Chief financial officer's report

Tryphosa Ramano
Chief financial officer
 

This is a high-level overview of the financial performance of PPC Ltd for the year ended 31 March 2018. It should be read in conjunction with the group’s annual financial statements on our website www.ppc.co.za/investors/financials

 

We made pleasing progress on our focus areas to significantly improve our balance sheet after our extended investment to build capacity in recent years. This has given PPC around 40% more capacity and diversified our portfolio into regions with solid economic fundamentals. In our last report, we noted our key initiatives, with progress to date summarised below:

Focus area     Update  
Optimal capital structure, solvency and liquidity    
  • Successfully restructured the South African (RSA) debt-funding package of R2 billion from domestic lenders by the end of March 2018. The refinanced package was used to repay R1,6 billion debt due in June 2018. The new debt package has a maturity profile of between three and four years, and a reduced effective interest rate, enabling us to manage liquidity
  • Successfully renegotiated debt funding for the DRC project, with an additional capital repayment holiday of 24 months
  • Achieved long-term gearing target in line with debt covenants
  • Renegotiated retention payment terms with the main contractor in DRC
  • Optimised capital expenditure to maintain business sustainability by focusing on maintenance and efficiency improvements
 
BEE III    
  • Announced a top-up transaction to achieve an effective 30% BEE shareholding
  • The transaction includes employees, communities and black entrepreneurs
  • Vests after 10 years, with the communities’ component being perpetual
  • Funded through a notional vendor-funding structure
 
Impairment risk    
  • The impairment risk materialised in the DRC, where an impairment of R165 million was recognised on the DRC plant due to the competitive landscape which remains challenging, as the production capacity is higher than market demand
  • In other markets, being Rwanda and Zimbabwe, with the route-to-market strategies implemented, delivering value in stable market regions resulting in no impairments
  • The deferred tax risk of impairment in Rwanda does no longer exist as the business performance will result in deferred tax asset being utilised sooner
  • The impairment risk was mitigated in all other business units resulting in no other significant impairments
 

As reflected in the CEO’s report, the FOH-FOUR strategic priorities adopted during the financial year under review, included the financial capital optimisation, which focused on the optimal capital structure, liquidity management and extended maturity profile, the development of the BBBEE structure for approval to relevant authorities in order to comply with MPRDA and financial disciplines across different segments and business units in order to optimise financial reporting and reduce financial risks. As part of the above mentioned FOH-FOUR strategic priorities, we have managed to execute on those priorities as they are highlighted in tabular form above and have implemented more stringent financial disciplines to ensure that the group deleverages and improves liquidity and free cash flows.

The execution of the strategic priorities is demonstrated by the announcement on 29 June 2018 by S&P Global Ratings (S&P) that PPC has been upgraded for its long-term South African national scale rating to “zaA-” from “zaBBB”.

The investment grade rating reflects S&P’s view that PPC’s underlying credit metrics are broadly stable. In particular, S&P regards PPC as having adequate liquidity and, as a result of the deleveraged balance sheet, sufficient covenant headroom of greater than 15% based on its base case for 2019.

Furthermore, PPC’s short-term South African national scale rating was affirmed at “A-2” and S&P removed the “under criteria observation” (UCO) designation from these national scale ratings.

The ratings upgrade demonstrates the impact of the financial disciplines and strategic measures PPC has introduced to improve the group’s liquidity and reduce leverage as outlined in the group’s FOH-FOUR strategic priorities.

Income statement

Key indicators of our operating performance are shown below:

Group performance

Group revenue rose 7% to R10 271 million (2017: R9 641 million), partially impacted by the strengthening of average rand exchange rates against most foreign currencies. Group gross profit rose 3% on the strong performance of the Zimbabwe and Rwanda operations. On a constant-currency basis, revenue grew by 14%, accounting for the 7% strengthening in the rand against the US dollar to an average rate for the year of 13,06 (2017: 14,08). Excluding DRC sales, which were included for the first time for five months, like-for-like growth was 5%. Total cement volumes increased 6% to 5,9 million tonnes.

Group cost of sales rose 8% to R7 924 million (2017: R7 359 million). Excluding the impact of DRC, like-for-like growth was 6%, in line with growth in the producer price index (PPI). Operational efficiencies and introducing the R50/tonne savings initiatives in South Africa contributed to good cost control.

