BUSINESS DAY TV: Omnia’s Rod Humphris looks forward to better days
Chemicals company Omnia’searnings were hit by a plant shutdown and the drought, but its CEO says the worst is over in its mining and agriculture units
Rod Humphris is CEO of Omnia.
BUSINESS DAY TV: The market is not liking Omnia’s results today with a 2.5% rise in group revenue offset by a 25% fall in headline earnings for the first half. There were a number of issues that bedevilled the company during the period and joining me now on News Leader is CEO Rod Humphris.
Rod … the biggest issue, it seems, was the breakdown in the Nitric Acid 2 complex. For many years we’ve been lauding this plant and this project — which, at the time that you brought it online, was on time and on budget and seemed to be working fantastically. So what actually happened?
Rod Humphris: It’s still a fantastic investment, we had a break of about three months here and one of the more sophisticated pieces of machinery broke, it was really an issue from the start of the plant in terms of the way it was set up. It was really unfortunate, the break has been repaired and the machines are all running absolutely fine.
BDTV: But it was offline for 86 days, as you said three months, so what was the knock-on effect on the business of that shutdown?
RH: Yes what you see coming through in these results is a one-off cost of R34m. We will recover some of that through an insurance payout in the second six months, but some of it is an actual cost that will stay in the business.
BDTV: And does it also mean that you’ve had to play catch-up then and import certain products to sell to your customers ? Is it chiefly fertiliser that is produced by this complex?
RH: That would be correct … in terms of us not being able to produce the full amount of fertiliser that we require, we did import some fertiliser to compensate for that. And certainly the margins on that fertiliser won’t be the same as what we can achieve by our own production. So there is a knock-on effect, particularly on production overhead recovery, but the main effect was the R34m that went through in the six months, which you can regard as a one-off.
BDTV: What about … the agricultural trading division, or is that a different division, where you experienced an issue too?
RH: That would be in agriculture, but the agriculture trading business was also part of the agriculture business. And in fact it made a really poor transaction some 18 months ago, and this period there is also a one-off cost of about R35m which has gone through now. It’s cleaned up the books completely and it really revolves around a write-down in some stock value but that position is now closed and there will be no further impact on the business.
BDTV: So does that suggest that while it was a really a bad six months for the agriculture division, if you take these two incidents into account, the next six months should be a lot better — particularly with rainfall looking much better than it did this time last year?
RH: We would certainly expect so, it’s a normal feature of our business — particularly in agriculture — that the operating margin percentage in the first six months is always lower than what we see coming through for the full year. It’s just the way the income stream works and the revenue works in the agricultural business, which is predominantly weighted to the summer season. So we would expect the same sort of pattern — and indeed it’s raining a lot, after this terrible drought that we’ve had, and farmers are planting flat out at the moment and the rain forecast for the next few months is well above normal. So it’s good news.
BDTV: I suppose no one wants to get their hopes up too much but would you say, given the business that you’ve done with the rains taking place now, all in all is this going to be a better year for Omnia?
RH: Oh yes I think so. Certainly agriculture is now starting to perform, we don’t have a drought to contend with and going forward more importantly on what we call our ammonia:urea ratio — let me put it in simple terms: what it means is that the ammonia price has come down dramatically. That gives us a significant benefit on our raw material costs.
So some of the stock is already in place for this year and the financial impact of it is mainly going to come through in the following year. But it is really substantial in terms of the way that particular raw material cost is made.
BDTV: What about mining and chemicals? Obviously it’s not just agriculture that Omnia is exposed to, and mining didn’t seem to have a great six months either. I wonder, is Omnia a lagging indicator or a leading indicator? Because we have seen an improvement in commodity prices over the last six months and I wonder if that’s going to lead to an improvement in Omnia’s business — or how do you relate to the commodity price cycle, for example?
RH: The fact that commodity prices have turned up is good for our business but clearly from the time that the prices move up to the time it means new business for us does take some time. There’s definitely a lag in the mines moving ahead with expansion and further production. So that does take a little bit of time.
BDTV: So are you actually seeing any improvement in expansion or people placing more orders than they did this time last year?
RH: Yes, one of the businesses [where we’ve had] quite a lot of substantial business [is] in the Zambian copper belt. Now this is a business which is ramping up its volumes and started off quite low at the beginning of the year. We had quite a lot of additional costs in the start-up of that business, [with] double handling, there wasn’t sufficient warehousing space etcetera, and that’s come through in the first six months and has impacted financially. But as we move into the second six months we will be able to sort out some of those issues. It’s a five-year contract, so it will be good business for us going forward but initially there are some additional costs.
BDTV: And what about chemicals? Is that in any way likely to improve? Because it does seem that your outlook for both agriculture and mining is more positive. Is chemicals, and manufacturing in particular, to which you are exposed, still in the doldrums?
RH: Yes, we’re very positive about mining and agriculture, chemicals is a bit different. We’ve seen some volume reductions. Now some of them were self-imposed due to us restructuring our business and taking out some of the more profitable lines and we’ve seen some of that volume impact on the six months. But there’s also a volume impact from the market because the industrial space is just not growing, it’s really stagnant in industrial and manufacturing, and we play an important component in providing products into that market space. So we really need to do something here in SA to stimulate the growth in the industrial manufacturing sector.
BDTV: Are you in any way cheered by events? Do you think it’s going to change at all? Certainly we still have the same leader of the ANC, so the same leadership in government seemingly — in which case, it doesn’t suggest there’s going to be any sort of dramatic change in policy?
RH: Yes it’s going to take some time and the government certainly needs to consider how they bring about certainty in this space. It’s not just in the industrial space, it’s also very much in the mining space. Mining is a long-term investment and it’s a risky investment and investors need certainty to bring their money. And if they don’t get certainty well, very simply, they’ll go elsewhere with their money. So the manufacturing sector here in SA really does need some stimulation and some thought as to how best to move away from these very stagnant conditions.