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Voluntary trading update for the 11 months to 31 August 2019
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 2019
Macroeconomic environment in key markets
SOUTH AFRICA
The South Africa economy recorded positive growth of 3.1% in the
second quarter of 2019, rebounding from negative growth of 3.1% in Q1
2019. Whilst this is positive, GDP growth forecasts were revised
downwards mid-year and average GDP growth is expected to be less than
1% for 2019. This is reflective of ongoing difficult trading
conditions for the majority of retailers and consumer goods companies
resulting from constrained consumer spending and sensitivity to
pricing. Despite these conditions, the beverage can market continued
to grow in excess of GDP growth, abating the impact of new entrants
on Bevcan’s market share.
NIGERIA
Nigeria’s growth slowed down somewhat to 1.9% in the second quarter
of 2019 from 2.1% growth in Q1 2019, due to sluggish performance in
non-oil sectors; the oil sector advanced 5.2% as oil production
levels approached 2 million barrels per day. The Nigerian economy is
forecast to grow 2% to 3% in 2019. There is continued availability of
foreign exchange currencies with the naira stable around NGN 360 to
the USD, and unconstrained liquidity ensured normal cash flow from
Nampak’s operations in country
ANGOLA
Economic conditions are challenging in Angola, following the
devaluation of the kwanza, which has resulted in a 1.2% contraction
in GDP in 2018. GDP is estimated to have decreased by 0.4% in Q1 2019
and double digit production and consumer price inflation has
prevailed while wage inflation has lagged. This has led to continued
weak demand in the beverage can market as consumers’ disposable
income remains under pressure. In line with trends that were evident
in Nigeria following the devaluation of the naira, it is expected
that consumer demand will increase once wage inflation restores
consumers’ spending power.
ZIMBABWE
Zimbabwe has negative GDP growth prospects for 2019. Economic growth
is expected to be restricted by foreign currency constraints and the
ongoing drought. Inflation, in both food and non-food prices, is
accelerating markedly. It increased from 31.3% in the last quarter of
2018 to 61.0% in the first quarter of 2019, and has since shifted
dramatically to an annualised rate of over 240% at the end of August
2019.
The inter-bank foreign exchange market was established in February
2019 and the RTGS dollar, which traded at RTGS$2.5:US$1 upon
introduction, has been deemed the official currency. It has devalued
significantly and is converging towards the parallel market exchange
rate since introduction. The closing rate on 20 September 2019 was
RTGS$14.4:US$1. This devaluation will also impact translated results
from and financial position of operations in the country.
DIVISIONAL UPDATE
Continuing operations
METALS
Bevcan South Africa volumes have been stronger than expected at the
start of peak season due to good market growth and higher allocations
than expected from customers. This partially offset expected market
share shed to new entrants. Whilst revenue is expected to be down for
the year, Bevcan SA trading profit is expected to be only marginally
down due to improved operational efficiencies, higher line speeds,
stringent cost control and a keen focus on customer service to
mitigate competitive pressures.
Overall, Metals South Africa results are expected to be moderately
down, due to Divfood experiencing a challenging year. Food can
volumes were down due to a loss of a major customer in the vegetables
category. This was partially offset by volume growth in meat, milk
and good fish can volumes. Diversified can volumes were slightly down
on prior year due to lower demand from consumers. A review of the
business is being undertaken to access growth opportunities and
further reduce costs to improve the profitability of this division.
After a strong first quarter, Bevcan Angola volumes softened markedly
for the remainder of the financial year and consequently revenue and
trading profits are expected to be significantly down for the year.
In response to the slowdown in demand, management acted decisively
and retrenched 32% of employees. The project to convert the steel
plate line to aluminium is on track, on schedule and on budget. Cash
extractions continue to be satisfactory with R1.6 billion being
transferred for the period and 68% of rand equivalent cash balances
hedged using US dollar-linked kwanza bonds as at the end of August
2019.
Bevcan Nigeria has had strong revenue growth to date. Volume growth
driven by a higher market share and growth in can pack share has been
sustained into the second half while trading profits are expected to
be flat for the year. Capacity utilisation is now approaching the
capacity of Line 1 and the decision to install a second line is
expected in the coming financial year given the upside potential of
this market.
