Wrap Text
Voluntary trading update for the five months to 29 February 2020
Nampak Limited
(Incorporated in the Republic of South Africa)
Registration Number: 1968/008070/06
Share Code: NPK
ISIN: ZAE000071676
(“Nampak” or “the Company” or “the Group”)
VOLUNTARY TRADING UPDATE FOR THE FIVE MONTHS TO 29 FEBRUARY 2020
Update on key markets
Global economic conditions have been challenging since 2018 and
economic growth is expected to be impeded further by the coronavirus
pandemic (COVID-19), as economies shift their focus towards
containing the spread of and eradication of the virus.
The impact of COVID-19 is expected to further hinder an already
burdened economy and will put further pressure on consumers’
disposable income. While some businesses may inadvertently benefit
from the outbreak, due to demand spikes for food and related
products, these are viewed as industry specific short term gains and
are not expected to deviate significantly from the general economic
outlook.
The current economic uncertainty has resulted in a weaker Rand
against major foreign currencies, as well as unpredictable share
price movements amid concerns over debt levels, covenant compliance,
business continuity and the lower oil price’s impact on liquidity in
Nampak’s secondary key markets of Angola and Nigeria. Since the last
reported financial period, Nampak has seen healthy liquidity in its
operations in both Angola and Nigeria.
Angola
A currency devaluation of more than 32%, since September 2019 and
lagging wage inflation have placed consumer spending under severe
pressure. Consequently, very weak demand for beverage cans has
prevailed throughout the period, resulting in trading income from
Angola reducing to near break-even levels. US Dollar linked Kwanza
bonds have provided effective protection against the Angolan Kwanza
devaluation against the US Dollar with 56% of the Kwanza cash
balances currently hedged. The requirement to have US Dollar imports,
supported by cash backed letters of credit, has contributed to the
reduction in the proportion of cash in country that is hedged. These
bonds continued to be settled on time and in full by the Angola
government. Where early redemption has been possible the average
discount has been below 3%. Cash balances have reduced to the Rand
equivalent of R624 million with a pleasing transfer of R639 million
to offshore treasury from Angola since September 2019.
Nigeria
While general consumer demand has been somewhat constrained in
Nigeria, demand for beverage cans has remained positive. Cash levels
were maintained at the optimal level required to fund the day-to-day
activities of operations, while R543 million was timeously
transferred to settle outstanding supply chain financing provided by
the Group. This has limited exposure to potential Naira currency
movements.
Zimbabwe
The contraction in the Zimbabwe economy continues. Despite the
establishment of an inter-bank foreign exchange market in February
2019, the Zimbabwean Dollar continued to weaken and has devalued by
18% in the five months ended February 2020. A further devaluation to
ZWL25 to the US Dollar has occurred to 26 March 2020. Liquidity in
Zimbabwe remains challenging and the government has recently
announced that it will allow US Dollars (fixed at ZWL25 for every
USD1) as legal tender, in order to address the liquidity problem. The
Nampak Group has not provided further funding to its Zimbabwean
operations since April 2018, with these businesses being cash
generative and self-funding. Raw material inputs into Zimbabwe
continued to be funded by US Dollars provided by customers, traders
and commercial banks, to the extent available as well as from foreign
exchange generated through exports to neighbouring countries. During
the period under review, Zimbabwe was the only country where Nampak
experienced problems with foreign currency liquidity.
Cash transfers and balances in Angola, Nigeria and Zimbabwe:
LIMITED
Sub-
29 FEBRUARY 2020 Angola Nigeria LIQUIDITY TOTAL
total
Zimbabwe
Opening cash on
R1 041m R217m R1 258m R57m R1 315m
hand – 30 Sept 2019
Cash on hand R624m R 176m R 800m R77m R877m
Hedged cash R347m –(2) R347m –(4) R347m
% cash hedged 56% –(2) 43% –(4) 40%
Cash transferred R639m R543m R1 182m – R1 182m
Cash transfer 90%
rate(1) 61% 250% 94% 0%
A further USD9 million was transferred from Angola between 1 to 15
March 2020.
LIMITED
Sub-
30 SEPTEMBER 2019 Angola Nigeria LIQUIDITY TOTAL
total
Zimbabwe
Opening cash on
R2 307m R300m R2 607m R1 190m R3 797m
hand – 30 Sept 2018
Cash on hand R1 041m R217m R1 258m R57m(3) R1 315m
Hedged cash R742m –(2) R742m –(4) R742m
% cash hedged 71% –(2) 59% –(4) 56%
Cash transferred R1 747m R1 458m R3 205m R43m R3 248m
Cash transfer 86%
rate(1) 76% 486% 123% 4%
(1)
Cash transfer rate is the amount of cash transferred compared to cash on hand at the end of the
previous reported period.
