Strategy review

Our strategic aspiration is exceeding the expectations of all our stakeholders on a sustainable basis. Achieving this strategic aspiration requires fundamentally changing our corporate culture while excelling at these five pillars of our strategy.

Our vision and strategy, approved in 2015, has at its core two fundamental drivers:

  • We believe in the Africa Rising narrative over the long term; our strategy is premised on a view of how our continent will look in 2050. According to the Mo Ibrahim Foundation, the next 35 years will see Africa’s urban population grow to 900 million, the highest rate in the world while, concurrently, governance and institutions on the continent improving. We reiterate this belief in the Africa Rising narrative and believe that PPC can participate in this long-term upward trajectory.
  • Secondly, our analysis showed that PPC was anomalously focused on cement to a greater extent than all of its peers. We believe that the infrastructural growth in Africa will provide (and indeed require) many related products and services. PPC should be ideally suited to diversifying its revenue streams on the back of this trend and requirements, making PPC a more stable earner with a higher average growth rate.

When considering our vision and strategy, we overlay different time-bound dimensions to its achievement. There are short-term (one to two years), medium-term (two to four years) and long-term (four to 10 years) elements to our vision and strategy which are both fluid (with overlap) and discrete in nature. Management’s key focus may well be on the short-term elements of the strategy currently. However, work is certainly under way to position the company to enable it to deliver on its medium and long-term goals and aspirations. Below, we summarise how these time-bound dimensions apply to our five strategic pillars:

Strategy implementation
WORLD-CLASS
EXCELLENCE
PROVIDER OF MATERIALS
AND SOLUTIONS
INNOVATION
CULTURE
TAKING A STRATEGIC
APPROACH
DOUBLING OUR BUSINESS
EVERY 10 YEARS
  SHORT-TERM (ONE – TWO YEARS)            
 
Capital conservation and generation

Reaffirming PPC’s position as an industry leader, gaining the confidence of all its stakeholders and positioning PPC for future growth.

 
1 Balance sheet further strengthened and enhanced
2 Optimise existing cement operations in Botswana, Rwanda, South Africa and Zimbabwe and the materials business
3 Ramp-up new operations and successfully complete projects in the DRC, Ethiopia, South Africa and Zimbabwe
       
  MEDIUM TERM (TWO – FOUR YEARS)        
 
Consolidate for growth

Enable delivery of PPC's long-term strategy through the development of relevant and efficient structures, effective people strategies and leveraging intellectual property and expertise.

 
 

Capital conservation and generation

 
 
1 Performance-driven culture
2 Positive return on innovation solutions
3 Commitment to world-class standards
4 Strive for technical excellence that will manifest itself in a cost leadership philosophy
   
  LONG-TERM (THREE + FIVE YEARS)        
 
Expansion

Leverage achievement of short and medium- term objectives to facilitate the long-term strategic objective of doubling the business every 10 years.

 
 

Capital conservation and generation

 
 
 

Consolidate for growth

 
  1 Deep understanding of the locations, owners and influencers of all relevant inputs, businesses and markets  
  2 Utilise our strength to become a major global cement player  
  3 Investment into adjacent and transformational businesses  
PEOPLE AND CULTURE
   

In the short term, the company’s focus is to ensure that:

  • Predominantly, the projects in the rest of the continent are completed on time and under budget
  • The business plans of new operations meet their planned operating and financial objectives
  • The existing cash-generating business units improve revenue and continue to drive cost and efficiency improvements
  • The balance sheet has sufficient liquidity and strength to weather cyclical turbulence in the operating environment
  • Risk is reduced to acceptable levels in all operating entities
  • The empowerment credentials of the company are improved
  • Our people structures, processes and operating architecture are optimised to ensure the effective delivery of our strategy

Success with our short-term strategic objectives will enable us to effectively pursue our medium and long-term strategic objectives. In the medium term, the focus will move to the effective repositioning of the company to allow it to deliver on the long-term aspects of the strategy. Specifically, a focus on enhancing our overall intellectual property in order to provide products and services to a wider clientele without taking the focus off our core cement making and materials businesses. We will endeavour to better understand the drivers, risks and trends in each of our regions in order to position ourselves to capture emerging growth opportunities.

Once we have satisfactorily achieved our short and medium-term objectives, and depending on the prevailing business cycle dynamics, we will then be in a better position to pursue and execute our long-term strategy. In the long term, we want to double our business every 10 years. Ultimately, this will be achieved by growth in our existing markets and territories but will also require investment in adjacent and transformational businesses related to our inputs, processes and products.

