Adverse movements in JSE-listed African Oxygen’s (Afrox’s) operating environment resulted in the company’s headline earnings per share (HEPS) for the year ended December 31, 2018, decreasing by 23% year-on-year to 154.9c.
Basic earnings per share (EPS) decreased by 29% to 144.8c, while diluted EPS decreased by 28.6% to 144c.
Adjusted for nonrecurring items, normalised HEPS decreased by 16.9% to 167c and EPS by 11.8% to 169.8c.
Earnings before interest, taxes, depreciation and amortisation (Ebitda) declined by 9% from R1.1-billion to R1-billion.
Operating profit, or Ebit, at R596-million, was 30.3% lower year-on-year. Adjusted for nonrecurring items, the company’s Ebit declined by 17.8%.
Overall, this reduction in Ebit was as a result of higher operational costs, additional plant breakdown costs of R56-million, liquefied petroleum gas (LPG) stock devaluation, a market price impact of R32-million and an increase in depreciation of R45-million.
Despite these challenges, however, the underlying growth in strategic markets, solid price cost inflation recovery and continued productivity gains from various efficiency projects, helped to offset the cost increases during the period.
Afrox, therefore, managed to increase its revenue by 6.2% to just over R6-billion, from a combination of higher volumes in certain sectors of the business and successful recovery of cost inflation as a result of effective price management.
Higher market prices in the LPG segment contributed to that growth and revenue adjusted for changes in LPG market price increased by 2.3%.
In December 2018, Afrox announced another restructuring to address its fixed cost base, functional market strategy and the change in operating segments. R52-million has been provided in 2018 for the 2019 restructuring.
The intended restructuring will allow Afrox to focus more on being effective in its company management, as well as improving on the announced results. Included in the restructuring is a reduction from four to three operating segments.
Afrox CFO Matthias Vogt told Engineering News Online on the sidelines of the company’s results presentation on Wednesday, that the restructuring strategy this year “is about streamlining”.
“We believe . . . we will see higher efficiencies going forward,” he added.
Meanwhile, as part of its Atmospheric Gases business, Afrox finalised the installation for the additional healthcare business and invested a further R150-million during 2018 to meet the demand in respect of this new business.
Afrox will deliver medical gases and regulators to the public healthcare sector in all nine provinces for at least five years as part of a tender awarded to it by the government. Afrox expects to earn about R1-billion in revenue from the tender.
Overall, revenue for the Atmospheric Gases business increased by 3.5%, compared with 2017, which Afrox said reflected revenue growth in all business areas and most market sectors of this operating segment.
This increase in revenue was as a result of effective pricing in line with inflation and growth from Healthcare and various Industrial Gas Bulk products and applications.
According to the company, Afrox’s gas business has demonstrated high levels of resilience with positive nominal growth in most sectors and demonstrated Afrox's ability to successfully compete in its core segment.
Within Industrial Gases – which comprises acetylene, oxygen, nitrogen and argon – the demand for bulk products was above that of the prior year, resulting in increased volumes at customer installations. On-site revenue improved from recovering higher electricity costs and volume growth from various customers, Afrox said on Wednesday.
“Satisfactory growth” was achieved in the existing Medical Gases business and increased revenue from a continued increase in demand from public and private hospitals.
Looking ahead, Afrox believes the investment and roll-out of an in-house designed and toll manufactured integrated valve for medical oxygen cylinders will deliver innovative solutions on a rental basis to the public healthcare sector.
Packaged gas volumes were below these of the prior year. Improved recovery of cost inflation due to effective pricing management underpinned the overall increase in revenue.
Ebit for the division decreased by 19.7% to R458-million, and the reduction included nonrecurring items of R55-million for plant impairments and R56-million relating to unplanned plant downtime costs.
As a result, the Ebit margin decreased by 500 basis points to 17.1%.
There was continued volume erosion in the Hard Goods segment and lower volumes in the company’s Industrial Packaged Gas business because of reduced levels of South African business activity.
Hard Goods revenue increased by 2.8% owing to the effective recovery of cost inflation from imported products through pricing despite volumes in parts of the business.
However, the continued lower demand from the mining and steel industries resulted in lower volumes owing to reduced business activity in the South African mining sector and lower output levels in the manufacturing industry, Vogt said during the presentation.
This, he told attendees, was partly offset by increased volumes in the petrochemicals sector from maintenance activities at a large South African customer.
“We experienced a reduction in volumes in welding, gas equipment and our Self Rescue Pack business, all negatively impacted on by the continued downturn in mining, iron and steel and manufacturing,” Vogt elaborated, adding that the focus on growth in sub-Saharan Africa was encouraging.
Afrox intends to continue exploring various options to strengthen supply, production and logistics of this operating segment, and reaffirmed its continued focus which will remain on cost containment, efficiencies, improved, just in time delivery and price management in line with cost inflation.
Ebit decreased by 3% to R129-million. The decline in Ebit margin by 100 basis points to 15.7% was mainly as a result of lower volumes.
Operating cash flow for the Hard Goods segment decreased by R100-million from R897-million, compared with the prior year.
Revenue for LPG, meanwhile, increased by 10.5% to just over R2.2-billion, after adjusting for the change in LPG market prices. Total volumes for the group grew by 0.8% to 158 000 t, while cylinder volumes increased by 1.7% on the back of growth in strategic South African markets, mainly as a result of the introduction of an additional 120 000 five kilogram cylinders for lower-income households.
“This cylinder delivers an affordable alternative energy solution to a large group of the population,” Afrox MD Schalk Venter said on Wednesday.
Overall, the LPG bulk business volumes reduced by 1.9% as a result of a lower demand from key industrial customers.
Revenue was negatively impacted owing to the South African government not adjusting the fuel price and the maximum refinery gate price at the end of September, Vogt said.
Excluding the 2017 and 2018 portions for one-off bulk trading, Afrox’s total LPG volumes were down by 0.3%.
Ebit reduced by 17.1% to R330-million and the Ebit margin reduced from 17.2% in 2017 to 12.9% in 2018 as a result of non-trading items.
Overall, the company’s capital expenditure had increased by R150-million as a result of the State Healthcare tender and air separation unit plant upgrades of R61-million; additional cash used to acquire shares in respect of the share incentive scheme of R57-million; and the acquisition of the remaining 30% of the equity in Afrox Zambia of R41-million.
All of this, combined, resulted in a net cash position of just over R1.1-billion.
While the economic growth outlook in South Africa remains subdued, Venter and Vogt both confirmed that the company would continue to focus on specific growth opportunities, and that it would continue with cost containment measures and effective price cost recoveries during the upcoming financial year.
Vogt, however, told Engineering News Online that, given the environment, Afrox “still had a fairly good year”.
Should the events of 2018 not repeat themselves, Vogt is confident that Afrox will have a “fairly balanced result” during 2019.
The company is eager to return to levels more in line with those seen in 2017, which was Afrox’s strongest year since 2015.