Chief executive’s report
Getting the best out of our assets
Nampak’s determination to consistently improve performance was evident in 2016, when we recorded significant advances in our work to deliver against our strategic objectives. This was despite a challenging trading environment, which is one of five material issues identified in the year and discussed in further detail here.
Building on the achievements of 2015, in 2016 we focused our efforts on unlocking further value from our base business. We put in place comprehensive plans to ‘buy, make and sell better’ and in so doing generated more cash, and moved closer towards completing our asset recapitalisation programme that is already enhancing our efficiency and competitiveness. Our operational performance improved markedly, with improved trading margins at 10.5% from 9.8%.
We reduced the complexity of our business and introduced new systems and processes to monitor, manage and forecast activities. We implemented a new information management plan, appointing a new chief information officer, and upgraded our supply chain activities, appointing a chief procurement officer and increasing data accuracy. This paid off with a R126 million procurement saving in the year, and more to come. We reduced inventories, net of disposals, by a total of R900 million over two years.
Safety is our number one priority and a key performance indicator for executive remuneration, as well as a good proxy for operational performance. In the year, we recorded an LTIFR of 0.48, down from 0.89 a year earlier and better than the target for the year of 0.5. However, we are committed to zero harm and have set ourselves a target of 0.4 in 2017.
In the chief financial officers review , CFO Glenn Fullerton unpacks the many achievements in the finance portfolio in the year. Suffice to say that the fundamental restructuring of the balance sheet has been transformative for Nampak – we have de-risked the balance sheet, and returned the business to a sound financial footing, with strong cash flows. Having stabilised our gearing, we are looking forward to resuming dividend payments in the coming financial year.
In 2016, we focused on those things we could control and did our best to optimise our assets and processes. However, due to the commodity crisis hitting oil-producing countries hard, the environment was tough, particularly in Angola and Nigeria: liquidity issues and the exposure to currency volatility of restricted cash in these countries was a material issue for Nampak, and resulted in an overall decline in headline earnings.
In some parts of our business, slower GDP growth was not all bad: as our packaging goes into a number of staple food products, we benefited as consumers traded down to canned product – cheaper forms of protein – from fresh produce, or favoured larger beverage packs offering greater value. Some countries restricted imports of certain goods by encouraging import replacement with locally produced and packaged goods.
Believing in the African growth story
Despite the macro-economic headwinds in many African markets in 2016, we are still confident of the demographic fundamentals underpinning long-term packaging growth, and our strategic objective to accelerate growth in the Rest of Africa remains intact. We are, however, being circumspect as well as mindful of the need not to lose our first-mover advantage. We are investigating alternative mechanisms to allow us to achieve our objective without necessarily committing to significant and risky capital expenditure.
In 2016, our trading margins in the Rest of Africa continued to be attractive and our volumes showed remarkable resilience. Revenue from these businesses contributed 31% compared with 27% in 2015. Trading profit for the region made up 52% of our total, from 2015’s 48%. Consumption, urbanisation and disposable income trends in sub-Saharan Africa support our investment thesis. The consumption of packaging in this region is expected to grow by 5 – 10% per annum until 2021. In South Africa, the expected growth rate is 2 – 5% a year over the same period.
Although we made good progress on many fronts in 2016, in the year ahead we are not complacent: more needs to be done to improve our cash-generating ability, our operational focus and unlocking growth opportunities through greater agility and a deeper understanding of the needs of our customers. We will continue to focus on achieving an excellent overall manufacturing offering, leveraging our many important partnerships.
The changing trading environment requires us to maintain a keen eye on economic, political and market conditions, while taking a longer-term strategic view on building for the future. Ours is now a restructured and optimised organisation, with our plants by and large operating efficiently and at benchmark rates following a period of intense intervention to achieve operational excellence.
Following the substantial investments made over the past few years, the bulk of our facilities now operate the latest-generation machinery, and we have a great opportunity to use this new machinery to work hard to deliver value for us and our stakeholders. While more work is scheduled mainly in our South African Plastics business, we intend to keep a close rein on the group’s total capital expenditure. Our forecast for spending in 2017 is approximately R1 billion, down from R1.4 billion in 2016.
I would like to thank Nampak people everywhere for their commitment in 2016, and look forward to their continuing contribution in taking this organisation to greater heights in the year ahead.
André de Ruyter
Chief executive officer
21 November 2016