NAMPAK LIMITED - Voluntary trading update for the five months to 28 February 2018

Release Date: 29/03/2018 12:00
Code(s): NPK
 
Wrap Text
Voluntary trading update for the five months to 28 February 2018

Nampak Limited
(Incorporated in the Republic of South Africa)
Registration Number: 1968/008070/06
Share Code: NPK
ISIN: ZAE 000071676
(“Nampak” or the "Group")

VOLUNTARY TRADING UPDATE FOR THE FIVE MONTHS TO 28 FEBRUARY 2018

Macroeconomic environment in key markets
The South African gross domestic product (“GDP”) growth data for 2017
were better than expected and the recent Statistics SA January 2018
manufacturing production results showed an increase on the January 2017
results. The renewed and improving consumer confidence in 2018,
together with expected higher growth rates and a stronger Rand, in line
with historic trends is expected to have a positive multiplier effect
on packaging demand and drive growth in volume and overall performance
for the year.

The Nigerian economy is displaying an improvement, having emerged from
a recession during 2017. Whilst overall inflation remains high, wage
inflation has now caught up and purchasing power has been restored
resulting in stronger consumer demand. The World Bank is forecasting
GDP growth of 2.5%. As small shifts in Nigeria’s sizeable population of
approximately 194 million contribute towards significant changes in
demand, Nampak has experienced volume growth substantially in excess of
GDP growth for the period to date. Significant improvement in liquidity
since the introduction of the Nigerian Autonomous Foreign Exchange
Market (“NAFEX”) in April 2017 and the improvement in the oil price
have also led to foreign currency reserves doubling to approximately
USD44 billion.

The Angolan Government introduced a series of foreign currency auctions
in late 2017 to devalue the kwanza in order to stimulate liquidity.
This followed the new President’s shift in monetary policy and focus on
attracting foreign investment and diversifying the country’s dependence
away from the oil industry. Whilst devaluation of the kwanza is
proceeding slower than anticipated, this is a positive development by
the Central Bank towards increasing foreign exchange reserves. Further
devaluations are expected to result in market-determined floating
exchange rates.

Divisional update
METALS
Bevcan South Africa has experienced pleasing volume growth in excess of
GDP growth for the period. Should this trend continue on the back of
improved consumer sentiment, additional capacity by a new entrant in
the beverage can market is likely to be absorbed in the medium term.
Discussions with a major customer regarding the renewal of an existing
supply agreement that comes to an end on 31 March 2018 are in progress
and we expect that some volume will be allocated to the new entrant.

Bevcan Angola volumes have shown pleasing growth for the period as
beverage can demand remains strong. The decision to convert the tin
plate line to aluminium is in abeyance pending sustained cash
extraction and subject to the Angolan Government agreeing to a kwanza
dollar swop to fund the import capital equipment requirements of the
expansion project.

Bevcan Nigeria has experienced a very robust recovery in demand.
Relationships with key customers are strong and the recovery in demand
of this market has been pleasing since the easing of the financial
crisis. Should the current demand growth trend continue, management
will assess the viability of a second line to double existing capacity.

DivFood is seeing improved volumes from fish can sales on the back of
the imported frozen fish and a higher local allowable catch. Meat can
sales are up and there appear to be early signs of improving consumer
confidence. General metals packaging in the Rest of Africa is trading
to expectations with modest growth in certain categories.

PLASTICS
Plastics South Africa is enjoying a moderate volume recovery in certain
sub-categories, but performance for the period has been impacted by the
loss of volume from lower tender allocations by a major customer in
late 2017. This volume loss has been partially mitigated by higher
capacity utilisation initiatives and strong water container demand
throughout the country, especially in regions impacted by the drought.
The operational turnaround is continuing and individual assets are
being optimised. Further structural labour cost saving initiatives
including plant closures and/or consolidations will be implemented in
the second half of 2018 and in 2019, resulting in cost savings and
improved profitability going forward.

Demand in Zimbabwe continued to grow, bolstered by new customers and
increased market share.

