Wrap Text
31 August 2020 and Pre-Closed Period Investor Call
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 11 MONTHS TO 31 AUGUST 2020 AND PRE-
CLOSED PERIOD INVESTOR CALL
Nampak management wish to update shareholders on how the Nampak group
and its various divisions have performed over the past 11 months before
publishing its year end results on or about 1 December 2020.
OVERVIEW
The 11 month period from 1 October 2019 to 31 August 2020 was
characterised by a weak economic climate and pressure on consumers'
disposable income up to the end of March, which was exacerbated by an
even more challenging second half as lockdown measures were implemented
by governments in most markets from late March 2020 to combat the spread
of the novel coronavirus (COVID-19). A ban on alcohol sales and
restrictions on social events impacted negatively on overall volumes,
but significant progress was made in reducing US Dollar debt, defending
our market share and developing new growth opportunities.
As outlined at our interim results on 29 May 2020, a number of our sites
continued to operate to the extent allowed by regulations and Nampak
acted swiftly in implementing safety measures to mitigate the impact of
COVID-19 as best as practically possible. To date we have experienced
285 COVID-19 infections across our facilities, of which 274 employees
have fully recovered. Sadly, two employees passed away as a result of
the virus and we extend our sympathies and condolences to their
families. The pandemic resulted in reduced economic activity across all
geographies and adversely impacted the group's profitability. Trading is
now gradually returning to normal as economic activity and consumer
consumption patterns recover.
We have renewed two substantial supply contracts with multi-national
customers for the supply of beverage cans for the next three years. In
addition, we have secured two material contracts to supply beverage cans
to new large export customers. The bulk of these secured volumes will be
delivered throughout FY21 and will boost the utilisation of the South
African beverage can facilities. This will contribute towards improved
earnings in FY21 and contribute significantly to closing the gap caused
by the impact of COVID-19.
The group is in the process of reviewing its portfolio and its capital
and funding structures. Focus continues to be on margin improvement
activities and cash generation. Given the impact of COVID-19 on normal
demand patterns, the optimisation of working capital and conservative
capital expenditure have been key focus areas. As a result, the group
has continued to be cash positive throughout the period impacted by the
pandemic.
In line with our intention to reduce US Dollar denominated debt, the
R1.4 billion net proceeds from the disposal of Glass and US$16 million
from Cartons Nigeria were utilised to reduce this debt by US$100
million.
COVID-19 and a weaker ZAR:US Dollar exchange rate have adversely
impacted trading results and debt levels during the period with
concomitant negative impacts on profitability, cash generation and
funding covenants. Accordingly, the group has obtained covenant
relaxations from its lenders for both the 30 September 2020 and the 31
March 2021 measurement periods with a return to normal covenant levels
expected to be reached by September 2021. It should be noted that the
impact of COVID-19 and reduced economic activity in Angola were the key
drivers in the need to obtain a relaxation in funding covenants.
DIVISIONAL UPDATE
Metals
Bevcan South Africa managed to defend its strong market share, by
successfully renewing its largest supply agreement with a major
multinational customer, which was set to expire at the end of March
2021, for a further three years and a revised allocation of 85%
(previously 100%).
Tough trading conditions, due to the ban on alcoholic sales and reduced
consumer spending during the COVID-19 lockdown period, resulted in sales
volumes being 30% lower than the corresponding prior year period and
trading profit is expected to contract for the year. Since the ban on
sales of alcoholic products has been lifted, the demand for beverage
cans has trended upwards and operations are currently gearing up ahead
of the December/January peak period generally experienced during the
year-end holiday period.
New export opportunities emerged due to higher demand for beverage cans
in other parts of the world. We have secured two sizeable export
contracts, with a potential demand in excess of 800 million beverage can
bodies over the ensuing year.
Bevcan Nigeria performed relatively well despite a tough operating
environment. The impact of COVID-19 has limited revenue and trading
profit growth for the period under review. However, Bevcan Nigeria also
secured a multi-year supply agreement with one of our major customers,
effective 1 July 2020. Good service levels were rewarded with a 100%
volume allocation (previously around 50%), which increases Nampak's
overall market share. Although COVID-19 resulted in volumes contracting
over the lockdown period, demand is recovering faster than in any other
territory in which we operate. Since the start of August sales volumes
have exceeded pre-lockdown levels, with the month of August already
being a record month for this time of the year and projections for
September predict another record month.
Bevcan Angola remained challenged by low consumer spending and a
strictly enforced COVID-19 lockdown, resulting in reduced informal
trading. Volumes to date have more than halved compared to the prior
period. Management reacted swiftly and substantially lowered the
business's fixed cost structure and headcount, but trading profit is
still expected to be significantly lower than the prior period. Positive
trends in volumes have emerged since July, with volumes slowly
recovering from a low base.
The Divfood South Africa division incurred a loss for the period,
attributable to the loss of a key customer in the prior period and the
impact of COVID-19 on revenue. To compensate for the lost revenue,
significant restructuring has been implemented to streamline the
business and thereby rebase the fixed cost structures of the plant.
