Operational review – Plastic
Nampak has 20 plastics facilities in South Africa, running 226 lines. We make HDPE plastic bottles mainly for milk and juice; PET bottles and preforms for juice, CSDs and water; and paper gable-top cartons for sorghum beer, mageu and extended-shelf-life milk. We produce drums and intermediate bulk containers for bulk alcohol and chemicals; closures for CSD bottles, milk bottles and cartons, and sports drinks; tubes for toothpaste; and crates for beverages, bakeries, dairies and the agriculture market. Nampak Plastics Europe operates 10 facilities producing HDPE bottles, mostly for the dairy and juice markets, in the United Kingdom and the Republic of Ireland. In the Rest of Africa, we have preform, crate and closure businesses in Zimbabwe, Ethiopia and Nigeria.
|Key natural capital inputs:|
|Energy use (GJ)||720 003||646 169||11|
|Outputs affecting natural capital:|
|Emissions intensity (t/CO2e/Rm revenue)||25.28||26.45||(4)|
|Revenue (R million)||5 557||5 011||11|
|Trading profit (R million)||392||362||8|
|Trading margin (%)||7.1||7.2||–|
|Employees||2 036||2 000||2|
In 2016, we made good progress in our work to strengthen the operations in the South African plastics business: we are enhancing the visibility of our operational performance, refining our working capital management and better monitoring our operational efficiencies. Together, these will facilitate a sustained improvement in our overall performance in the long term.
The market proved challenging, with the drought depressing milk production and hence sales of bottles; liquidity issues in the Rest of Africa affecting the uptake of drums; and consumer demand slowing down.
Despite the pressure on volumes, revenue increased by 2.9% and profits improved. This was as a result of an improved product mix, greater efficiencies and a successful turnaround of our plastics closures and crates businesses.
The implementation of our seven-pillar safety approach went well. We reported a significant reduction in the number of incidents, with our LTIFR coming down by 79%, achieving our target of 0.5. We continue to ensure that risks are adequately appraised, mitigation action is formulated and implemented and we follow our rules and procedures. We aim to ensure that no employee gets injured on duty. Zero harm is possible and remains a high priority.
In line with our strategic objective to unlock further value from our base business, we enhanced operations at our key facilities. We gave greater attention to maintenance as well as to standardising our systems for efficiency monitoring and reporting. As plant reliability improved, we were able to secure additional sales, largely mitigating the impact of economic headwinds.
We adopted a sales and operations planning framework as part of our drive to achieve operations excellence. At select plants, we rolled out an automated manufacturing monitoring system, developed in-house by our facility in Westmead, Pinetown. This system allows operators to view the efficiency of each machine, in terms of quality, production, waste and other operational performance metrics.
Liquid packaging – HDPE and PET bottles, drums and cartons
The drought had a mixed impact on the production of plastic bottles: high summer temperatures lifted our customers’ water and juice sales, and hence demand for our bottles, but led to lower milk production and therefore reduced milk bottle sales.
The greater promotion by producers of UHT long-life packaging continued to limit growth in sales of fresh milk, which is traditionally packaged in HDPE bottles. Preform sales picked up as CSD volumes grew, supported by the hot weather.
As part of efforts for greater operational efficiencies and to support our customers’ growth, we commissioned a number of new pieces of machinery. In July 2016, we brought on line equipment to produce up to 36 million PET water bottles a year for a customer in Gauteng. In our drum business in this province, in August 2016 we commissioned a new line to blow-mould up to 400 000 drums a year, mainly for the agricultural chemicals market.
Towards year-end we brought on stream a new aseptic HDPE packaging line for a large producer of mageu, a non-alcoholic fermented beverage. This segment continues to expand at a rate in excess of the general beverage market.
Liquidity constraints in a number of countries north of South Africa’s borders led to pressure on the sale of drums, many of which are used for bulk alcohol exports to the rest of the continent. However, volumes began to pick up towards year-end.
Demand for paper cartons from the juice and extended-shelf-life milk sectors remained good, but a slowdown in the sorghum beer industry led to a reduction in the total volumes of these cartons that are made in our factory in Isithebe, KwaZulu-Natal.
