As economies shift their focus towards containing the spread of and the eradication of the Covid-19 virus, packaging products manufacturer Nampak on March 30 lamented that the pandemic was expected to further hinder an already burdened economy, and that it would put further pressure on consumers’ disposable income.
While some businesses may inadvertently benefit from the outbreak, owing to demand increases for food and essential products, Nampak said these would be short-term gains and unlikely to deviate significantly from the general economic outlook.
The current economic uncertainty has resulted in a weaker rand against major foreign currencies, as well as unpredictable share price movements amid concerns over debt levels, covenant compliance, business continuity and the lower oil price’s impact on liquidity in Nampak’s secondary key markets of Angola and Nigeria.
Since the last reported financial period, Nampak has seen healthy liquidity in its operations in both Angola and Nigeria.
In Angola, specifically, a currency devaluation of more than 32% since September 2019 and a lagging wage inflation have placed consumer spending under severe pressure. This is alongside weak demand for beverage cans having prevailed throughout the period, ultimately resulting in a reduction of trading income from Angola at near break-even levels.
Cash balances in this country have reduced to the rand equivalent of R624-million, Nampak noted, adding that there was also a transfer of R639-million to an offshore treasury from Angola since September last year.
Meanwhile, in Nigeria, while general consumer demand has been somewhat constrained, demand for beverage cans has remained positive, Nampak said in its statement on March 30. Cash levels were maintained at the “optimal level” that is required to fund day-to-day activities of operations, while R543-million was transferred to settle outstanding supply chain financing provided by the group.
This has limited Nampak’s exposure to the currency movements in Nigeria.
The contraction in the Zimbabwean economy continues despite the establishment of an inter-bank foreign exchange market in February 2019, and the Zimbabwean dollar continued to be weak and devalued by 18% in the five months ended February 2020.
Liquidity in this region remains challenging, Nampak said. Nampak has not provided further funding to its Zimbabwean operations since April 2018, considering that these businesses are cash generative and self-funding.
Locally, in South Africa, however, with the Covid-19 pandemic having led to a three-week national lockdown from March 26, only the production and supply of essential goods and services are exempted, which has resulted in a number of Nampak factories having remained operational to date.
While the primary impact of the lockdown will only be on product lines related to alcohol packaging and some smaller non-essential packaging products, Nampak said it had implemented business continuity plans, provided guidelines and support, as well as empowered local management in its various markets to implement practical measures to minimise the impact on employees and ensure continuity of supply to customers, where permitted.
Detailed risk assessments of Nampak’s inbound supply chain have so far indicated that there are minimal disruptions from its suppliers and that it currently has an adequate supply of raw materials in its businesses.
“All measures currently in place will be assessed on an ongoing basis to determine their effectiveness, and enable amendments where required, to ensure the safety of employees and continued supply to customers,” the company said in its statement.
While the impact on customer demand in South Africa is unknown at this stage, Nampak said that Divfood will likely experience a temporary hike in demand driven by the stockpiling of food cans from higher living standards measure customers.
The demand for beverage cans will, however, be impacted negatively in the short term owing to restrictions on alcohol sales during the lockdown period. Additional health concerns by consumers may lead to pack share shifts in alcohol consumption away from returnable sharing packs and towards single serve pack like beverage cans, Nampak mentioned.
The impact on overall demand for both food and beverage cans will only become more apparent during the second half of the year, Nampak said.
DIVISIONAL UPDATE
Nampak’s results for the period are reflective of the weaker economic growth and difficult trading environment prevailing in its key markets.
Except for Bevcan Nigeria, all other major businesses have shown significant downward trends for revenue, with the Rest of Africa being impacted more negatively than South Africa.
Results for all operations in Zimbabwe will also be impacted by hyperinflationary accounting, while Bevcan SA continued to defend its market position with operational excellence initiatives to drive continuous improvement, reduce costs and uphold and improve safety levels.
Revenue and trading profits were both lower than expected as the total beverage can market contracted in line with restrained consumer spending. As a result, Nampak management intends to focus on further reducing operational overheads and other cost structures in order to defend Nampak’s strong market position.