Phase two of the restructuring is underway and will be completed by the
end of FY21. These changes are expected to return the division to
sustainable profitability in FY21. The restructuring costs incurred
during the second half, will be similar to the costs incurred in the
first half of the current year.
Metal operations in Zimbabwe performed very well and profitability is
expected to improve. Tanzania returned to profitability in the last
quarter of the financial year, following a significant restructuring and
rationalisation of product lines. The metals operation in Kenya
experienced significant headwinds due to the pandemic and a number of
natural environmental occurrences that reduced demand significantly. The
business did, however, manage to perform on par with the previous year
due to a restructuring exercise that reduced overheads significantly. A
further restructuring and simplification of the business is planned in
the first quarter of FY21, to further enhance profitability.
Plastics
Plastics South Africa was on track to return to profitability at interim
in March 2020, but the decline in demand during the lockdown has
negatively affected results for the period. The demand for smaller packs
of CSD, milk and water bottles was significantly reduced. Volumes have
improved for the last two months of the financial year but remained
below the comparative prior period. Overall revenue for the business is
expected to be down and a small trading loss is expected for the year.
However, trading margins are expected to improve from the prior period
as restructuring initiatives continue to deliver positive results and an
improved FY21 is expected.
The performance of Cartons in South Africa was impacted by the alcohol
ban, as conical cartons used for sorghum beer could not be sold for
three months in the second half. The rest of the business performed
slightly below expectation due to a decrease in the demand for mageu and
milk as disposable income levels decreased in South Africa. Business
development initiatives and product launches were hampered by travel
restrictions, but the foundation created before the onset of the
pandemic remains intact and ready for execution. While trading margins
will be maintained, revenue and trading income will be reduced for the
year.
The business expects to benefit greatly over the coming years from a
newly formed joint venture with Elopak, to grow the footprint of gable
top cartons for both the fresh and aseptic beverage markets in sub-
Saharan Africa.
Plastics operations in Megapak Zimbabwe performed well in a challenging
economic environment. The reduced demand from the market was serviced to
the extent that foreign currency was available and raw materials could
be sourced, but trading margins more than compensated for demand
declines. These operations continue to self-fund their operational and
capital requirements, and generated cash is reinvested into operations
and equipment to limit exposure to currency fluctuations. These
businesses also have experienced and stable management teams, good
production capabilities and are poised to respond to improved demand
when the economic climate in Zimbabwe improves.
Demand for crates in Zambia and Ethiopia were strong, driving much
improved profitability from operations in these countries.
Paper
Demand and profitability at Hunyani in Zimbabwe remained strong on the
back of decreased importation of tobacco cases from foreign suppliers.
Volumes of conical cartons in Zambia were lower relative to the previous
year due to the pandemic, although profitability increased significantly
as a result of raw material procured at a lower cost prior to the
devaluation of the exchange rate. The Malawian business became
profitable in the current year, reaping the rewards of restructuring in
prior periods and a continued focus on customer service. Demand was
limited by lockdown restrictions. Cartons Nigeria was sold in January
2020 and will only be included for three months in the 2020 results.
FINANCIAL UPDATE
Financial position
Total gross debt reduced by 21% to R6.9 billion from March 2020 as
management achieved its goal to reduce US Dollar debt during the period.
Proceeds of R1.4 billion from the sale of Glass and US$16 million from
Cartons Nigeria were used to pay down US$100 million debt in the second
half. This improved the mix of Rand and US Dollar denominated debt,
reduced the group's exposure to foreign exchange fluctuations going
forward and will alleviate to some extent the adverse impacts on the
funding covenants of a dislocation between the spot and average Rand and
US Dollar exchange rates late in a reporting period. US Dollar debt now
comprises 65% of total gross debt as at 31 August 2020, a reduction from
75% in March 2020 and 73% in September 2019.
The ZAR:USD closing rates have improved by 5% since March 2020. The Rand
remains volatile and is impacted by emerging market risk sentiment.
Despite showing promising recoveries during the period, recent sentiment
has resulted in the Rand weakening ahead of the group's FY20 reporting
period. This will adversely impact the translation of the US Dollar debt
to Rands.
Whilst the group is well funded with significant headroom in its total
banking facilities, the use of available headroom was restricted by
current EBITDA levels, which were lower than anticipated due to limited
trading activity during the lockdown and overall weaker economic
conditions.
Banking facilities
The group's banking facilities, which were restructured in September
2018, are surplus to its medium-term requirements. In order to reduce
banking commitment fees, the group has restructured its funding mix,
profile and capacity to more closely align the facility levels with
expected future trading levels, but has ensured that significant
headroom remains in its banking facilities. The revised funding package
is expected to positively benefit earnings.
Covenant relaxation
The group's EBITDA was adversely impacted primarily due to the slowdown
in the Angolan economy and this was exacerbated by COVID-19 lockdown
restrictions. The implementation of profitability improvement measures
successfully reduced operating costs and enabled the group to remain net
cash positive through this period. These measures included salary
sacrifices (including directors' fees), a freeze on new capital
expenditure for non-essential projects, improved working capital
management and asset disposals. Although these measures protected group
cash flows to a large extent, the impact of COVID-19 on earnings
resulted in EBITDA levels that were lower than expected. Compliance with
debt covenants continued to be closely managed with the consortium of
funders.