Our existing markets on the African continent continue to present a unique growth opportunity and we will ensure that our market share is at least maintained in line with the growth prospects on the continent. Effectively, through our strategic work in the medium term, we will have a deep understanding of the locations, owners and influencers of all relevant inputs, businesses and markets and this will allow us to leverage our position in order to maintain and extend our influence and growth. This strength will allow us to ultimately become a major global cement player, growing out of Africa.

Performance against strategy

In this integrated report, we provide our assessment of the company’s performance against the short-term objectives of our strategy:

As stated above, the achievement of our vision, strategy and strategic aspiration requires changes to our corporate culture. The people and culture work that is under way acknowledges that the successful delivery of excellence, innovation and solutions requires shifts in people and culture dynamics. Below, we provide an update on our progress with our strategies:

  Strategic pillar: World-class excellence                    
  Strategic objective        Progress       Rating       Outlook Related info on page  
  Cash generating units maximise revenue and optimise costs and efficiencies       Group revenue increased 5% to R9,6 billion, supported by the rest of Africa cement business which grew revenue by 9% and the aggregates and readymix segment which grew revenue by 23%             Continued focus on cost and efficiency
optimisation while maximising revenue
opportunities
40, 143  
          Revenue in PPC’s southern African cement business (South Africa and Botswana), which was impacted by intensified competition and high rainfall during the first two months of 2017, was flat with the 2% increase in cement sales volumes offset by lower selling prices             Subdued economic growth, fixed investment and household expenditure in South Africa expected to constrain meaningful growth in cement volumes. Botswana’s economy, however, is expected to begin improving 54  
          Overall volumes in Zimbabwe ended down 3% and selling prices in US dollars were 10% lower. This performance although better than expected, is reflective of the economic headwinds and liquidity challenges in the market             Continued focus on cost and operational
efficiencies, route-to-market initiatives and
product innovation
63  
          Rwanda’s CIMERWA increased its contribution to group sales in its first full financial year of operation. Sales volumes of 310 000 tonnes was achieved while gradual ramp-up ensured minimal disruption to prevailing market prices             CIMERWA continues to focus on developing
transport capacity within Rwanda to support
growing volumes and the use of alternative fuels to reduce reliance on coal
62  
  Strategic pillar: Provider of materials and solutions                    
  Acquisitions in the materials business integrated effectively      
  • 3Q Mahuma Concrete acquired effective 1 July 2016; integration with Readymix business progressing in line with expectations
           
  • Leverage acquisition to enhance channel management and increase revenue streams
67  
  Strategic pillar: Innovation culture                    
  Creation of an innovation
process to harness benefits
of innovation ideas
     
  • The company has implemented a best practice web-based idea management system to encourage a bottom-up flow of ideas, ensure continuous feedback and remove barriers to implementation
           
  • Further entrenched use of the innovation platform with future capability-building plans including idea development and collaboration with customers, suppliers and partners
49  
  Creation of an innovation culture as the core driver of the business      
  • The innovation platform has gone some way to begin to change the culture of the organisation; however, there is still some resistance to fully adopting this culture due to time constraints and prioritisation
  • 36 ideas implemented with projected gross saving of R2,9 million
           
  • Work is under way in collaboration with the human resources team to embed an innovation culture throughout the organisation as part of the culture transformation journey we have embarked on
   
  Strategic pillar: Taking a strategic approach                    
  Risk mitigation strategies
effectively deployed
     
  • DRC – strategies to reduce the risk of the project to PPC are being explored
           
  • Conditions in the DRC continue to
    deteriorate, requiring a strategic review of the project
60  
         
  • Some improvements have been made in effective liquidity, working capital and covenant management
           
  • Further improvements to be done in
    modelling and forecasting to ensure effective and transparent monitoring of liquidity and covenants
40  
         
  • Some improvements made with strengthening of risk processes and compliance function
           
  • Further embedding of improved risk culture and stress testing with work required to enhance the compliance function
84  
  Improvement of company’s
empowerment credentials
     
  • PPC’s ownership credentials reduced post rights offer and winding up of elements of BEE I – work is under way to implement BEE III
           
  • BEE III to be implemented in compliance with mining charter requirements
40  
         
  • BBBEE empowerment scorecard has improved from level 8 to level 4 contributor
           
  • Continued emphasis on maintaining and improving BBBEE rating
174  
  Strategic pillar: Doubling our business every 10 years                    
  Projects executed timeously
and cost effectively
     