(2)
Cash balances in Nigeria are not considered to be restricted as a consequence of liquidity
provided by the NAFEX market.
(3)
Net of a devaluation adjustment amounting to R1.1 billion due to the introduction of the
Zimbabwean Dollar.
(4)
USD67 million hedge secured with the Reserve Bank of Zimbabwe to repay legacy debt on a 1:1 basis
over a period of five years in quarterly payments commenting on 31 March 2021. An expected credit
loss ratio of 85% was raised in 2019 with an effective 85% expected credit loss ratio and at a
90% level taking into account hyperinflation adjustments.
South Africa
The COVID-19 pandemic led to the South African president, Cyril
Ramaphosa, announcing a national lockdown for 21 days, with effect
from midnight on Thursday 26 March 2020 until Thursday 16 April 2020.
The production and supply of essential goods and services were
exempted from this lock down. As a result a significant number of
Nampak’s factories have remained operational to date. The primary
impact of the lock down will only be on product lines related to
alcohol packaging and some smaller non-essential packaging products.
Nampak has implemented business continuity plans, provided guidelines
and support and empowered local management in our various markets to
implement practical measures to minimise the impact on our employees
and ensure continuity of supply to customers, where permitted. As the
health of employees is our key concern and safety remains a priority
throughout this period, management will continue to prioritise a
healthy work environment.
Detailed risk assessments of our inbound supply chain have so far
indicated that there are minimal disruptions from our suppliers and
that we currently have an adequate supply of raw materials in our
businesses. All measures in place will be assessed on an ongoing
basis to determine their effectiveness, and enable amendments where
required, to ensure the safety of employees and continued supply to
our customers.
The impact on customer demand in South Africa is unknown at this
point, but Divfood is likely to experience a temporary hike in
demand, driven by stockpiling of food cans from higher LSM consumers,
who would not normally be consuming similar volumes of canned
products. In the short term, demand for beverage cans will be
impacted negatively, due to restrictions on alcohol sales during the
lock down period. However, additional health concerns by consumers
may lead to pack share shifts in alcohol consumption away from
returnable sharing packs and towards single serve pack like beverage
cans. The impact on overall demand for both food and beverage cans
will only become more be apparent during H2 2020. Outside of overall
demand shifts in the economy, Nampak does not anticipate material
impacts on demand for plastic and paper products.
DIVISIONAL UPDATE
The Group’s results for the period are reflective of the weaker
economic growth and difficult trading environment prevailing in our
key markets. Except for Bevcan Nigeria, all other major businesses
have shown significant downward trends for revenue, with the Rest of
Africa being impacted more negatively than South Africa. Results for
all operations in Zimbabwe will also be impacted by hyperinflationary
accounting.
Metals
Bevcan SA continued to defend its market position with operational
excellence initiatives to drive continuous improvement, reduce costs
and uphold and improve safety levels. Revenue and trading profits
were both lower than expected as the total beverage can market
contracted in line with restrained consumer spending. Management will
focus on further reducing operational overheads and other cost
structures in order to defend Nampak’s strong market position.
Divfood’s volumes were lower for food cans due to the loss of a
significant customer in H2 2019 and remained loss making for the
period. While short term demand spikes for food cans are expected due
to COVID-19, these will most likely only impact H2 2020 results. The
rationalisation of Divfood is unfortunate but necessary and is
progressing as planned. Consultations with employees, trade unions
and other stakeholders continue and operations are being streamlined
to consolidate the cost base significantly and return the business to
profitability. As a result, retrenchment costs will be incurred
during the year.
Beverage can demand at Bevcan Nigeria has continued to grow at a
healthy rate. Trading profit remained stable and the operation’s
safety record continues to be exceptional at more than 3 million
incident free hours worked to date. Successful operational excellence
initiatives enabled us to increase the potential output of the line
to up to 1 billion cans per year, thereby pushing out any short term
capital expenditure requirements for a second production line. The
general metals packaging business continued to experience subdued
demand in line with the rest of the economy and volumes and trading
margins were lower for the period.
Beverage can volumes in Angola remained very weak, as outlined above.
In response, management continued to reduce employee and other fixed
costs, but due to the loss of volume, trading profit was
significantly lower. Marketing initiatives to grow can volumes are in
progress and Nampak still believes in the medium to long term growth
prospects of this market. Aluminium beverage cans remain popular in
this market, albeit softer current market demand. It is expected that
demand will improve once wage inflation catches up with the impact of
currency devaluations. The line 1 conversion from steel to aluminium
had to be halted due to the COVID-19 pandemic, but will be completed
during H2 2020. This delay is not expected to have any negative
impact on profitability.
Plastics
Plastics South Africa performed as expected during a period
characterised by lower market volumes for liquid plastics, which was
adversely impacted by a fire at a key customer’s premises. Trading
margins improved as the Plastics division started to see positive
results from the restructuring of this business. Plastics in the Rest
of Africa largely comprises Zimbabwean operations, and demand in this
market was lower due to the challenging economic conditions and a
limited supply of raw materials.
