Operational review – Metals
Bevcan is the largest manufacturer of beverage cans in Africa, and the only producer of these in southern Africa, as well as in Angola, where we continue to grow our market share. We have production facilities in South Africa, Angola and Nigeria. Our cans represent more than a third of the market in both Nigeria and East Africa.
Operating from five sites, DivFood manufactures two- and three-piece tinplate food cans, and a number of diversified tinplate cans. We are the only producer of aluminium monobloc aerosol cans and two-piece tinplate cans in South Africa. Some 60% of our sales go to the food industry. In the diversified part of our business, tinplate aerosol cans, monobloc aerosols, paint cans and polish cans are the major product categories.
Metal packing collected for recycling in South Africa (% of tonnes consumed)
Source: Packaging SA. Latest data.
- Completed Bevcan recapitalisation, improved operational efficiency in South Africa
- Recorded lower Bevcan South African volumes
- Faced difficulties in repatriating cash from Angola and Nigeria, where manufacturing facilities ran well
- DivFood grew food can volumes and rationalised diversified can offering; improved profitability
- DivFood completed the first phase of the recapitalisation programme
|Key natural capital inputs:|
|Energy use (GJ)||1 543 075||1 619 509||(5)|
|Outputs affecting natural capital:|
|Emissions intensity (t/CO2e/Rm revenue)||18.37||21.27||(14)|
|Revenue (R million)||10 510||9 933||6|
|Trading profit (R million)||1 285||1 203||7|
|Trading margin (%)||12.2||12.1||–|
|Employees||3 314||3 364||(1)|
South Africa – Bevcan
In 2016, we completed the recapitalisation of Bevcan South Africa, commissioning on time and below budget the last of our new aluminium beverage can lines, as well as a beverage can ends line. This reflects delivery on the Nampak strategic imperative to invest to compete. We launched a comprehensive operations excellence initiative, targeting improvements in operational efficiencies, safety, people development, supply chain management and planning, as well as in our brand and marketing.
We reaped the early rewards of this project, recording significant improvements in the operational performance of our Springs facility, as well as a 40% reduction in the LTIFR (lost-time injury frequency rate). This, along with a number of management changes, is helping with the delivery of our strategic imperative to improve business performance by buying better, making better and selling better.
In a challenging macro-economic environment, demand for our products was erratic: good growth in the first few months of the financial year thanks to the higher-than-usual summer temperatures was followed by an unusually sharp contraction during the late summer and the winter months.
For the year as a whole, volumes fell by 5.4%. The impact on consumer spending of subdued economic activity accounted for around half of this decline, while the rest was a result of the cessation of our beverage can exports from South Africa to Angola, where we had installed a second production line at the end of our 2015 financial year. The effect of the decline in volumes in South Africa was, however, offset by the operational efficiencies and cost reductions we achieved in the year.
Leveraging learnings from previous installations, in July 2016 we installed our Rosslyn facility’s second high-speed aluminium can line. This line performed ahead of expectations. Spoilage, traditionally associated with the commissioning of a new line, was at acceptable levels and we look forward to further improvements in the year ahead. In anticipation of the commissioning of the second line, we closed down the Rosslyn lines that produced so-called slim and slender cans. We started manufacturing these cans out of aluminium at Springs, where we moved closer to benchmark levels of spoilage.
In August 2016, we completed the expansion in Springs of our beverage can ends plant, the operational performance of which was pleasing. The expansion added two billion ends per annum to the existing can ends manufacturing facility with the new volumes destined primarily to our can manufacturing businesses in Angola and Nigeria.
Our aluminium cans weigh on average 60% less than those made of tinplate. Lines that produce aluminium cans consume 17% less energy per can than those that produce tinplate cans. As the end product is lighter, these lines also contribute to reduced transport costs. Our investment in these facilities demonstrates our commitment to a more sustainable and infinitely recyclable form of packaging.
