Chief financial officer's review

Confront challenges, optimising our position

Financial highlights
  • Group revenue of R19.1 billion increased by 11%
  • Group trading profit of R1.9 billion improved by 4%
  • Trading profit from Rest of Africa of R990 million was up 12%
  • Glass operation turned around, delivered profit of R105 million compared to loss of R81 million in prior year
  • Group operating profit of R2.2 billion up 29%, benefiting from sale and leaseback transaction
  • Dollar illiquidity in Nigeria and Angola resulted in R681 million abnormal foreign exchange loss
  • Impairment of assets adversely impacted earnings by R360 million
  • EPS up 11%
  • HEPS down 48% due to forex losses, increased interest costs and higher effective tax rate
  • Sale and leaseback transaction raised R1.7 billion, boosting equity by R1.3 billion and reducing interest-bearing debt
  • Group gearing ratio reduced from 72% to 49%
  • Covenants well managed
  • Balance sheet structure substantially strengthened
    • R2 billion short-term funding converted to long term
    • Current ratio improved 50% from 1.0 times to 1.5 times
  • Capital expenditure managed in line with guidance of R1.4 billion to the market with reduction of R0.8 billion from prior year
  • R561 million released from net working capital compared to absorption of R669 million in prior year
  • PRMA liability addressed
  • Net increase in cash generated of R1.8 billion compared to utilisation of R0.1 billion in prior year
  • Net increase of R4.2 billion in cash and cash equivalents compared to net decrease of R1.5 billion in the prior year
  • No final dividend in line with group’s efforts to conserve cash and strengthen the balance sheet further
Focus area How we did in 2016
Capex management
Working capital management
Managing liquidity in Rest of Africa *
Optimising the balance sheet
Managing down gearing
Focusing on cash generation
Creating a platform for growth

* Continuous work required.


In 2016, Nampak rose to the challenges presented by the dificult macro-economic conditions that we faced. We identified various opportunities to improve our financial structure and processes, successfully implementing a number of initiatives that assisted the group in it's journey towards sustainable value creation. By restructuring the balance sheet, we placed Nampak in a much stronger position from which to leverage opportunities, reduce costs and enhance profitibility.

Determined to improve our cash position, we introduced a new cash management system that instilled much more rigour in our processes, allowing our refocused team to take charge of our cash position on a daily basis. We readjusted to the financial implications of prior year divestitures; fundamentally changed our approach to working capital management by giving particular attention to restoring inventories to lower, more acceptable levels; and renegotiated our loan covenants with lenders with regard to the exchange rate at which these are measured for the March 2016 and September 2016 measurements respectively. We kept a tight lid on capital expenditure completing already approved capital projects and worked to improve our forecasting abilities. In this way, we managed the material issues the group faced in the year.

Growing revenue

Revenue increased by 10.7%, a pleasing performance in challenging trading conditions. Bevcan Nigeria and Nampak Glass recorded respective revenue growth in excess of 50% and Bevcan in Angola and our metals business in Nigeria posted increases in revenue in excess of 20%. The performances in Nigeria and Angola are notable given the significant drop in oil prices in the year and expectations in some quarters that this would result in declining revenue for Nampak operations in these two oil-dependent countries. Stable production at our Glass operation in South Africa was fundamental to the growth in turnover and return to profitability.

Trading margins from operations increased from 9.8% to 10.6% previously due to cost savings and the turnaround achieved in Glass. Increased centre costs related to unrealised foreign exchange losses on forward exchange contracts and project related costs resulted in group trading margin declining from 10.6% in 2015 to 10.0% in the current year.

Benefiting from the improved performance of our major businesses

Nampak’s overall business performance, net of the losses resulting from macro-economic events beyond the control of management, displayed some distinct highlights. Bevcan in Angola and Nigeria contributed one third of group trading profit in the year and, after a difficult 2015, Nampak Glass recorded a R186 million positive swing in profitability at the trading profit level. Together these three businesses made a significant contribution to the overall performance of the group despite trading profit in Angola declining. In light of the continuing weak outlook for economic activity in South Africa, contributions from the group’s higher-margin businesses in the Rest of Africa remain central to the group’s prospects and continued value creation.

