Managing Director’s review

Sustained focus on cost efficiencies, right-sizing operations, improved logistics, market channels and leveraging the business with the help of committed and determined people brought benefits that will manifest in 2017.

Schalk Venter
Managing Director

Highlights

  • Afrox successfully completed its ‘get healthy’ activities in the context of the Turnaround Plan
  • Benefits from the Turnaround Plan were as expected, with EBITDA increasing by 23.2% to R1 237 million (2015: R1 004 million)
  • Improvement in ROCE by 790bps from 16.7% to 24.6%
  • Bulk industrial gases volumes improved in the second half of 2016
  • Strong LPG performance in the second half of 2016 driven by improved supply chain, cost recovery, and volume growth
  • Major, long-running legal claim settled

Challenges

  • A sluggish first quarter including shortages of CO2 and LPG, and an uncertain economic environment
  • On-site business were negatively impacted by a fixed cost base, supplier shutdowns and reliability challenges at certain plants
  • Hard Goods and industrial compressed gases attained lower volumes but bottomed out towards the fourth quarter due to slightly improved economic activity and higher commodity prices
  • Currency exchange rate impacts, especially in Africa, as well as the challenges of a relatively high inflationary environment, made cost recovery through price increases to market challenging

Overall performance

Financial synopsis

Revenue increased to R5.537 billion (2015: R5.473 billion)

The EBITDA margin before restructuring costs incurred in 2015, increased by 400bps to 22.3% (2015: 18.3%)

Headline earnings per share of 189.4 cents (2015: 139.2 cents)

Basic earnings per share of 193.3 cents (2015: 134.2 cents)

Overall, our performance was again positive. Low levels of capital expenditure, focused trade working capital management, optimisation of fixed assets and underlying EBITDA growth resulted in Afrox remaining strongly cash generative. Cash reserves increased by R301 million to R153 million from a net debt position of R148 million in 2015. ROCE improved 790bps to 24.6%, reflecting improved profitability and asset utilisation.

Refer to the Financial Director’s review for further details.

Performance and developments in the context of our environment

The first quarter of 2016 got off to very slow start and was further hampered by the early Easter period which curtailed business momentum. Afrox’s high level of exposure to the weak South African manufacturing, mining and engineering sectors remains a key challenge. We will continue to robustly manage the balance between sales, gross margin and expenses, as well as position the Company to supply products and services to more robust, high-growth consumer-led markets like hospitality, food and beverage, LPG supply, healthcare, as well as Emerging Africa.

The underlying economy remains a difficult place to do business with price cost recovery a challenge. In general our markets continue to face commodity price pressure, an uncertain labour climate and increased competition. This, coupled with slowed infrastructure construction amid electricity shortages continues to hamper production and investments in sub-Saharan Africa.

We continue to drive the new customer-centric go-to-market model (refer to stakeholder engagement for further detail), increase effectiveness of traditional channels, drive best commercial practice on price cost recovery and target growth in the key markets mentioned.

In South Africa, we opened our latest state-of-the-art facility in Riverhorse Valley, KwaZulu-Natal. The filling and engineering services hub represents an investment of more than R60 million and is a sign of confidence in the KwaZulu-Natal economy. Our Afrox eShop continues to help reduce the cost to serve and to drive e-commerce sales, with online orders values up by 203% compared to last year.

We completed the Cornubia land disposal for R119.4 million and concluded a significant settlement agreement, receiving R165 million from ArcelorMittal South Africa Limited (AMSA) in settlement of an ongoing dispute. Afrox also signed an agreement with TETRA 4 and The Linde Group to exclusively market and supply helium from the Free State natural gas field from 2018. Refer to atmospheric gases for further detail.

Business segment performance

LPG

LPG revenue decreased by 1.26% mainly due to negative price movements

Two strategic LPG import deals in KwaZulu-Natal and the Western Cape mitigated customer run-outs during refinery shutdowns and peak winter demand. This improved security of supply will place us well ahead of competition going into 2017.

