The board and management identified the key levers that Nampak must pull to ensure value creation for all stakeholders in the years ahead.
Focusing on operational excellence
Against a backdrop of moribund economic activity and political volatility, increased regulatory requirements and growing competition, in 2017 Nampak remained focused on the task at hand: to enhance its performance across the board.
The singular focus on operations excellence resulted in exceptional performances in some parts of the business, most notably Bevcan, while others – such as Glass and Nampak Plastics Europe – are still heading up the curve of improvement.
Headline earnings per share increased 15%. The board took the difficult decision not to resume dividends to shareholders until the sustainability of cash repatriation from Nampak's substantial businesses in Nigeria, Angola and Zimbabwe is assured, and the operating challenges at the Glass business, which took a R321 million goodwill and R114 million intangible asset impairment in the year, are resolved.
The board and management identified the key levers that Nampak must pull to ensure value creation for all stakeholders in the years ahead. In his review, the CEO outlines the group's approach to unlocking operating leverage, which I see as simply getting the most out of Nampak's existing facilities, many of which have been upgraded in recent years to now operate the latest generation equipment.
Contending with a difficult environment
In 2017, business confidence in South Africa dropped to its lowest level in a quarter of a century. Unemployment was at its highest in 13 years. Demand was weak and political and policy uncertainty heightened. The de-industrialisation of the economy - which has seen the manufacturing sector's contribution to GDP fall from 24% in the early 1980s to around 13% now - continued, correlating with more job losses. Local government became increasingly inefficient, and the supply of key infrastructure such as roads and electricity became less reliable.
This environment is clearly not conducive to efficient manufacturing - and the disruption caused to the Glass business in the second half of 2017 by protracted problems with the quality of the municipal electricity supply to its site is a case in point. Without investor and consumer confidence, underpinned by stable and predictable policies and reliable infrastructure, South Africa will continue to de-industrialise, putting both business and jobs at risk.
In other key Nampak markets in the Rest of Africa, the impact of soft commodity prices continued; however, there were some signs of recovery. The Nigerian economy emerged from its first contraction in 25 years, Zimbabwe's GDP was supported by a rebound in agriculture, and Angola started to benefit from the upturn in oil markets. But foreign currency shortages remained a problem in many markets, with businesses struggling to pay for imports and Nampak facing difficulties in repatriating cash. The launch of the Nigerian Autonomous Foreign Exchange (NAFEX) market in April 2017 did, however, lead to significantly improved liquidity and cash repatriation from Nigeria.
The contribution of the South African businesses to Nampak's group revenue increased to 60% in 2017 from 57% in 2016 and that of the Rest of Africa businesses edged up to 32% from 31%. Due to the extremely strong performance of Bevcan Angola, the Rest of Africa operations' contribution to trading profit increased to 64% from 52%.
Sticking to strategy, enhancing governance
In the year, while Nampak retained its broad strategy, more attention was given to the group's first strategic objective (to unlock further value from the base business) than to the second (to accelerate growth in the Rest of Africa). This was a direct result of the issues around forex liquidity in key Rest of Africa operations, and slow recovery in commodity markets, which constrained growth in key African markets.
The board, which is responsible for the strategic direction of the group, continued to work to create value for all stakeholders through ensuring that the company is governed in an ethical and effective way. To this end, it oversaw a refresh of Nampak's values and an update of its code of ethics in the year, and also welcomed two new directors.
Ms Jenitha John joined as an independent non-executive director of the board and a member of the audit committee and Ms Mandisa Seleoane was appointed as an executive director responsible for human resources. They replaced Ms Nosipho Molope and Mr Fezekile Tshiqi, who both retired from the board and whom we thank for their valuable contribution over the years.
We are satisfied that the board comprises the appropriate balance of knowledge, skills, experience, diversity and independence to discharge its governance roles and responsibilities objectively and effectively. Transformation is a key focus of the board, and like many corporates, Nampak was negatively affected in the year by the reconfiguration of the B-BBEE codes, suffering a significant downgrade to its contributor status. The Nampak B-BBEE ownership scheme had matured and was wound up. But the company was not pushed off course; Nampak's employment equity has never been stronger and it has redoubled its efforts on every aspect of B-BBEE. In the year ahead, we will work on a new B-BBEE ownership scheme, which we intend to implement with great care to ensure that shareholder value is created during the process.
After a challenging year, Nampak is clear on what it needs to do in 2018 to further improve performance across the board in an environment of growing competition and greater regulatory requirements. It will focus first and foremost on delivering more operational improvements, most particularly at Glass and at Nampak Plastics Europe. It will do that in collaboration with its many stakeholders, to whom I would like to extend the sincere thanks of the board for their constructive engagement and support in 2017.
28 November 2017