenditure - property, plant and
equipment 1 044 688
- expansion 683 381
- replacement 361 307
Capital commitments 978 1 251
- contracted for 550 340
- not contracted for 428 911
Future rentals on property, plant and
equipment leased 317 253
- payable within one year 144 77
- payable thereafter 173 176
Net contingent liabilities and guarantees 115 140
Net borrowings 2 359 1 001
Gearing (%) 59 25
Current assets to current liabilities 1,4 1,4
Net asset value per ordinary share (cents) 3 601 3 430
Depreciation - continuing operations 211 176
- discontinued operations 5 61
Notes
(1) Basis of preparation and accounting policies
The reviewed condensed consolidated financial results have been prepared in
accordance with the historic cost convention except for certain financial
instruments, which have been 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 reviewed condensed consolidated financial results and accounting policies
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 R3 379 million (2007: R1 722 million).
(3) Calculated in accordance with IAS33. 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 scheme. In practice, therefore, there will be
no future dilution.
(4) Net of 11 884 669 (2007: 10 311 120) treasury shares held by a subsidiary
company.
(5) Discontinued operations
Following unsuccessful attempts to dispose of the SANS Fibres businesses, the
decision was taken that SANS Technical Fibers, Stoneville, USA will run as a
stand alone - and self-sustaining entity for the foreseeable future and has,
therefore, been reclassified as a continuing operation with the comparative
figures adjusted accordingly. The remaining South African businesses of SANS
Fibres will discontinue manufacturing activities at the end of March 2009. As a
result, closure costs and impairments in respect of these businesses amounting
to R204 million before tax have been charged against income in the year to 31
December 2008.
(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 reviewed 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 2007.
(8) The preparation of the 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
The Group`s revenue from continuing operations grew by an impressive 48% to
R12,8 billion (2007: R8,7 billion) on the back of rising commodity prices in the
first nine months of the year, as well as volume growth in all of AECI`s
business segments other than property. Operating profit on continuing operations
increased by 39% to over R1 billion - a performance similar to 2006. Unlike that
year, however, no once-off major property transaction facilitated this
achievement. Operating margins in respect of continuing operations were
marginally lower at 8,3% (2007: 8,6%), primarily as a result of high commodity
prices relating to sulphur and ammonia. Fixed costs remained well controlled.
Headline earnings of R443 million, equivalent to 412 cents per ordinary share,
increased by 16% compared to the previous year (2007: 355 cents per ordinary
share).
Headline earnings per share were adversely impacted by costs associated with the
closure of operations at SANS Fibres (SANS) in Bellville, Western Cape,
communicated to the market in November 2008. These manufacturing operations will
cease at the end of March 2009. Closure costs were calculated at R148 million
after tax (R204 million before tax).
The Pension Fund employer surplus account and the plan assets for post-
employment liabilities incurred losses of R70 million, compared with a profit of
R66 million in 2007. This also had a negative effect on HEPS and was largely
attributable to the significant fall in South African equity markets, where the
Pension Fund invests a substantial portion of its assets, in the second half-
year.
Notwithstanding the currently uncertain economic environment and the challenges
that the Group faces in 2009, as detailed later in this commentary, AECI`s Board
of directors remains confident that the Company has a robust strategy and the
correct focus to successfully meet these challenges. Accordingly, an increased
final ordinary dividend of 150 cents per ordinary share (2007: 141 cents) has
been declared. This brings the dividend for the year to 240 cents per share,
compared with 213 cents in 2007.
Mining solutions
The mining solutions segment`s pleasing revenue growth of 50% can be attributed
to high commodity prices and volume growth in explosives. Much of the volume
growth was delivered by the African subsidiaries of African Explosives Limited
(AEL) while the company`s Surface and Massive business in South Africa grew
steadily. Customers in the South African Narrow Reef sector were plagued by
electricity shortages early in the year and by the global slowdown towards the
end of 2008, both factors impacting negatively on their volumes.
Operating profit increased by 52% year-on-year after taking into account a
significant stock write down as a result of falling ammonia prices towards year-
end. Operating margins, affected by the high price of ammonia, remained in line
with the previous year at approximately 6%. This margin performance remains well
below that of AEL`s global peers.
AEL`s international business recorded solid growth in South East Asia and
additional global sales channels are being developed. Sustaining the trend set
in 2007, the DetNet joint venture delivered significant growth in operating
profit, with increased volumes and further improvements made to established and
new offerings in its product range.
The capital investment plan remains on target to be completed in 2010. During
the year, the business invested R389 million in capital projects, of which R132
million was spent on the Initiating Systems Automation Programme (ISAP). To date
R408 million has been spent on the ISAP investment. A strategic review of this
investment earlier in the year confirmed that its business case remains
attractive. Capital investments of R101 million were also made in the rest of
Africa and Indonesia to support the business`s growth strategy.
Specialty chemicals
Chemical Services Limited (Chemserve) is the specialty chemical arm of AECI and
its performance continued to exceed expectations, with growth in revenue of 50%
from R5,6 billion in 2007 to R8,4 billion in 2008 and an increase in operating
profit of 49% from R570 million in 2007 to R851 million in 2008. Revenue growth
is attributable to the increase in commodity prices and volumes, primarily in
the mining and agriculture sectors. Businesses in Chemserve serving market
sectors such as consumer, automotive and manufacturing, delivered mixed results
in respect of volume growth but were well managed and improved their margins. In
addition to its exceptional revenue performance, Chemserve`s fixed costs were
well controlled. Operating margins remained at levels similar to those in the
prior year. Chemserve continued to explore potential activities outside the
African continent and has identified promising opportunities for 2009.