Administration and other operating expenditure rose 28% to R1 343 million (2017: R1 049 million), with the DRC accounting for R146 million (2017: R35 million) of the cost. Administration costs were further impacted by corporate action, restructuring, separation costs and other nonrecurring costs totalling R145 million. Like-for-like administration costs, excluding the impact of non-recurring costs and DRC, would have risen 4%. The head office workforce was restructured, which is expected to generate future savings of some R20 million per annum.

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: R39 million loss). Excluding the impact of once-off costs and exchange rates, EBITDA would have risen 2%, with a corresponding EBITDA margin of 19,7%. In addition, excluding the impact of the DRC, like-for-like EBITDA would have risen 4%, and corresponding margins maintained compared with last year.

Group EBITDA bridge (Rm)
  Year ended
31 March
2018
Audited
Rm
Year ended
31 March
2017
Audited
Rm
Change 
 
Revenue 10 271 9 641  
EBITDA 1 880 2 065 (9)  
EBITDA margin (%) 18 21    
Depreciation and amortisation 876 832  
Operating profit before IFRS 2 charges 1 004 1 233 (19)  
Operating profit margin (before IFRS 2 charges) (%) 10 13    
Finance charges 675 741 (9)  
Taxation 205 153 34   
Earnings attributable to shareholders 149 93 60   
Earnings per share (basic) (cents) 10 8 25   
Revenue
  Year ended
31 March
2018
Audited
Rm
  Segment
%
Year ended
31 March
2017
Audited
Rm
  Segment
%
Change 
 
Revenue analysis by segment                
Cement 8 261   80 7 626   79  
Southern Africa 5 499     5 507     —   
Rest of Africa 2 762     2 119     30   
Materials business 2 010   20 2 015   21 —   
Lime 801     786      
Aggregates and readymix 1 209     1 229     (2)  
Total revenue 10 271     9 641      
Contribution to group revenue by business

Contribution to group revenue by business

Cement segment

The cement business segment contributed 80% (2017: 79%) to group revenue in the review period. Group revenue rose 7% to R10 271 million (2017: R9 641 million), while total cement volumes were 6% up on last year at 5,9mtpa (2017: 5,5mtpa).

The South African cement portfolio revenue declined to R5 499 million (2017: R5 507 million). Volume in southern Africa decreased by 3% while selling prices were slightly up (2%). Volume and margin were under pressure due to reduced infrastructure activity and increased imports into the country. The Botswana operations, which are included in the southern African business segment, recorded a 2% drop in volumes while selling prices were up 6%.

In our rest of Africa portfolio, revenue increased by an impressive 30% to R2 762 million (2017: R2 119 million), rising to 27% (2017: 22%) of group revenue and 33% of cement revenue (2017: 27%). Our Zimbabwe operation recorded a remarkable revenue increase of 34% to R1 813 million (2017: R1 352 million). In-country liquidity for the Zimbabwean operation is still a management focus area, with major strides achieved including local payment of major suppliers. The Rwandan operation continues to improve performance in a market where demand still outstrips supply. Revenue increased 10% to R804 million (2017: R733 million) and the rampup process of the CIMERWA plant progressed well during the period. The DRC segment is consolidated for the first time after successful commissioning in November 2017, recording revenue of R144 million for the five-month period under review. This is below expectation and reflects a stagnant economy in which infrastructure investment is very slow. Ethiopia is an equity-accounted investment and therefore will not impact revenue. The plant was successfully commissioned on 1 January 2018.

Materials business segment

In the South African materials portfolio, the combined materials business’s contribution reduced slightly to 20% (2017: 21%). The total contribution to group revenue was R2 010 million (2017: R2 015 million). Lime volumes are under pressure because of slow steel industry growth. Lime revenue ended the year at R801 million (2017: R786 million). Revenue from our aggregates and readymix business was 2% lower at R1 209 million (2017: R1 230 million) after a delayed start to key projects.

EBITDA
  Year ended 
31 March 
2018 
Audited 
Rm 
  Segment 
Year ended 
31 March 
2017 
Audited 
Rm 
  Segment 
Change 
 
EBITDA analysis by segment                
Cement 1 936    103  1 880    91   
Southern Africa 1 200      1 235      (3)  
Rest of Africa 736      645      14   
Materials business 192    10  316    15  (39)  
Lime 135      165      (18)  
Aggregates and readymix 57      151      (62)  
Group services and other (248)   (13) (131)   (6)  
Total EBITDA 1 880      2 065      (9)  

Cement segment

The cement segment contributed 103% (2017: 91%) to group EBITDA, while the materials business contributed 10% (2017: 15%). Group services contributed negatively to EBITDA as not all head office costs can be recovered from the other business units.