Paper
Raw material supply management was also challenging for Hunyani in
Zimbabwe due to the lack of foreign currency liquidity in the market.
However, demand and profitability in this business remains strong.
Cartons Nigeria will only be included for four months to the
effective date of its disposal in January 2020. Despite muted volumes
in Zambia and Malawi, the profitability of these units have improved
relative to the previous financial year.
Proceeds from disposals and financial position
Nampak has continued to rationalise its portfolio and focus on its
core businesses, with the disposals of Nigeria Cartons and Nampak
Plastics Europe having been completed since the financial year ended
30 September 2019. The Glass disposal completes the originally
indicated trio of disposals, yielding expected net proceeds of
approximately R1.9 billion.
The Glass disposal became effective on 28 February 2020 when all
suspensive conditions were fulfilled or waived and proceeds of
approximately R1.5 billion are expected to be received on 31 March
2020. The Nigerian competition authorities’ approval for the sale of
the Cartons Nigeria business was received in January 2020 and
proceeds of EUR29 million have been received offshore with all
conditions to this transaction having been fulfilled. Nampak Plastics
Europe, inclusive of the pension fund liability of approximately R500
million, was disposed of effective 13 December 2019 for a nominal
amount. This disposal will deliver future cash flow savings as a
result of the Group no longer being required to fund operating
losses, major capital expenditure requirements and annual
contributions to the offshore defined benefit pension fund.
The proceeds from the disposal of Cartons Nigeria will immediately be
utilised to reduce US Dollar denominated interest bearing debt. The
R1.5 billion proceeds from the Glass disposal will initially be used
to reduce South African interest bearing debt and, when considered
appropriate, are earmarked to further reduce the Group’s exposure to
US Dollar denominated interest bearing debt. With this in mind,
management is considering the best use and timing for settling
foreign-denominated debt to the best advantage of the Group.
The impact of the recent weakness in the Rand against the US Dollar
on foreign denominated debt, muted growth in key markets and tough
trading conditions in general have been discussed with the Group’s
funders. US Dollar denominated debt will be adversely affected by the
significant weakening of the South African Rand during March 2020,
amid the spread of COVID-19. The receipt of the proceeds from
disposals will reduce the Group’s finance costs, but only from the
beginning of H2 2020.
Covenant relaxation
Nampak’s banking covenants remain susceptible to a sudden weakening
in the Rand versus the US Dollar late in a measurement period, with a
dislocation in the spot exchange rate compared to the average rate
adversely impacting the net interest bearing debt to EBITDA covenant.
This is due to EBITDA being translated at the average rate, as
opposed to the US Dollar debt being translated at the reporting
period’s final spot rate.
The Group’s EBITDA has primarily been adversely impacted by the
significant slow-down in the Angolan economy. Compliance with debt
covenants continues to be closely managed with the consortium of the
Group’s funders. To this end the Group has negotiated a covenant
relaxation for the interim reporting period. The net debt: EBITDA
covenant for the 31 March 2020 measurement period has been relaxed
from 3.0 times to 3.5 times primarily to accommodate any potential
late payment of the Glass proceeds and a further weakening in the
Rand to the US Dollar. In addition, the EBITDA interest cover for the
reporting period has been relaxed from a minimum of 4.0 times to 3.25
times. It was considered prudent to obtain a relaxation of these
covenants before 31 March 2020, given recent Rand weakness and any
possible delay in the receipt of any of the disposal proceeds.
Reporting period
Covenant requirement
31 March 2019 31 March 2020
Net debt: EBITDA less than or equal to 3.0x less than or equal to 3.5x
EBITDA: interest cover more than or equal to 4.0x more than or equal to 3.25x
The proceeds from the disposals are expected to result in lower
financing costs for the Group in H2 2020. Active management of
working capital in changing market conditions as well as tight
control of capital expenditure without compromising the asset base,
are expected to protect Group cash flows and alleviate pressure on
the Group’s covenants.
Foreign exchange 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 interim period will be impacted by foreign
currency movements.
The Nigerian Naira remained stable, while the Angolan Kwanza devalued
by 32% over the period. In light of the weak oil price, further
currency devaluations are expected in both these markets.
For the five months ended 29 February 2020, the Zimbabwean Dollar
(ZWL) devalued by 18% and as a result, foreign exchange losses are
expected for the interim period. This currency has devalued further
in the month of March 2020.
US Dollar functional currency operations in the Rest of Africa have
benefited from a weaker average exchange rate for the period.
US Dollar denominated debt is expected to be adversely affected by
the weakening of the South African Rand against the US Dollar since
September 2019 due to the general devaluation of emerging market
currencies and the anticipated downgrade of South Africa’s credit
rating, which happened on 26 March 2020, may to lead to a more
pronounced impact than indicated by the table below.
