Wrap Text
Update for the period 1 October 2016 to 28 February 2017
Nampak Limited
(Incorporated in the Republic of South Africa)
Registration Number: 1968/008070/06
Share Code: NPK
ISIN: ZAE 000071676
(“Nampak” or the "Group")
Update for the period 1 October 2016 to 28 February 2017
We have made significant progress in the implementation of our comprehensive
plan to improve operational performance through ‘buying better, making better
and selling better’. Operations excellence initiatives and programmes to improve
efficiencies and cost are generating good results and we have refocused the
culture towards “making bottles and cans profitably”. The asset recapitalisation
programme in South Africa is almost complete and already contributing to
improved efficiencies and competitiveness. Following on achievements made in
2016, our operational performance has continued to improve in the five months to
end February 2017.
Sluggish growth and low consumer confidence in our key markets continue to
impact consumer spending and hence demand for packaging. Being mindful of the
challenging and uncertain macroeconomic environment in key markets in South
Africa, Angola and Nigeria, we continue to focus our attention on managing and
optimising aspects of the business within our control, namely our costs, assets and
processes.
Slower than optimal cash extraction from Nigeria and Angola as well as the
exposure to currency volatility of cash held in these restricted areas remain the key
issues impacting overall performance. While we have taken all possible steps to
extract cash from these markets, we cannot rule out further impacts resulting from
exchange rate fluctuations. The substantially strengthened Nampak balance sheet
has significantly enhanced our ability to be resilient during continued macro-
economic uncertainty.
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A CHALLENGING MACROECONOMIC ENVIRONMENT
In South Africa, the slowdown in consumer spending is impacting spending on goods
and services, including packaged goods. An improving inflation outlook, the
relatively stable to stronger rand (ZAR), improving commodity prices and a
narrowing in the current account deficit are expected to support a modestly higher
growth rate in 2017 (compared to 2016). Nigeria’s economy contracted in 2016, with
the delayed adjustment of the naira to the weaker oil price contributing to the
slowdown. Inflation, currently just below 20%, has negatively impacted consumer
spending and is expected to remain high in 2017 with growth forecast to improve in
2017 and 2018 depending on the government’s ability to maintain and implement
investment promoting fiscal and monetary policy. Angola’s economy is anticipated
to grow in 2017 driven by higher public spending. The IMF expects inflation to
decline to about 20% from current levels of 40+% assuming tight monetary
conditions, no further domestic fuel price increases and a stable kwanza. Besides
pegging the kwanza to the US dollar (USD) since April 2016, the government has
increased the supply of foreign exchange to the interbank foreign exchange
market, although liquidity remains constrained. The backlog of forex purchase orders
in the banking system is estimated at USD5 – USD7 billion and an estimated 3% of
GDP in domestic payment arrears have accumulated.
FOREIGN CURRENCY TRANSLATIONS
Since 30 September 2016, the group’s last year end, there has been no devaluation
in the Nigerian naira and Angolan kwanza official exchange rates. As a result,
Nampak’s performance for the five months ended 28 February 2017 was not
materially affected by foreign currency translation events. The strengthening of the
ZAR impacted the translation of USD and British pound (GBP) earnings. During the
period the translation of the profit from the Rest of Africa and Europe was impacted
by a stronger ZAR versus the GBP and USD.
METALS
Bevcan South Africa's volumes were marginally lower than in the previous year as a
result of constrained consumer demand. The newly commissioned ends plant
expansion contributed positively to revenue, as previously imported ends were
substituted with locally produced ends. The Angolan beverage can market
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recovered very strongly with record can sales volumes recorded for a number of
months. The lower crude oil price and high inflation remain key risks in the country
and the conversion of the tinplate line is awaiting government confirmation of the
allocation of foreign currency from cash on hand. Bevcan Nigeria’s can volumes
were down on the previous year as the consumer remained under pressure amid
negative economic growth and a high inflation environment, following a 58%
devaluation in the naira in 2016. The factory’s utilisation was at an annualised output
rate of 450 – 500 million cans per annum for the period. The substitution of beverage
cans with other more affordable packaging is a key risk and is being monitored
closely. A key contract is in a tender process, and depending on the outcome of
the tender, may have an impact on the valuation of Bevcan Nigeria.
