Material issues

Material issues are those with the potential to significantly affect our ability to deliver on our strategy, to create sustainable value for 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 more than 9% of its value in 2017.

Managing material issues

 

We identify them
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  • Information at divisional board and group executive committee meetings
  • Industry developments and the group's risks and opportunities
  • Economic research
  • Stakeholder engagements
  • Applicable policies and regulations
  • Relevant media coverage
  • Input from key management
We prioritise
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  • Potential impact
  • Our risk and reward metrics
We respond
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  • 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
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  • At regular board and sub-committee meetings
  • To shareholders in formal reporting sessions
  • To employees and unions through structured channels
  • Through industry bodies
We continuosly
  • Against internal and published performance targets
  • Against competitor activities
  • In consultation with our stakeholders

IDENTIFYING MATERIAL ISSUES

In 2017, we considered that the five material issues identified in 2016 remained relevant:

Our operational
and financial
performance
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Liquidity restrictions
and the exposure of
restricted cash to
currency volatility
Volatility
Challenging
macro-economic
environment
Macro-economic
People – safety,
skills and
transformation
People-safety
Uncertain
regulatory and
policy
environment
Policy Environment

MATERIAL ISSUE

OUR OPERATIONAL AND FINANCIAL PERFORMANCE

Bevcan South Africa reported a strong overall performance, with efficiency gains, a reduction in spoilage levels and a world-class safety record. DivFood completed its equipment modernisation programme but reported lower revenue and profitability in the second half amidst tough SA market conditions. Glass experienced operational challenges in the second half, aggravated by electricity supply problems. Plastics in South Africa and the UK lost customers to backward integration. Paper reported pressure on revenue and lower trading profits.

Trading profit

IMPLICATIONS FOR VALUE

  • Impaired goodwill of R321 million and intangibles of R114 million at Glass and impaired in-plant at Nampak Plastics Europe of R112 million which adversely impacted on earnings per share and the group effective tax rate but were excluded from headline earnings per share

OUR STRATEGIC RESPONSE IN 2017

  • Continued to focus on interventions to improve operational efficiencies
  • Freed up executive management's time to focus exclusively on Glass
  • Appointed new management at Nampak Plastics Europe
  • Devoted considerable attention to addressing our defined benefit liabilities
  • Formalised plans to consolidate two large liquid packaging sites in Gauteng
  • Maintained a strengthened balance sheet

LIQUIDITY RESTRICTIONS AND THE EXPOSURE OF RESTRICTED CASH TO CURRENCY VOLATILITY

After a steep fall between mid-2014 and early 2016, oil prices recovered slightly. Crude exporters Angola and Nigeria continued to suffer low export earnings, declines in their currencies and shortages of forex. The naira depreciated 14% against the US dollar but forex liquidity improved significantly with the launch of the NAFEX market. 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 reporting currency, all movements in monetary items are made through the profit and loss account.

US dollar

IMPLICATIONS FOR VALUE

  • Experienced losses from the currency devaluation on translation in Nigeria, resulting in losses of R160 million compared to R507 million in 2016.
    The loss of R174 million in Angola in 2016 was not repeated in 2017
  • Substantially increased our cash repatriation from Nigeria after the launch of NAFEX with US$79 million being repatriated
  • Inconsistent availability of forex led to supply chain disruptions in Nigeria and Ethiopia; hampered Zimbabwe operational performance
  • Limited our ability to settle intergroup loans and creditors
  • Cash balances in Angola, Nigeria and Zimbabwe increased from R2.3 billion to R3.7 billion

OUR STRATEGIC RESPONSE IN 2017

  • Increased hedging of Angolan exposures
  • Continued to link Bevcan Nigeria product pricing to dollar
  • Secured cash repatriation of US$127 million from Angola and Nigeria

CHALLENGING MACRO-ECONOMIC ENVIRONMENT

Across our markets, economies were weak as commodity prices remained soft and political uncertainty dented confidence. In South Africa, poverty and unemployment increased, hurting consumer spending, and confidence waned. The country's sovereign credit rating was downgraded to sub-investment status. There were some tentative signs of recovery in Nigeria, which, like South Africa, emerged from recession in the second quarter. Consolidation of both the competitive and customer landscape continued.

SA and Nigeria

IMPLICATIONS FOR VALUE

  • Decline in demand for packaging products as consumers trade down to value brands and products and consume less
  • Decline in revenue, pressure on earnings
  • Limited potential for organic growth as well as opportunities for new investments

OUR STRATEGIC RESPONSE IN 2017

  • Intensified our efforts to improve overall performance with operational excellence approach
  • Took steps to address fixed costs throughout our business
  • Further reduced gearing to lessen the impact of the sovereign downgrade
  • Planned to rationalise some Rest of Africa operations, mindful of the need not to lose our first-mover advantage

PEOPLE – SAFETY, SKILLS AND TRANSFORMATION

Ensuring the safety of our people and that of our contractors is critical. Tragically, on 1 October 2016 a logistics contractor at our Glass facility died in a fork-lift truck accident. Our overall safety performance improved, nearing our tolerance level. We continued to face a shortage of skills. The fall in Nampak's share price had implications for our ability to retain key talent. Under the new codes, our B-BBEE contributor status fell to level 6 from level 3.

Injury frequency

IMPLICATIONS FOR VALUE

  • Unsafe operations harm people, the environment, quality and our reputation
  • Insufficient skills may impact our ability to meet customer requirements, harm operational effectiveness and our ability to deliver on strategy, with the potential to affect revenue, profitability, investor returns and tax payable to authorities
  • Poor B-BBEE rating could impact the revenue of South African operations
  • Without transformation to a more equal society, the sustainability of the South African market is at risk

OUR STRATEGIC RESPONSE IN 2017

  • Continued to prioritise safety across the group
  • Injected new talent as opportunities arose
  • Provided external managerial training aligned with Nampak skills imperatives
  • Set up a B-BBEE steering committee to initiate our efforts; commenced work on a new B-BBEE ownership scheme

UNCERTAIN REGULATORY AND POLICY ENVIRONMENT

South Africa has a multitude of existing and planned legislative requirements, directly affecting Nampak or our customers. The increased regulatory load includes implications of the National Pricing Strategy for Waste Management Charges; the requirement to prepare and submit for government approval waste management plans; the planned tax on carbon emissions and the proposed tax on sugar-sweetened beverages. In other parts of Africa, significant levels of red tape, port and logistics inefficiencies hamper the importation of raw materials.

Glass,metal and plastics

IMPLICATIONS FOR VALUE

  • Unpredictable policy changes make planning difficult
  • Waste management levies will place local manufacturing at a structural disadvantage
  • Additional fees could lead to the industry recycling less 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

OUR STRATEGIC RESPONSE IN 2017

  • Participated in industry-wide engagement with government to improve the environment for manufacturers
  • Maintained our significant contributions to recycling
  • Sustained our efforts on further reducing the weight of products
  • Engaged 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