Material issues affecting our strategy

Material issues are those with the potential to significantly affect our ability to deliver on our strategy, create value and sustain the group in the short, medium and long term. The most noticeable impact of these issues in the short term is on the group’s share price, which lost 25% of its value in 2016.



Managing material issues
We identify them by reviewig:
  • Information at divisional board and group executive committee meetings
  • Industrydevelopments and the group’s risks and opportunities
  • Economic research
  • Stakeholder engagements
  • Applicable policies and regulations
  • Relevant media coverage
  • Input from key management
We prioritise them by assessing:
  • Potential impact
  • Our risk and reward metrics
We respond to them by:
  • Evaluating the effect on our risk tolerance and risk appetite
  • Putting in place management actions to mitigate against negative outcomes
  • Considering the trade-offs between the capitals
We report on them:
  • At regular board and sub-committee meetings
  • To shareholders in formal reporting sessions
  • To employees and unions through structured channels
  • Through industry bodies
We monitor them:
  • Against internal and published performance targets
  • Against competitor activities
  • In consultation with our suppliers and customers

Identifying material issues

In 2016, we identified five material issues:

Challenging
macro-economic
environment
in key
markets

Liquidity restrictions
and the exposure of
restricted cash to
currency volatility

Our operational
and financial

performance

People - safety,
skills and
transformation

Uncertain
regulatory and
policy
environment

Material issue Implications for value Our strategic response in 2016

Challenging macro-economic environment in key markets

In our key markets the economies were weak and currencies were volatile. Lower commodity prices dampened macro-economic demand and led, in some cases, to a national shortage of foreign currency albeit trading in Nigeria remained strong. Government revenue came under pressure, with an impact on consumers, who cut spending. In South Africa, manufacturing conditions and investment sentiment were poor, further depressed by the possibility of a sovereign credit downgrade in December 2016. Consolidation of both the competitive and customer landscape continued.
  • Decline in demand for packaging products
  • Upward pressure on inventory levels as customers drew down less than forecast
  • Downward pressure on revenue, margins and earnings
  • Dollar-denominated debt’s exposure to rand/dollar exchange rate volatility
  • Hampered potential for organic growth as well as opportunities for new investments
  • Any downgrade in South Africa’s sovereign rating could increase our cost of funding
  • Restructured the balance sheet to reduce impact of any sovereign downgrade
  • Worked to improve operational and business performance by
    • Buying better – cut procurement costs by R126 million
    • Making better – implemented operations excellence, made management changes, reduced headcount
    • Selling better – rationalised product offering, reduced complexity
  • Improved forecasting, planning, procurement and information management

Liquidity restrictions and the exposure of restricted cash to currency volatility

The sharp fall in oil prices from above US$110 a barrel in mid-2014 to below US$30 in early 2016 hit oil exporters Angola and Nigeria hard. It led to lower export earnings, a steep decline in their currencies and shortages of foreign currency. In line with IFRS, the functional currency for Bevcan in Angola and Nigeria is the US dollar, and that for our paper and metals businesses in Nigeria is the naira. In our accounts, when translating from functional currency to our reporting currency, all movements in monetary items are processed through our profit and loss statement. This resulted in a foreign exchange loss of R681 million against a loss of R161 million in the prior year.
  • Limited our ability to settle debt with internal creditors (Isle of Man treasury)
  • Reduced cash balances at group level due to weaker naira and kwanza while cash balances in Nigeria and Angola rose to R2.0 billion from R700 million
  • Abnormal foreign currency translation losses of R681 million and significantly reduced group profitability
  • Increased engagement with local regulators, central banks and credit providers
  • Leveraged position as major manufacturer in Angola and good relations with authorities to extract restricted cash
  • Hedged US$45 million in Angola via US dollar-indexed kwanza bonds
  • Secured US$27 million in dollar deliverable forwards in Nigeria
  • Restructured our debt both locally and in Rest of Africa
  • Continued to link Bevcan Nigeria product pricing to US dollar
  • 49% of cash in Nigeria and Angola hedged
  • Cash extraction in Nigeria and Angola improved from 59% to 77%

