The theme for this year's integrated report – Fit for the future – expresses the focus of our efforts in 2019, when we worked to further streamline the business to future-proof it from both a sustainability and business performance perspective. In an increasingly competitive market, we concentrated on better managing factors within our control, including taking decisive steps to address our cost base and optimise our portfolio.
In his review, the chairman highlights Nampak's position on sustainable packaging, amid growing awareness of the harmful impact on the environment of thoughtlessly discarded single-use plastic. He also discusses the challenging macro-economic context in which we operated in the year, which contributed to a mixed financial performance.
Earnings per share declined by 76% and headline earnings per share fell by 69%. This was affected in large part by the accounting treatment of our businesses in Zimbabwe, where – because of hyperinflation – we were obliged to use the closing rate of the rand against the local currency rather than the average rate during the year.
After reporting steady improvements in our safety performance for the past five years, in 2019 this deteriorated. The increase in our lost-time injury frequency rate was disappointing and hardened our resolve to ensure that safety remains our top priority. Committed to playing our part in South Africa's transformation to a more equal society, we reported a much stronger B-BBEE contributor status. The improvement to level 2 in November 2019 from level 6 a year earlier is an exceptional achievement, and testament to our determination to be a good corporate citizen for the benefit of all South Africans. As many of our customers place a strong emphasis on B-BBEE scores when assessing bids to supply packaging, Nampak's level 2 also has important implications for our competitive position going forward.
Our South African beverage can business, Bevcan, performed very well in 2019, defending a strong market position and preserving profitability through cost reduction and efficiency improvements, supported by good underlying growth in the South African beverage can market. The Bevcan business in Angola was well managed in difficult circumstances - including a sharp drop in consumer spending which adversely affected sales volumes. We responded quickly by reducing group costs by R412 million after the market contracted in the second quarter. In Nigeria, Bevcan increased both sales volumes and market share, and our factory there is running at close to full capacity with opportunities to expand our production capability.
Our South African Plastics business recorded a definitive improvement in operational performance, reducing waste and reporting greater efficiencies. The liquid cartons business continued to do very well, growing volumes and new markets. In both these businesses, strong management, sound basics and new product development driven by environmental considerations were impressive and the prospects are good.
DivFood in South Africa and Nampak Plastics Europe in the United Kingdom, however, both had a challenging year, not meeting their potential and reporting losses. These businesses are focused on significantly reducing operating costs to improve their financial performance in the year ahead.
In Zimbabwe, we actively managed the group's exposure to the impact of economic volatility. We did this by not extending any further credit to our businesses there, and by concluding a hedging agreement with the Reserve Bank of Zimbabwe to protect US$67 million of historical debt against devaluation. Hyperinflationary accounting posed significant complexities, but at a fundamental level, the Zimbabwean businesses are well run, with a focus on managing raw material availability by leveraging export proceeds.
Delivering on strategy
Within this operating context, we remained driven to deliver on our strategy: to unlock further value from our base business and accelerate growth in the Rest of Africa. On the first objective, we reported encouraging progress, particularly with regards to unlocking value through the active management of our portfolio.
In September 2019, we entered into an agreement to dispose of Nampak Glass on a cash-free, debt-free basis. In recent years, the financial returns of this business have failed to meet the levels we require because of an inability to secure the right skills to run the technically complex production processes, high levels of capital expenditure and high fixed costs. Frequent interruptions to municipal power supply to the furnaces – which need high and stable temperatures – have presented an additional challenge.
The disposal of Glass, which awaits the approval of competition authorities, will allow us to focus more keenly on the rest of the portfolio and further reduce interest-bearing debt, details of which the CFO gives in his review.
In August 2019, we resolved to account for Nampak Plastics Europe as an "asset held for sale" and at year-end were engaged in a process to dispose of it. This business, whose products represent a third of the UK milk bottle market, has been challenged by a weak dairy market characterised by plummeting milk prices and tight margins. In recent years, customers' increasing backward integration and self-manufacture of bottles has put additional pressure on our cost structure by reducing sales revenue by more than half.
In the year, we sold our Cartons Nigeria business. Suppliers such as Nampak are increasingly affected by the changing global procurement initiatives of large fast-moving consumer goods companies, some of whom seek to consolidate their supplier base in line with the consolidation they are witnessing among their customers.
In an environment such as this, Nampak must continue to differentiate our offering, leveraging the expertise and experience garnered over many decades. Ours are innovative, safe, world-class packaging solutions: we continue to redesign our packaging, removing non-essential parts and reduce the quantity of substrate we use to create light weight products. This cuts our consumption and lowers the volumes that need to be managed after use. Lighter packs also mean reduced carbon footprints across the distribution network. Ensuring that our customers' food and beverages are packaged safely is non-negotiable and our R&D services provide customers with that assurance.
Customer service and price are other important differentiators, and in a subdued economic environment marked by increasing competition, we continue to focus on providing excellent service while optimising costs. This led to retrenchments in many markets, including Angola, Tanzania, Kenya, Malawi and South Africa.
2020 will be a year of further restructuring and optimisation. Tepid economic growth and greater competitor activity will require that we rationalise across the board. In South Africa, following the growth in capacity by higher line speeds, Bevcan will further reduce crewing on one line to rationalise capacity, DivFood will reduce and simplify its capacity, most particularly at the Vanderbijlpark factory, and further cost reduction and optimisation initiatives will continue in our Plastics and Paper businesses. We also have to restructure our R&D department to reduce costs. In the absence of economic growth to drive demand in our key markets, we have no option but to address our cost base to ensure that we remain competitive.
Throughout this significant restructuring process, we will consult constructively with our partners in organised labour. To enhance our engagements with labour, we are progressing discussions to establish a management advisory committee with labour as part of the Nampak governance structures. While we will incur some associated costs that will impact earnings in the year ahead, we believe these changes are essential: they will ensure that our business delivers sustainable profitability for years to come.
We will continue to be responsive to input from our many stakeholders, including that from shareholders. In the years ahead, in order of priority, we will endeavour to:
- Firstly, reduce debt, and in particular dollar-denominated debt by using proceeds from the disposal of the Glass and Cartons Nigeria businesses.
- Secondly, consider a share buy-back, given the attractive share price.
- Thirdly, consider resuming dividend payments from accessible cash flow based on a moderate dividend cover.
- Finally, focus on our growth initiatives at returns substantially higher than our weighted average cost of capital.
I would like to thank all Nampak's stakeholders for their contribution in 2019. In January 2020, I will be leaving Nampak to join Eskom. I have every confidence in the capability of my colleagues to continue to build a business that is fit for the future.
André de Ruyter
Chief executive officer
26 November 2019