As a consequence of the impacts of COVID-19 on Nampak's financial
position, covenant relaxations have been agreed with the group's
funders. Covenants will be measured quarterly until 31 December 2021 and
reported on to the group's funders. EBITDA for covenant calculations is
based on a rolling twelve-month period to the date of measurement.
Consequently, the adverse impacts of COVID-19 on the group's EBITDA will
only be excluded from the computation for the September 2021
measurement. The revised covenant levels have taken this factor into
account and have been structured accordingly.
The respective covenant limits for these reporting periods has been
relaxed as follows:
Reporting period
Covenant 30 31 30 31 31 30 30
requirement Sep Mar Sep Dec Mar June Sep
2019 2020 2020 2020 2021 2021 2021
Net debt: Less Less Less Less Less Less
EBITDA Less
than than than than than than
than or
or or or or or or
equal
equal equal equal equal equal equal
to
to to to to to to
5.25x
3.5x 3.5x 5.25x 5.25x 4.5x 3.0x
EBITDA: More More More More More More
interest More
than than than than than than
cover than or
or or or or or or
equal
equal equal equal equal equal equal
to
to to to to to to
2.25x
4.0x 3.25x 2.25x 2.25x 2.25x 4.0x
The group is reviewing its capital structure and borrowings levels with
an internal portfolio review expected to significantly reduce borrowing
levels by 30 September 2021.
As part of the covenant waiver and to reduce gearing, Nampak is
committed to explore the sale of certain assets. We are also in the
process of implementing the restructuring of certain businesses, in
order to further improve profitability. Together with internally
generated cash, these actions will support a deleveraging plan through
the 2021 financial year.
Cash transfers and liquidity in the Rest of Africa
Good liquidity in the Rest of Africa was maintained for the period and
cash transfers were healthy at R2.2 billion. R1.0 billion and R1.2
billion were transferred from Angola and Nigeria respectively, despite
slowing availability of foreign currencies in Nigeria. Cash balances at
the end of August amount to the Rand equivalent of R411 million and R309
million for Angola and Nigeria respectively, with pleasing transfer
rates since September 2019. Of the R411 million cash balance in Angola,
75% remains hedged and protected against further devaluations through US
Dollar-Kwanza linked bonds. No cash balances are hedged in Nigeria as
economic hedges are not available.
The availability of foreign currency in Zimbabwe remains challenging and
only R6 million or 10% of the opening cash position of R57 million was
transferred for the period.
Foreign exchange movements
As Nampak has sizeable operations outside of South Africa and is exposed
to various foreign currency movements, the group's performance for the
year will be impacted by foreign currency movements.
The Nigerian Naira remained relatively stable, while the Angolan Kwanza
devalued by more than 60% over the period. The Zimbabwean Dollar
devalued by more than 440% and as a result, foreign exchange losses are
expected for the full year period. This devaluation will also impact
translated results from, and the financial position of, operations in
the country. The impacts of hyperinflation accounting are expected to
compensate for this devaluation.
Capital expenditure
Capital expenditure for the full year is expected to be between R600-
R675 million, compared to R735 million in the prior year. The group
adopted a cash conservation approach during these uncertain times.
Capital expenditure will be kept to an absolute minimum for the short to
medium term, without compromising the group's well capitalised asset
base.
OUTLOOK
The renewal of major long-term supply contracts will assist us to defend
our market share in key markets, while large export contracts to non-
traditional markets are expected to boost profitability during the next
financial year, as the economy recovers from the impact of the pandemic.
A new joint venture with Elopak will not only allow us to expand our
product offering, but also allow us to compete effectively in market
segments previously unavailable to us.
Given a well-capitalised asset base in our core businesses, it is our
intention to keep annual capital expenditure to below R350 million for
the next two years, in order to fast track the deleveraging of our
balance sheet.
Our portfolio review of assets will give consideration to divest from
those businesses with either a poor strategic fit, those that will
reduce complexity or those that are unlikely to provide adequate
returns. Proceeds will be utilised to reduce leverage and improve
balance sheet risk.
'Our short to medium term focus is to proactively deleverage and reduce
currency and operational risk to the business. We believe that the macro
environments will continue to be muted to some extent for the next 6-12
months, but our current strategies will ensure that Nampak will produce
much improved results and emerge as a lower risk organisation with a
stronger balance sheet.' ' Erik Smuts, Nampak's CEO
Pre-closed period conference call
Nampak management will hold a pre-closed period telephonic conference
call on Wednesday, 30 September 2020 at 15:00 Central Africa Time
(GMT+2) to discuss this trading update and address questions from the
investment community. Dial-in details are available on Nampak's website
http://www.nampak.com/Investors.
Nampak will release its results for the financial year ending 30
September 2020 on the Stock Exchange News Service on or about 1 December
2020. Nampak will be in a closed period from 1 October 2020 until the
release of its year end 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.
Bryanston
30 September 2020
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.
Date: 30-09-2020 02:09:00
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