Restructuring the balance sheet - sale and leaseback

he single most important element of the restructuring of Nampak’s balance sheet in the year was the sale and leaseback transaction concluded with Imbali Props 21 Proprietary Limited. In terms of the deal, Nampak transferred ownership to Imbali of fifteen of our industrial properties, which we are leasing back at rentals similar to those previously paid by Nampak’s operations to Nampak’s property division, as well as the outright sale of another property to Imbali. On 1 September 2016, we received R1.744 billion as full consideration for this transaction, resulting in a capital profit of R1.3 billion that has been disclosed as an abnormal item given its nature and size. Utilisation of past capital losses has resulted in a deferred tax asset being raised during the year, with minimal tax consequences attributable to the disposal.The lease has been classified and recognised as an operating lease in terms of the criteria set out in IAS 17 Leases. Fourteen of the properties were leased for an initial period of 15 years with an option to renew the lease for one additional period of 10 years, and an option to repurchase the properties at market-related prices on termination of the lease. One property was leased for a period of three years. Escalation of rentals is provided for in the lease agreements at inflation-related rates.

As part of our efforts to deploy capital for the highest return and to deleverage and de-risk the balance sheet, we applied the proceeds of this transaction to reduce interest-bearing debt as well as addressing our growing post-retirement medical aid (PRMA) liability. The transaction boosted equity, significantly reduced interest-bearing debt, playing a pivotal role in the restructure of the group balance sheet and substantially reduced the risk of any breach of the group’s loan covenants during a year that was characterised by volatile rand/dollar exchange rates. Our debt to equity ratio declined to 49% at year end, from 72% at 30 September 2015, significantly improving the group’s balance sheet structure and creating a platform for future growth.

Reducing our post-retirement medical aid liability

In recent years, Nampak’s post-retirement medical aid liability grew sharply as longevity of pensioners increased and medical costs expanded faster than inflation. In 2016, we devoted considerable attention to addressing this liability, which had reached R1.5 billion by September 2015. By offering pensioners below 75 years of age alternatives to the post-retirement medical aid, we reduced our liability by R393 million to R1.1 billion, continuing to fulfil the promise made to pensioners without Nampak having to continue to carry this risk on the group balance sheet with a concomitant reduction of the group’s long-term liabilities. The effect of the acceptance at year-end, of the annuity option offered and accepted by pensioners, will be a pay-out of R406 million and a curtailment benefit of R84 million.

Nigeria and Angola: liquidity constraints and currency devaluation

The collapse in the global crude oil price from above US$110 a barrel in mid-2014 to below US$30 in early 2016 had far-reaching impacts on the economies of oil-dependent countries. Consequently, it led to the economies of Angola and Nigeria recording sharply lower export earnings, a steep decline in their currencies and dire shortages of dollars to fund dollar-denominated imports. The liquidity trends in our Nigerian and Angolan operations changed during the year under review with the good liquidity achieved in Nigeria during the prior year not being repeated in 2016 as a consequence of the uncertainty and liquidity constraints that arose in the Nigerian foreign exchange market ahead of and after the lifting of the naira’s peg on 20 June 2016. We actively pursued opportunities to convert naira into dollars with moderate success.

Over the past year, the macro-economic environment in Nigeria and Angola has remained under pressure with the timing and quantum of conversion from in-country currencies to US dollars uncertain and sporadic. Nampak operations in both countries remain adequately funded with raw material supply secured through the group’s offshore buying and treasury office located in the Isle of Man. During the year we successfully managed down inventory levels and to the extent possible secured appropriate hedging instruments, thereby mitigating the foreign exchange risks. This, together with reduced capital expenditure in these countries in the year, resulted in a 43% decrease in overall supplies secured by the Isle of Man on behalf of Nigeria and Angola.

