Chief financial officer's report

This report covers our first 12-month period since the change in year-end, as previously reported, and aligns to the change in our group's legal organisational structure which became effective in the review period.

Chief financial officer
Tryphosa Ramano
Chief financial officer
Tryphosa ramano

Given these changes and for ease of comparison, pro forma financial information reflecting the financial results and cash flows for the 12 months ended 31 March 2016, released on SENS on 9 March 2017, is used as the comparative to the current reporting period.

As noted in my prior report, the new group structure, which came into effect on 1 April 2016, allowed us to streamline the business: PPC Ltd was split up into a holding company, remaining as PPC Ltd with two new operating entities created, namely PPC Cement South Africa and PPC Group Services.

Accordingly, our segmental reporting was amended in the review period, aligning operating segments to the way the business units are managed and reviewed. The key operating segments are now cement, split between southern Africa cement and the rest of Africa cement, materials business and group services. The prior period comparison has been amended from that previously reported.

Overview

Following the liquidity constraints we faced earlier in the financial year, which were to an extent addressed by an oversubscribed rights issue, the group undertook various initiatives to deal with its challenges, including:

  • Strengthening the capital structure after receiving proceeds from the rights issue of R4 000 million and R1 041 million on maturity of the first BBBEE transaction. The net proceeds were used to reduce the company’s borrowings and fund capital expenditure, specifically the SK9 expansion project
  • Appointing two leading South African banks to advise on an appropriate capital structure, taking cognisance of the liquidity and maturity profile of the group’s debt
  • Improving cash flow management by better understanding the context of each operation within its jurisdiction

The table below reflects a number of challenges that are unusual in our current environment and have impacted the current reporting period:

  Challenges     Solutions
  The group’s new legal and reporting organisational structure    
  • We implemented the new legal organisational structure effective April 2016 with the new group
    services company and splitting out the South African cement operations into a separate legal entity
  • At the same time, we strengthened the financial reporting structure to realign and support the
  S&P rating downgrade in May 2016 created short-term liquidity constraints    
  • We implemented a successful rights issue with gross proceeds of R4 000 million received in September 2016
  • Our first BBBEE transaction, which concluded in December 2016, resulted in net proceeds of R1 041 million flowing to the group
  • Proceeds from the rights issue and first BBBEE transaction were used to reduce group borrowings
  • Post-year-end, the group rescheduled debt maturing in September 2017 to June 2018
  BBBEE compliance as required in terms of the Minerals and Petroleum Resources Development Act (MPRDA)    
  • The group is working with a local financial institution to develop an appropriate ownership structure
    that complies with the MPRDA
  • This work is ongoing and the board has approved an in-principle structure
  Challenging tax environment    
  • We reviewed and improved our tax governance structures across the group
  • The new legal organisational structure gives visibility to the group’s tax risks, which can then be addressed accordingly
Financial performance

Income statement

Key indicators of our operating performance include:

  Twelve
months
ended
31 March
2017
Audited
Rm
  Twelve
months
ended
31 March
2016
Pro forma
Rm
Change
%
 
Revenue 9 641   9 187 5  
EBITDA 2 065   2 385 (13)  
EBITDA margin (%) 21   26    
Depreciation and amortisation 832   755 10  
Operating profit before IFRS 2 charges 1 233   1 630 (24)  
Operating profit margin (%) 13   18    
Finance charges 741   572 30  
Tax 153   384 (60)  
Earnings attributable to shareholders 93   793 (88)  
Earnings per share (basic) (cents) 8   117 (93)  
Revenue analysis by segment
  Twelve
months
ended
31 March
2017
Audited
Rm
  Region
%
  Twelve
months
ended
31 March
2016
Pro forma
Rm
  Region
%
Change
%
 
