Metals

Bevcan is the largest manufacturer of beverage cans in Africa. We have production facilities in South Africa, Angola and Nigeria. Our cans represent the majority of the South African and Angolan markets and about 40% of the market in Nigeria.

Operating from five sites in South Africa and one in Botswana, DivFood manufactures two- and three-piece tinplate food cans, and a number of diversified tinplate cans. We hold strong market positions and are the only producer of two-piece tinplate cans and aluminium monobloc aerosol cans in South Africa. Some 64% of our sales go to the food industry. Outside the food sector, our major product categories are tinplate aerosol cans, monobloc aerosols and paint and polish cans.

METALS
Erik smuts and Christiaan Burmeister
Erik Smuts
Group executive: Bevcan
Christiaan Burmeister
Group executive: Group executive: DivFood
2017   2016   % change  
Key natural capital inputs
Energy use (GJ) 1 527 722   1 543 075   (1.0)  
Outputs affecting natural capital
Emissions intensity (tCO2e/Rm revenue) 16.01   18.37   (12.8)  
Financial capital
Revenue (Rm) 11 281   10 510   7.3  
Trading profit (Rm) 1 695   1 285   31.9  
Trading margin (%) 15.0   12.2    
Human capital
Employees 3 074   3 314   (7.2)  
LTIFR 0.180   0.407   Improved  
Key development

Key developments

  • Reported strong improvement in safety performance, ahead of group tolerance level
  • Participated in establishment of MetPac-SA to promote recycling of metal packaging
  • Bevcan South Africa benefited from volume growth, additional can ends production and efficiency gains
  • Bevcan Angola performed exceptionally,but faced difficulties in repatriating cash
  • DivFood’s financial performance was challenged by poor demand

SOUTH AFRICA

Bevcan

A 2.8% increase in sales volumes, the first full year of production of our expanded can ends plant, and efficiency gains across the board supported a strong overall performance for Bevcan South Africa in 2017, in pursuit of the group’s objective to deliver advanced manufacturing.

We continued to benefit from the recent recapitalisation of our facilities, as well as from our operations excellence initiative targeting improvements in efficiencies, safety, people development, supply chain management and planning, as well as in our brand and marketing. We reduced spoilage levels and reported a world-class safety performance, reaching two million lost-time injury-free manhours in our Springs factory at the end of September. This represents delivery on the strategic imperatives to invest to compete as well as to improve business performance by buying, making and selling better. Trading profit increased sharply.

After a weak first half of the financial year, we experienced good growth in the second half, when demand for can packaging for beer, cider and energy drinks was robust. The pack share of beverage cans in the market increased relative to other packaging formats. Beer continued to migrate to value packs (440ml and 500ml) and we witnessed a migration towards more value brands amid straitened economic conditions. Demand for energy drinks continued to grow at rates in excess of general market trends.

By year-end, the bigger packs (440ml and 500ml), which consumers consider better value for money, accounted for more than half of Bevcan’s total can size volumes produced. This compared to just 10% in 2010. The standard 330ml can – representing three-quarters of our overall can size offering in 2010 – made up only about a third of our offering by year-end.

Our expanded can ends plant in Springs, which added two billion ends per annum to the existing manufacturing facility, performed in line with expectations, with the new volumes destined primarily for our can manufacturing businesses in Angola and Nigeria.

In December 2016, in line with the strategic imperatives to manage costs stringently and to actively manage our portfolio, we closed our tinplate can line in Durban. As far as possible, we worked to redeploy skills from this facility to other Bevcan operations. The line’s closure led to a saving in our 2017 financial year of approximately R23 million, a figure that is forecast to rise to R30 million in the years ahead.

We maintained world-class operating systems at our facilities, retaining certification under the relevant ISO quality, food safety and environmental standards.

In the year, Nampak R&D trialled and qualified three new aluminium can body stock suppliers. This was to mitigate the risk of dependence on limited suppliers and allow for a continuous supply of raw materials. Nampak R&D also started qualifying suppliers of pre-coated can end stock, and continued its development work on BPA-NI (Bisphenol-A not intentionally added) coating systems.

In response to new regulatory requirements, in the year both Bevcan and DivFood participated in the establishment of independent industry body MetPac-SA which will promote and assist with the recycling of metal packaging.

