Chief executive officer's report
Chief executive officer
A year of change and realignment
This has been a year of change for PPC. In addition to changes to the board and the executive leadership team, we realigned the group’s strategy and launched the FOH-FOUR key strategic priorities to refocus financial, operational and human capital objectives.
Our performance has been resilient against the backdrop of challenging environments. Zimbabwe and Rwanda achieved stellar results while the DRC and Ethiopian plants were commissioned late in the financial year and are in early ramp-up phase. The southern Africa cement operations faced price increases during the period with volume declines far below industry rates, while the materials operations were subdued. These results show our portfolio effect is bearing fruit.
We concentrated on getting back to basics by refocusing our strategic priorities. We achieved an increase in like-for-like EBITDA, stable margins, increased free cash flow and significant increase in total volumes. These key milestones have laid an important foundation that will enable PPC to create long-term sustainable value for stakeholders.
Our performance has been resilient amid challenging environments. The group has achieved key milestones in its strategic priorities and laid an important foundation to create long-term sustainable value for all stakeholders
Executing on our priorities
Improved free cash flow
The group improved net cash flow after investment activities by R1,8 billion. The main contributors were solid operational performance with good cost control, lower finance costs and reduced capital expenditure after completing all our major projects.
Total cement sales volume increased 6% to 5,9 million tonnes per annum (mtpa), translating into group revenue growth of 7% to R10,3 billion. This was supported by strong performances in Zimbabwe and Rwanda. Once-off costs relating to corporate action, the DRC and restructuring affected EBITDA. Without these impacts, like-for-like EBITDA would have risen 4%, and margins would have been maintained at prior-year levels.
Strengthened balance sheet and improved liquidity
The group's gross and net debt positions have improved significantly from last year. Our net debt to EBITDA ratio has reduced from 2,3x to 2,0x and group capital expenditure is significantly lower than last year. Group liquidity benefited from a two-year capital moratorium negotiated with funders in DRC and we are engaging with our main contractor on a possible equity holding. We also refinanced and restructured South African debt, ensuring a smoother payment profile of three to four years, coupled with reduced effective interest rate costs of some 2%, giving the group adequate liquidity to meet its financial obligations.
Progress on our key strategic priorities – what we have achieved to date
ALIGNING OUR OPTIMISATION TO ENSURE DELIVERY
Creating value for stakeholders
Key milestone projects completed
In April 2017, the Habesha cement plant in Ethiopia was opened in the presence of His Excellency, Prime Minister Ato Hailemariam Desalegn, with cement sales beginning in June 2017. The PPC Barnet factory in DRC was commissioned from November 2017. The Slurry complex in the North West province was upgraded. With most projects now completed, our focus turns to ramping up the new cement plants, as well as optimising production and distribution efficiencies.
Modernised Slurry complex
Southern Africa's newest cement kiln is Slurry Kiln 9 (SK9) in our modernised 2mtpa Slurry complex. This key milestone project has a new material-handling facility, raw milling circuit and kiln system. It is an important part of our three mega-plant strategy and will continue to ensure PPC goes beyond expectations in delivering consistent quality products to its customers. The R1,7 billion SK9 project increases production capacity and complies with the latest environmental regulations. The increase in efficient capacity enables PPC to meet market demand without risk of shortages, and the new kiln has a number of technical benefits for the Slurry complex. For example, the improved thermal and electrical efficiency of the SK9 line will significantly reduce carbon emissions for every tonne of clinker produced.
Launched R50/tonne profitability improvement strategy
In southern Africa, we introduced the R50/tonne profitability improvement strategy in September 2017. The aim of this programme is to improve the longer-term sustainability of the business and will be implemented over the next two to three years through:
- Revenue enhancement by implementing real selling price increases and value-added technical support
- Strategic cost reduction by integrating businesses and restructuring where appropriate
- Cost improvements by benefiting from the efficiencies of the three mega-plants
We have already achieved key milestones in each area of the strategy and are on track to achieve a 2 to 3% improvement in EBITDA margin over the next two to three years.
Empowerment and regulatory matters
BEE III top-up transaction
As a good corporate citizen, we remain committed to transformation principles and improving the lives of all our stakeholders. In March 2018, we announced the terms of our top-up BEE transaction. This will allow PPC to comply with the Department of Mineral Resources (DMR) and Department of Trade and Industry (dti) on ownership requirements and to compete on an equivalent BEE equity level with industry peers. It will be implemented in the new financial year. Following the transaction, PPC Ltd's equity shareholding in PPC South Africa will decrease from 100% to 74,6% to benefit a broader and more representative shareholder base.