Cement 7 830   81   7 605   83 3  
Southern Africa 5 712       5 659     1  
Rest of Africa 2 118       1 946     9  
Materials business 2 048   21   1 819   20 13  
Lime 818       817     0  
Aggregates and readymix 1 230       1 002     23  
Inter-segment revenue (237)   (2)   (237)   (3)    
Total revenue 9 641       9 187     5  

CONTRIBUTION TO GROUP REVENUE BY BUSINESS (%)

Contribution to group

Cement segment

The cement business segment contributed 81% (2016: 83%) to group revenue. Group revenue rose 5% to R9 641 million (2016: R9 187 million) for the review period, while total cement volumes were 2% up on last year at 5 538kt (2016: 5 451kt).

The South African portfolio reflected a marginal revenue increase of 1% to R5 712 million (2016: R5 659 million). Volumes in South Africa rose 2% while selling prices were down. Given the competitive landscape, particularly the Gauteng region, prices decreased specifically in the bulk market, resulting in lower margins. In contrast, the coastal region recorded strong volume increases. The Botswana operations, which are included in the southern African business segment, recorded flat volumes while selling prices were down 9% due to competition from South African imports.

In our rest of Africa portfolio, revenue increased 9% to R2 118 million (2016: R1 946 million), equating to 22% (2016: 21%) of group revenue. Our Zimbabwe operations recorded a volume decline of 3%, while selling prices, in US dollars, decreased 10% over the year. The tough operating environment and liquidity challenges in the domestic market, compounded by increased local competition from imports, affected the Zimbabwe performance. The new plant in Rwanda, commissioned in 2016, recorded cement sales of 310kt compared to 124kt in the prior year, noting that the plant had not run for a full 12 months in the prior period due to the timing of plant commissioning. Our market share has risen in line with increased output. The Democratic Republic of the Congo (DRC) segment is not included in group revenue due to delays in hot commissioning which meant that the plant was not commissioned by 31 March 2017. Ethiopia is an equity-accounted investment and will therefore not affect revenue. In addition, the plant was only commissioned after 31 March 2017.

Materials business segment

In the South African materials portfolio, the combined materials business contributed 21% to group revenue at R2 048 million (2016: R1 819 million). Lime volumes were affected by a major client’s three-month shutdown, limiting revenue growth compared to the previous year. Lime revenue ended the year at R818 million (2016: R817 million). Revenue in the aggregates and readymix business was 23% higher at R1 230 million (2016: R1 002 million) and supported by the 3Q readymix business, which was acquired effective 1 July 2016. In the aggregates business, South African sales volumes were down 6% on the comparative year on lower sales to the readymix concrete segment amid increased competitor activity, but this was partly offset by improved sales to the concrete products manufacturing segment.

EBITDA segmental reporting
  Twelve
months
ended
31 March
2017
Audited
Rm
  Region
%
  Twelve
months
ended
31 March
2016
Pro forma
Rm
  Region
%
Change
%
 
EBITDA analysis by segment                  
Cement 1 880   91   2 064   87 (9)  
Southern Africa 1 235       1 524     (19)  
Rest of Africa 645       540     19  
Materials business 316   15   383   16 (17)  
Lime 165       196     (16)  
Aggregates and readymix 151       187     (19)  
Group services and other (131)   (6)   (62)   (3)    
Total EBITDA 2 065       2 385     (13)  

Ebitda segmental

Cement segment

The cement segment contributes 91% (2016: 87%) to group EBITDA, while the materials business contributes 15% (2016: 16%), with group services contributing negatively to EBITDA as not all head office costs could be allocated to business units.

Group EBITDA decreased 13% to R2 065 million (2016: R2 385 million) with an EBITDA margin of 21% (2016: 26%). The decline was mainly attributable to the southern Africa cement segment where EBITDA was 19% lower than the previous year, resulting in EBITDA margins in this segment declining from 27% to 22%. The decline in the EBITDA margin reflects lower selling prices in the southern African market and the inability to pass on these cost increases to customers, despite ongoing focus on managing costs within our control, which were managed well in the current year.