Divfood’s volumes were lower for food cans owing to the loss of a significant customer in the second half of 2019 and remained lossmaking for the period.
While short-term demand spikes for food cans are expected owing to the Covid-19 outbreak, Nampak said these will most likely only impact the second half of 2020’s results.
“The rationalisation of Divfood is unfortunate but necessary and is progressing as planned,” Nampak said, advising that consultations with employees, trade unions and other stakeholders continued and that operations were being streamlined to consolidate the cost base significantly and return the business to profitability.
As a result, retrenchment costs will be incurred during the year.
Beverage can demand at Bevcan Nigeria has continued to grow at a healthy rate, where trading profit remained stable and the operation’s safety record continues to be at more than three-million incident-free hours worked to date.
Successful operational excellence initiatives enabled Nampak to increase the potential output of the line to up to one-billion cans a year, thereby pushing out any short term capital expenditure requirements for a second production line.
The general metals packaging business continued to experience subdued demand in line with the rest of the economy and volumes and trading margins were lower for the period.
Beverage can volumes in Angola, meanwhile, remained very weak, and in response, management continued to reduce employee and other fixed costs, but owing to the loss of volume, trading profit was significantly lower.
Marketing initiatives to grow can volumes are in progress and Nampak still believes in the medium- to long-term growth prospects of this market.
Aluminium beverage cans remain popular in this market, notwithstanding the softer current market demand. It is therefore expected that demand will improve once wage inflation catches up with the impact of currency devaluations.
The line 1 conversion from steel to aluminium had to be halted owing to the Covid-19 pandemic, but will be completed during the second half of this year.
According to Nampak, this delay is not expected to have any negative impact on profitability.
Turning towards plastics, South Africa performed as expected during a period characterised by lower market volumes for liquid plastics, which was adversely impacted by a fire at a key customer’s premises.
Trading margins improved as the plastics division started to see positive results from the restructuring of this business. Plastics in the Rest of Africa largely comprise Zimbabwean operations, and demand in this market was lower owing to the challenging economic conditions and a limited supply of raw materials.
For paper, raw material supply management was also challenging for Hunyani in Zimbabwe owing to the lack of foreign currency liquidity in the market. However, Nampak said that the demand and profitability in this business remains strong.
Cartons in Nigeria will only be included for four months to the effective date of its disposal in January. Despite muted volumes in Zambia and Malawi, the profitability of these units has improved relative to the previous financial year.
Nampak has continued to rationalise its portfolio and focus on its core businesses, with the disposals of Nigeria Cartons and Nampak Plastics Europe having been completed since the financial year ended September 30, 2019.
The glass disposal completes the originally indicated trio of disposals, yielding expected net proceeds of about R1.9-billion. The glass disposal became effective on February 22, when all suspensive conditions were fulfilled or waived and proceeds of about R1.5-billion are expected to be received on March 31.
The Nigerian competition authorities’ approval of the sale of the Cartons Nigeria business was received in January and proceeds of €29-million have been received offshore with all conditions to this transaction having been fulfilled.
Nampak Plastics Europe, inclusive of the pension fund liability of about R500-million, was disposed of effective December 13, 2019, for a nominal amount, and this disposal will deliver future cash flow savings as a result of Nampak no longer being required to fund operating losses, major capital expenditure requirements and yearly contributions to the offshore defined benefit pension fund.
The proceeds from the disposal of Cartons Nigeria will immediately be used to reduce dollar denominated interest-bearing debt, while the R1.5-billion proceeds from the Glass disposal will initially be used to reduce South African interest-bearing debt and, when considered appropriate, are earmarked to further reduce the group’s exposure to dollar-denominated interest-bearing debt.
Further, capital expenditure for continuing operations for the full year was planned to be between R600-million and R750-million, but is under even more stringent review as a consequence of Nampak adopting a cash conservation approach during these uncertain times and will be kept to an absolute minimum for the short to medium term, without compromising the group’s asset base.