  • Zimbabwe milling project concluded on time and below budget
           
  • Provisional acceptance certificate received and official state opening in March 2017
63  
         
  • Ethiopia project executed timeously and cost effectively
           
  • Hot commissioning under way in March 2017 with official state inauguration of plant in April 2017
61  
         
  • DRC project slightly later than schedule due to delays in electrification of plant and 4% to 6% above initial budget
  • Project cost approximately US$300 million (previously US$280 million)
           
  • Post commissioning of plant, first truck load of saleable cement in mid-April 2017
60  
         
  • Slurry kiln 9 (SK9) project progressing timeously and cost effectively
           
  • On schedule for commissioning in 2018
55  
  Meeting of business plans in
new operations
     
  • Satisfactory volume ramp-up and pricing achieved in Rwanda
           
  • Enhanced route-to-market strategy expected to improve sales volumes and market penetration
62  
         
  • Increasing of market share in Harare area post commission of new mill
           
  • Increased emphasis on route to market
    strategies to improve market penetration
63  
  Balance sheet further
strengthened and enhanced
     
  • Rights offer and BEE I proceeds have significantly degeared the balance sheet
           
  • Rights offer process successfully concluded and winding up of residual matters relating to BEE I under way
40  
         
  • Lengthening of terms of remaining debt on the South African balance sheet under way
           
  • R1,6 billion of debt on the South African
    balance sheet extended six months to
    June 2018
40  
  At the centre of our strategy are our people and culture                    
  Delivery of excellence, innovation and solutions requires shifts in people and culture dynamics      
  • Key frameworks established for integrated talent
    management, leadership development and performance
    management
           
  • Effective implementation of key frameworks for talent management, leadership development and performance management
110  
         
  • Work to redefine PPC cultures and values under way
           
  • Finalisation and implementation of PPC
    culture and values work streams
109  
         
  • Work on defining internal processes and operating
    architecture largely concluded
           
  • Roll out of defined internal processes and entrenchment of matrix organisational structure
   
  Achieved       Did not achieve     Work in progress


STRATEGY REVIEW – KEY STAKEHOLDERS

In line with best practice, our strategic approach aligns itself to the principles of sustainable value creation, whereby we appreciate that strategy, risk and opportunity, performance and sustainable development are all inseparable elements. Moreover, in line with best practice, we have ensured that our disclosures enable stakeholders to make an informed assessment of the performance of the organisation and its ability to create value in a sustainable manner. Specifically, there is a direct link to which remuneration and incentives have been aligned to performance and sustainable value creation. Our short-term incentive scheme detailed in the remuneration report on page 91 captures company performance as well as personal performance. The scorecard for company performance includes financial and non-financial targets detailed on page 95. Specifically, the financial performance elements include EBITDA, normalised HEPS and the cash conversion ratio achieved while the non-financial performance elements include transformation, sustainability and safety.
Personal performance of executives is then scored largely on the achievement of the short-term elements of the company’s strategy as highlighted in the table above. The CEO’s scorecard is derived from the strategy and cascaded to members of the group executive committee and thereafter to the organisation as a whole. Collectively, these two dimensions (company and personal performance) drive the outcomes of the short-term incentive scheme and consequently the incentive payable.
Similarly, our long-term incentive scheme, detailed on page 92 follows that same philosophical approach of aligning performance to sustainable value creation for the benefit of all stakeholders.

Stakeholders are reminded that in the 2016 year, no short-term incentives were paid due to the subdued performance of the company and the financial position of the company. This was done despite the company attaining some of the targets set out in the short-term incentive scheme. The rights offer process that the company undertook in 2016 is not seen as a failure of our ability to execute on our strategy but rather a manifestation of a specific risk associated with the accelerated terms of the note programme. This matter is dealt with in greater detail in the chief executive officer’s report on page 30. This report also deals with the rationale for the proposed merger of PPC with a local industry player.

Our strategic aspiration is to exceed the expectations of all our stakeholders on a sustainable basis. As an indicator we discuss one measurement indicator per stakeholder group below:

Shareholders/investors     Current status     Impact on value creation     Outlook     Trend

We use return on invested capital (ROIC) as a performance measure as this tracks how well PPC is using funds to generate sustainable returns for shareholders.

This measure indicates whether PPC is achieving returns above the cost of capital, to sustainably create stakeholder value.