We still operate two tinplate lines, one in Durban and the other in Cape Town. In the year, in line with our strategic imperative to manage costs stringently, we concluded consultations with trade unions and affected parties about the planned closure of the Durban facility. As far as possible, we worked to redeploy skills from this facility to other Bevcan operations. The line’s closure, planned for 15 December 2016, will result in a saving in 2017 of R30 million, rising to R40 million in the years that follow.
We benefited from the support of Nampak Research and Development and our technology agreement with Crown. Nampak R&D continued to work on trials of thinner gauge aluminium for beverage cans and ends, as well as on development work on BPA-NI (Bisphenol-A not intentionally added) coating systems. We maintained world-class operating systems at our facilities, retaining certification under the relevant ISO quality, food safety and environmental standards.
South Africa – DivFood
At DivFood, we improved our operational and financial performance in the year. A significant amount of management’s attention was devoted to the commissioning of numerous capital projects. We also closed the diversified packaging factory in Epping in the Western Cape. These projects were executed largely on time and in budget, while maintaining satisfactory customer service during the changeover.
We continued to focus on safety, with increased emphasis on behaviour-based interventions. Our overall safety performance improved and we recorded a LTIFR of 0.4 for the year. However, the improvement was overshadowed by a high-voltage explosion at our Mobeni factory in Durban on 1 August 2016. Four people were injured, including two contractors. Due to the seriousness of his injuries, tragically one contractor, Jacques van der Berg, passed away some weeks later. The safety and skills of people are material issues at Nampak.
Our capital programme, aligned to the strategic imperative to invest to compete, was aimed at replacing ageing equipment with energy-efficient and technologically advanced machinery to be able to convert the latest generation of thin-gauge tinplate and operate at higher efficiencies. This contributed towards leaner production units and will enhance our competitive position and profitability into the future.
Despite a challenging economic environment, demand for fish cans grew strongly as the industry processed more imported frozen fish in local cans and the importation of filled product declined. Demand for cans for processed meat expanded at a rate ahead of GDP growth and we gained some market share in the fruit canning sector in the year. Demand for vegetable cans was steady.
Our efforts to simplify the business were focused mainly on the diversified product range, customer base and operating models. In line with the strategic imperative to actively manage our portfolio, we closed our Epping plant, with the loss of 47 jobs, and centralised paint can manufacturing in Mobeni. Even though volumes reduced on the back of rationalisation efforts, profitability improved. Tinplate aerosol volumes were steady, while domestic demand for monobloc aerosols grew. Paint volumes declined by 23% on the back of the rationalisation programme and packaging for the small oil can category was largely converted to plastic packaging.
We further developed and stabilised our imported supply of tinplate and reported sustained improvements in the quality and service of our local tinplate supply. Nampak R&D continued to play an important role in supporting DivFood. Significant areas of support were the qualification of imported tinplate; product support for our cans and customer products; field services such as hygiene audits and can handling audits; education on best practice in canning; shelf life studies and thermal processing work. Our plants are all certified under the relevant ISO environmental, quality and food safety standards.
In the short term, continued pressure on consumer spending is likely to limit growth in beverage can volumes. However, consolidation among Bevcan’s customers in the carbonated soft drinks (CSD) sector is potentially good for growth in our volumes. Some 90% of our production volumes are secured in long-term contracts, which guarantee an annual per unit saving to customers from more efficient production capacity as well as volume growth.
We will continue to monitor closely developments in the policy environment, including the proposed tax on sugar-sweetened beverages.
In the year ahead, as part of our continuous improvement journey Bevcan will continue to work to reduce costs and focus on improving cash generation through stringent working capital management. Our investment in the latest technology, our low cost structure, internationally competitive pricing and long-term agreements with customers mean that we are well positioned to defend our market share should long-mooted competition in the sector materialise.