At 30 September 2016 the equivalent of US$45 million indexed kwanza bonds were acquired as a hedge, up from the US$25 million at 31 March 2016. For the year ended 30 September 2016 repayments in an amount of US$40 million were received in respect of goods and services procured on behalf of the Angolan operation representing liquidity of 95% (2015: 31%) of invoices presented for payment in the year, with the IOM funding the shortfall through financing facilities. The securing of these bonds materially assisted the group’s hedging activities but did not offer immediate convertibility into dollars. In the year to 30 September 2016, the kwanza depreciated by 23% against the US dollar. There is, however, an actively traded secondary market for these Angolan government-backed bonds.

In 2015 the US dollar cash extraction rate in Nigeria exceeded that achieved in Angola; however, 2016 saw improved cash extraction from Angola while that from Nigeria declined. Significant regulatory uncertainty in Nigeria before and after the unpegging of the naira on 20 June 2016 placed significant pressure on Nampak’s ability to receive US dollar allocations.

During the year the equivalent of US$27 million in dollar deliverable forward contracts were secured as a hedge for the Nigerian operations, with the majority maturing during November 2016. In addition, repayments in an amount of US$23 million were made to the IOM in respect of goods and services procured on behalf of the Nigerian operations representing liquidity of 57% (2015: 91%) of invoices presented for payment in the year. This excludes the aforementioned hedge. Again, the IOM funded the shortfall through financing facilities. In the year to 30 September 2016, the naira depreciated by 58% against the US dollar.

On translation of the Nigerian and Angolan monetary items to the US dollar for dollar functional currency operations and the dollar-based liabilities to naira and kwanza respectively at the ruling official exchange rate, the group incurred R681.0 million (2015: R160.5 million) in abnormal foreign exchange losses with Nigeria contributing the majority of this loss.

At 30 September 2016 Nampak cash balances in both countries amounted to R2.0 billion, up from R1.5 billion at 31 March 2016 and R700 million at 30 September 2015. The cash balances at 30 September 2016 are after taking into account the R681.0 million foreign exchange losses.

No repayments on capital loans, remittance of interest on loans or dividend extractions were possible during the year. During the year US$10 million was classified as part of the net investment in the Nigeria metals and cartons businesses in terms of IAS 21 The Effects of Changes in Foreign Exchange Rates.

At the year-end, R990 million or 50% of these cash balances were hedged.

The increase in the cash on hand represents a combination of profit generated in the period, the liquidity shortfall funded by the Isle of Man treasury operation and various foreign exchange translation differences on consolidation. These foreign exchange losses have been disclosed as abnormal items as they are not directly attributable to normal trading and relate to in-country US dollar shortages. All foreign currency translations and foreign currency transactions are translated using the official exchange rate in line with the requirements of International Financial Reporting Standards and foreign exchange regulations in individual countries.

The group remains committed to the operations in these countries with the overall long-term investment rationale based on the demographics underpinning growth in packaging being sound. The group has adequate funding for operations in the Rest of Africa and is well positioned to benefit in the medium to long term.

Performing on our loan covenants

Nampak has two defined loan covenants. The first is net interest-bearing debt to EBITDA cover of not more than three times. The second is to maintain an EBITDA to net interest ratio of not less than four times. Through our work in the year, most notably the sale and leaseback transaction and our working capital optimisation programme, our performance with regards to the first loan covenant was very encouraging. It improved to 1.7 times by year-end from 2.3 in 2015 and well below the upper limit of 3.0 times reflecting the improved balance sheet structure.

Our performance with regard to the second covenant – EBITDA to net interest for covenant purposes declined from 9.7 times in 2015 to 5.4 times in 2016 but was still satisfactory and ahead of the required 4 times. This was mainly the result of higher interest costs resulting from consistently higher levels of interest-bearing debt for a significant portion of 2016 due to the balance of the capital expansion programme having been funded, as well as higher interest rates in South Africa.

