Our top risks and opportunities

We consider both the potential impact of each risk on the achievement of the group's strategy, as well as the probability of it materialising. The positions of the risk ratings on the heat map reflect the residual risk after considering the effectiveness of our mitigation strategies and actions. We rank these risks in order of magnitude, recognising that these positions may change during the year. We also provide a forward-looking view of the risks and opportunities that we believe may impact future performance. The icons in the risk table show the link of each risk to our material issues.

RISK HEAT MAP

RISK NAME AND RANK

1

Dependence on foreign exchange liquidity and currency movements.

2

Operational underperformance of certain operations

3

Challenging macroeconomic and political conditions in our key markets

4

Customers diversifying their supplier base

5

Increased public pressure on plastic packaging


 

 

6

Uncontrollable increases to legacy defined benefit liabilities.

7

Inadequate diversity, people development and a skills shortage

8

Uncertain regulatory and policy environment

9

Potential to fall prey to cyber crime


Within the context of the six capitals, our risk management culture is informed by our risk framework, risk management guidelines and other group policies and procedures. The audit and risk committee considers the material outcomes of these processes and reviews the level of risk exposure against our risk tolerance and appetite levels. Understanding our risk environment informs strategy and assists with decision making throughout the organisation.

We participate in the CDP (formerly the Carbon Disclosure Project) with ongoing assessment of Nampak's impact on the environment from an operational perspective and also in relation to our product stewardship.

Information management services (IMS) is a standing agenda item for the audit and risk committee. Ultimate responsibility for IMS governance rests with the board.

In order to support the board in the execution of its responsibilities, information management and key technology risks remain a key focus area for the audit and risk committee.

1
DEPENDENCE ON FOREIGN EXCHANGE
LIQUIDITY AND CURRENCY MOVEMENTS
   

MATERIAL ISSUES:

  
                 
 

IMPACT IF NOT MANAGED

High volatility in translated rand value of earnings from the Rest of Africa impacts our financial performance. A lack of market liquidity holds up the repatriation of cash and places constraints on the purchase of imported raw materials and our ability to invest behind growth opportunities

 

HOW WE DID IN 2019

  • Nigerian liquidity continued into 2019
  • Angolan liquidity remained stable; we repatriated R1.8 billion
  • Strongly cashgenerative businesses in Zimbabwe faced liquidity constraints and the effects of the devaluation of the Zimbabwean currency and hyperinflation
 

VALUE CREATED FROM OUR MITIGATION STRATEGIES

  • The group's financial position remains strong on the back of the two revolving credit facilities secured in 2018
  • Activities of the cash management committee, in its fourth year of operation, ensured that cash flow management remained a strong focus
  • Firm management of capital expenditure and improvements in liquidity delivered a stronger balance sheet
  • US$67 million has been secured with the Reserve Bank of Zimbabwe for payment over five years with an initial two-year payment holiday. Expected credit loss ratio of 85% applied at 30 September 2019 given the financial and economic situation in Zimbabwe
   

Looking forward

  • Currency volatility will continue to have a bearing on financial results
  • Strengthened balance sheet is better able to withstand currency volatility

Opportunities for value

  • Investment of R100 million behind growth in demand in our first food can line in Nigeria which is anticipated to be operational in 2020
  • Conversion of our tinplate beverage line in Angola at a cost of R200 million is expected to be complete in early 2020
  • Should the RBZ honour the US$67 million agreement, the expected credit loss provision will reverse in future
2
OPERATIONAL UNDERPERFORMANCE AT
CERTAIN OPERATIONS
      
                 
 

IMPACT IF NOT MANAGED

This can result in job losses, impairment of assets and harm the group's sustainable profitability

 

HOW WE DID IN 2019

  • Bevcan's internal operating efficiencies, including reduced spoilage, cost savings and its sales volumes supported financial performance
  • Bevcan's Cape Town beverage can line closure delivered the anticipated cost savings
  • Bevcan Nigeria operation performed very well
  • Rigids' South Africa operational turnaround strategy is gaining traction
  • Rigids' gable-top cartons division performed strongly
 

VALUE CREATED FROM OUR MITIGATION STRATEGIES

  • Continued to deliver on our drive towards improved productivity to extract value from our newer technologies and ensure readiness for higher volumes
  • Applied improved maintenance practices to limit associated downtime
  • Consistent engagement with customers to streamline our product mix, reducing complexity and providing opportunities to review cash fixed costs
   