The turnaround at Plastics Europe is progressing well and management
expects this business to return to profitability during the 2018
financial year, one year earlier than previously guided. Sales volumes
continue to be impacted by backward integration by a major customer,
but good progress has been made in securing additional volume from
second-tier dairies. Satisfactory progress has also been made in
addressing the unfunded portion of the defined benefit pension
liability in Plastics Europe and it is now considered appropriate to
investigate strategic options regarding the portfolio role of this
business.

GLASS
Market demand, driven primarily by substrate substitution into glass,
exceeds the operation’s current ability to supply given ongoing
production limitations. While municipal supply of electricity remains
very inconsistent, stable electricity supply to the glass plant has
been secured from the operation’s rotary uninterruptible power supply
system for the second quarter of the financial year. The business is
being closely managed by the group executive responsible for Glass,
supported by external consultants and the company’s technical partner.
Progress, however, has not been as fast as desired and this business is
expected to make a loss for the half year to March 2018 due to lower
than targeted operational efficiencies resulting from insufficient
technical skills.

PAPER
Demand in Zimbabwe has slowed and continues to be impacted by the lack
of foreign currency. Cartons volumes in Nigeria were strong, in line
with the improving consumer demand currently being experienced in this
country. Zambia and Malawi continue to be affected by subdued carton
demand owing to a change in the packaging strategy of a major customer,
although this trend is expected to be reversed in the second half of
the financial year as the sale of this major customer to a local brewer
is finalised.

Foreign currency movements
Nampak has sizeable operations outside of South Africa and is exposed
to various foreign currency movements. As a result, Nampak’s
performance for the five months ended 28 February 2018 has been
impacted by foreign currency movements. Since the 2017 year end, there
has been no devaluation in the Nigerian naira. In Angola, the kwanza
has been devalued through a series of controlled auctions by the
Central Bank and has devalued by 27% to the end of February 2018. The
strengthening of the South African rand (“Rand”) will adversely impact
the translation of foreign earnings for all Rest of Africa territories
but will benefit the translation of the Group’s dollar denominated
borrowings.

Currency movements for key markets:
                  Average rates                   Closing rates
Currency 28 Feb 31 Mar      %    30 Sep 28 Feb 30 Sep       %    31 Mar
          2018(1) 2017(2) change 2017(3)  2018     2017  change   2017
ZAR/GBP    17.52   16.83    (4)%  16.96   16.25    18.17     11%  16.83
ZAR/EUR    15.51   14.54    (7)%  14.78   14.39    15.98     10%  14.29
ZAR/USD    12.97   13.57      4%  13.38   11.79    13.56     13%  13.41
AOA/USD   183.99 171.73     (7)% 171.74 217.63 171.75      (27)% 171.73
NGN/USD   359.68 311.69    (15)% 321.90 360.13 358.99       (0)% 314.29
(1) For the 5 months to 28 February 2018, (2) For the 6 months to 31
March 2017, (3) For the year to 30 September 2017

Currency, liquidity and procurement in Rest of Africa
The Rand equivalent of cash balances held in the currently          cash
restricted areas of Angola and Zimbabwe increased by 21% to         R3.4
billion from R2.8 billion at 30 September 2017.
As indicated at the year-end presentation in November 2017, there are
currently no further constraints to extracting cash from Nigeria.
Nampak has successfully extracted R567 million (USD48 million) from
that country for the five months. Cash balances in Nigeria reduced to
R586 million as at end February 2018 from R828 million at the 2017 year
end. Cash from Nigeria will be used to repay outstanding loan balances
with the Group’s procurement and treasury operations.

Angolan cash balances have grown from R2.2 billion at 30 September 2017
to R2.6 billion as a result of continuing strong can demand in Angola
and a continued in country shortage of US dollars. Initiatives to
alleviate the rate at which cash is accumulating have been implemented
with the cash extraction rate increasing to 68% from 47% achieved in
the prior financial year. One of these initiatives is that can ends are
now being supplied directly to customers from Bevcan South Africa. The
Group continues to engage in high level discussions with authorities on
liquidity and the allocation of foreign currency, to improve Nampak’s
operating ability and funding model in Angola. Some progress has been
made in repatriating cash from Angola with R239 million (USD20 million)
being extracted for the five months ended 28 February 2018.