BEE III caters for three categories of shareholders:
- All eligible employees of our South African operations and subsidiaries
- Communities near and/or impacted by existing and future operations
- Eligible black entrepreneurs identified through a private selection process
PPC is currently a BBBEE level 3 contributor under the dti codes of good practice.
Human capital and sustainability
Key senior appointments were made and a new executive committee structure was implemented during the year. We are also developing an operational and leadership pipeline that supports our strategy and considers transformation and diversity imperatives. Internal branding and values were launched across the group.
Our safety record improved significantly in the review period. We pride ourselves on excellent safety systems and have made considerable progress in recent years. The number and severity of lost-time injuries (LTIs) decreased significantly, with our lost-time injury frequency rate (LTIFR) dropping from 0,40 in March 2017 to 0,25 at year-end. More importantly, there were zero fatalities in the period.
Environmental sustainability was highlighted during the period by water scarcity in the Western Cape. To ensure ongoing operations and reduce overall water consumption, a desalination plant to purify quarry water was commissioned at our De Hoek plant in the province.
The 2018 South African budget speech indicated that carbon tax will be implemented from January 2019. This will be treated as an excise tax which is an indirect tax similar to VAT and, ideally, will be passed on to the consumer. To mitigate the overall impact of carbon tax, we are continually pursuing ways to improve process technology, efficiencies and our use of alternative fuels.
In 2017, our corporate social investment programme focused on education initiatives. Our mobile science lab project benefited over 25 000 learners across 20 schools, with significantly improved results at participating schools.
A year of change and realignment
As the chairman outlined, this has been a year of change for PPC. In addition to changes to the board and executive leadership team, we realigned the group’s priorities as communicated to shareholders in November 2017.
Total cement sales volume rose 6% to 5,9mtpa, translating into group revenue growth of 7% to R10,3 billion. The rest of Africa cement segment contributed 27% (2017: 22%) of group revenue. This performance underscores the positive impact of our portfolio effect.
Group gross profit rose 3% on strong performances by the Zimbabwe and Rwanda operations.
Group EBITDA declined 9% to R1 880 million (2017: R2 065 million) while the EBITDA margin was 18,3% (2017: 21,4%). The DRC operation contributed an EBITDA loss of R105 million (2017: loss of R39 million). As noted, excluding this impact, once-off costs and exchange rate movements, like-for-like EBITDA would have risen 4%, and margins would have been maintained at the same levels as the prior year.
Finance costs reduced 9% to R675 million (2017: R741 million), reflecting the benefits of an improved capital structure and the additional liquidity and guarantee facility agreement fees incurred in the prior period. Additionally, finance costs for the DRC were expensed post-commissioning. Optimising the capital structure and liquidity management are yielding positive results.
Net cash flow from operating activities increased 69% to R1 430 million (2017: R845 million). Positive working capital movements, coupled with lower finance costs and a lower effective taxation rate, contributed to improved cash generation.
Capital expenditure on property, plant and equipment decreased significantly to R921 million (2017: R2 058 million). The peak of the capex cycle was in 2017 and, in future, group capex will be concentrated on maintenance and efficiency improvements.
Initiatives to improve liquidity and capital management are paying off as PPC continues to focus on improving free cash flow. Our progress was affirmed by S&P Global Ratings reinstating PPC's credit rating to investment grade.
Together with improved free cash flow, group net debt declined from R4 746 million in March 2017 to R3 846 million, while net debt to EBITDA improved from 2,3x to 2,0x, in line with our revised long-term gearing targets and covenants with lenders. There is now significant headroom in the group balance sheet.
The southern African cementitious market remains challenging. We have successfully responded to these challenges with moderate price increases and improved efficiencies. Our performance has been better than the overall market in maintaining sales volumes, although 2,5% down compared to an overall market volume contraction of 3 to 4%. While only an estimated 4% of market volume in 2017, imports increased by roughly 30% year on year, with Cape imports increasing by 3%. We achieved selling price increases of 3% (compared to industry increases of 3 to 5%) in the review period, with further increases implemented post- year-end. We continue to demonstrate cost leadership and improved operational efficiencies, resulting in a below-inflation cost increase per tonne.
Zimbabwe's sales volume performance has been excellent, rising 40% from the previous year. This reflects strong demand and market-share growth in the Harare region. A successful harvesting season injected additional disposable income to the economy and boosted building and construction activities, which were all locally supplied due to the import barrier created by the country's liquidity constraints. These liquidity issues could offset the benefit of the good performance as no dividends can be repatriated to the group. Export sales to neighbouring countries are being maintained to generate foreign exchange and management continues to work on other initiatives to address liquidity challenges.