In South Africa, Divfood’s performance was below that of 2016, due mainly to lower
volumes from a number of product categories. Monobloc aerosols, polish cans,
paint cans and exports into various emerging markets were below prior year
volumes resulting from consumers being under financial pressure. Fish can sales were
disappointing following a much lower allowable catch quota for 2017. The
performance of the general metal packaging businesses in the Rest of Africa was
generally subdued. While the Nigerian operation benefited from higher sales
volumes, mainly on import substitution, in the remainder of the portfolio demand was
impacted by country-specific macroeconomic challenges.
PLASTICS
In South Africa, liquid packaging and closures volumes were up on the previous
year, driven by the recovery in demand in the KZN and Cape regions affected by
the drought in 2016. Improved drum volumes were recorded due to a recovery in
bulk alcohol sales to the Rest of Africa, as well as improved conical and crate
volumes. Higher demand resulted in better volumes for plastic closures and tubes.
Plastics Europe continued to be under pressure, with volumes down on the prior year
due to lower customer demand as a result of vertical integration. This business
continues evaluating projects aimed at improving operational performance and
capturing opportunities outside the milk industry to grow volumes. With key
management changes having been made recently, progress was made in
improving operational performance. In Zimbabwe the performance of the
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businesses was down on 2016 due to macroeconomic challenges, including the
inconsistent availability of foreign exchange that impacted both operations and
consumer demand.
PAPER
Nigeria Cartons’ performance was lower than the previous year as a result of
generally lower demand across all market segments. Sales volumes are expected to
improve in the remainder of the year. In Zambia, sorghum beer carton sale volumes
were down due to poor demand and substitution into other packaging formats.
Kenya Bullpak’s revenue was below the previous year due to a decrease in volumes
from some customers as well as competitive pressure in the market. The recovery in
demand from a key customer contributed positively to performance. Malawi,
despite a late surge in orders for tobacco cases, was down as a result of lower
sorghum beer carton sales resulting from a shift to HDPE returnable bottles. In
Zimbabwe, Hunyani performed well on the back of good tobacco carton sales and
import duties on various packaging formats which has stimulated demand for locally
manufactured packaging.
GLASS
Following a successful operational turnaround with pleasing production efficiency,
sales volumes have been disappointing, reflecting subdued demand in the South
African container glass market. All product categories were affected by the lower
demand, with the exception of wine which showed good volume growth supported
by increased market share. Performance in the second half of the year is expected
to improve due to increased volumes in beer and cider markets.
NIGERIA AND ANGOLA RAW MATERIAL PROCUREMENT, CURRENCY AND LIQUIDITY
UPDATE
Overall Nampak businesses continue to generate cash and operations remain
adequately funded with raw material purchases secured through the Isle of Man
(IOM) procurement office. Additional working capital funding is being allocated to
support the strong demand in Angola and inventory levels in Nigeria are being
closely managed taking into account softer demand. Operations can be sustained
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for at least 24 to 30 months at current production with existing financing and funding
facilities.
For the five months to 28 February 2017, USD allocations from Angola averaged 72%
of invoices presented for payment in the period. In Nigeria all the deliverable
forward contracts (DFs) secured by 30 September 2016 which became due during
the period under review were honoured. These amounted to USD17 million out of a
total of USD 27 million with the remainder becoming due between May 2017 and
October 2017. As a result, Nigerian USD allocations for the period amounted to 90%
of invoices presented for payment. Raw material purchases during the period were
also lower due to lower demand. The situation in Nigeria is being closely monitored
and alternative methodologies for the extraction of USDs are continuously being
investigated.
Currency volatility and liquidity constraints are expected to remain in the short to
medium term and alternative hedging instruments are being considered to mitigate
the foreign exchange risks. Regulated repayments include capital loans, interest on
loans remittance and dividend extractions.