Formula: ROIC is calculated as a percentage of operating profit net of tax, divided by the total assets less cash and current liabilities. The calculation excludes acquired subsidiaries.

   

Historically, PPC’s ROIC range has varied between 25% and 27% while the company was not expanding capacity. Currently, the company’s ROIC is 10%, up slightly from last year’s 9%.

This reflects PPC’s capital-intensive expansion phase, focusing on capital expenditure financed by long-term borrowings without a commensurate immediate increase in earnings.

The rest of Africa projects have come online and are in the initial ramp-up phase, meaning EBITDA will be generated, but contribution returns will be minimal in the short term.

   

PPC’s expansion phase has impacted shareholder value through increased capex and resultant debt levels which could not be funded and serviced by existing operations.

Increased finance costs start to negatively impact as these projects come online, resulting in lower profitability.

We envisage that ROIC will improve once we reach steady states in new operations.

PPC sets hurdle rates per country as a determinant of investment decisions and evaluation purposes. Hurdle rates and WACC are updated every six months.

   

We expect ROIC targets for 2018 and 2019 to remain suppressed until new operations reach anticipated returns.

Given that the ramp-up phase can take up to three years, the gradual increase in earnings over this period implies a gradual improvement in ROIC.

Risks
The inability to achieve price, volume and cost expectations could negatively impact our ROIC.

Political and liquidity risks in countries where we operate could affect the ability to achieve expected business-case returns which would affect ramp-up profitability.

   
Environment and the community     Current status     Impact on value creation     Outlook     Trend

The cement industry is acknowledged globally as a significant contributor to global greenhouse gas (GHG) emissions.

Considering the extent of initiatives aimed at GHG reductions and calls for reporting from organisations like CDP (formerly Carbon Disclosure Project), it is important that PPC has an effective response strategy to climate change.

In addition, the South African government has related international obligations that are fulfilled through national inventory reporting and has committed to a peak plateau/declined emissions trajectory to be achieved by legislative mechanisms, eg pollution prevention plans and a carbon tax.

Monitoring and reporting is therefore critical: firstly, to meet the expectations of our stakeholders (including government and investors) and to engage effectively with government in the legislative reform process and ultimately comply with those requirements.

The cement and lime manufacturing processes release air emissions such as dust, sulphur dioxide (SO2), and oxides of nitrogen (NOx).

   

CO2 emissions for 2017 were flat at 765kg CO2 per tonne cement.

Reasons: Increased market demand in the Western Cape required starting up less efficient kilns.

The less efficient Hercules facility was used while the Dwaalboom bag filter upgrade project was under way.

The required product mix impacted our overall cement extension levels.

PPC monitors emissions using a combination of continuous emission monitors, portable monitors and biokinetic sampling and gas analysis.

   

Through our energy-management initiatives, PPC De Hoek’s thermal replacement of coal was increased to 10% by using waste tyres, replacing a non-renewable resource. Coprocessing projects will be extended to other PPC facilities.

PPC is implementing an energy management system, in collaboration with the National Cleaner Production Centre (NCPC).

Replacing electrostatic precipitators in Dwaalboom and Port Elizabeth with bag filters reduced dust emissions by 41%.

   

Over the medium term, we aim for carbon intensities of finished cement at under 700kg CO2/tonne.

This will be done by reducing the average heat consumption at PPC and increasing the amount of product extension.

Our mega-plant strategy, constructing SK9, and integrating efficient technologies in PPC Barnet DRC and CIMERWA will reduce average heat consumption.

Strategies to reduce gross and net emissions will also contribute to improved CO2 performance; particularly driven by biomass and alternative fuels.

Risks to meeting our targets include changes in demand which require starting up inefficient/old technology that would compromise group performance, while the lack of alternative fuel replacement and biomass opportunities or security of supply could jeopardise our alternative fuels strategy.

Aim to measure all emissions in the group using continuous emission monitors.

   
Regulatory     Current status     Impact on value creation     Outlook     Trend

The Department of Trade and Industry’s (dti) revised codes of good practice seek to transform the South African economy and a company’s BBBEE score indicates its legislated contribution to this goal.

As a responsible corporate citizen, PPC has adopted the principles of the revised codes and will continue to contribute to the benefit and growth of the South African economy, particularly skills development and enterprise and supplier development.

The revised codes comprise five elements or pillars that affect PPC’s stakeholders in various ways. The dti has highlighted priority pillars (equity ownership, skills development and enterprise and supplier development) which will ensure economic transformation, better skills and job creation in South Africa.

