PPC reports ‘solid’ results despite challenging trading conditions

28th June 2019 By: Simone Liedtke - Writer

Despite having had to navigate through challenging trading conditions across the markets in which it operates, cement producer PPC on Friday reported a 60% increase in its basic earnings a share to 16c, and a 33% increase in its headline earnings a share to 20c for the financial year ended March 31.

CEO Johan Claassen described the results as “solid” and said the successful implementation of the FOH-Four strategic priorities had realised significant cost savings for the company and positioned the group “well” for the future.

The company intends on reaching its business objectives by following a definite strategy aimed at growth by introducing the FOH-Four strategic priorities, namely optimizing the financial, operational and human capital of PPC, while also addressing these priorities as the company’s foundation for “creating long-term sustainable value for all stakeholders in future”.

Group revenue for the period rose by 1% to R10.4-billion, while cement volumes increased by 1% to 5.9-million tonnes.

A higher cost of sales in the Democratic Republic of Congo (DRC), Southern Africa cement and the materials division resulted in a 6% increase in the group’s cost of sales to R8.4-billion.

Group overhead costs, meanwhile, decreased by 19% to R260-million, benefitting from head office restructuring and the R70/t cost savings initiatives in its Southern Africa operations.

Group earnings before interest, taxes, depreciation and amortisation (Ebitda) increased by 4% to R1.9-billion, while net movement in cash and cash equivalents saw an inflow of R126-million compared with an outflow of R59-million in the previous financial year.

This was aided by improved working capital management.

Finance costs, however, rose by 1% to R681-million as lower finance charges in South Africa were offset by higher finance costs in the rest of Africa and, impacted by rand weakness, PPC’s gross debt increased by 6% to R5-billion.

About 69% of the group’s debt is located outside of South Africa.

CFO Tryphosa Ramano said positive free cash flow was used to repay debt obligations, which remained within targeted levels.

DIVISIONAL REVIEW

PPC’s Southern Africa cement division, which includes Botswana, contributed slightly less revenue of R5.4-billion.

Volumes declined by 2% to 3%, with both the consumer and the construction industry customer segments experiencing market pressure.

This was compounded by increased competition from imports, which rose by 84% for the 2018 calendar year, and higher levels of blended product production, PPC explained, adding that average selling price increases of 1% to 2% were realised during the period.

Cost of sales, however, rose by 6%, driven primarily by a 10% increase in distribution costs on a per tonne basis, which was as a result of a 30% increase in fuel prices for the period under review.

All other production costs were well controlled within the 5% to 7% range. The commissioning of Slurry Kiln 9 (SK9) and an unplanned shutdown at is Dwaalboom operation resulted in a one-off negative impact of R78-million on Ebitda which ended the period down at R957-million.

SK9 is PPC’s R1.7-billion project, which was built with the intention of increasing cement production at Slurry from 1.2-million tonnes a year to 1.9-million tonnes a year, following first clinker production at the start of 2018.

The company achieved R60/t in savings since October 2017, Claassen added, noting that the company “will continue to drive operational cost efficiencies in order to achieve targeted savings”.

The materials business, comprising the aggregates and ready-mix and lime divisions,

delivered revenue growth of 7% and contributed R140-million to group Ebitda.

“Our rest of Africa operations delivered a pleasing performance [by] having grown volumes by 10%, increased revenues by 2% to R2.8-billion and achieved 10% growth in Ebitda to R810-million,” Claassen said.

He added that volumes were supported by the ramp-up of operations in the DRC and a positive contribution from Rwanda, post the debottlenecking in the first half of the financial year.

The DRC operations, Claassen noted, were taking place “in an environment where there is only 30% capacity utilisation”.

However, from a costing point of view, Ramano said during a presentation on Friday that costs in the DRC remained high and that the company was renegotiating with funders to restructure the group’s debt in the DRC.

Negotiations, she explained, were under way to add a two-year capital holiday.

PPC’s first repayment is currently scheduled for January 2020.

“The discussions are very positive and that will help us from a liquidity point of view,” she noted.

Despite the successful implementation of a route to market strategy, PPC Zimbabwe experienced a weaker cement market, clinker shortages and a depreciation in the functional currency in the second half of the financial year which resulted in a contraction of revenue to R1.4-billion and a decline in volumes of 5%.

Ebitda reduced to R461-million.

“PPC Zimbabwe is operationally self-sufficient and is driving local procurement and exports to reduce forex requirements. Debt obligations continue to be serviced using in-country cash resources, while management has implemented contingency measures to mitigate the impact of the liquidity challenges,” Claassen explained.

In Rwanda, Cimerwa achieved revenue growth of 10% to R885-million on the back of a 5% increase in volumes. Revenues were additionally supported by higher realised cement prices in dollar terms.

According to Claassen, Cimerwa was “well-positioned to take advantage of the growing cement demand”.

However, Ebitda declined to R246-million owing to the planned shutdown for debottlenecking and clinker imports during the shutdown period, which amounted to a nonrecurring Ebitda impact of about R100-million.

In the DRC, PPC Barnet’s production ramp-up bolstered revenue to R494-million from R144-million in the prior financial year, while the entrenchment of route-to-market initiatives supported the business to achieve a market share of between 25% and 30%, and Ebitda of R108-million was boosted by stringent cost control.

Although still in ramp-up phase, Habesha, in Ethiopia, achieved volumes of more than 500 000 t. An action plan is being implemented to resolve the operational challenges including suboptimal plant performance and pricing which resulted in an equity accounted loss of R67-million, PPC confirmed on Friday.

“We are committed to achieving sustainable price increases, optimising operational efficiencies and reducing financial leverage to counter the challenging operating environment in South Africa, which is expected to continue,” Claassen averred.

PPC also intends to continue focusing on achieving its R70/t profitability initiatives, assess opportunities to refine its network and optimise its support structure.

“Our rest of Africa operations are well-positioned to take advantage of growth supported by stable political environments. PPC Zimbabwe continues to focus on cash preservation, self-sufficiency and optimising operations, while Cimerwa is expected to capitalise on expanded production capacity and output,” Claassen noted.

PPC will continue the ramp-up of its DRC operations with a focus on maximising Ebitda.

CARBON TAX UPDATE

PPC MD for South Africa Njombo Lekula, meanwhile, commented that the company expects the Carbon Tax, which came into effect in South Africa on June 1, to have an impact on the business going forward. That cost will be passed on to consumers.

In this respect, Lekula explained that, even though the current tax structures proposed a tax of between R6/t and R120/t, PPC qualified for certain allowances which were likely to reduce the carbon tax impact.

This impact, he noted during the presentation, was anticipated to be in the region of between R100-million and R120-million a year for cement and lime.

The carbon tax, Lekula added, would be treated as an excise or indirect tax.

Regulations on the exact mechanism for levying this tax were still outstanding.