DivFood

In a weak economy, DivFood had a challenging year, with revenue and profitability led lower by constrained demand for our products across many categories. However, we improved our operational performance and made good progress on the delivery of Nampak’s strategy.

Focused on the strategic imperative to improve business performance by buying, making and selling better, we continued to optimise profitability on both a customer and product basis, rationalising our product offering and customer base, while looking to grow specific product categories such as two-piece cans. To ensure that we achieved appropriate levels of profitability, we optimised run sizes and running campaigns, where appropriate.

We continued to focus on safety, reporting further improvements in our overall performance ahead of group targets. In response to weaker demand, we reduced employee numbers by 50.

In May, we introduced a new sales and operations planning system, providing significant benefits in terms of inventory management, in turn supporting delivery on the strategic imperative to manage working capital prudently.

One of Nampak’s risks is dependence on limited suppliers. The only tinplate supplier in South Africa is under significant financial and operational pressure and has instituted general and safeguard duties on all flat steel products except tinplate. Local tinplate volumes continue to decline and the viability of the long-term supply of tinplate is questionable. To mitigate this risk, in the year we established a more reliable supply of good quality raw materials, including an imported supply of tinplate.

In line with our strategic imperative to invest to compete, we continued with the recapitalisation of the business, making it more efficient. Among our most significant capital projects was the installation of a R67 million multi-deck printer for our facility in Mobeni to support products destined for the paint and polish markets. It led to the reduction by more than half in the number of lines in the printing and coating department, thereby realising numerous maintenance, energy and employee cost savings. We also upgraded a large format can assembly line in Paarl at a cost of R35 million, reaping significant light weighting benefits.

We acquired two can assembly lines from an operation in Botswana: one is being installed in Paarl in South Africa, while the other is destined for Nampak in Nigeria. As part of this transaction, we entered into a joint venture with the Botswana Development Corporation to produce can ends in Lobatse, Botswana.

With the South African consumer under increasing pressure in a weak economy, demand for our customers’ products declined, leading to lower DivFood volumes across many product categories. This was particularly evident in discretionary spending items such as paint (down as much as 20%), as consumers postponed home renovations; personal care items such as premium anti-perspirants sold in monobloc aerosol cans; as well as higher-priced canned fish, as consumers traded down to lower-priced sources of protein. Volumes of cans for baked beans in tomato sauce – the largest of our canned vegetable categories – remained stable.

A sharp reduction in the allowable fish catch quota in both South Africa and Namibia, as well as a lower landed catch and slow imports of frozen fish, led to lower sales of fish cans in the year. The canned meat category continued to grow at rates in excess of GDP, while sales in the canned fruit category were negatively influenced by the weaker agricultural harvest and the strong exchange rate.

Nampak R&D continued to play an important role in supporting DivFood. It trialled, evaluated and approved new tinplate grade materials that have improved ageing characteristics because of changes made to the chemical composition of the alloy. Nampak R&D’s close developmental work with suppliers led to the reduction of edge trimming of tinplate coil, resulting in less waste and lower input costs. It also identified, trialled and evaluated the use of soft ultra-low-carbon steel in the production of paint pails. The flexible steel allows us to follow a more consistent manufacturing process when producing paint pails.

Nampak R&D also continued with its work over many years to develop internal lacquers that are BPA-NI compliant, which means we are well prepared to comply with new European standards when they come into force.

We continued to focus on building the stocks of intellectual capital by developing technical skills. In the year, DivFood had 78 apprentices in training and 11 new graduates on the payroll. Our plants remained certified under the relevant ISO environmental, quality and food safety standards.

Looking ahead

The recent entrance of a competitor in the South African beverage can sector will likely lead to the loss of some of Bevcan’s volumes in the new year, particularly as a contract with a large customer comes to an end in March 2018. The start of the long-mooted competition will provide us with an opportunity to rationalise underutilised assets in line with our strategic imperative to actively manage our portfolio. It will also give customers a realistic reference point in terms of price and service levels: our well-established, cost-competitive manufacturing footprint and strong market position place Bevcan in the best possible position to defend market share and leverage opportunities.