Cash balances in Zimbabwe have grown to R841 million from R654 million
at 30 September 2017. Following intensive engagements with customers
and the Zimbabwe Central Bank, Nampak expects to be allocated foreign
currency on a monthly basis beginning in the second half of the 2018
financial year. These funds will be utilised to continue operations in
Zimbabwe as well as to repay monies advanced by the Rest of Africa
procurement hub.

Cash balances and extraction rates in Angola, Zimbabwe and Nigeria are
as follows:
                                  RESTRICTED            NON-RESTRICTED
   28 FEBRUARY 2018
                         Angola    Zimbabwe    Total       Nigeria
Cash on hand            R2 598m     R841m     R3 439m       R586m
Hedged cash             R2 598m       –(2)    R2 589m         –(3)
% cash hedged             100%        –(2)      75%           –(3)
                    (1)
Cash extraction rate      68%         1%        37%          133%

                                    RESTRICTED             NON-RESTRICTED
  30 SEPTEMBER 2017
                           Angola     Zimbabwe    Total       Nigeria
Cash on hand              R2 188m      R654m     R2 842m       R828m
Hedged cash               R1 954m        –(2)    R1 954m         –(3)
% cash hedged               89%          –(2)      69%           –(3)
Cash extraction rate(1)     47%         40%        47%          93%

(1) Liquidity ratio of invoices presented for payment in the period.
(2) There are currently no appropriate hedges available in Zimbabwe.
(3) Cash balances in Nigeria are no longer considered restricted as a
consequence of the liquidity that has been provided by the introduction
of the NAFEX.
Currency volatility and liquidity constraints are expected to remain in
the short to medium term in Angola. The Angolan Government has signaled
its intention to allow the kwanza to devalue against the dollar through
controlled auction processes in an attempt to find a more appropriate
exchange rate that is expected to stimulate trade and attract foreign
investment. Accordingly, the Group has increased its hedging of its
kwanza cash balances through US dollar indexed kwanza bonds from 89% at
30 September 2017 to 100% at 28 February 2018. 67% of US dollar linked
kwanza bonds mature after September 2019, 19% mature after September
2018 and the remaining 14% mature during the next six months.
Alternative hedging instruments are being considered to mitigate
further foreign exchange risks.

As there are currently no appropriate hedging instruments in Zimbabwe,
interventions with the authorities and customers will continue. In
addition, consideration is being given to the potential alternative
uses of the cash balances in order to limit the amount of cash
accumulation in Zimbabwe to strengthen the Group’s position.

Taxation
The pioneer status in Nigeria ended on 31 December 2017 resulting in
Bevcan Nigeria becoming a taxable entity from 1 January 2018. The
Bevcan Nigerian effective tax rate will be reduced through the
deduction of accumulated wear and tear allowances brought forward from
the five year pioneer period as well as other allowable tax deductions,
thereby reducing the effective tax rate that is applicable in the
commencement year. The tax holiday in Angola will end on 31 December
2018. The group tax rate will accordingly be affected by the respective
contributions to earnings from Angola and Nigeria for the Group’s
financial year ending 30 September 2018.

Capital expenditure
Guidance post the release of the 2017 financial results for capital
expenditure was between R1.0 and R1.2 billion for the 2018 financial
year. As a result of stringent capital allocation processes, capital
expenditure for 2018 is expected to be lower than the initial guidance
and more in line with the 2017 full year spend of R735 million.