Given the rand/dollar exchange rate volatility in 2016 and the group’s exposure to US$378 million interest-bearing debt, we renegotiated debt covenants with our lenders for the 31 March 2016 and 30 September 2016 measurement periods. The renegotiated position allowed both the EBITDA and the interest-bearing debt to be converted at the average rate for the periods as opposed to the interest-bearing debt being measured at the spot rate at the measurement date. This position substantially reduced the risk of a covenant breach during the negotiation period of the sale and leaseback given the extreme volatility in the rand/dollar exchange rate. The restructuring of the balance sheet allowed the group to operate well within the covenants, creating a platform for growth.

Net debt to EBITDA (covenant <3 times)
EBITDA/interest cover (covenant >4 times)

Profit in the year under review
From continuing operations 2016  
Revenue 19 138.9   17 291.3   10.7  
Trading profit 1 905.1   1 839.6   3.6  
Abnormal items
–profits/(losses) 257.7   (158.2)
Operating profit 2 162.8   1 681.4   28.6  
EBITDA* 3 434.9   2 605.1   31.9  
PBT 1 677.4   1 398.6   19.9  
PAT 1 478.3   1 456.1   1.5  
EPS–cents 254.5   228.3   11.5  
HEPS-cents 107.6   208.2   (48.3)  
Ordinary dividend – cents –   134.0  

* Adjusted for impairments

Nampak’s trading profit increased by 3.6% to R1 905.1 million in 2016 from R1 839.6 million in 2015, primarily due to Bevcan Nigeria’s pleasing performance, the recovery by Nampak Glass and improved performances from DivFood, Plastics’ Liquid Packaging and our Zimbabwe operations. These results were partially offset by increased corporate costs related to various projects and treasury-related unrealised foreign exchange losses at year-end compared to unrealised foreign exchange profits in the prior year. A pleasing turnaround was achieved at Glass with a trading profit of R105 million delivered, compared to a trading loss of R81 million in the prior year with stable production contributing significantly to the improved performance. Glass’s trading loss in the prior year of R76 million has been restated to include unrealised foreign exchange losses previously disclosed as abnormal.

Bevcan South Africa’s volume decline was more than offset by improvements in operating efficiencies. DivFood delivered a pleasing result off the back of its recapitalisation plan, cost efficiencies and improved focus.

Bevcan Nigeria continued to gain market share with strong growth in trading profit. DivFood’s recapitalisation programme and cost-saving initiatives resulted in improved operational efficiencies with a concomitant improvement in profitability. Our UK Plastics business experienced difficult trading conditions, leading to volume and margin pressures with the result partially offset by a once-off credit to earnings of R45 million due to a change in the pension plan rules.

Trading profits in Metals increased by 7%, Plastics by 8% and Paper by 12% with margins in Metals and Plastics being similar to the prior year. Trading margins in the Paper division declined from 14.4% in the prior year to 13.5% in 2016 primarily due to a contraction of margins in Zambia. The trading profit in the Metals division takes into account a reduction of R122 million in the Bevcan operations’ depreciation as a consequence of applying the units of production method to can lines that are not operating at full capacity as opposed to the straight-line method used in the prior year. IAS 16 Property, Plant and Equipment paragraph 61 requires that the depreciation method applied to an asset will be reviewed at least at each financial year-end and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the method will be changed to reflect the changed pattern. Such a change will be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. In line with this International Financial Reporting Standard, we changed the method of depreciation for can lines not operating at full capacity. Once operating at full capacity the units of production method will equate to the straight-line method. This is considered a change in estimate of the consumption of the asset over its economic life.

Given the unfavourable macro-economic environment both in South Africa and the rest of the world, these trading results were pleasing.


The group performed impairment testing on the carrying value of goodwill and concluded that no goodwill impairment was required for the year ended
30 September 2016.

The tinplate beverage can line in Angola has been impaired, consistent with the group’s intention to replace it with an aluminium line, from existing kwanza cash balances subject to the allocation of the required foreign exchange by the Angolan authorities. Total asset impairments during the year were R360.4 million (2015: R121.4 million).