Group EBITDA decreased 9% to R1 880 million (2017: R2 065 million) with an EBITDA margin of 18% (2017: 21%). The decline was mainly due to the materials business, where EBITDA was 39% lower than the prior year. The decline in the EBITDA margin reflects lower selling prices in the readymix market and general inability to pass on cost increases to customers.

Southern Africa cement maintained EBITDA margins at 22%, but EBITDA declined marginally to R1 200 million (2017: R1 235 million) on better cost control.

In our rest of Africa portfolio, EBITDA increased 14% to R736 million (2017: R645 million) although the EBITDA margin reduced from 30% to 27% on a negative contribution from the DRC business.

Materials business segment

In this segment, lime, aggregates and readymix recorded a lower EBITDA of R192 million (2017: R316 million), mainly due to tough local conditions and competition.

Depreciation and amortisation
  Year ended
31 March 2018
Audited
Rm
  Segment
%
Year ended
31 March 2017
Audited
Rm
  Segment
%
Change 
 
Depreciation and amortisation analysis by segment                
Cement 720   82 672   81  
Southern Africa 373     374     —   
Rest of Africa 347     298     17   
Materials business 119   14 123   15 (3)  
Lime 40     46     (14)  
Aggregates and readymix 79     77      3   
Group services and other 37   4 37   4    
Total depreciation and amortisation 876     832      

Depreciation and amortisation increased 5% to R876 million (2017: R832 million), mainly due to rest of Africa from commissioning the DRC plant in November 2017 and the full-year impact of the new plant in Zimbabwe (Harare mill), which was commissioned in December 2016. The DRC contributed R70 million to group depreciation. Excluding the DRC plant, the depreciation went down 3% as South African businesses have matured and no expansionary capex has been included in the material business and SK9 is not yet commissioned in the period under review.

In the southern Africa cement segment, depreciation is in line with maintenance capital expenditure and has not increased. The Slurry SK9 expansion project is still in project phase and depreciation will be only begin once the plant is commissioned in 2019.

Finance costs

Finance costs decreased 9% to R675 million (2017: R741 million). Prior year charges included once-off costs for the liquidity and guarantee raising fees of R128 million. The reduction in once-off fees was offset by including finance charges for the Harare and DRC plants in the income statement post commissioning. The interest rate for DRC debt was further increased as a result of debt restructure.

The southern Africa finance charges decreased 41% to R337 million (2017: R573 million), if you exclude once-off costs of R128 million, they reduced by 24% due to reduced average borrowings during the year.

In the rest of Africa, finance charges increased 101% to R338 million (2017: R168 million) due to DRC plant commissioned in November and finance costs of R117 million for the plant included for five months and once-off costs of interest from revenue authorities in Zimbabwe of US$3 million (R39 million) included in finance costs. If you exclude the once-off costs and DRC plant, the finance costs increased by 8%.

Taxation

The group’s taxation charge increased by 34% to R205 million (2017: R153 million) at an effective taxation rate of 68% (2017: 85%). The effective tax rate was impacted by restructuring, corporate action and an additional assessment of US$3 million from Zimbabwe Revenue authorities relating to tax assessment of the period from 2009 to 2012. The current effective tax rate is too high and not sustainable. The sustainable tax rate is between 32% to 35%.

Impairment and exceptional items

In the results to March 2018, the DRC market continued to face uncertainty driven by political instability, lower cement demand and subdued selling prices. Furthermore, the competitive landscape remains challenging due to production capacity that is higher than market demand. The delayed elections have created uncertainty in the economy and most of the infrastructural projects have been put on hold or they are slow. As a result of these factors, management undertook an impairment assessment. Following the impairment assessment review, the recoverable amount of the DRC operation was considered lower than the current carrying value and an impairment of R165 million (US$14 million) was charged against property, plant and equipment for the year ended March 2018.

Profit attributable to ordinary shareholders and earnings per share

Profit attributable to PPC shareholders rose 60% to R149 million (2017: R93 million). Earnings per share was 25% higher at 10 cents (2017: 8 cents per share). The group’s attributable headline earnings and headline earnings per share for the year increased by 172% and 114% to R231 million (2017: R85 million) and 15 cents (2017: 7 cents) respectively. The weighted number of shares increased from 1 137 million in the prior year to 1 510 million.

Statement of financial position

Cash and cash equivalents decreased from R990 million to R836 million, with R500 million of that cash in the Zimbabwean subsidiary. Gross debt reduced by R1,0 billion to R4,7 billion. PPC made significant progress in improving the liquidity and debt maturity profile.