Looking forward

  • Investment behind growth markets in Nigeria (food cans) and Angola (second beverage can line) is now in progress
  • Incremental improvements from various manufacturing projects is anticipated
  • The conclusion of the sale processes of the Glass, Nigeria Cartons and Rigids' intermediate bulk container businesses is expected in the new financial year
  • The disposal of the Nampak Plastics Europe business is at an advanced stage

Opportunities for value

  • We have the established capacity to ramp up production to meet increased customer demand
  • Group restructuring initiatives to reduce complexity, limit non-value-add activities and reduce cash fixed costs
3
CHALLENGING MACRO-ECONOMIC AND
POLITICAL CONDITIONS IN KEY MARKETS
      
                 
 

IMPACT IF NOT MANAGED

  • Low economic growth in South Africa and high interest rates in key markets in the Rest of Africa result in reduced consumer demand which translates into lower volumes and revenue and pressure on profit margins. It also limits opportunities for growth
  • Hyperinflation in Zimbabwe
 

HOW WE DID IN 2019

  • Foreign currency shortages for much of the year and a weakening kwanza impacted on volumes in Angola
  • Beverage can volumes continued to grow in Nigeria despite muted economic growth with improved market shares
  • Bevcan sales in South Africa have remained robust
  • Beverage carton sales increased
  • Secured hedge with RBZ
  • Customers provide US dollar funding for raw materials
 

VALUE CREATED FROM OUR MITIGATION STRATEGIES

  • Ongoing drive to deliver improved operating efficiencies and cash fixed cost reductions
  • Operations geared to meet increased capacity requirements
  • Potential protection of US$67 million from currency devaluation through hyperinflationary cycle
   

Looking forward

  • Business and consumer confidence in South Africa are likely to remain weak in the short to medium term
  • Economic activity in Nigeria, though muted, supported a strong performance which is expected to continue
  • Angola is showing signs of slow recovery but the further currency devaluation in Q3 2019 may further slow recovery

Opportunities for value

  • We are well positioned to take advantage of organic growth in our markets
  • Long-term fundamentals for packaging growth in key African markets remains intact
  • Our market positions are strong with more than 60% of our customer base consisting of large multinationals with global brands and strong credit ratings
4
KEY CUSTOMERS DIVERSIFYING
THEIR SUPPLIER BASE
      
                 
 

IMPACT IF NOT MANAGED

Certain customers wish to limit their supply risks by appointing more than one supplier of primary packaging

 

HOW WE DID IN 2019

  • Some volumes lost in South Africa to new third beverage can manufacturer, however, 2019 sales volumes remained steady
  • Drop in sales volumes and profitability of DivFood after the loss of a key customer
 

VALUE CREATED FROM OUR MITIGATION STRATEGIES

  • Footprint of factories which affords customers better security of supply
  • Value-added services provided by Nampak R&D
   

Looking forward

  • Continued emphasis on price, safety, quality, reliability, good governance and on-time delivery

Opportunities for value

  • Opportunity to take advantage of growing demand for environmentally friendly packaging by extending the reach of gable-top cartons to other liquid and dry food products
5
INCREASED PUBLIC PRESSURE ON
PLASTIC PACKAGING
      
                 
 

IMPACT IF NOT MANAGED

Bad publicity and strong public reaction to plastic packaging waste could negatively impact demand

 

HOW WE DID IN 2019

  • Participated in industry initiatives to increase recycling rates
  • Developed lightweighting plastic packaging opportunities for customers
  • Carried out consumer education programmes on the value and cost effectiveness of plastic packaging that extends shelf life and prevents product deterioration
 

VALUE CREATED FROM OUR MITIGATION STRATEGIES

  • Continued research and development into opportunities for further lightweighting and the use of more recycled material in primary plastic packaging
  • Development of metal and paper products to extend offering in the liquid packaging sector
   

Looking forward

  • Ongoing engagement with other industry players on alternative solutions for plastic packaging waste that limits its impact on the environment
  • Support the growth of metal and paper alternatives

Opportunities for value

  • Opportunity to work with customers on alternative primary packaging solutions
  • Greater public awareness of which plastics products are not recyclable. All of Nampak's products are recyclable
6
UNCONTROLLABLE INCREASES TO LEGACY
DEFINED BENEFIT ARRANGEMENTS
      
                 
 

IMPACT IF NOT MANAGED

If cost increases associated with providing the benefits outstrip affordability, profits will be adversely affected

 