In our rest of Africa portfolio, EBITDA increased 19% to R645 million (2016: R540 million) and the EBITDA margin improved from 28% to 31% mainly due to additional output from the Rwandan plant, which was included for the full financial year, and despite reduced EBITDA and EBITDA margins from the Zimbabwe operations in tough market conditions. The DRC contributed negatively, albeit marginally, to EBITDA figures due to certain costs that could not be capitalised to project costs.

Materials business segment

In the materials business segment, lime, aggregates and readymix recorded lower EBITDA at R316 million (2016: R383 million) despite inclusion of the 3Q business for nine months of the current year. The decline is mainly due to tough local conditions and a competitive environment in the segment.

Administration and other operating expenditure

Included in EBITDA is administrative and other operating expenditure. This declined 2% to R1 049 million (2016: R1 065 million), with total administrative and operating expenses approximating 11% of group revenue (2016: 12%), despite the current inflationary environment.

Depreciation and amortisation
  Twelve
months
ended
31 March
2017
Audited
Rm
  Region
%
  Twelve
months
ended
31 March
2016
Pro forma
Rm
  Region
%
Change
%
 
Depreciation and amortisation analysis by segment                  
Cement 672   81   608   81 11  
Southern Africa 374       386     (3)  
Rest of Africa 298       222     34  
Materials business 123   15   109   14 13  
Lime 46       44     5  
Aggregates and readymix 77       65     18  
Group services and other 37   4   38   5 (3)  
Total depreciation and amortisation 832       755     10  

Depreciation and amortisation increased by 10% to R832 million (2016: R755 million), mainly due to commissioning of the Zimbabwe Harare mill in December 2016 and the full-year impact of the new plant in Rwanda, which was commissioned in September 2015.

In the southern Africa cement segment, depreciation is in line with maintenance capital expenditure and has not increased. The SK9 expansion project is still in project phase and depreciation will be only begin once the plant is commissioned in 2018.

Finance costs

Finance costs increased 30% to R741 million (2016: R572 million), mainly as a result of once-off items such as raising fees and additional interest costs of R165 million arising from the capital raised in the South African business following the liquidity constraints noted earlier. In the rest of Africa segment, finance costs declined on repayment of a portion of the debt in Rwanda. Interest on the Zimbabwe debt was capitalised until plant commissioning.

Taxation

The group’s taxation charge decreased by 60% to R153 million (2016: R384 million) at an effective taxation rate of 85% (2016: 31%). The decrease in taxation was mainly due to lower profitability, while the increase in the effective rate to 85% mainly reflects withholding tax on dividends declared from Zimbabwe, the impact of non-deductible finance costs, IFRS 2 charges related to the BEE 1 transaction, forex losses on foreign currency-denominated monetary items on exchange rate movements and prior year taxation adjustments.

Profit attributable to ordinary shareholders and earnings per share

Profit attributable to PPC shareholders declined by 88% to R93 million (2016: R793 million). In line with this, earnings per share was 93% lower at 8 cents (2016: 117 cents per share). Earnings per share in the current year was affected by issuing 1 000 million additional shares after the successful rights issue. Earnings per share for 2016 was restated in terms of IAS 33 Earnings Per Share as a result of the rights issue.

In addition, the group’s results were further impacted by certain once-off and other significant items, as described below:

  • IFRS 2 charges of R206 million, resulting mainly from modifying certain original terms of the first BBBEE transaction relating to strategic black partners and recapitalising certain entities incorporated in terms of the same transaction
  • Foreign exchange losses on foreign currencydenominated monetary items of R124 million (2016: R3 million gain), and mainly due to the remeasurement loss recorded against US dollar-denominated project funding debt in Rwanda and exchange loss recorded on VAT receivable in the DRC after the recent decline of the Congolese franc (CDF) against the US dollar
  • The head office technical department was restructured during the year, resulting in restructuring costs of R9 million being recorded under administration and other operating expenditure
Statement of financial position

In summary, the group’s statement of financial position was impacted by the significant increase in capital expenditure due to ongoing capital projects and the reduction in net borrowings, offset by a strengthened balance sheet post the successful capital raising and conclusion of the BEE 1 transaction.