Our operational and financial performance

The levels of spoilage at Bevcan Springs plant improved but remained above target. At the Bevcan Rosslyn facility, a second aluminium line was commissioned and ramped-up, in line with expectations. We turned around Glass. Operationally, Bevcan Angola and Nigeria performed very well. Plastics put in place the foundations required for enhanced performance. We restructured our balance sheet, which was stressed by years of high capital expenditure and a generous dividend policy. We readjusted to the financial mplications of recent divestitures. We devoted considerable attention to addressing our post-retirement medical aid liability, which had grown significantly. Net gearing was reduced from 72% to 49%.
  • Improved prospects for efficiencies, profitability, longer-term returns to investors
  • Vulnerability to weaker rand – for every R1 easing in the rand/dollar in 2016, our US dollar debt increased by R389 million
  • Pressure on ability to meet loan covenants
  • Post-retirement medical aid liability of R1.5 billion prior to an alternative annuity offer to pensioners
  • Successfully implemented numerous interventions to improve operational efficiencies
  • Restructured the balance sheet:
    • Entered property sale and leaseback deal, raising R1.7 billion and reducing liabilities accordingly
    • Released R1 billion from inventories and trade receivables
    • Limited capital expenditure to R1.4 billion
    • Suspended 2016 dividend, reduced net gearing from 72% to 49% which is within the 40% to 60% target range
    • Offered pensioners alternatives to post-retirement medical aid, reducing liability by R393 million to R1.1 billion
    • Renegotiated loan covenants; applied transformative cash management system
    • Cash extraction increased from 59% to 77%

People – safety, skills and transformation

Ensuring the safety of our people and that of our contractors is critical. Tragically in the year, an electrical contractor died in a high-voltage incident and two people were killed when a contractor driving a Nampak truck lost control of his vehicle. Our overall safety performance improved.

Nampak continued to face a shortage of skills. The fall in Nampak’s share price had implications for our ability to retain key talent. In South Africa, the meaningful transformation of society from one characterised by huge inequality remained vital.

  • Unsafe operations harm people, the environment, quality and our reputation
  • Insufficient skills may impact our ability to meet customer requirements
  • Inadequate skills could harm operational effectiveness and ability to deliver on strategy
  • Potential to affect revenue, profitability, investor returns and tax payable to authorities
  • A transformed society in the workplace, with greater equality, is a more sustainable one
  • Introduced group-wide behaviour-based safety initiative
  • Firmed up succession plans for all managerial positions
  • Injected new, diverse talent as opportunities arose
  • Provided executive coaching to facilitate people development
  • Delivered management training aligned with recognised qualifications
  • Offered specific technical training; committed to inclusive growth

Uncertain regulatory and policy environment

A significant regulatory burden is being placed on South African manufacturing, and packaging in particular. New broad-based black economic empowerment (B-BBEE) codes recently came into force. The increased regulatory burden includes implications of the National Pricing Strategy for Waste Management Charges; the requirement of the Department of Environmental Affairs (DEA) to prepare and submit for government approval waste management plans; the planned tax on carbon emissions and the proposed tax on sugar-sweetened beverages.
  • Our contributor status under the new B-BBEE codes will decline
  • Waste management levies will place local manufacturing at a structural disadvantage
  • Additional fees could change the industry’s recycling of post-consumer packaging
  • Failure to remain compliant could lead to penalties and harm our licence to operate
  • Profitability will be pressured, impacting returns to investors
  • Drove multi-pronged B-BBEE approach, with clear development and succession plans
  • Maintained our significant contributions to recycling
  • Sustained our efforts on greater light-weighting of products
  • Engaged constructively with policy makers on proposed regulatory changes
  • Focused on unlocking further value from base businesses to build resilience to withstand requirements of greater regulatory burden