Chief executive officer's report
Celebrating 125 years of producing quality cement and shaping the infrastructural landscape in southern Africa and beyond is a great achievement and proud milestone for PPC. Over the years, we have produced cement for iconic landmarks such as the Union Buildings in South Africa and, as we expand across Africa, we are proud to have contributed to structures such as the Kigali Convention Centre in Rwanda and Kariba dam in Zimbabwe. After commissioning plants in the Democratic Republic of the Congo (DRC) and Ethiopia, we are excited about the impact we will make as we bring innovation and engineering expertise to the continent’s growing markets.
Chief executive officer
In October 2015, we launched our new vision and strategy to all PPC staff. This year, we begin to share our progress on this journey with our stakeholders. We have plotted short, medium and long-term objectives (page 8) and on page 9 provide highlights of our performance against the short-term elements of our strategy.
In 2016 S&P Global Ratings downgraded our corporate credit rating to below investment grade on liquidity and leverage concerns. The severity and timing of the ratings action was unexpected, and compelled PPC to accelerate its capital raising plans and increase the quantum to R4 billion as the sub-investment grade rating required us to redeem our outstanding bonds. The accelerated terms of the bond programme meant that we had to make an offer to buy back the bonds within three days of the downgrade, in turn requiring the board to make a going concern assessment at that point. In short, while the timing and severity of the downgrade was not anticipated, the fact that it triggered accelerated terms for the bond programme made it a critical matter. We have strengthened processes and functions in PPC to prevent such an event recurring. On page 22 we provide a view of the material issues identified across the group and corresponding responses. In changing our operating structure, we now have a matrix that emphasises the use of multi-disciplinary teams supported by a three-tier risk system, quarterly business reviews, improved transparency, reporting and performance management as well as the introduction of robust strategic and business planning processes. The board has also formally constituted the investment committee while providing additional support and vigilance on key matters.
Our headline results reflect substantial declines in earnings over the reporting period. These largely relate to higher financing costs for the capital raising fee and related interest charges for the R2 billion liquidity and guarantee facility secured in June 2016 to redeem outstanding PPC bonds as well as a generally weaker trading environment in our core businesses. Other sizeable contributors include an additional IFRS 2 charge of R206 million for the partial unwind of our first empowerment scheme (BEE I), currency devaluation losses and the non-recurrence of exceptional profit in the prior period. Normalising the impact of these effects resulted in basic earnings per share of 47 cents for the year.
In these challenging markets, we continue to
advocate the value of cash generation and
cash conversion, and we are pleased with our
performance. Cash earnings per share was
75 cents and we have achieved a cash-conversion ratio of 0,9x.
Cost management remains a key thrust in our operational performance. Commendably, the South African cement business's variable delivered costs have only risen 5% on a rand per tonne basis below both consumer and producer price inflation. If we normalise our cost of sales by removing the impact of consolidating 3Q, cost of sales increased by 7%. Our focus has been on costs within our control, which we managed well in the reporting period, with overheads declining by 1,5%.
The performance of our business units has been quite varied. The South African cement business recorded volume improvements of 2%, and a decline in selling prices when seen in conjunction with inflation of costs. We believe that the cycle of falling prices has ended and look forward to reporting selling price growth in future.
The international businesses recorded steady performances. The ramp-up in Rwanda continued at a measured pace with the unit selling 310 000 tonnes of cement over the period within the expected EBITDA margin range of 30% to 35%. In Zimbabwe, despite major economic headwinds, volumes were resilient. The Botswana business continues to make a contribution to group performance.
The mixed performance of the materials business reflects pressure on our lime business after one of its largest clients had a major shutdown during the year. Our readymix business improved its contribution on the back of the 3Q transaction while the aggregates business in South Africa performed satisfactorily.
All rest of Africa projects successfully commissioned*
We are particularly proud of the fact that we successfully commissioned the three remaining African expansion projects in the review period and up to the time of this report.
In Zimbabwe, the US$82 million Harare mill was completed on time and below budget with an excellent safety record – no lost-time injury was recorded during the project's 1,25 million hours. The associated project debt was initially expected to be US$75 million but using our own cash resources reduced debt drawdowns by US$20 million. The first biannual debt and interest payment was made in December 2016. All performance tests have now been successfully concluded and final handover has occurred. We were honoured to have the plant officially commissioned by His Excellency, President Robert Mugabe in March 2017.
In the DRC, construction of our 1mtpa plant was completed on schedule. Hot commissioning was delayed slightly due to bulk power supply to the plant being made available later than expected. First cement and clinker was produced in March 2017 during the hot-commissioning process and the plant went into production in April 2017, recording its first sales.
The DRC project was financed on a limited-recourse basis to PPC. As such, any funding shortfalls prior to financial completion will be for the account of PPC as first sponsor. Current Darryll Castle Chief executive officer shortfalls include any capital overruns (estimated at US$16 million) bringing the project cost to US$296 million and start-up funding for the prepayment of VAT and settling bank facilities (estimated at US$36 million). Repayment of funding obligations begins in July 2017 – with any shortfalls also for PPC's account.
