Emerging Africa

Key highlights

  • Revenue growth remained flat year-on-year in a difficult economic environment
  • Commissioned more micro plants and additional bulk LPG storage facilities
  • Relocated operations in Mozambique to Afrox-owned property from leased land
  • Improved governance, compliance and processes across our geographies

Key challenges

  • Depressed commodity prices resulting in a slowdown of major sectors, such as mining
  • Inflationary pressure caused by the devaluation of local currencies
  • Constrained LPG and CO2 supply from South Africa due to refinery and production plant shutdowns
  • Electricity volatility and an instance of plant reliability challenges in Zambia

Performance review

Key performance indicators

1 Afrox exited the Democratic Republic of Congo as part of the restructure programme.

Overview

At its current level of profitability, Emerging Africa achieves appropriate returns to warrant the higher risks associated with the countries in which we operate.

Despite adverse economic conditions, Emerging Africa volumes and revenue remained flat. We continued to experience an increase in demand for consumer-led products such as CO2 and LPG. Volumes differed by product sector, often impacted by commodity prices and demand, but collectively, volume levels for Emerging Africa remained flat year-on-year. Revenue remained flat at R755 million. We foresee consumer-led demand trends continuing and we will capitalise on these further though our improved security of supply agreements through imports and various South African sources.

Emerging Africa experienced high currency devaluations that pushed up the cost inflation on imported products. Although the frequency of sales price adjustments was increased, we were unable to recover all the historic costs of inflation from customers. Additional strain was experienced from stretched and changing payment terms from customers seeking to manage cash flows and reduce their own costs, especially in Zambia.

Market impacts in the year

The first half of 2016 was negatively impacted by constrained bulk LPG and CO2 supply from South Africa. In the second half of the year, LPG shortages were largely resolved while CO2 challenges persisted. This was a direct result of refinery and CO2 production plant shutdowns. However, alternate supply sources enabled Afrox to largely maintain customer service levels, the increased logistics costs were not all recoverable from customers due to contractual pricing arrangements. The agreement established through the Richards Bay terminal allows for increased throughput for improved LPG volumes into Emerging Africa, providing scope to further grow market share. Refer to LPG for further information.

The business continues to invest in small mobile filling plants in various African countries. This reduces the reliance on imported products and reduces the level of currency risk in this business. Due to the current commodity price cycle, no large tonnage opportunities have materialised as yet. However, Afrox remains open to opportunities in this area and engages with stakeholders when such opportunities arise.

Electricity supply shortages pose a continuous challenge to our operations, especially in Zambia. To reduce volatility, we negotiated with the local electricity supplier, ZESCO, who is installing a dedicated 11 kVA cable from its depot to the substation that services Afrox Zambia. The arrangement will provide our facilities with a dedicated and continuous electricity supply. As part of the agreement, the facility will operate for only three weeks each month. This will not adversely impacted our operations, rather the electricity consistency will allow the plant to run more effectively over a continuous period as opposed to the strain caused from erratic stop and start in production previously.

For more country-specific highlights and developments, refer here.

Governance

During the restructure, significant focus was placed on improving the governance culture and applying clear, consistent policies in geographies. Internal Control Steering Committees are now in place in all our operating countries to ensure that internal controls are adequate to safeguard the income and assets of Afrox, and that operation takes place according to standard. The committees also oversee and facilitate the closure of internal audit findings on a continuous basis.

Multinational customers expect a seamless extension of the Afrox South Africa product service offering.

The adherence to good corporate governance is strengthened by a local Board of directors in the majority of our operating countries and includes a number of independent non-executive directors. In most instances, these representatives chair various committees, most notably the Audit Committee.

Future focus areas

  • Our strategy for this segment remains unaltered. Difficult economic conditions, driven by low international commodity and oil prices, are expected to persist in the short to medium term. Therefore, Emerging Africa’s focus for 2017 will remain on consumer demand-driven growth areas such as healthcare, CO2, LPG and special gases.
  • Productivity and efficiency improvement initiatives remain important to ensure profitability is maintained and enhanced to act as a buffer to offset economic and currency headwinds.
  • Efforts to standardise Emerging Africa country structures under the functional discipline model of The Linde Group Blueprint for small countries is underway. This model is well suited to the country-specific operations of Emerging Africa and provide a fit-for-purpose structure to weather the expected economic conditions of the future. Completion is targeted for early 2017.
  • We will look to improve our sales pricing, including full cost recovery.
  • Programmes are in place to continue building a performance culture in the sales and marketing teams across all Emerging Africa countries. These programmes will upskill sales teams to increase sales effectiveness and to be better equipped to identify and deliver tailored solutions that add value to customers doing business with Afrox.
Zambia micro-fill plant

Afrox Zambia Limited sells approximately 420 tons of compressed oxygen annually, 120 tonnes of which is transported to the southern region where Lusaka is located. A decline in volumes from our Ndola-based filling facility (320 km from Lusaka) due to inconsistent supply and long lead times for delivery developed into a challenge for us to resolve. The new location in Lusaka optimised the supply chain, reducing the need to transport cylinders over great distances and helped secure our market share in an oxygen sector full of opportunity, despite prevalent economic difficulty. Our improved customer service has resulted in increased sales revenue as a result of more competitive pricing and reduced distribution costs. There is less pressure on our cylinder population, reduced transport risk and improved customer retention.

Maputo development

The property purchase transaction has been completed and operations relocated to the new site at the end of 2016. The construction of the sales centre is nearing completion. This Afrox-owned property reduced the significant foreign currency exposure we experienced with the historical lease agreement. It will allow for scaleable expansion of operations and allows for increased strategic storage of bulk products.


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