Debt restructuring and gearing
As indicated to investors in 2017, Nampak is in the process of
restructuring a portion of its debt obligations to committed term
revolving credit facilities with its banking partners in order to
further strengthen the group statement of financial position and
address the group’s debt maturity profile. To the extent that Nampak
Limited will be required to extend direct or indirect financial
assistance to related or inter-related corporate entities as part of
the debt restructuring process, shareholders’ approval will be sought
for intra-group financial assistance in terms of section 45 of the
Companies Act 71. A shareholders’ meeting will be called for this
purpose before the 2018 financial year end.

Taking into account the Group’s current shareholders’ equity, gearing
for the half year to March 2018 and the full year is expected to remain
within the target range of 40-60% with comfortable headroom in key
covenant ratios.

Structural changes
The Board has decided to dispose of the Glass business. To ensure the
long term profitability of Glass and to address the operational skills
gap, the Board has resolved to approach packaging industry players to
invite proposals for the sale of the Glass business. Exploratory
discussions have been held with a number of strategic players with a
formal corporate finance disposal process currently in progress.

Outlook for the remainder of the year
With renewed consumer confidence and increasing spending expected in
South Africa, demand for packaging is expected to improve. Gains from
improved operating efficiencies and cost savings from a reduced
manufacturing footprint are expected to mitigate the impact of the new
entrant in the beverage can market. The Group’s operations in the Rest
of Africa are anticipated to continue generating cash as demand in
Angola and the recovering economy in Nigeria drive increased demand for
packaging products. Overall performance will however, be impacted by
macroeconomic dynamics. Despite measures having been put in place
already, if liquidity in Zimbabwe does not improve in the second half,
performance will be subdued as more stringent requirements for
customers have been put in place to limit exposure in that country. US
dollar shortages in Angola and Zimbabwe and a series of expected
currency devaluations in Angola may result in potential foreign
currency translation impacts.

Shareholders are advised that the financial information contained in
this announcement has not been audited, reviewed or reported upon by
Nampak’s external auditors.

The Group’s interim results for the six month period ended 31 March
2018 are scheduled to be announced on the Stock Exchange News Service
on or about 30 May 2018.

Bryanston
29 March 2018
Sponsor: UBS South Africa (Pty) Ltd

Forward-looking statements: Certain statements in this document are not reported financial
results or historical information, but forward-looking statements.     These statements are
predictions of or indicate future events, trends, future prospects, objectives, earnings,
savings or plans. Examples of such forward-looking statements include, but are not limited
to, statements regarding volume growth, increases in market share, exchange rate
fluctuations, shareholder return and cost reductions.       Forward-looking statements are
sometimes, but not always, identified by their use of a date in the future or such words as
“believe”, “continue”, “anticipate”, “ongoing”, “expect”, “will”, “could”, “may”, “intend”,
“plan”, “could”, “may”, and “endeavour”. By their nature, forward-looking statements are
inherently predictive, speculative and involve inherent risks and uncertainties, because
they relate to events and depend on circumstances that may or may not occur in the future.
If one or more of these risks materialise, or should underlying assumptions prove
incorrect, our actual results may differ materially from those anticipated. There are a
number of factors that could cause actual results and developments to differ materially
from those expressed or implied by these forward-looking statements. These factors include,
but are not limited to: changes in economic or political conditions and changes to the
associated legal, regulatory and tax environments; lower than expected performance of
existing or new products and the impact thereof on the Group’s future revenue, cost
structure and capital expenditure; the Group’s ability to expand its portfolio; skills
shortage; changes in foreign exchange rates and a lack of market liquidity which holds up
the repatriation of earnings; increased competition, slower than expected customer growth
and reduced customer retention; acquisitions and divestments of Group businesses and assets
and the pursuit of new, unexpected strategic opportunities; the extent of any future write-
downs or impairment charges on the Group’s assets; the impact of legal or other proceedings
against the Group; uncontrollable increases to legacy defined benefit liabilities and
higher than expected costs or capital expenditures.        When relying on forward-looking
statements to make investment decisions, you should carefully consider both these factors
and other uncertainties and events. Forward-looking statements apply only as of the date on
which they are made, and we do not undertake any obligation to update or revise any of
them, whether as a result of new information, future events or otherwise.

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