In April 2017, we were privileged to have His Excellency, Prime Minister Ato Hailemariam Desalegn officiate the inauguration of our 1,4mtpa plant in Ethiopia. First cement sales were achieved in June 2017.
Capital structure management
In September 2016, the group's net debt reduced from R8,7 billion to R4,7 billion after receiving proceeds from the rights offer and inflows from maturing components of the BEE I transaction. The group now has a cash balance of around R990 million, although about a third relates to Zimbabwe and is not readily available. Consequently, the group net debt to EBITDA ratio, which had been at 3,7x in March 2016, has now reduced to 2,3x.
The maturity profile reflected South African debt of R1,6 billion payable in September 2017. After discussions with lenders, this debt has been extended to June 2018.
Safety and sustainability
We have excellent safety systems in place and have made considerable progress in recent years. Despite this, our safety performance in the period was disappointing. We sadly reported one fatality at our 3Q Rustenburg operation (North West), and extend our deepest condolences to the family, colleagues and friends of the deceased.
In the year, 31 lost-time injuries (LTIs) and one fatality were recorded, significantly higher than recent years where we consistently recorded LTIs of below 20 per 12-month reporting period. Our analysis has shown that an increased number of contractors, projects and acquired businesses all contributed to a higher risk profile for PPC. Typically, the on-boarding process of new subsidiaries and conversion from project into a fully fledged operation present risks for more safety incidents. The health and safety report on page 104 gives further insights on our strategies, most notably the introduction of the snakes and hazards programme. We are optimistic that these initiatives will improve the safety culture and performance across the organisation.
Our environmental and energy management initiatives recorded good progress in the period. We converted Dwaalboom kiln 1's electrostatic filter to a baghouse at a cost of R69 million and successfully reduced dust emissions to under 30mg/Nm3 which meets 2020 environmental emissions standards well ahead of deadline. At De Hoek, our waste tyre initiative is progressing well, with a 10% thermal substitution rate of fossil fuels. At CIMERWA (Rwanda), we have migrated from diesel generators to the local power grid, giving us access to some hydroelectric power and we have replaced 20% of coal use with alternative sources. At the Bulawayo milling factory (Zimbabwe) we implemented an energy monitoring system with energy savings of 16%. Please see our environmental report on page 122 for details.
The February 2017 budget speech confirmed that a revised carbon tax bill will be published for public consultation and tabled to parliament in mid-2017. According to the proposed draft bill dated November 2015, we have contemplated that the carbon tax for PPC group is expected to be around R90 million. We continue to engage constructively with relevant industry bodies and government on this matter.
In terms of the broad-based black economic empowerment (BBBEE) codes of good practice, PPC's contributor level improved from level 8 to level 4 in December 2016. This enables our customers to claim back 100% of their spend with our group for their own preferential procurement points. Our efforts are now focused on maintaining and improving this rating. Work on a new BEE III transaction was well advanced with the board having approved a new structure appropriate to the 2010 Mining Charter. Subsequently the new 2017 Mining Charter has resulted in a review of this structure given the legislative uncertainty.
In 2015, we implemented a new climatesurvey approach which was conducted independently across PPC to assess employee morale and identify areas of improvement. In 2016, all nine dimensions scored high. A highlight of the survey results is the level of understanding for PPC's vision and strategy of the company (which moved from position six in 2015 to first in 2016). It is encouraging to learn that, despite the challenges the company faced in the past year, employees were still engaged and this is credited to effective communication across the group.
In February 2017, we issued a cautionary announcement on a proposed merger between PPC and AfriSam Group. At the time that the transaction was announced, the stated rationale for the merger was to:
- Create a financially stronger, operationally more efficient South African cement producer with access to deeper technical capability
- Allow for improved balance sheet capabilities that would pave the way for investment in future growth opportunities
- Create a merged entity with complementary production assets in six African countries outside of South Africa
- Allow for the exploiting of synergies that may arise from the combined entity
- Create a significantly empowered merged entity
Due diligence work is under way and during the second half of calendar 2017, we expect to inform stakeholders of the outcomes of these investigations.
Looking ahead to 2018
This reporting period has certainly been difficult but we are pleased with our progress. Our balance sheet is stronger, our African projects are all operational and we believe the South African cement market is stabilising. Certainly, there are still challenges ahead but we are cautiously optimistic that we have the right building blocks in place to be able to manage these headwinds effectively.
I thank my fellow board members, the executive committee, and Team PPC for their continued focus and energy in the review period. Congratulations to all the Diamond Awards 2016 winners. Our customers, shareholders and other stakeholders remain critical to our success and we are grateful for their support.
Chief executive officer
12 July 2017
DIAMOND AWARDS 2016