2019 was a year of change at Nampak. A number of long-standing directors retired after serving the company with distinction over many years, and we welcomed four new non-executive directors. Soon after year-end the CEO also announced that he would be leaving in January 2020, to take the helm at power utility Eskom. We wish him well in this most important role in Eskom and South Africa.
During the year, we amended our governance structure, reducing the number of committees from six to three.
Our immediate focus will be to ensure that the new directors understand our business and its intricacies sensibly and speedily so that they will be able to add value to the organisation. Agility in decision making will continue to be a key focus to give the executive the support it requires to carry out its mandate.
In the last year, we witnessed exponential growth in the level of consumer awareness of the damaging impact on the environment of single-use plastics. These products collect in landfill, waterways and oceans and are harmful to marine and other life forms. Nampak's sustainability orientation is towards ensuring that the company's products are recyclable and are sourced from appropriate raw materials; there is continued focus on initiatives to reduce the weight of products and increase the percentage of recycled content. Support of industry bodies that encourage the collection and recycling of post-consumer waste is another element of Nampak's sustainability focus. The group also has a number of exciting initiatives, which include packaging water, wine and other beverages in infinitely recyclable aluminium cans and paper cartons as well as supporting the development of the market for returnable PET bottles.
In 2019, the operating environment remained challenging. A number of the currencies in Nampak's key markets weakened and the foreign exchange translation between the rand, dollar and domestic currencies – most notably in Zimbabwe – continued to be difficult. Hyperinflation in Zimbabwe caused its own challenges, creating serious negative impact. Furthermore an unexpected change in the tax laws provided another negative impact. However, Nampak's Zimbabwe business operated well against all odds. It is clear that the "Africa Rising" theme of the early 2000s is on hold, and with the exception of one or two countries, it is a now a question of optimising existing businesses and then maximising new opportunities as they arise.
In South Africa, while national elections gave the new administration a clear mandate, investor sentiment remained fragile and the rand depreciated as inactivity on policy implementation remained a concern. Municipal infrastructure and administration continued to deteriorate to Nampak's detriment. For example, Nampak Glass suffered more than 30 power outages in July alone and recorded a total electricity downtime of 12 days during the financial year. So, despite having invested R156 million in a rotary uninterruptible power supply system, production disruption was unavoidable.
We remain positive and are encouraged and supportive of the Finance Minister's strategy. However, there have been similar good-sounding initiatives, in both 2008 and 2015, which failed to be implemented sufficiently. The consequence of this is a stagnant economy and a volatile rand, which has the effect of hobbling corporate South Africa. We are hoping that these initiatives are implemented.
In Zimbabwe, in 2019 the economy sank deeper into trouble and there is no way of predicting what the immediate future holds. In Angola, a sharp depreciation in the kwanza and high inflation caused consumers to battle, making products that were previously affordable no longer so. In Nigeria, the economy was relatively steady, while in the United Kingdom, Brexit caused its own uncertainty.
Performance and prospects
In this environment, Nampak's performance was mixed. For details see the CEO's report. The CFO's review sets out Nampak's financial performance. Management must be commended on its control of debt levels in this difficult environment notwithstanding below par working capital management in some business units as a result of an abrupt and significant slowdown in demand in some major economies. In Angola, for example, demand dropped leading to higher inventory levels at a time when Nampak was building up stock ahead of the conversion of Bevcan's tinplate production line to aluminium.
You will find disclosure of the material issues the group identified in the year. These have the potential to significantly affect – both positively and negatively – Nampak's ability to deliver on strategy and create value in the years ahead. The group recognises the opportunities that exist for packaging, both within South Africa and beyond its borders, where it has a meaningful presence and the prospect of leveraging its first-mover advantage when the economic tide turns.
Marking a milestone
In 2019, Nampak celebrated the 50th anniversary of its listing on the Johannesburg Stock Exchange. In this time, the group has serviced customers across a wide footprint, providing reliable and innovative packaging and creating value for many other stakeholders – shareholders, employees, governments, suppliers and society at large. Over these five decades its structure and composition have also changed.
Analysts and shareholders have been lobbying for Nampak to focus increasingly on fewer substrates, in line with world trends. The company has been doing this, leading to the sale in recent years of Nampak's Corrugated, Folding Cartons and Tissue businesses. In September 2019, the group signed an agreement to sell the Glass business, proceeds from which will be used to repay debt. Nampak Plastics Europe is also for sale, and at year-end the group was in advanced discussions regarding its disposal.
Looking to 2020
As a consequence of these transactions over the past few years, Nampak is now smaller and more focused. Most of the businesses are now profitable and 2020 will be a year of further consolidation. Action is required to fix those businesses that continue to underperform. Regrettably, this will involve some restructuring which will lead to retrenchments. The costs of this restructure will reduce the benefit of the expected improved results in 2020. However, once complete, the company will be able to deliver continuing improved performance.
Nampak's geographic diversity will remain, but I am confident that the group will be able to successfully manage the challenges and leverage the opportunities that this presents. I would like to thank all our stakeholders for their continued support, including the directors who recently left Nampak, whose meaningful contribution I acknowledge, namely Phinda Madi, Roy Andersen, Reuel Khoza, Nopasika Lila and latterly Jenitha John – thank you. I wish you all the best for the future. To Nampak employees everywhere, I appreciate your commitment to building the group's greater resilience as well as your dedication to creating more value in the years ahead.
26 November 2019