Property, plant and equipment

At 31 March 2017, property, plant and equipment (PPE) was R12 531 million (2016: R11 716 million). Capital investments in PPE totalled R2 058 million (2016: R3 038 million), with R307 million used for the SK9 project in South Africa and the balance attributable to Zimbabwe, the DRC project and ongoing maintenance capital expenditure. The group will continue to investment in PPE over the next few years with an estimated R1 000 million to R1 200 million to be spent in each of 2018 and 2019, and R800 million to R1 000 million in 2020. Following the strengthening of the rand at year-end, a translation adjustment of R853 million was recorded against PPE. Capital commitments at year-end were R1 071 million (2016: R3 283 million). As previously reported on the DRC project, we have identified additional potential funding requirements to which PPC will have to contribute. These payments will arise due to a delayed VAT refund, settling of bank facilities and specific capital overruns with ongoing funding of operations supported by the cash flow expected to be generated from operations.

Due to the current economic and political environments and trading performances, impairment assessments were undertaken on the cement businesses in Rwanda, Zimbabwe and DRC. Following internal reviews, no impairments were required in any of these jurisdictions. The DRC operations continue to face stiff competition with subdued selling prices and political uncertainty. Management will continue to monitor the situation and an assessment will be performed to identify any impairment at the next reporting date. Internal review assessments will be also be applied to other jurisdictions in which we operate.

Post-year-end, the group invested an additional US$4 million in Ethiopia, increasing our shareholding from 35% to 38%.

Other non-current assets

Other non-current assets reduced to R380 million (2016: R590 million), mainly due to remeasurement adjustment of R112 million against VAT receivable in the DRC which arose from devaluation of the CDF against the US dollar. A letter has been received from the relevant authorities in the DRC acknowledging the refund and giving instruction for this to be paid by the revenue authorities; however, the timing remains uncertain. The letter further states that the refund is to be utilised for payments of local suppliers and salaries.

Cash and cash equivalents

The group’s cash and cash equivalents ended the year at R990 million (2016: R460 million), including cash on hand and cash on deposit. A large portion of the group’s cash and cash equivalent is denominated in US dollar. Due to the current liquidity situation in Zimbabwe, the full cash balance of R289 million has been recorded as restricted at group level.

     
Cash and cash equivalents 2017   Cash and cash equivalents 2016
Borrowings group dept
Equity and borrowings

Stated capital

The stated capital balance was R3 919 million (2016: debit R1 113 million), with the increase mainly attributable to rights issue proceeds of R4 000 million and R1 041 million received on the maturity of the first BBBEE transaction.

In light of the rights issue, the group’s weighted average number of shares increased to 1 137 337 834 shares (2016: 680 086 112 shares) while shares in issue ended at 1 591 759 954 (2016: 607 180 890).

The equity proceeds, as highlighted earlier, were mainly used to reduce gross borrowings and resulted in the group’s borrowing position reducing to R5 736 million from R9 171 million in 2016, strengthening the statement of financial position. Net debt to EBITDA reduced from 3,7 times in 2016 to 2,3 times. Net debt was R4 746 million (2016: R8 711 million).

Group debt
Borrowing profile per currency
 
 
Borrowing profile per currency  

A large portion of the group’s debt is denominated in US dollars, which increased during the year as further drawdowns were made on DRC project funding and the Zimbabwe capital expansion project. The debt in Rwanda has reduced in line with the terms of the facilities.