Abnormal items
Profit on disposal of property subject to sale and leaseback 1 318.9   –  
Profit on disposal of other property 15.2   102.5  
Profit on disposal of investments 3.5  
Devaluation loss arising from Nigerian and Angolan illiquidity (681.0) (160.5)
Net impairment losses on property, plant, equipment, intangible assets, investments and shareholder loans (360.4) (121.4)
Retrenchment and restructuring costs (34.1) (77.3)
Gain on revaluation and consolidation of Zimbabwe associates –   124.2  
Business acquisition-related costs (4.4) (25.7)
Net gain/(loss) 257.7   (158.2)

During the year, a net gain of R257.7 million was made on abnormal items compared to a net loss of R158.2 million in the prior year. A net profit of R1 318.9 million was achieved on the sale and leaseback transaction. Dollar illiquidity in the Nigerian and Angolan markets resulted in a foreign exchange loss of R681.0 million with the majority of the loss being attributable to the Bevcan Nigerian operation. In the prior year, the R160.5 million loss arose in Bevcan Angola and Bevcan Nigeria. The net impairment losses on property, plant, equipment, intangible assets, investments and shareholders’ loans relates in the main to the R278.0 million impairment of the Bevcan Angola tinplate line. Retrenchment and restructuring costs relate to the closure of the Bevcan Durban operation.

EBITDA (adjusted for impairments)

EBITDA improved from R2 605.1 million to R3 434.9 million and benefited from improved operational performances, the capital profit on the sale and leaseback transaction but was negatively impacted by the foreign exchange losses and impairments.

Finance costs

Net finance costs increased 74% to R485.5 million as a consequence of increased interest rates, the funding of the capital expenditure programme embarked upon in prior years and a significant reduction in capitalised interest from R100.0 million to R37.9 million in the current year, as projects near completion.

Profit before tax

Profit before tax of R1 677.4 million reflected a 19.9% improvement over the prior year aided by the capital profit on the sale and leaseback transaction which was partially offset by foreign exchange losses incurred in Nigeria and Angola and impairments of certain plant and equipment.

Managing taxation

Nampak has a good record of managing the group’s taxation affairs: we prioritise compliance in all respects across several jurisdictions while optimising allowable deductions and taking opportunities to the full extent possible. In 2016, we continued to benefit from a tax holiday in respect of Bevcan in Nigeria, where we enjoy the benefits of our ‘pioneer’ status in that market. This expires in 2018. In Angola, our tax holiday ends during 2019. We have also benefited from tax incentives granted in relation to our beverage can lines in South Africa with management actively managing the requirements to benefit from these favourable tax laws that encourage investment.

The effective tax rate increased from a negative 4.1% in the prior year to 11.9% primarily due to reduced government incentives. No tax shield on forex losses in the jurisdictions of Nigeria and Angola given the respective pioneer and tax holiday statuses, certain disallowable expenditure and B-BBEE share scheme expenditure claimed in the prior year. The taxation rate was not affected by the capital profit on the sale and leaseback transaction as this capital profit was shielded from capital gains tax by capital tax losses incurred in prior years on which deferred tax assets were raised in the current year.

Profit after tax from continuing operations of R1 478.3 million exceeded the prior year of R1 456.1 million by 1.5%. The group benefited from lower tax rates in jusrisdictions outside of South Africa. The tax rate is expected to return to the previous guidance of between 15% and 20% in 2017. The Bevcan Nigeria pioneer status expires in 2018 and the Bevcan Angola tax holiday ends during 2019.

Effective tax rate

Earnings per share (EPS) and headline earnings per share (HEPS)

In 2016, EPS improved by 11.5% assisted by the impact of the sale and leaseback transaction, which was partly offset by foreign currency translation losses as well as impairment costs. HEPS declined by 48.3% to 107.6 cents from 208.2 cents in 2015 primarily due to foreign exchange losses, higher interest costs and an increased effective tax rate.


