Chief executive's report
Our unrelenting focus on operational excellence will ensure that we are better able to make every can, bottle, carton, crate, tube and closure profitably.
UNLOCKING OPERATING LEVERAGE
"Advanced manufacturing", the theme of this year's integrated report, appropriately sums up what we at Nampak are driven to deliver. In 2017, we extended the progress made in recent years to use new technologies, processes and management methods to improve our overall performance in the manufacture of packaging products.
In so doing, we advanced delivery of the group's strategy, which is to extract operating leverage from our recently modernised assets over the near to medium term. We are determined to maximise total shareholder return by producing sustainable profitability which creates value for all stakeholders. To understand exactly what this means to Nampak, please click here.
In the past six years we have invested R9.2 billion in state-of-the-art water and power-efficient machinery and facilities, including new high-speed beverage and food can lines, upgraded plastics equipment and a new glass furnace. Now, the challenge is to make the equipment work harder and deliver value to shareholders from the investments we have made.
Our South African beverage can business, Bevcan, achieved just that in the year. After launching a comprehensive operations excellence initiative in 2016, in 2017 it reported a truly world-class safety performance of 0.11, a substantial improvement in production, reduced spoilage and a significant increase in profitability. This underlines the value of operations excellence, and we see room for further operational improvements in the year ahead.
Apart from efficiencies and safety, the operations excellence initiative across the group also targets improvements in people development, supply chain management, planning, forecasting, and in branding and marketing. This new way of working, facilitated by our investment in new systems and processes, will in turn enhance our competitiveness in an environment of growing competition.
Safety remains our highest priority and as such is a key performance metric for executive remuneration. It is an excellent proxy for operational performance and the trend in recent years is most encouraging. In 2017, we reported a lost-time injury frequency rate (LTIFR) of 0.41, bettering our performance of 0.48 in 2016 and 0.89 in 2015, but just shy of our tolerance level for 2017 of 0.40. We are committed to even stronger outcomes in the years ahead.
Indicative of our steadily improving operational performance in 2017 was our ability to maintain our trading margin of 10.4% (2016: 10.0%) and trading profit under challenging macro-economic circumstances. Our continuing effort to reduce our cost base also yielded pleasing results. We have further cut head office costs by an additional R57 million and reduced supply chain costs by R100 million, in addition to savings previously banked of R126 million. This enabled us to remain competitive in the face of new entrants, pressure which has been exacerbated by decreased demand in the market.
Headline earnings per share rose 15% but the board considered it prudent to hold off on the resumption of dividends to shareholders, in particular having regard to demonstrating the sustainability of cash repatriation from Nigeria, Angola and Zimbabwe, as well as the operating challenges of our Glass business.
CFO Glenn Fullerton details Nampak's financial performance in his report, in which he also points to the strength of the balance sheet, the reduction in finance costs and the group's rigorous management of capital expenditure.
SIMPLIFYING OUR BUSINESS TO SUPPORT STRONGER OPERATIONS
The challenging macro-economic environment in our key markets, which remained a material issue for the group in the year, meant demand for many of the products for which DivFood produces packaging was constrained, dampening revenue and profitability. A very poor fish catch meant reduced demand for cans for this category. Despite this, thanks to the decisive measures taken since 2014 to simplify the business, it reported a stronger operational performance.
Our South African Plastics business continued to catch up with a backlog of maintenance and capital expenditure required to strengthen operations. Nampak Plastics Europe had a tough year; however, new leadership was able to drive improvements in operational performance, which are expected to result in improved financial performance in 2018. By consolidating our footprint, standardising our processes, procedures and systems, eliminating waste, renewing equipment, focusing on energy efficiency and diversifying our product and customer base, we will make our Plastics business sustainably profitable.
After a good operational performance in 2016, Glass had a disappointing second half of 2017 caused by unpredictable and erratic power supply following the failure of a major transformer on the electricity grid. Excellence in manufacturing cannot be built if the right infrastructure is lacking - this includes a reliable supply of power and water, and well-maintained roads and ports. While Glass's performance was exacerbated by the electricity issues, we acknowledge that there are things we need to do better. We recently introduced management changes to allow for a more focused effort to turn Glass around. We are also investing in new technical skills.
Our businesses in the Rest of Africa had a mixed year. Bevcan recorded increased profitability in Angola and grew market share in Nigeria. Easing of currency restrictions in Nigeria led to improved liquidity and cash repatriation from that market; however, in Angola we continued to face difficulties in repatriating cash. Our general metal packaging business in the Rest of Africa delivered better revenue and trading profit, lifted by a strong performance in Nigeria. A very strong performance from our Zimbabwe business supported our otherwise weak Paper business. Dependence on foreign exchange liquidity, one of the group's top risks, had a significant impact on our Rest of Africa businesses in the year.
Our strategic performance table shows the progress made to deliver on our strategy in 2017, and also the initiatives we have in place to ensure stronger delivery in the year ahead. While our strategic objective to accelerate growth in the Rest of Africa is largely on hold for now because of the negative impact on liquidity of the commodity slowdown, we still believe in the African growth story. While we plan to rationalise some businesses in southern and east Africa in the year ahead, we remain mindful of the need to retain our first-mover advantage in many markets.
As a company significantly exposed to the consumer market, the 27.7% unemployment rate and the fact that more than half of all South Africans are living below the poverty line is a cause for considerable concern. The catalyst required to unlock consumer demand is confidence among investors and consumers, which in turn depends to a large extent on improved certainty in the political environment.
In the year ahead, we will continue to concentrate on those factors within our control. Our unrelenting focus on operational excellence will ensure that we are better able to make every can, bottle, carton, crate, tube and closure profitably. To this end, we will extend our work to unlock operating leverage and streamline our cost structure.
Our approach to capex will remain judicious, and we forecast spending of between R1.0 billion and R1.2 billion, from R735 million in 2017. Among our most significant capital projects in the year ahead will be the US$13 million first phase conversion of our tinplate beverage line in Angola to aluminium funded by a kwanza/US dollar swap.
Correcting the poor operational performance of Glass, and that of Nampak Plastics Europe are special areas of focus for 2018. I am counting on the continued dedication and hard work of Nampak people everywhere to ensure that ours is an advanced manufacturing offering, and thank them for their notable contribution in 2017.
André de Ruyter
Chief executive officer
28 November 2017