Currency movements for key markets:
Average rates Closing rates
29 31 % change 30 29 30 % 31
Currency Feb Mar vs Sep Feb Sep change Mar
2020 2019 Mar 2019 2020 2019 vs 2019
2019(1) Sept
2019(1)
ZAR/USD 14.71 14.15 (4.0%) 14.35 15.66 15.17 (3.2%) 14.50
NGN/USD 361.86 362.50 361.55 363.94 362.04 (0.5%) 360.23
0.2%
AOA/USD 485.47 315.40 (53.9%) 333.94 512.53 389.49 (31.6%) 326.11
ZWL/USD 16.54 2.54 (more 13.07 17.96 15.20 (18.2%) 3.01
(2) than
100.0%)
ZAR/GBP 19.02 18.32 (3.8%) 18.30 20.08 18.65 (7.7%) 18.90
ZAR/EUR 16.25 16.11 (0.9%) 16.18 17.27 16.54 (4.4%) 16.27
(1)
Negative and positive percentage changes indicate devaluations and strengthening positions
respectively compared to the relevant comparative period.
(2)
The ZWL has devalued further and was fixed at ZWL25 to USD1 on 27 March 2020.
Capital expenditure
Capital expenditure for continuing operations for the full year was
planned to be between R600-R750 million, but is under even more
stringent review as a consequence of the Group adopting a cash
conservation approach during these uncertain times and will be kept
to an absolute minimum for the short to medium term, without
compromising the Group’s asset base.
Outlook
There is widespread global uncertainly associated with the COVID-19
pandemic. We are closely monitoring the situation and adapting the
business as required.
The heightened uncertainty as a result of the rapidly evolving nature
of the COVID-19 outbreak, together with the impact of individual
country's responses to it, increases the difficulty in predicting the
impact on the Group's 2020 performance. In particular, uncertainty
surrounds supply chain disruption and travel bans, which have the
potential for significantly impacting the results of the Group.
As a significant proportion of all material used in our production
processes is imported from foreign suppliers, potential changes in
exchange rates, labour laws or policies affecting the cost or supply
of goods could negatively impact our cost of production and the
timely availability of the desired amount of raw materials.
Furthermore, delays in production or shipping of product, whether due
to work slow-downs, work stoppages, strikes, port congestion, labour
disputes, product regulations and customs inspections, public health
crises or other factors, could also have a negative impact on future
operating results and resultant cash flows.
If the COVID-19 outbreak continues and results in a prolonged period
of travel, commercial and other similar restrictions, or a delay in
production or distribution operations at any or all of our suppliers'
facilities, we could experience significant supply chain disruptions.
While we continue to monitor the situation on a daily basis, it is
currently unknown whether the outbreak will meaningfully disrupt our
inventory shipments or meaningfully impact manufacturing at any of
our suppliers' plants. To date, based on discussions with various
suppliers, we are not anticipating significant supply chain
disruptions, however, should this situation change it is unlikely
that we will be able to develop alternate sourcing quickly on
favourable terms, if at all, which could result in increased costs,
loss of sales and a potential loss of customers, adversely impacting
margins and ultimately the results of our operations.
Following on the above, a number of discussions have been held with
customers across the spectrum. To date, with the exception of non-
essential producers, the majority of essential goods producers have
indicated an intention to continue production or supply of goods to
the market. In some cases, there has been an increase in the demand
for essential goods packaging. However, it should be noted that the
full impact of COVID-19 cannot be established at this point in time
and may have a significant influence on demand in the days and weeks
ahead, which in turn will impact on profitability and consequently
cash flow.
In addition to the aforementioned, the devaluation of emerging market
currencies, in particular the Rand, will positively impact earnings
on translation, but negatively impact the translation of US Dollar
denominated debt. To the extent possible, cost increases as a result
of the devaluation will be factored into future selling prices. At
this point in time, the customer base’s ability to absorb price
increases is uncertain.
Based on current available information, there are insufficient data
points to understand the long term impacts of the decrease in the oil
price and the impacts of COVID-19 on future profitability and the
consequent carrying value of assets.
The extent of the impact of COVID-19 on our business and financial
results will depend largely on future developments, including the
duration and spread of the outbreak and the related impact on
consumer confidence and spending, all of which are highly uncertain
and cannot be predicted.
Pre-close period conference call
Nampak management will hold a pre-close period telephonic conference
call on Monday, 30 March 2020 at 15:30 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.
Nampak will release its interim results for the six months period
ending 30 March 2020 on the Stock Exchange News Service on or about
29 May 2020. Nampak will be in closed period from 1 April 2020 until
the release of its interim 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 March 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: 30-03-2020 12:22:00
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