For most companies, the new codes have meant a substantial drop in their BBBEE level – PPC dropped from level 2 to level 8 in December 2015.

    In December 2016, PPC achieved a level 4 BBBEE rating. This significant improvement was reached a year ahead of plan. Areas that improved are skills development – due to enhanced recognition of black unemployed learnerships and PPC’s improved efforts to absorb these learners on completion. Reporting on PPC’s enterprise and supplier development initiatives also improved this year and optimum recognition was achieved.    

A good BEE score makes PPC a preferred supplier to local companies aiming to procure from compliant suppliers to achieve a 100% recognition for procurement spend.

Our efforts illustrate a sincere intent to reduce economic inequalities in society and contribute to a better life for all.

   

Our three-year BBBEE improvement plan focuses on the empowerment priorities of the revised codes and aims to improve black ownership through the planned BEE III transaction.

The economic outlook is still a concern that impacts the company’s profitability and our ability to fund these initiatives. Nevertheless, PPC aims to maintain a favourable BBBEE rating.

Reviewed mining charter was published by DMR following year-end in June 2017.

   
Customers     Current status     Impact on value creation     Outlook     Trend

The customer satisfaction survey is important to PPC as it gives us a multifaceted metric to understand our customers’ needs and an indication on how to further improve our business.

The survey also provides insights on new requirements, trends and competition.

We are thus able to identify opportunities for growth and creating value for our customers.

Our response mechanisms, aligned to customer needs, allow us to build strong brand affinity and preference with our customers.

   

PPC’s current group customer satisfaction score is 79%: RSA – 79%; Botswana – 79%; Zimbabwe – 82%; and Rwanda – 72%.

Customers noted that our strengths lie in operational excellence, customer service, the PPC brand, as well as consistent product quality.

Areas for improvement include a wider product range, pricing, managing rebates efficiently, shopper marketing and increasing technical advice and training in the business-to-business segment.

   

The bargaining power of customers has increased.

Customers are demanding more from suppliers in an increasingly commoditised market.

Failure to drive value, add partnerships and offer customised products and solutions will affect our business.

Fostering trusted relationships has taken on added significance to manage customer churn.

   

To achieve our 2020 customer satisfaction score targets (group: 85%, total RSA and Botswana: 85%, Zimbabwe: 86% and Rwanda: 79%), a number of initiatives are under way:

  • Broaden our range of products and solutions to cover the full spectrum of customer requirements
  • Use our innovation platform to drive product innovation and improvement
  • Review the rebate management process and demand creation side of retail
  • Continue managing relationships and increase the level of expert technical support
  • Build a strong, differentiated African brand

 

   
Employees     Current status     Impact on value creation     Outlook     Trend

In the previous year, we implemented a climate survey that was conducted independently across PPC to assess morale and identify areas of improvement. The same survey was repeated in 2016 to compare to prior results.

The purpose of the climate survey is to continue engaging with our employees to find ways to make PPC a great place to work, with a positive organisational climate and to determine the level of improvement and progress made on issues identified in the 2015 climate survey.

   

Latest results indicate an overall score of 74,8%, down 0,2%. All nine dimension elements measured scored high, with the top six scoring an average of 76% and the bottom three averaging 71%.

The engagement level was maintained at 76,2%, which is a positive outcome given the challenges we faced in 2016.

An action plan has been developed to address identified areas of improvement per business area including:

  • Continued focus on creating a high-performing organisation
  • Creating an environment where diversity is embraced
  • Strategic commitment to developing our leadership teams in the way they should lead and enable their teams to achieve PPC’s strategic priorities
  • Robust drive to introduce career pathing to attract and retain talent
   

An engaged workforce better delivers results and achieves business objectives.

A performance management process viewed as fair by employees will effectively embed a high-performance culture.

Awareness of company offers is critical to attract and retain talent.

Organisations that embrace diversity flourish as they are able to harness the associated value.

Cohesiveness and alignment within the leadership team can affect the morale and climate of the organisation, either positively or negatively.

All organisations are competing for talent; effective career pathing is a critical tool to attract, motivate and retain talent and to increase the talent pipeline.

   

In 2017 we will introduce an engagement survey to replace the climate survey. Initiatives will include:

  • Performance management training for line managers and employees
  • Awareness sessions on employee value propositions
  • Diversity management
  • Leadership development programmes aligned to revised leadership competencies
  • Career pathing process will be phased in from June 2017 to end-2019
   
  Improving       Similar performance     Deteriorating