Reviewing our dividend policy

After many years of applying a constant dividend policy of 1.55 times cover with a payout ratio of 64.5% of HEPS, driven primarily by corporate action rather than cash generation, in 2016 the board made the difficult decision to suspend the payment of both the interim and full year dividend. The decision was part of the group’s balance sheet restructuring programme given the high historic gearing levels that arose from aggressive capital expenditure and corporate finance activities over the preceding five years and liquidity issues in Nigeria and Angola. Future dividends will be based on cash generated from operations in non-restricted cash regions after taking into account replacement capital expenditure and net interest paid, and will be based on a payout ratio of 40%.

Capital expenditure and depreciation

After many years of significant capital expenditure, in 2016 Nampak’s capex was more restrained as we came closer to the end of our major capital investment programme. Over the last three years, capital expenditure has declined from R2.6 billion in 2014 to R2.2 billion in 2015 and R1.4 billion in 2016. This trend is expected to continue, with capital expenditure of R1.0 billion guided for 2017.

Depreciation versus capex

The majority of the current years’ capex relates to capex approved in prior years. Expenditure of R1.4 billion in the year is in line with guidance provided to the market.

Focusing on working capital improvements

Historically, the single biggest impact on working capital at Nampak was related to outflows due to the group’s significant investment in inventory. In 2016, we reversed this trend through careful planning and decisive execution by management resulting in a pleasing cash release during the year. Inventory management will remain a key focus area and form part of the management incentive structure. In 2016, we reduced inventory by R487.8 million and lowered trade and other receivables by R119.1 million, resulting in a gross inflow of R606.9 million compared to an outflow of R1 191.3 million in the prior year. We believe that in the main, inventory is now at levels more suitable to each division and this will be maintained, or improved upon wherever possible. However, there is reduced opportunity for further material optimisation. Our trade receivables consist of several blue-chip companies, which maintained terms. There was little in the way of bad debts, testimony to an extremely well managed and high quality accounts receivable portfolio. The decrease in accounts payable was mainly the result of reduced capex creditors.

Measuring our performance with key ratios

A moderate increase in earnings and a proportionally larger increase in equity flowing from the profit on the sale and leaseback transaction and the decrease in treasury shares (Black Management Trust) has slightly decreased ROE compared to the prior year.


An improvement in RONA was achieved through improved trading profit after several years of significant capex to modernise assets

Net gearing

Net gearing has benefited from the sale and leaseback transaction, improved working capital management and cash management interventions.

Current ratio

The proceeds from the sale and leaseback transaction improved working capital management and cash generation has resulted in a 50% improvement in the current year from 1.0 to 1.5 times.

Acid-test ratio

The declining acid-test ratio since 2013 has reversed with the ratio tending towards one times cover indicating the group is almost able to settle all creditors without liquidating inventories.

Looking forward

After considerable progress on many fronts in 2016, in the year ahead we will focus on leveraging our new, well-capitalised asset base to the benefit of our shareholders. We will continue to tighten our financial discipline and forecasting and despite continuing macro-economic headwinds believe we have a stable platform for growth following the optimisation of our balance sheet.

After a year in which significant cash was released from inventories, in the period ahead we are targeting further improvements in working capital management, with the aim of inventory holdings being funded by trade payables and increased working capital velocity. This will be supported by linking management incentives to key metrics.

The finance function is a critical enabler to operations to drive profitability and capital allocations. We will continue to closely monitor liquidity issues in the Rest of Africa and work to improve group gearing through greater cash generation. Capital allocation will be prudently reviewed, supported by the multi-disciplinary team we have recently established to review all capital expenditure.

I would like to thank the finance team for their diligence and resourcefulness in a year of many changes, the group executive committee, board and other group committees and our various providers of capital, for their support during the year. I look forward to further improvements in the group’s financial performance in 2017.

Glenn Fullerton
Chief financial officer

21 November 2016