Borrowings profile per region

The rest of Africa debt has been increasing, mainly due to our expansion projects, particularly the DRC construction project. At 31 March 2017, project-related funding amounted to R3 685 million (2016: R3 372 million). The DRC project was financed on a limited recourse basis to PPC Limited. 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 Limited will be required to stand behind its first sponsor obligations.

Borrowings profile per region  
Cash flow statement

Cash generated from operations after working capital decreased by 22% to R1 871 million (March 2016: R2 389 million) were impacted by negative working capital movements. Negative working capital movements of R230 million include VAT receivable and prepayment movements of R139 million, all of which are non-trade-related.

The group’s cash inflow from operating activities reduced to R845 million (2016: R1 213 million) due to costs associated with the liquidity event, lower operational cash flows and higher effective taxation paid. Net cash outflow from investing activities of R2 091 million (2016: R3 279 million) decreased as a significant capital expenditure programme comes to an end. Net cash outflow from financing activities declined by R147 million as proceeds from the rights issues were used to reduce debt by R3 billion, noting that some of the proceeds from the rights issue due to the secondary listing on the Zimbabwean stock exchange of R86 million have not been repatriated due to in-country liquidity constraints.

Significant items impacting results

To contextualise the impact of the operating environment on our business, it is important to understand the factors that affect our ability to achieve our strategic objectives against key performance indicators. The key risks that affected the business operations can be summarised as:

  • Commodity prices
    The group is exposed to the volatility of commodity prices, particularly selling prices of cement, oil, diesel, packaging and coal, as these form part of our key input costs. Commodity prices are affected by macroeconomic conditions, market sentiments and political risk.
  • Exchange rates
    Revenue and capital spending significantly impacted by the volatility of multiple exchange rates (US dollar, Rwandan franc, Congolese franc and Botswana pula). Most of our commodity products, whose prices are largely based on global commodity prices, are quoted in US dollar.

As a significant part of the group’s debt is quoted in US dollar, exchange rate movements will significantly affect finance charges, further impacting our profitability and debt balances at year-ends.

Exchange rates

The graph above reflects global commodity prices quoted in US dollar. Operationally, the group has faced headwinds from increased competitor activity, the slowdown in our economic operating zones and exchange rate movements, which have impacted the group’s EBITDA. There is much political uncertainty in the countries where we operate and further changes in the political landscape could negatively affect our performance.

Dividends

The company’s dividend policy considers its growth aspirations as well as the 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 2018

We will continue to focus on the following key initiatives:

  • Optimal capital structure, including solvency and liquidity
    The group has strengthened its financial position through various initiatives, most notably the successful conclusion of the rights issue and BEE I transaction, as discussed earlier. We will continue focusing on the liquidity and solvency of the business. As noted, we have appointed two leading banks that are working with the group to determine the optimal capital structure. This will take into account an optimal mix of long and short-term debt relative to equity and the maturity profile of the debt. The ongoing challenges of the DRC funding shortfall will continue to be monitored.
  • BEE
    III As noted, the company’s reported BEE ownership level is below the 26% required by the Mining and Petroleum Resources Development Act (MPRDA). This is as a result of PPC’s rights offer in September 2016 and the maturity of components of the 2008 BBBEE transaction in December 2016. Accordingly, the board approved a framework for the new BBBEE transaction to ensure compliance with legislation. In June 2017, however, the Department of Mineral Resources gazetted the 2017 mining charter which has significant implications for our compliance in the BBBEE scheme. The company will continue to engage with the authorities on this matter.
  • Impairment assessment risk
    In DRC and Rwanda, there is an impairment risk on our investments due to the current economic and political environment and trading performance. Further impairment risks relate to Zimbabwe and Rwanda’s deferred tax asset. We set various hurdle rates per country as a determinant for investment and evaluation purposes. Hurdle rates and weighted average cost of capital (WACC) are updated every six months as evident in the impairment assessment performed at year-end.

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

MMT Ramano
Chief financial officer

12 July 2017