Property, plant and equipment

At 31 March 2018, property, plant and equipment (PPE) totalled R11 393 million (2017: R12 531 million), with capital investments in PPE of R921 million (2017: R2 058 million). The group is nearing the end of its expansion project, which should result in less capital spending and more maintenance and efficiency spending.

Due to the current economic and political environments and trading performances, impairment assessments were undertaken on the cement businesses in Rwanda, Zimbabwe and DRC, as well the Botswana aggregates business. PPE-related impairment was up sharply to R165 million (2017: R10 million) mainly due to DRC, as mentioned above.

Other non-current assets

Other non-current assets reduced to R303 million (2017: R380 million), mainly due to the reduction in advance payments for plant from R38 million to zero and a 51% reduction in VAT receivable to R104 million (2017: R210 million).

Cash and cash equivalents

The group’s cash and cash equivalents were R836 million (2017: R990 million), including cash on hand and cash on deposit. A large portion of the group’s cash and cash equivalent is denominated in US dollars. The cash in Zimbabwe is freely available for use in-country, but the transfer of funds outside the country is limited.

Equity and borrowings

The stated capital balance was R3 984 million (2017: R3 919 million). The increase reflects the vesting of shares treated as treasury shares held by the consolidated BBBEE entity.

Borrowings
Group debt profile (Rm)

Gross debt reduced by R1 billion to R4,7 billion (2017: R5,7 billion) and net debt/EBITDA from 2,3 times to 2 times.

Group debt
Borrowing profile per currency

Borrowing profile per currency

A large portion of the group’s debt is denominated in US dollars, which further decreased due to capital repayments and the strengthening of the rand against foreign currencies used by the group.

  • The debt in Rwanda has reduced in line with the terms of the facilities, and repaid monthly from cash generated from operations.
  • DRC debt is subject to a 24-month capital repayment holiday.
  • Zimbabwe debt repayment is in-country from locally generated cash.
Borrowing profile per region

Borrowings profile per region

The rest of Africa debt is decreasing as all projects have now been completed and ramp-up is progressing well in both Rwanda and Zimbabwe. As at March 2018, project-related funding totalled R2 889 million (2017: R3 685 million). The DRC project was financed on a limited-recourse basis to PPC Ltd. As such, any funding shortfalls prior to financial completion are for the account of PPC, as first sponsor. To the extent that this amount cannot be generated from the DRC operations, PPC is required to honour its first-sponsor obligations. US$42,5 million was paid to cover shortfall in line with guidance.

Free cash flow (Rm)

Cash flow statement

Cash generated from operations rose 23% to R2 300 million (March 2017: R1 871 million) on improved working capital management. Negative working capital movements improved to a net inflow of R411 million as a result of accounts receivable being better than expected due to improved processes on cash collections and also the introduction of 2% cash discount in the Zimbabwe operations, encouraging customers to buy in cash.

The reduction of 20% of finance cost paid to R592 million (2017: R743 million) is mainly due to once-off costs of R128 million of liquidity and guarantee fees stated earlier in the report paid in the previous financial year. The cash tax increased 11% to R330 million (2017: R296 million), which is mainly due to increased taxable profits in southern Africa, resulting in R196 million taxes paid, and Zimbabwe increased taxable profits, including penalties of US$2,2 million (R28 million at average exchange rate of R13,06), resulting in taxes of R134 million being paid.

The group’s cash inflow from operating activities increased to R1 430 million (2017: R845 million) mainly due to good operational performances from Zimbabwe and Rwanda. Net cash outflow from investing activities of R912 million (2017: R2 091 million) decreased as our significant capital expenditure programme ends. Net cash outflow from financing activities of R577 million is mainly due to repaying borrowings in Zimbabwe, Rwanda and southern Africa. Prior year net inflow mainly reflects the final tranches of borrowings for expansion projects.

Significant items impacting results

To contextualise the impact of the operating environment on PPC’s business, it is important to understand the factors that affect its ability to achieve its strategic objectives against key performance indicators.