The diversified metals packaging business of Nampak Nigeria’s revenue
is expected to be slightly higher, boosted by foreign exchange
movements, while demand remains constrained due to cost and margin
pressures. The turnaround intervention at Nampak Kenya is now
complete resulting in the retrenchment of 19% of staff. A decision
has been taken to rationalise the Nampak Tanzania facility and the
full complement of 75 employees will be retrenched. Discussions with
union bodies have already been concluded.
PLASTICS
Plastics South Africa continued to experience lower sales volumes in
a tough trading and economic environment in South Africa. A new
focused senior management team for this division is now fully staffed
and operational efficiencies have improved at the liquid bottles
business at our Isando plant, after the consolidation of Industria
operations into this plant.
While volumes for the crates business continued to be subdued, a
significant contract for the supply of crates to a major soft drinks
manufacturer for a period of three years was secured. The upside
potential of this operation, as a result of the new contract and a
restructuring of the business to reduce labour cost, has resulted in
the Crates and Drums businesses being withdrawn from a proposed
disposal process.
The liquid cartons business had a strong operating performance
supported by improved demand for beverage cartons to package milk,
fruit juice and sorghum beer. Revenue and profit are expected to
remain flat. Initiatives to capitalise on the global sentiment
against single-use plastics have created much interest in cartons as
a more recyclable and sustainable pack and we have seen positive
sentiment amongst retailers regarding the benefits of recyclable
cartons. This business is on a path for strong and sustained growth
in the coming years with exciting growth opportunities.
The Zimbabwean operations CMB and Megapak improved profitability
despite lower volumes in the second half. Limited demand for certain
products in a challenging economy and the unavailability of foreign
exchange currency for raw material purchases will, however, limit the
annual results. No funding has been provided to our Zimbabwean
operations from the Nampak Group since April 2018; with these
operations securing adequate hard currency to support importation of
the required materials to meet market demand. As a hyperinflationary
environment now exists in Zimbabwe, hyperinflation accounting is
being adopted for this operation and we are awaiting the publication
of the applicable index for the financial year.
Plastics Europe continued to lose volumes and reported a loss for the
period. Capital expenditure projects at Livingston are expected to
attenuate those losses through transport savings and greater
efficiencies. As has been indicated to the market previously, the
business is not considered strategic for Nampak going forward. The
business is in a disposal process which is proceeding according to
plan with at least five prospective buyers showing varying degrees of
interest.
PAPER
Demand for beverage cartons at Hunyani remained strong, supported by
growth in exports to Malawi. Zimbabwe had a very good tobacco harvest
in 2019 and strong demand remained for tobacco cases in both the
local market and for export markets. Sustained operational
efficiencies also contributed to improved profitability for Hunyani
but results will be impacted by hyperinflation accounting.
Cartons Nigeria had a relatively weaker second half following its
sale to A&R Packaging Group AB. The sale of this business was
concluded in April 2019 and has been submitted to local competition
authorities for approvals with a decision expected in the near term.
Whilst the revised strategy of pursuing new breweries yielded good
results in Zambia, the global economic downturn and social economic
issues took its toll on local breweries and demand was limited for
the period. The Malawian business was extensively restructured and is
now break-even after a reduction of 70% in the staff complement.
Discontinuing operation
GLASS
Revenue for the period grew in the single digits, while volumes
remained relatively flat constrained by production output.
Due to the potential disposal of the Nampak Glass business, Nampak
Limited advised shareholders to exercise caution when dealing in the
Company's securities on 28 February 2019.
Nampak has made significant progress in the negotiations and the
parties remain fully committed to concluding the transaction. The
transaction, if concluded, will be subject to competition authority
approval and may have a material effect on the price of the Company's
securities. Accordingly, shareholders are advised to continue
exercising caution when dealing in the Company's securities until a
full announcement is made.
Foreign exchange movements
Nampak’s performance for the year is expected to be impacted by the
movement of the rand against key trading currencies. The South
African rand has been weaker in the second half against major foreign
currencies and this will positively impact the translation of results
of foreign operations but is expected to adversely impact the
translation to South African rand of the Group’s US dollar
denominated debt.