Rwanda's sales performance has been promising and in line with our expectations, rising 20% year on year despite fierce competition from imports, mainly from Uganda. Overall plant output was restricted by the performance of the raw material feed system. A major kiln shutdown in April 2018 addressed the bottlenecks constraining operation at full potential. The proven viability of two small limestone deposits has increased the life of mine by two years.
The DRC plant was commissioned from an accounting (IFRS) perspective on 1 November 2017. The western DRC cement market remains challenging due to oversupply and competitive pricing, with selling prices continuing to decline. Route-to-market initiatives are steadily yielding positive results and our volumes are expected to improve. Operational initiatives implemented, including rightsizing and other cost reductions, resulted in a relatively small EBITDA loss for the period (excluding once-offs) and will enable the business to be EBITDA neutral going forward, even at current volumes.
At year-end, management undertook an impairment assessment of the DRC operation due to the plant not operating as expected in the country's prevailing economic and political climate. Results indicated that the recoverable amount was lower than the current carrying value. An impairment of R165 million (US$14 million) was charged against property, plant and equipment.
Ethiopia was equity accounted for three months in the reporting period. The business sold around 300 000 tonnes, of which 50% was accounted for in the income statement and the remainder in the balance sheet. Business performance was impacted by instability in the country that resulted in several operational disruptions. Full ramp up is anticipated in the next 12 to 24 months.
The lime business increased revenue by 2%. Volumes were constrained by key steel customer shutdowns and non-extension of the milk-of-lime contract. Cost of sales per tonne was well controlled.
Aggregates' volumes were flat year on year, and increased sales in Botswana were offset mainly by muted demand from the readymix market in Gauteng. Per-tonne cost of sales improved 3% year on year on the back of savings initiatives. Readymix volumes and pricing were under pressure from significantly lower activity in the construction industry and intense competition in the Gauteng market. The result is a contraction of EBITDA to breakeven. Our readymix operations remain strategically important to drive cement demand. Ulula Ash grew volumes by 40%.
Looking ahead to 2019
The South African trading environment remains challenging, with minimal GDP growth projected for the next 12 months, and the regulatory regime increasingly adding to compliance costs in the RSA cement sector. The outlook for our materials division is also muted, as it is linked to infrastructure investment growth, with the lime division mainly exposed to the steel industry, and readymix and aggregates relying on construction projects. To mitigate this, management will remain focused on improving profitability and increasing free cash flow. The cement business, with its focused R50/tonne profitability improvement strategy, will continue its disciplined approach to growing price and volume, and driving operational efficiencies. PPC has a strong leading position and competitive advantage from the perspectives of footprint, scale and efficiency in South Africa. We will continue to maintain, defend and optimise this competitive advantage.
In the rest of Africa, strong demand is expected to continue, driven by our Zimbabwe and Rwanda businesses, while we continue to ramp up from a low base in DRC and Ethiopia. The political landscape is improving in Zimbabwe, with elections scheduled for July 2018, but the liquidity shortage is yet to be resolved. Now that the CIMERWA plant in Rwanda has been modified to operate at full potential, continued good growth in that country's GDP should sustain cement demand, which currently appears to be exceeding supply. In DRC, elections are scheduled for December 2018. We continue to record volume growth in our ramp-up, despite the market being constrained by overcapacity and muted demand. We will continue to examine options to further mitigate risk exposure in DRC. In Ethiopia, the political landscape is expected to improve, and strong growth forecasts are supporting cement demand. With the Habesha plant in successful ramp-up phase, it is well placed to rapidly become a leading cement supplier.
In conclusion, PPC will continue to execute its strategic priorities over the next 12 to 18 months. We are confident this will result in stability, where required, as well as improved performance and results, both financially and against other key performance indicators. We have completed all major capex investments to enhance and modernise our plants. Reduced capex, coupled with significantly lower interest rate charges, is expected to improve free cash flow. Going forward, the group will implement rigorous processes for capital allocation using value-based management, in pursuit of an optimal capital structure through the cycle. The group remains well positioned to benefit from growth in all the regions in which it operates.
I thank my fellow board members, the executive committee, and team PPC for their continued focus and determination in the review period. I also acknowledge the support of our customers, shareholders, employees and other stakeholders who are so critical to our success. We look forward to engaging with you in future.
Chief executive officer
12 July 2018