The key risks that affected business operations are summarised below:

  • Habesha’s first three months of operations The Ethiopian operations have been included in the financial accounts for the first time for three months in the year under review. The plant was commissioned for IFRS purposes in January 2018. The loss of R61 million was recognised mainly as a result of devaluation of Ethiopian BIRR currency against the US dollar resulting in unrealised losses due to foreign currency denominated debt of US$55 million in Ethiopia
  • DRC five months of operation

    The DRC plant has been included for consolidation in the income statement from the five months starting from 1 November 2017 due to commissioning of the plant for IFRS purposes. In addition, an impairment assessment was done for the plant, which negatively affected the financial results, as stated somewhere in the report

  • Commodity prices
    The group is exposed to volatility in commodity prices, particularly oil, diesel, packaging and coal, as these are key input costs. Commodity prices are affected by macro-economic conditions, market sentiment and political risk
  • Exchange rates

    Revenue and capital spending significantly affected the volatility of multiple exchange rates (US dollar, Rwandan franc, Congolese franc and Botswana pula). Most of PPC’s commodity products, with prices largely based on global commodity prices, are quoted in US dollars

    The rest of Africa performance was impacted by the 7% strengthening in the ZAR:US$ exchange rate. Group net debt benefited from the exchange rate as 57% of debt is US dollar denominated. The statement of comprehensive income was affected by the foreign currency translation reserve of R598 million (2017: R489 million)

  • Political uncertainty

    Political changes in South Africa and Zimbabwe are largely seen as positive, and expected to boost business confidence. Botswana and Rwanda remained stable, while DRC and Ethiopia remained uncertain. Elections are expected in the current financial year for DRC and Zimbabwe, while South Africa and Botswana have scheduled elections in the next financial year. Downside risks are around the DRC and Zimbabwe elections, while South Africa and Botswana are expected to run smoothly. Ethiopia’s change in leadership is expected to enhance stability and certainty

Exchange rates

The table shows global commodity prices in US dollars. Operationally, the group has experienced headwinds from increased competitor activity, slowdown in our economic operating zones and exchange rate movements, which have impacted the group’s EBITDA.

Dividends

The company’s dividend policy considers its growth aspirations and prudency of its capital structure. Under current circumstances, it is prudent to address debt refinancing and optimisation of the capital structure before dividend payments are considered.

Outlook 2019

We will continue to focus on the following key strategic priorities in the long term:

  • BBBEE III ownership implementation

    As previously reported, the company’s BEE ownership level was below the 26% required by the DMR. We announced a top-up transaction, achieved an effective 30% BEE ownership. We will finalise implementation in a way that seeks to achieve the strategic aspirations of the government and commercial aspects of the business. On completing this transaction, PPC will have its highest empowered levels and will continue aiming to exceed the minimum requirement by investigating innovative ways of partnering with government to support the requisite black industrialisation

  • Optimal capital structure and capital allocation

    The group continues to focus on achieving an optimal portfolio that will position it to capitalise on opportunities as they arise or are created internally and manage all financial risks effectively. We will continue to optimise our financial position to ensure that we achieve our optimal capital structure through the cycle of 30% debt and 70% equity in order to maximise the group’s value

    Standards & Poor’s has reviewed our credit rating and upgraded PPC to investment grade. We will continue to strive to maintain investment grade rating and furthermore, we will use value-based management principles to prioritise capital allocation going forward

  • Liquidity

    The finance team, together with operations and procurement, continue to examine commercially sound ways to reduce importing goods in each operating country and manage forex requirements. We are also focused on improving working capital management processes by engaging with operations and improving enterprise resource-planning processes from both processing and monitoring perspectives. We are engaging with authorities in our investment countries to enable the flow of cash that will support the growth of our investments in those countries and the group

    We will continue to focus on the maturity profile of debt that ensures the company is not exposed to liquidity challenges and will strive to focus on repatriation of funds in countries where large cash generation is made

  • Financial disciplines

    Full implementation of operational and finance structure, funding and liquidity framework and tax risk matrix: we are focused on improving the culture of financial discipline, where processes are standardised, and operational and reporting processes are systematic throughout the group. This is aimed mainly at reducing management’s administration time to focus on taking advantage of business opportunities. This will also further enhance performance analysis and improve our ability to forecast

  • Free cash flow

    Generating free cash flow has historically been one of the strengths of our business. The recent and highly necessary expansion programme has stressed our balance sheet and reduced our ability to generate cash. As we are finalising the last project in our programme (Slurry kiln 9), we are also concentrating on improving liquidity and cash flow by smoothing debt repayment, along with the focus on financial disciplines. As highlighted earlier in this report, support to PPC Barnet in DRC has resulted in over R500 million cash outflow from the business

In conclusion, I thank the businesses for their continued support of our financial objectives and the finance teams for their ongoing dedication to team PPC.

T Ramano
Chief financial officer

12 July 2018