Chairperson’s review

Afrox operated with unrelenting focus and our 2016 results bear witness to the skill and determination of everyone in Afrox to deliver a motivated, competitive business, regardless of economic challenges.

Sue Graham Johnston
Chairperson

We are at a pivotal time for Afrox. As head of The Linde Group’s Region Africa, the UK and Ireland, I have been working closely with the Afrox management team since June 2015. In September 2016, I succeeded Bernd Eulitz as Chairperson of the Afrox Board and have strived to support the business to fully realise and sustain the benefits of the 2015 turnaround plan’s restructure process.

The Company delivered positive financial results which reflect the benefits of our 2015 restructure. Reduced selling, general and administrative overheads, improved efficiency and an enhanced competitive position were evident in this performance and Afrox is in an advantageous position going into 2017.

The last year was a bedding-down period for the Company’s new structures and operating model. Afrox now seeks to align its commercial practices, procurement processes, governance and compliance guidelines with the best practices of The Linde Group, our parent company.

Refer to the Managing Director’s review and Financial Director’s review for further detail.

Economic review

Afrox’s leaner, more customer-focused approach, and benefits realised from the 2015 restructure (refer to the Turnaround Plan), have somewhat cushioned the economic shocks of low gross domestic product (GDP) and industrial demand in South Africa.

The outlook for 2017 is another year of subdued growth for South Africa, with a likelihood of further political uncertainty as an additional risk factor. This will be a real test of Afrox’s abilities to deliver on the promise to shareholders of sustainable growth and results.

What growth occurs in Africa during 2017 is not expected to come from our traditional sectors. While we will continue to efficiently serve those sectors, we will be looking for new revenue streams to compensate for the changing business dynamics.

Strategic overview

Our cost-base has reduced substantially and firm controls are in place to ensure this remains the case.

As a strong proponent of technologies to drive efficiencies and to deliver innovative products, I am pleased to confirm our commitment to e-commerce, our Tag ’n Trace Individual Cylinder programme and the transfer of knowledge, best practices and latest product offers from The Linde Group to Afrox.

Our sales force, and in turn our customers, will benefit from global Linde support in rolling out a major training and sales development programme in 2017, supported by a new customer relationship management system. This will equip our sales teams with cutting-edge knowledge and the latest tools and technology available to serve our markets and deliver tailored solutions that add value to our customers.

Our focus on renewable energy, healthcare, hospitality, food and beverage and speciality gases as growth markets will continue, as will our drive to grow our share of the LPG sector and helium market through improved security of supply.

Our four strategic objectives remain unchanged this year, namely:

Maintain and grow profitability and operating performance

Ensure sustainable growth while enhancing competitiveness

Embed advanced performance in areas of safety, health, environment and quality (SHEQ)

Build a performance culture

1. Generating sustained financial returns by:

  • identifying opportunities for growth;
  • achieving growth in headline earnings; and
  • delivering superior returns to shareholders.

2. Driving transformation by:

  • achieving a positive shift in our BBBEE rating in South Africa in 2017; and
  • promoting the ongoing transformation of Afrox’s equity profile.

3. Optimising operations by:

  • actively evaluating and mitigating risk, and maintaining effective governance systems;
  • driving effectiveness and efficiency throughout our value chain; and
  • attracting, developing and retaining the best available talent.

4. Build and maintain relationships by:

  • delivering value to customers; and
  • adhering to strict product quality standards.

Refer to strategic objectives for further details on our strategy.

Afrox continues to improve in all areas of its strategic objectives and tangible progress has been made in achieving a step change in profitability and operating performance. Our leaner, more focused organisation post-restructure adds a layer of confidence to our continued positive performance. It is now imperative to preserve the benefits achieved, build a performance culture, and endeavour to improve on the operating margins achieved during 2016.

Governance

We continued with in-house training across all divisions on ethics, anti-corruption, and business partner compliance. Good governance will always be at the heart of what we stand for as a business, an employer and as a socially responsible corporate citizen.

Afrox’s Social, Ethics and Transformation Committee is in its fourth year of operation, achieving steady progress on our non-financial agenda, under the committee chairperson and lead independent director, Dr Khotso Mokhele.

BBBEE

A company’s BBBEE rating is fast becoming the differentiating and deciding factor in the awarding of many South African government and government-linked contracts. As expected under the new BBBEE codes promulgated in 2016, Afrox fell from a level 3 status to a level 8. We are committed to achieving the highest possible rating in balance with business viability and the newly introduced BBBEE Codes in the short to medium term. Refer to human resources for our BBBEE strategy.

Board

In September 2016, Bernd Eulitz stepped down as Afrox Chairman after serving in this position since 1 June 2015. We thank him for his dedication and commitment to Afrox and wish him well in the future. We also welcome Nolitha Fakude who joined us in February 2017 and brings a wealth of petrochemical and business acumen to our team. Refer to our approach to governance for our governance structure.

Outlook

In South Africa, our decision to reorganise and refocus our operations has produced positive results. However, the continued turbulence experienced in our traditional markets indicates that we must continue to be agile and resilient in these times of economic uncertainty.

With wages in South Africa growing at 8% a year, inflation quickening to 6.8% in December 2016 and GDP at 0.4% for 2016, there is no shortage of risk going into 2017. While economists forecast GDP growth of between 0.9 % to 1.5% for 2017, they also predict government debt to GDP rising to over 51%. This highlights the short-term risk to the economy of a sovereign downgrade by rating agencies. In the worst-case scenario a downgrade could precipitate a recession.

In the short term, we will have to leverage the solid progress in our restructure of the Company, management structure and our geographic footprint, channels to market, our distribution network as well as our business and product portfolios, to achieve our profit targets.

It remains incumbent on Afrox to drive continuous improvements and maximise efficiencies to ensure the Company profile mirrors customer needs and that our products are competitive, relevant and cost-effectively delivered.

Gratitude

I wish to thank my fellow Board members for their support and guidance. I would also like to thank our management team, employees and our suppliers for their dedication and commitment. Most importantly, I thank our customers, without whom we would not exist.

Sue Graham Johnston
Chairperson


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