BUSINESS DAY TV: People are trading down in their consumption patterns
Nampak CEO André de Ruyter talks to Business Day TV about the latest results from the packaging group and how it’s dealing with a weak economy and forex issues in Nigeria and Angola
BUSINESS DAY TV: Despite an 8% rise in first-half earnings Nampak is still holding back on paying a dividend. The company says that in view of current risks and challenges, it would rather focus on efforts to conserve cash. Joining us for more detail on that is CEO André de Ruyter.
André, so dividend or no dividend the market really liking your numbers today pushing your shares 15% higher, what was the catalyst for that?
ANDRÉ DE RUYTER: The major catalyst was first of all net profit up 41%, so that’s a reasonable number, a reasonable performance but the major news as far as we are concerned is that we were able to demonstrate to the market that we have commitments from a major commercial bank in SA to make available to us $54m from Nigeria. So we are finally able to extract meaningful amounts of money from Nigeria.
BDTV: Extracting meaningful amounts, how much is left to go and how much improved a relationship are we looking at between a company like Nampak and the Nigerian government?
ADR: It’s not so much dependant on the Nigerian government but on the foreign exchange regime. So what has happened in Nigeria is that the central bank has introduced a new exchange rate called the Nafex, which is the Nigerian autonomous foreign-exchange rate and that allows parties to transact at a market clearing rate. And that has unlocked significant liquidity, and as a consequence of that we have been able to do a number of transactions that will allow us to repatriate out of Nigeria an amount of about R700m before financial year-end.
BDTV: Apart from this development you’ve also seen a turnaround in operations in Nigeria and you’re say in the results, record sales of beverage cans in Angola, so it looks like things have worked in your favour in the first half of the year?
ADR: Yes, the key story about Africa is that one has got to have patience and you’ve got to have perseverance and resilience. People very often forget that the oil price dropped to the mid $20s not too long ago and it’s recovered to north of $50. So for countries like Angola and Nigeria the inflow of dollars into those economies have been very meaningful in restoring liquidity, and those effects are now coming through. We still believe that the African consumer is the play for the future, we’re certainly backed up by the biggest brewer in the world, AB InBev who support that view and we’re very happy to concur with them.
BDTV: And also a lot of focus on your growth strategy and that’s something that you’ve got to have, a clear growth strategy going into a territory like rest of Africa, how far into that strategy are you at this stage?
ADR: I think at this stage we would like to invest more into Angola. We’ve also announced today that we are going to invest an additional $23m into converting an existing tin plate beverage can line into an aluminium line, this will add about 300-million cans of capacity in that market, we are effectively sold out in that market, so we think that there are significant opportunities for us in that country to expand our growth even further.
BDTV: While you’re investing in Angola you’re also being quite prudent with capital — have you finished with your Capex programme in SA? Is everything where you’d like to see it?
ADR: Not quite, there are still a couple of odds and ends, but we have essentially recapitalised the beverage can business, we’ve expanded the glass business so that’s pretty well set.
BDTV: And is that going on full steam now, because that was a problem area previously?
ADR: Correct, we’ve sorted out the glass operation so we’re pretty comfortable, we’d like more demand obviously but from an operational perspective the glass business is doing fine. We have invested an amount of about R500m in our diversified and food can business, so that’s nearing its end. And the next business that requires recapitalisation is our plastics business but that’s going to require significantly less capital. So we are going to spend about half of the total Capex that we have spent in prior years during the current financial year.
BDTV: Forex movements aside, efficiencies aside as well, talk us through what you’re noticing when it comes to trends in play as far as spending and demand for packaging is concerned?
ADR: It’s a story of two markets, the South African market is in a very difficult position at this point in time. We are seeing quite a bit of pain coming through, especially in the lower-income segments of the market. Instead of buying a can of fish, people will buy a can of baked beans, so people are trading down in their consumption patterns, and that is obviously a real concern for us.
BDTV: At least they’re still buying cans, whether it’s fish or baked beans, are you lean and mean at the moment? You still managed to grow in this environment, you have been cutting back on costs, scaling back on Capex, do you remain lean and mean, are we seeing sustainable profit growth in a tough environment here?
ADR: We’ve taken about R70m of costs out of Nampak. We’d like to do some more, I’m still not satisfied that we have achieved the operational efficiencies that we should be achieving, so there’s more work to be done, particularly in the UK that had a very disappointing performance. We need to do more work there, a new management team has been put in place to deliver that. So there’s more work to be done and of course the up side of that is that there’s more potential for us to deliver more value.
BDTV: When it comes to UK Plastics, was it purely a management issue that you were having on that end or what influence to that disappointing performance?
ADR: It was probably a perfect storm that hit that business. There was a significant drop off in demand first of all as two of our major customers vertically integrated into making their own bottles, and then there was also the fact that in the UK, milk on the supermarket shelf is cheaper than water. It is regarded as a loss leader so margins throughout the dairy industry are under incredible pressure and we have not escaped that.
BDTV: On the dividend, you stopped paying a while back when things did start to get tough, what would it take to resume the dividend? You still talk about risks in the economy, would you want to see things turning around significantly before you resumed?
ADR: The stars are lining up slowly, we’ve got the balance sheet pretty much under control, we’ve got increased liquidity out of Nigeria, we’d like to have some more cash out of Angola and we’d like our South African business to really start firing on all cylinders. We recognise that shareholders would like a dividend but obviously we also have to bear in mind that we have to have a sustainably profitable business, and in our view that has to have first priority.