Material issues

Material issues are those with the potential to significantly affect our ability to deliver on our strategy, create value and sustain 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 38% of its value in 2019.

Material issue

 

OUR OPERATIONAL AND FINANCIAL PERFORMANCE

Efficiency gains supported stronger profits for Bevcan South Africa after normalising for once-off foreign exchange gains in 2018. DivFood reported a trading loss, partly due to losing a significant portion of volumes from a large customer. The liquid cartons operations continued to deliver pleasing results. Lower demand in Angola due to lagging wage inflation after a sharp decline in the kwanza adversely impacted profitability in the Rest of Africa. Despite tough trading conditions, Paper recorded lower results with the Zimbabwe business funding its own operations. The UK Plastics business reported a loss inclusive of impairments. It and Glass are assets held for sale. Glass reported improved profitability, assisted by lower depreciation charges, and persistent operational difficulties. Foreign exchange fluctuations continued to impact the group. 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. When translating from functional to reporting currency, all movements in monetary items are made through the profit and loss account.

Trading profit (R million)

LIQUIDITY RESTRICTIONS IN THE REST OF AFRICA

The availability of foreign exchange in Nigeria remained good, with pleasing cash transfers. In Angola, the kwanza depreciated sharply with cash positions partly protected using US dollar-linked kwanza bonds. These bonds have been settled in full on each maturity date. Zimbabwe faced severe liquidity restrictions in the year, a steep currency devaluation and was classified as a hyperinflationary economy.

Angola forex sales (US$ billion)

MACRO-ECONOMIC ENVIRONMENT

In South Africa, economic growth forecasts for 2019 were revised down to less than 1%, with high levels of poverty and unemployment persisting. Nigerian growth slowed, with a rate of 2% to 3% forecast for calendar 2019. Angola's economy contracted, following the currency's decline, while inflation accelerated. Zimbabwe's GDP was restricted by foreign currency constraints, the ongoing drought and hyperinflation. Competition in the South African beverage can market intensified, with two new entrants to the market.

South Africa, Nigeria and Angola GDP growth (%)

PEOPLE, SAFETY, SKILLS AND TRANSFORMATION

Ensuring the safety of our people is critical. Our overall safety performance deteriorated to beyond our tolerance level. Regrettably, we recorded one workplace fatality. We continued to contend with a shortage of skills, although we were able to secure key Glass talent. We dramatically improved our B-BBEE contributor status in the year, level 6 to level 2 shortly after year-end, benefiting in part from the YES4Youth programme.

LTIFR

UNCERTAIN REGULATORY AND POLICY ENVIRONMENT

South Africa has a multitude of existing and planned legislative requirements, directly affecting Nampak and our customers. In other parts of Africa, significant levels of red tape and port and logistics inefficiencies hamper the importation of raw materials. Regulations relating to local content support the domestic manufacture of packaging products. Nampak is subject to various changes in tax laws in some jurisdictions.

 

Implications for value

Our strategic response in 2019

OUR OPERATIONAL AND FINANCIAL PERFORMANCE

  • Continuing operations
    • EPS
    • HEPS
  • Continuing and discontinued operations
    • EPS
    • HEPS
  2019
cents
%
change
2018
cents
 
         
  42.2 (76.1) 176.7  
  54.1 (68.8) 173.3  
         
  (132.1) (>100) 76.0  
  (19.4) (>100) 151.4  
  • Intensified our efforts to improve operational efficiencies
  • Further strengthened the balance sheet
  • Signed agreement for the sale of the Glass business
  • Launched accelerated process to sell UK Plastics business

LIQUIDITY RESTRICTIONS IN THE REST OF AFRICA

  • Cash balances in Angola, Nigeria and Zimbabwe of R1.3 billion from R3.8 billion
  • Cash balances in Zimbabwe decreased to R57 million from R1.2 billion
  • Nampak transferred R1.7 billion from Angola; R1.5 billion from Nigeria and R43 million from Zimbabwe
  • Experienced abnormal forex losses of R2.2 billion
  • Limited our ability to settle intergroup loans and internal creditors
  • Supply chain disruptions in Ethiopia and some Zimbabwe operations
  • Cash transfer from Rest of Africa of R3.2 billion
  • Limited further funding in Angola and Zimbabwe and partnered with customers to provide dollar funding for imported raw materials
  • We shielded Nampak's Angolan cash through hedging of US dollar-linked kwanza bonds
  • Continued to link Bevcan Nigeria product pricing to the dollar

MACRO-ECONOMIC ENVIRONMENT

  • Reduced consumer demand for discretionary spending items
  • Stable demand for cans in which lower-priced sources of protein are packaged
  • Reduced affordability of products made with dollar-denominated raw materials
  • Pressure on company's revenue and earnings
  • Limits to the potential for organic growth and new investments
  • Focus on continuous improvement programme
  • Sustained efforts to address fixed costs
  • Concentrated on securing greater internal manufacturing efficiencies, particularly at Bevcan

PEOPLE, SAFETY, SKILLS AND TRANSFORMATION

  • Safe operations enhance employee morale, business performance, the environment and our brand; unsafe operations harm people, the environment and our reputation
  • Insufficient skills may impact our ability to meet customer requirements and deliver on strategy, with the potential to affect profitability, investor returns and tax payable to authorities
  • Transformation to a more equal society enhances the sustainability of our business and the South African market; without it, this is at risk
  • A strong B-BBEE rating could significantly improve the revenue of South African operations as well as employee relations
  • Prioritised safety across the group
  • Set up a dedicated and resourced B-BBEE office
  • Continued to work on a new B-BBEE ownership scheme
  • Reduced our employee cost by 8.2%

UNCERTAIN REGULATORY AND POLICY ENVIRONMENT

  • Unpredictable policy changes make planning difficult
  • Additional waste management 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
  • Opportunity to take advantage of our lightweighting and increased recycled-content capabilities
  • Greater demand for in-country production supports our Rest of Africa operations
   
  • Continued to participate in industry-wide engagement with the government
  • Sustained our efforts to further reduce the weight of products
  • Focused on unlocking further value from base businesses to build resilience to withstand requirements of greater regulatory burden