Closures, tubes and crates
Our crate business benefited from the commissioning in May 2016 of a new injection-moulding line to produce up to one million crates a year. This is part of our turnaround drive in this business. We also invested in equipment, commissioned in July 2016, to produce 85 million new-generation sports drink closures a year.
Nampak Research and Development continued to make good progress on the design of lighter-weight plastic containers, thereby reducing the consumption of raw materials as well as the volumes of post-consumer packaging waste. We embarked on a project to reduce the weight of our crates as well as that of specific plastic closures. We believe this has great process and cost benefits for both Nampak and our customers. Another significant benefit of this intervention is the fulfilment of our promise to reduce, reuse and recycle: less material is used in the process of making crates, bottles and closures and less energy is required to transport lighter-weight products.
Nampak Plastics offers the latest developments in technology, trends and innovation to enhance the value of our customers’ products and brands. Our strong R&D innovation capability, along with our in-plant technology expertise, one-stop offering and excellent customer support are among our key competitive advantages.
After a year of considerable advances on many fronts, in 2017 we will align our organisational structure to focus on building the capacity of our business, improving coordination in the market, and standardising our products and practices.
In the next five years, we expect the South African rigid plastic market to expand at a compound annual growth rate of 3.5%. By 2020, we are targeting above-inflation growth, with a widening of our trading margin to above 10%.
We will achieve this through our clear plan to become the preferred and best value packaging partner and supplier in the market, serving the beverage, dairy, household chemicals, personal care and industrial segments. We will grow and defend our market segments; establish best cost and quality leadership; develop an integrated partnership approach and achieve technical excellence.
As more than a third of our lines are more than 20 years old, we see opportunity to introduce the latest-generation technology through a multi-year investment programme of R200 million to R300 million. Given that a number of the projects initiated in 2016 will deliver in the new financial year, we look forward to a positive 2017.
Rest of Africa
Our plastics business in the Rest of Africa performed well in the year, where we invested in additional capacity for preforms and plastic closures in Zimbabwe and Nigeria.
Megapak Zimbabwe had a good year, thanks to strong sales of new closures and the solid performance of our preform lines that supply the sorghum beer industry. In Zimbabwe, this sector favours rigid plastics packaging as opposed to the preference for cartons in other countries in the region.
In Ethiopia, the newly commissioned crate line ran well. While the demand was good, we faced significant regulatory administrative issues related specifically to banking and foreign exchange. This made sourcing of a sustained raw material supply difficult and hampered production; however, we resolved these challenges by year-end.
In Nigeria, demand for Nampak closures was healthy, helped by the substitution of imported product with locally manufactured goods.
We are considering further rigid plastics investments in Zambia, Zimbabwe and Tanzania in 2017 to cater for increased demand both in new and existing markets. Buoyed by increased demand, we plan to expand our Nigerian closure business in the year ahead with additional moulds.
Liquidity issues in Zimbabwe remain a concern.
United Kingdom and Republic of Ireland
Heightened competition in the dairy market, coupled with challenges in starting up two new production sites, led to a difficult year for Nampak Plastics UK, a reduction in profitability as well as management changes.
We launched various cost-cutting initiatives, including those aimed at optimising our energy use and our distribution costs. To reduce our reliance on producing HDPE bottles for the struggling British dairy industry, we started work on developing a number of potential opportunities in the manufacture of alternative plastics in addition to HDPE bottles in other sectors, including some outside the borders of the United Kingdom.
We also advanced our work to secure more opportunities to licence out our patented light-weighting technology, building on agreements already in place in Australia and New Zealand. Safety remains at the forefront of the business in a very regulated market and we reported a pleasing reduction in injury rates.
We closed our factory at Consett in north east England, but opened one in Ballitore, Republic of Ireland and another small plant near Stirling, Scotland. Establishing these two new production facilities cost more than planned because of delays in securing industrial power supply to one site and start-up project management challenges at the other. Plans and actions are underway to ensure both are firmly under control.
In the year ahead, under new leadership the business will look at opportunities for growth outside our traditional markets as well as step up turnaround plans. The business remains a generator of cash, holder of valuable intellectual property as well as a rand hedge. For the 2016 financial year, the closing rand/pound exchange rate was R17.80 from R20.97 a year earlier.