These initiatives also resulted in additional bulk sales to industrial customers, but, volumes were down compared to 2015 due to severe product shortages from local refineries in the first four months of the year.

Afrox continues to actively manage the illegal filling threat and we await the outcome of the Competition Commission LPG market inquiry, now expected in early 2017. Growing Afrox’s LPG footprint into Emerging Africa is being actively pursued as part of our strategy.

Refer here for the segmental report.

Atmospheric Gases

Revenue from Atmospheric Gases was up 9.99% at R2.319 billion (2015: R2.110 billion)

Difficult market conditions impacted demand in the steel, mining, and manufacturing sectors in South Africa. A two-month shutdown of a key CO2 supplier severely constrained the market in the first half of 2016. Afrox is actively seeking new sources to supplement current supplies and grow market share. Over-capacity in the atmospheric gases market due to steel plant closures, a general market downturn, rising inflation and electricity costs, impacted sales.

Refer here for the segmental report that includes the contributions and performance of various sub-segments.

Hard Goods

Hard Goods revenue down 15.5% (2015: 9.1%)

Hard Goods revenue continued to decline for the second consecutive year. Underlying performance was impacted by declines in the mining sector, export markets, and a slowdown of infrastructure projects in South Africa, all leading to increased price pressure.

Going forward Afrox will leverage Hard Goods as an integrated offer with gases, further reduce inventory, and seek options to right-size fixed costs to throughput. Growth opportunities in the light industry market exist today and Afrox has tailored offers to capitalise on these.

Refer here for the segmental report.

Emerging Africa

Revenue remained flat at R755 million (2015: R755 million)

Operations in Emerging Africa continue to face challenges and economic shocks stemming from global oil and commodity prices, currency fluctuations, rising national debt of certain countries and inflationary pressures.

Emerging Africa contributes 17.2% (2015: 19.6%) of the Group’s GPADE. Afrox maintains a pragmatic approach to investment in Emerging Africa, but remains determined to participate in the African growth agenda over the coming years.

Refer here for the segmental report.

SHEQ

MIRs increased marginally to 9 (2015: 8)

From a safety perspective, SHEQ saw an improvement in some key areas such as serious passenger incidents that decreased significantly year-on-year. The SHEQ Golden Rules are allowing us to further embed a safety-focused culture and address challenges such as the high rate of lost-time injuries (LTIs) that reached 15 (2015: 9), of which 40% were attributable to manual handling incidents.

Afrox is moving towards further integrating our occupational health programme with our management system to reduce and prevent the contraction of occupational illnesses and diseases.

On the environmental front, improvements occurred in areas such as water consumption, however, CO2 emissions increased marginally. Quality remains a focus area for continuous development, reflected in maintained and newly awarded accreditations such as the ISO 14001:2015 presented to the new Port Elizabeth ASU.

Dividends

The Company retains its policy whereby headline earnings cover the dividend twice. In compliance with this policy a final dividend for 2016 of 56 cents was declared, bringing the total dividend for 2016 to 94 cents.

Outlook

Afrox remains a profitable, robust and strongly cash-generative company. Our focus in 2017/18 remains our key business areas, aligning strategies in healthcare, special and bulk gases to retain and win profitable market share at sustainable margins. We will continue to seek and exploit new profitable opportunities and continue to drive greater operational efficiencies and customer service levels to higher standards. We expect 2017 to be another year of challenges and will require continued fiscal, operational, compliance and behavioural discipline. In the coming year we will strive to:

  • at least maintain core Hard Goods and industrial gases business at current levels of activity;
  • focus on price cost recovery;
  • improve asset utilisation;
  • grow Special Gases, CO2 Healthcare, LPG and Emerging Africa; and
  • maintain current ROCE levels of 20% or more.

Gratitude

I extend my sincere thanks to our customers, members of the Board and my colleagues for their unwavering commitment and support. It is only through this support that Afrox is able to achieve sustainable long-term growth and returns.

Schalk Venter
Managing Director


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