HOW WE DID IN 2019

  • Continued with derisking activities in the Nampak Staff Pension Plan in the UK
  • Evaluated the annuity market for further opportunities to provide annuities for retired employees in receipt of post-retirement medical benefits in South Africa
 

VALUE CREATED FROM OUR MITIGATION STRATEGIES

  • Steady reduction in the overall liability over the past few years
   

Looking forward

  • Medical inflation remains above the consumer price index, placing upward and uncontrollable cost pressure on the group's remaining post-retirement medical liability
  • Less volatility in deficits in the UK pension plan is anticipated with the introduction of underlying gilt-yield type investments which provide some hedge against movements in interest and inflation rates

Opportunities for value

  • The group will continue to consider and implement feasible buy-out and derisking opportunities that are beneficial for all parties
7
INADEQUATE DIVERSITY, PEOPLE DEVELOPMENT
AND A SKILLS SHORTAGE
      
                 
 

IMPACT IF NOT MANAGED

  • Without transforming to a more equal society, the sustainability of our market in South Africa may be in jeopardy
  • A poor B-BBEE rating could impact the revenue of the South African operations
  • Insufficient skills could impact operational effectiveness and our ability to deliver on strategy
 

HOW WE DID IN 2019

  • Improved our B-BBEE rating to level 2
  • Mandated B-BBEE steering committee to implement plans for an improved rating
  • Retained B-BBEE as a component of the management STI structure
  • Maintained our focus on management graduate, apprenticeship development programmes as well as various technical skills and safety programmes
  • Introduced participation in the YES4Youth job creation programme
 

VALUE CREATED FROM OUR MITIGATION STRATEGIES

  • Our aligned skills development initiatives result in improved productivity and faster problem solving as products are manufactured
  • Besides protecting employees from injuries, good safety practices result in reduced downtime, cost savings and improved productivity
  • Nampak Plastics Europe discontinued and held for sale
   

Looking forward

  • B-BBEE steering committee mandated to implement plans for an improved rating
  • Training and development outcomes evaluated annually and aligned to business requirements
  • Participation in the YES4Youth job creation programme

Opportunities for value

  • Depth of diverse qualified succession pool as well as opportunities for personal growth underpin sustainable profitability
8
UNCERTAIN REGULATORY
AND POLICY ENVIRONMENT
      
                 
 

IMPACT IF NOT MANAGED

Changes in regulations affecting Nampak and our customers could negatively impact demand or result in uncontrollable increases in cash fixed costs. The magnitude of changes to laws and regulations can be onerous and failure to comply can result in penalties and affect our licence to operate

 

HOW WE DID IN 2019

  • Continued to focus on the provisions in respect of the Waste Management Act, and carbon tax
  • Hyperinflation accounting negatively impacted results
  • Anglo tax regime changes resulted in a significant increase in the group tax rate
 

VALUE CREATED FROM OUR MITIGATION STRATEGIES

  • The Industry Waste Management Plans have been developed and submitted to the relevant authorities
  • Actively promoted the recycling of post-consumer packaging
  • Ongoing energy reduction management and initiatives
   

Looking forward

  • Ongoing engagement and alignment with government and other stakeholders on post-consumer packaging waste recycling objectives

Opportunities for value

  • Good corporate governance principles, policies and practices will continue to protect sustainable profitability
9
POTENTIAL TO FALL PREY
TO CYBER CRIME
      
                 
 

IMPACT IF NOT MANAGED

Ransomware attacks could result in catastrophic loss of data and paralyse the business, rendering it unsustainable

 

HOW WE DID IN 2019

  • Embedded vulnerability management and patch management process
  • Used Mimecast email filtering for malware
  • Continued to conduct penetration, cyber footprint and cyber assessments
  • Carried out disaster recovery tests of corporate systems
  • Internal audit review of our information systems infrastructure and environment to ensure appropriate control frameworks are established
  • Maintained appropriate insurance covers
 

VALUE CREATED FROM OUR MITIGATION STRATEGIES

  • Ongoing employee awareness campaigns
  • Consistent upgrading to protect against latest attacks
  • Mimecast provision of email continuity in the event of an attack
   

Looking forward

  • Protecting Nampak against cyber crime is an enduring commitment as hackers become more sophisticated
  • Improving security across all sites

Opportunities for value

  • Enhanced business continuity position for Nampak
  • Reducing the risk of the severity of the impact in the event of a cyber attack
  • Reduction of duplicated security strategies across Nampak