While the Nigerian naira remains fairly stable with no devaluation
over the period, the Angolan kwanza has devalued by 20% against the
US dollar for the period to closing rate of 360 from 301. This is
expected to lead to some foreign exchange losses on monetary items
for the year.
The US dollar-linked kwanza bonds have continued to operate as an
effective hedge during the period in Angola with expected foreign
exchange losses relating to the unhedged portion of the cash-backed
letters of credit that are required to secure importation
requirements.
Since the establishment of an inter-bank foreign exchange market in
Zimbabwe to formalise the trading of RTGS balances and bond notes
with US dollars and other currencies, in February 2019, the RTGS
dollar has devalued against the US dollar from a closing rate of 3.01
RTGS$ per 1 US$ at the end of March 2019 to 14.43 RTGS$ per 1 US$ as
at 20 September 2019. Further devaluations are expected for the
remainder of the month September 2019 and coupled with very high
inflation, will impact the translation of results for all operations
in that country.
Liquidity and cash transfers in the Rest of Africa
Nampak has seen continued foreign currency liquidity in Angola and
Nigeria. Cash balances in these two countries have halved to R1.3
billion at the end of August 2019 from R2.6 billion at the end of
September 2018 due to good cash transfers during the period. A
further R1.1 billion was transferred from Nigeria and Angola to date
in the second half, bringing a total of R2.9 billion transferred for
the 11 months ended 31 August 2019 from these two countries with R1.6
billion and R1.3 billion being transferred from Angola and Nigeria
respectively.
There is currently no restriction on the transfer of cash from
Nigeria and satisfactory liquidity in Angola continued. Of the rand
equivalent of R1.1 billion cash in Angola, 68% remains hedged up from
48% at the half year and protected against further devaluations
through USD-kwanza linked bonds. Hedging levels have decreased
compared to the 2018 financial year due to the new requirement for
all imports to be supported by cash-backed letters of credit. This
requirement has reduced the cash allocation towards the acquisition
of US dollar-linked kwanza bonds that have been used as highly
effective hedging instruments during the process of the devaluation
of the kwanza.
The availability of foreign currency in Zimbabwe remains challenging
and only R40 million or 3% of the opening cash position of R1.2
billion was transferred for the period. Rand equivalent cash balances
have devalued to R147 million due to the weakening of the RTGS dollar
against the US dollar with R1.1 billion of cash being accounted for
through other comprehensive income on consolidation for the period.
Raw material inputs into Zimbabwe are being funded by US dollars
provided by customers as well as from exports to neighbouring
countries.
Financial position
The results for the period and Nampak’s financial position will be
impacted by lackluster consumer demand, a devaluation in the Angolan
kwanza, the introduction and devaluation of the Zimbabwean RTGS
dollar as well as movements in the rand against the US dollar. The
Group’s key debt covenants are being managed in line with business
demands. The policy developments in Zimbabwe do not impact debt
covenants, as the new revolving credit facilities had stricter
requirements that excluded 100% of cash balances from Zimbabwe from
the covenant calculations, amongst other revisions.
Capital expenditure
Capital expenditure for continuing operations for the full year is
expected to be between R650-R750 million, in accordance with
guidance. A clear focus on the maintenance of the integrity of the
property, plant and equipment remains.
Board appointments and resignations
Following the resignation of Dr RJ Khoza and Ms NV Lila as non-
executive directors with effect from 30 May 2019, the Board of Nampak
Limited appointed Ms K Mzondeki as an independent non-executive
director with effect from 1 September 2019 as announced on 29 August
2019.
Pre-close period conference call
Nampak management will hold a pre-close period telephonic conference
call on Wednesday, 25 September 2019 at 15:00 Central Africa Time
(GMT+2) to discuss this trading update and address questions from the
investment community.
Nampak will release its annual results for the year ending 30
September 2019 on the Stock Exchange News Service on or about 27
November 2019. Nampak will be in closed period from 1 October 2019
until the release of its annual 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
25 September 2019
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: 25/09/2019 12:02:00
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