Welding, cutting and gas product supplier African Oxygen (Afrox) on Thursday reported a 57% drop in net profit for the six months ended June 30, while revenues fell by 11%.

Profit declined from R277-million in the first half of 2008 to R120-million, in a period during which the trading conditions were “extremely tough”.

“The substantial collapse in demand experienced in the last quarter of 2008 continued in the first half of 2009 as volumes declined in the manufacturing sector to which Afrox has substantial exposure. This was starkly reflected in the 22% year-on-year fall in manufacturing output in South Africa in the first quarter, the largest decline on record,” said MD Tjaart Kruger.

Afrox revenues declined by 11% to R2,4-billion, while operating profits dropped by 37% to R280-million in the six-month period.

The group curtailed its capital expenditure to R115-million in the period, and net borrowings decreased by R297-million to R1,2-billion as a result of increased focus on working capital.

Afrox reported that cost containment was a key focus, with positive results expected to work through in the second half of 2009.

Restructuring and retrenchment measures previously announced would be completed in the second-half of this financial year.

“These fundamental and structural changes to the cost base are considered essential to the company’s long-term viability,” said Kruger.

Afrox announced in May that it would reduce its headcount by 15% by the third quarter and implement operational and structural changes to save R200-million in costs.

Kruger said that it was “on course” to strip out R200-million in underlying costs by the end of the year.

The company planned to reduce filling sites, eliminate minimally profitable or slow moving product ranges, and to optimise market routes. A review of all the outlets have been completed, and the closure of branches that did not meet the minimum return thresholds, was under way.

“Identification of savings is now part of the business process and from this Afrox expects to achieve ongoing efficiencies.”

In the present climate, Afrox maintained a cautious outlook amid indications that half-year results for 2009 were likely be a reflection of business trends through to fiscal year-end.

The company stated that it would remain profitable and cash flow positive for the full year.

For the six months to June, volumes, production and labour costs remained under pressure. Sales volumes across all products recorded slightly improved increases month-on-month in the second quarter but off a severely curtailed demand base.

In response to these extreme trading conditions, Afrox maintained high market-place visibility to defend market share in the short-term and position the group for growth when economic constraints ease.  

Other African operations continued to achieve “very good” results, contributing 27% to the group’s half-year profits.

Afrox noted that infrastructure spending in South Africa remained an opportunity.

The company also stated that its capital expenditure programme, embarked on a few years ago, was coming to fruition. The capacity enhancements as a result of this programme have positioned it for future growth.