Below is a table indicating Nampak’s cash and hedging positions in Nigeria and
Angola as at 28 February 2017. The total cash on hand increased to R2.2 billion (30
September 2016: R2.0 billion) mainly due to the good trading performance of
Bevcan Angola. During the period the group managed to increase the hedged
positions by 52% from R990 million at 30 September 2016 to R1.5 billion at 28 February
2017 and thereby increasing the hedged position from 50% to 68%. In Angola, an
additional USD37.5 million in USD indexed kwanza bonds were acquired bringing the
holding to USD82.5 million. In Nigeria an additional USD20 million in DFs were
acquired with maturity dates to October 2017. The resultant impact of the newly
acquired DFs combined with the DFs that became due and were honoured during
the period was a USD3 million decline in the Nigerian cash on hand balances.
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ZAR Angola Nigeria Total
30 September 2016
Cash on hand 1.0bn 984m 2.0bn
Hedging 614m 376m 990m
Net un-hedged cash 386m 608m 994m
Cash extraction rate* 95% 57% 77%
% of cash on hand hedged 61% 38% 50%
28 February 2017
Cash on hand 1.3bn 941m 2.2bn
Hedging 1.1bn 399m 1.5bn
Net un-hedged cash 194m 542m 736m
Cash extraction rate* 72% 90% 78%
% of cash on hand hedged 85% 42% 68%
* Cash extraction rate = cash extracted in period as a percentage of invoices presented for
payment in the period.
All foreign currency translations and foreign currency transactions are translated
using the official exchange rate in line with the requirements of International
Financial Reporting Standards and foreign exchange regulations in individual
countries.
BALANCE SHEET STRENGTH
The balance sheet remained strong during the period on the back of the reduction
of interest bearing debt and the currently strong ZAR. 75% of the R1.744 billion sale
and leaseback proceeds received in September 2016 were utilised to reduce South
African interest bearing debt. Gearing to the end of March 2017, Nampak’s half
year, is expected to stay within the targeted range of 40 – 60% with the group’s
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covenant positions remaining strong. The current ratio is also expected to remain at
a similar level to that achieved on 30 September 2016. The significantly improved
balance sheet structure has created a platform for future growth.
Cash generation remains a key focus area for the organisation and good progress is
being made. Banking facilities remain strong with adequate funding capacity for
the group’s operations.
DIVIDEND
In keeping with past practice, the board will consider the appropriateness of paying
a dividend this year, having regard to the macroeconomic environment, capital
expenditure and the availability of cash from restricted areas.
REST OF AFRICA GROWTH PROJECTS
In view of prevailing macroeconomic conditions in key growth markets Nampak
continues to be circumspect regarding further capital investment. Notwithstanding
the aforementioned, opportunities in a variety of substrates are being evaluated
taking into account market conditions and the prospects of improvement in the
availability of hard currency.
CAPITAL EXPENDITURE
Capital expenditure for the full year is expected at between R0.8 - R1.0 billion, with
some 60% being replacement or sustenance capital, and the balance being
expansion capital. Maintenance expenditure is not compromised by cutbacks on
capital expenditure, as this forms part of the operational expenditure.
TAX RATE
The tax rate will be affected by the changing contributions to earnings from the
Bevcan Nigeria and Bevcan Angola operations and is expected to return to levels of
between 15% and 20% in 2017. The group continues to benefit from lower tax rates in
jurisdictions outside of South Africa with the Bevcan Nigeria pioneer status expiring in
2018 and the Bevcan Angola tax holiday ending in 2019.
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EXPECTATIONS FOR THE REST OF THE YEAR
It is expected that the South African consumer will remain under pressure which will
have a concomitant negative impact on sales volumes. Gains from improved
factory efficiencies, business improvement initiatives as well as cost savings are
expected to reduce this negative impact. The group’s operations in the Rest of
Africa are expected to continue generating cash as demand for some products
grows supported by import replacement, with overall performance being impacted
by macroeconomic challenges. Liquidity issues and possible currency devaluations
in Nigeria and Angola may result in potential foreign currency translation impacts. In
the absence of a catalyst to promote economic growth in our key markets, demand
for packaged goods and exchange rates are expected to remain a key factor
influencing our results.
Shareholders are advised that the financial information contained in this
announcement has not been audited, reviewed or reported upon by Nampak’s
external auditors.
Sandton
15 March 2017
Sponsor:
UBS South Africa (Pty) Ltd
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