With the first phase of the recapitalisation programme behind us, in the year ahead DivFood will direct more attention to inventory and supply chain optimisation as well as the improvement of our planning processes. In line with the strategic imperative to manage working capital prudently, we anticipate working capital benefits as well as efficiency improvements from these interventions. Realising the opportunity presented by more efficient equipment will be a further area of focus in the year ahead and we would expect our efforts with regard to operational excellence to support an overall improvement in quality and productivity as well as spoilage levels.
Rest of Africa – Beverage cans
In the face of significant economic headwinds, Bevcan’s operations in oil-dependent Angola and Nigeria performed satisfactorily. By signing up new customers, both gained a greater share of markets that were hit hard by the dramatic decline in crude oil prices, which led to reduced government revenues and waning economic activity.
A sharp depreciation of the kwanza and naira resulted in significant translation losses on local cash and debtor balances. We also faced difficulties in repatriating cash amid a shortage of foreign currency. Restricted cash in Angola and Nigeria is a material issue for Nampak, and is discussed in detail here.
In Angola, demand for beverage cans fell sharply. However, the start of our contract to supply a large local customer (previously reliant on imported beverage cans) helped limit the decline in our overall production volumes to 3.3%. We also supplied a number of smaller local beverage producers.
Our second production line, which makes aluminium beverage cans, operated above expectations. Because of the slowdown in economic activity, we took steps to cut overhead costs, particularly those related to the first line, which produces cans made of tinplate. We plan to convert the first line to aluminium once economic conditions improve.
Angola, a nation of some 26 million people, represents a major growth opportunity for Nampak, and the work we are doing in Luanda is in line with our strategic objective to accelerate growth in the Rest of Africa.
In Nigeria, even though the market was broadly flat, we grew our volumes as we gained market share at existing customers, in line with contractual commitments. We recorded good production efficiencies and acceptable levels of spoilage. To supplement our energy requirements, we used LPG and diesel generators. The country’s shortage of foreign currency made trading conditions extremely difficult, but there was a slight improvement from June when the government eased foreign exchange regulations and committed to making 60% of the available foreign currency available to the manufacturing industry.
In both Angola and Nigeria, we completed certification under the relevant ISO quality and food safety standards. In Nigeria, we are also certified for our environmental management systems, and are currently undergoing similar certification in Angola.
Rest of Africa – Other metal packaging
In a depressed Nigerian economy, demand was weak at the start of the year, but showed signs of recovery in the second half, led by the substitution of imports with locally produced goods amid a shortage of hard currency available for foreign imported products and production constraints at opposition companies.
In Kenya, we experienced a difficult year in the general food can market due to weaker agricultural harvests, particularly in pineapples and green beans, which are major product sectors. This was also aggravated by the increased self-manufacture of certain can sizes by our major customer.
The regional demand for crowns across Tanzania, Zimbabwe and Zambia remained stable.
In the year we disposed of our share in the metals operation in Mozambique. This was a small operation manufacturing only metal crowns and the small local market did not provide sufficient critical mass to justify further investment to remain sustainably competitive.
Despite the continued pressure in the short term on consumer spending in Nigeria and Angola, we remain optimistic about the longer-term outlook for our Bevcan businesses in these countries. Should oil prices and output stabilise, we expect a recovery in demand in 2018/2019.
In Nigeria the share of beverage cans in the overall packaging offering is still lower than international norms, with room to grow. We will consider installing a second production line when market conditions improve, but are not planning any large capital expenditure in the short term. Similarly, in Angola, we will convert the first tinplate production line to aluminium once economic activity expands.
Bevcan’s major focus in the short term is on overcoming the liquidity constraints in both Nigeria and Angola, where we have developed good relationships with the relevant authorities.
In Kenya, we will continue to grow the crowns business as well as printed pilfer-proof metal closures following our recent capacity expansions for both products. We anticipate a continuation of the recovery of metals demand in Nigeria as customers and general producers look at opportunities to manufacture more product locally.