The capital expansion programme approved in 2007 progressed well,
notwithstanding some timing delays and cost increases due to scope and design
changes. During the year, R595 million was spent on various strategic growth
projects. All projects have been reviewed and their business cases remain
financially and strategically sound. The guar project and one of the two
xanthate reactors were commissioned in the last quarter. Both are being ramped-
up as planned. The sulphonation plant at Chloorkop, and the second xanthate
reactor, the acrylamide and polyacrylamide plants as well as the carbon
disulphide plant at Sasolburg will all be commissioned in 2009, as will the
oleochemical plant in Brazil.
Property managed by Heartland
Heartland`s operating results of R45 million (2007: R75 million) net of
remediation costs of R91 million (2007: R83 million) were in line with AECI`s
forecast at half-year. Heartland has continued to invest in infrastructure to
make land ready for sale once the market recovers from its current depressed
position. During the year the company disposed of 35 hectares of land (170
000mSquared of commercial and industrial bulk rights). Heartland invests in bulk
infrastructure in lieu of bulk services contributions and intends investing
approximately R900 million over the next five years to release about 1 000
hectares of land for sale. This investment will be controlled and managed in
line with expected market conditions over the period.
The properties at Modderfontein and Somerset West were valued at R2,5 billion at
mid-year by an independent consultant. No adjustment to the balance sheet has
been effected to realise this value.
Discontinued operations
AECI`s decision to exit the industrial nylon fibres and the polyethylene
terephthalate (PET) businesses of SANS Fibres (SANS) is in line with the
Company`s long-term strategy of growing its position as a leading supplier of
specialty products and services to the mining and manufacturing sectors in
Africa and other international geographies. After protracted but unsuccessful
attempts to dispose of the businesses, the Board announced the contemplated
closure of the Bellville businesses. Both will discontinue manufacturing
activities at end-March 2009. The fibres business at Stoneville, USA, will be
run as a stand-alone and self-sustaining entity for the foreseeable future. This
business has been accounted for in continuing operations.
SANS, as a discontinued operation, delivered an operating profit of R155 million
(2007: R19 million). This excellent performance is due to weakening of the local
currency and an increased off-take of high margin product after the closure
announcement. Closure costs of R204 million have been provided for in the 2008
accounts. The SANS property in Bellville will be disposed of in the foreseeable
future.
Financial
The Group`s gearing increased to 59% at year-end (2007: 25%). This increase is
due to:
capital spend exceeding R1 billion, largely to drive the growth strategies of
the mining solutions and specialty chemicals segments;
a net working capital increase of R921 million, owing mainly to increased
revenue and the increased level of export revenue, where the trade cycle is much
longer. The average working capital ratio to annual gross revenue deteriorated
to 19,4% (2007: 17,8%);
a share buy-back of just under 3% of the Company`s issued ordinary share
capital, at a cost of R238 million.
In the latter part of the year, the Group successfully negotiated term debt with
various financial institutions and now has adequate funding to support its
growth programme going forward. The increase in borrowings resulted in a
decrease in headline earnings per share and earnings per share of approximately
69 cents.
Cash interest cover at 4,6 times (2007: 8,1 times) has deteriorated largely due
to the capital spend and the working capital increase in line with revenue.
The post-employment medical aid liability was actuarially valued and an
effective 0,5% adjustment of R123 million was required to increase the liability
at year-end.
Directorate
In September, AECI welcomed Mark Kathan as financial director and chief
financial officer. He succeeded Roger Williams who resigned in August for family
reasons. At year-end, Lex van Vught retired as a non-executive member of the
Board, after a 40 year career in the Group.
Outlook and strategic focus
It appears that the severe impacts of global recessionary trends will remain
with us through 2009. The mining sector, AECI`s area of focus, has already
suffered adverse impacts. Lower commodity prices are resulting in lower returns
for customers in this sector and those supplying the retail, manufacturing and
automotive sectors have recorded some sharp declines in activity in recent
months. The outlook for volume growth in 2009, therefore, is not promising.
The Company will need to be extremely vigilant of the overall business
environment and avoid short-term decisions that could have adverse long-term
impacts. 2009 will be a challenging year with much uncertainty and, therefore,
the preservation of cash will be a priority. Specifically, the Board has asked
AECI`s management to:
control working capital aggressively;
progress key capital projects, while delaying replacement capital spend;
apply cost leadership principles through all businesses and activities;
maintain market share and margins through continued excellent service.
It is essential that the Company maintain its level of profitability in 2009 and
that it be well positioned for growth from 2010, when the environment is
expected to improve and the benefits of the capital investment programme begin
to accrue.
Fani Titi Graham Edwards
Chairman Chief executive
Woodmead, Sandton
23 February 2009
Directors: F Titi (Chairman), GN Edwards (Chief executive)+, FPP Baker+, RMW
Dunne*, S Engelbrecht, Z Fuphe, KM Kathan+, MJ Leeming, LM Nyhonyha, AC Parker.
+Executive *British
Company secretary: A Kennedy
www.aeci.co.za
Date: 24/02/2009 07:05:05 Supplied by www.sharenet.co.za
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