We will continue work to grow the market for beverage cans through our dynamic “Can DO!” marketing campaign. In particular, we see room for growth in the pack share of the carbonated soft drinks market as consumer preference for more environmentally sound packaging – such as aluminium – grows. Aluminium is infinitely recyclable: by using recycled material, aluminium producers use just 5% of the energy required to produce virgin aluminium.

We will continue to monitor developments in the policy environment, including the proposed tax on sugar-sweetened beverages which, if implemented, is likely to lead to different pack configurations to hold price points at current levels. This, in turn, will lead to greater production complexity.

Amid forecasts of continued sluggish economic activity, at DivFood we expect the South African market to remain challenging in the new financial year. We see room to grow in the market for two-piece cans, currently our single biggest product, as well as opportunity to supply more pails to the water-based paint sector. In 2018, the fruit canning business will likely feel the impact on harvests of the drought in the Western Cape.

Despite the weak economic outlook, we will continue to extract value from the investments made in recent years, optimising our state-of-the-art equipment and ensuring that we realise benefits relating to energy consumption and productivity. We will accelerate our efforts to improve our cost competitiveness, and continue to advance our planning capabilities to optimise our inventories and provide excellent customer service at a lower cost.

REST OF AFRICA

Bevcan

Delivering on our strategic objective to accelerate growth in the Rest of Africa, in the year Bevcan increased profitability in Angola and grew market share in Nigeria. The start in April 2017 of the Nigerian Autonomous Foreign Exchange (NAFEX) market led to improved liquidity and improved cash repatriation from Nigeria. However, in Angola we continued to face difficulties in repatriating cash.

In Nigeria we changed our accounting practices to use the NAFEX rate, resulting in a foreign exchange loss of R116 million. To mitigate the risk of dependence on foreign exchange liquidity and currency movements, we continued to apply US dollar hedge strategies in Angola, with active cash repatriation and hedged structures in place. Limited forex availability is a material issue for Nampak, and is discussed in detail here.

In Angola, Bevcan lifted sales as the first full year of a contract to supply a large local customer (previously reliant on imported beverage cans) supported our production volumes. Another customer reversed an earlier decision to move most of its packaging to glass, choosing instead to package in cans, exporting some of this product to neighbouring territories to earn foreign exchange. We also supplied a number of smaller local beverage producers as a forex shortage led to the substitution of alternative packaging imports.

In the past five years, Bevcan volumes in Angola have more than doubled.

In Nigeria, we increased our estimated market share to 40% from 35% a year earlier. However, the overall market for beverage cans declined, impacted by a weak economy, a shortage of foreign exchange and as some non-alcoholic malt drinks moved to relatively cheaper PET packaging.

In both Angola and Nigeria, we retained certification under the relevant ISO quality and food safety standards and environmental management systems.

Other metal packaging

Our general metal packaging business in the Rest of Africa increased its trading profit in the year, lifted by a strong performance in Nigeria.

Demand for our range of diversified cans and aerosols from the Nigerian food, household, industrial, personal care and paint markets was strong, because of the substitution of imported products with locally manufactured products.

In Kenya, demand was subdued, a result of a poor agricultural season following the drought, as well as the ongoing expansion of self-manufacture of certain can sizes by our key customer. The ongoing political uncertainty related to the elections also impacted consumer demand.

Demand for crowns in Tanzania and Zimbabwe was subdued in the first half, but improved towards the end of the year. In Zambia, a change in the procurement strategy of a large customer led to the closure of our Ndola crown line.

Looking ahead

In the year ahead, we plan to convert our first beverage can line in Angola from tinplate to aluminium, with capability to produce slender cans. We expect to complete the US$13 million first phase of the project, which will be fully funded out of local cash balances, in 2019. This will help meet the greater filling capacity that is coming on line in that country.

In Nigeria, despite renewed economic optimism and improved foreign exchange availability, in the year ahead we expect demand for beverage cans to remain muted as the economy continues its slow recovery from recession. We will watch closely for any further migration of malt drinks to relatively cheaper PET packaging. In both countries, we will continue with our initiatives to drive improvements and cost efficiencies as well as cash repatriation, and remain optimistic about the longer-term outlook for our Bevcan businesses in these countries.

In general metal packaging, in Nigeria, we remain cautiously optimistic about the prospects for our business in the year ahead as the economy turns.