Nampak CEO finds Africa resilient despite uninspiring year
IT’S been a fairly tough start for Nampak CEO Andre de
Ruyter, who, since joining the packaging company in April last year, has seen its share price slip 8%. Nampak’s home base is subdued, and this year’s oil price slide has dulled the growth story for African countries, in which Nampak has enjoyed heady expansion. Business Times asked him . . .
You’re facing low growth at home, African economies are wobbling, and in your last set of results your glass division slumped to a R70-million loss. How long will that take to fix?
The issue at glass really coincided with the late construction start of the third furnace project, which was due to the fact that an important customer had not signed the off-take agreement that was fundamental to underpinning the economics of the project. Then there were issues around planning and scheduling.
Our key productivity ratios for this plant then dropped quite a lot, which had an impact on profitability, and to overcome that a whole series of interventions were launched.
They included the replacement of senior management and simplifying our product portfolio. We reduced the number of SKUs [stock key units] in that business by about 25%. The degree of complexity that had throughout the entire system really cost us quite a bit.
We are quite optimistic about the outlook for that business in the next financial year.
Sanlam’s CEO, Johan van Zyl, recently said business on the continent have become quite pricey — are you finding the same issue? Or has the drop in the oil price meant that sellers are getting more realistic?
There is a considerable amount of private equity money available for investments in Africa. Typically, private equity money has the ability to pay higher multiples than we would be able to justify because [private equity companies] have a different time investment horizon than what we would, so they have chased up multiples for potential acquisition opportunities in the rest of Africa.
We try to be very disciplined in how we evaluate these acquisition opportunities, to make sure we don’t overpay, and of course there’s always the thorny issue of being able to conduct a proper due-diligence and acquire a business that’s fully compliant from a tax and legal point of view. And we’re adamant that we will not compromise on our governance as we acquire businesses.
You must have Tiger Brands in mind . . .
I wouldn’t be able to say [laughs].
But if private equity money has chased up multiples, would Nampak then rather consider setting up its own businesses — notwithstanding the slower growth that it may bring?
When you look at the long- term return that you get from an acquisition, it is capped by the fact that you have to amortise goodwill, which is the premium that you pay over net asset value. When you do a greenfields investment, you do not have the same goodwill issue that obviously dilutes future returns.
There is a lag in project execution, so it takes longer for you to start generating returns, but the overall balance in the equity returns from a greenfields investment tends to be substantially higher over the life of an investment than an acquisition.
So you're more inclined to establish new operations than you are to buy companies?
Yes, absolutely.
Your Bevcan operations in Africa are growing strongly, but your African metals packaging business in Nigeria had a much tougher time. Why is Bevcan doing so well – is it simply the product?
Two different dynamics were at play there: the first is that our metals packaging business in Nigeria — excluding Bevcan — is far more exposed to general consumer sentiment and de- mand than the Bevcan business. It seems to us that the beverage business in Africa is remarkably resilient, and that the African consumer has a preference, particularly at the higher end of the market, for purchasing beer and other beverages in a can, and that tends to be because it’s a cool package, it’s safe and sealed.
The impact of the drop-off in consumer demand as a consequence of the lower oil price in Nigeria was shown very clearly in our Lagos business, and that business is also quite exposed to the Nigerian currency. That was not seen in the Bevcan business, because we price in US dollars. We also have a beverage-can business in Angola and that also continues to do very well, and in fact we are commissioning a second line there as we speak.
Your Africa divisions’ contribution to trading profit was 38%, from 27% last year. At what level is it likely to settle? Will it become the dominant contributor to Nampak?
The contribution from the African operations was somewhat flattered by the less-than-positive performance we saw from our South African businesses. There’s a lot of effort going into restoring the profitability of our South African businesses, a lot of investments going into those assets, so I’m quite optimistic that we’ll see an improvement from those businesses. Having said that, we do see that the opportunity for us to grow does lie predominantly in Africa — that is where the consumer is still showing significant appetite for packaged, fast-moving consumer goods and we want to participate in that growth.
For those who’ve become a bit jaundiced about the African growth story, would you say it’s unfair to lump Nampak with those companies that are having a tougher time of it now than they were a few months ago?
The benefit we have is that the businesses that we sell to — mainly the major beverage companies and the major brewers — have access to supply chains that are not as dependent on the formal retail sector as some of the retailers would be. The day when the average African consumer can push a trolley down an aisle and fill up with groceries is still, I think, some way off. But that does not prevent the lower-middle-class African consumer from purchasing a beer from the local spaza shop, which is your typical informal channel.
Back home, are you being as badly affected by Eskom outages as some of your manufacturing peers — like Hulamin, for example?
We are trying our level best obviously to work our way around it. It depends very much on the municipality in which we are located. We don’t buy electricity directly from Eskom, we rather buy it through the municipality, so a lot depends on the robustness of the local municipality’s infrastructure.
In our glass business we’ve invested in a UPS [uninterruptible power supply] system that allows us to run the plant independently from an outside supplier, and that has really helped us a lot. In the rest of South Africa, we find local authorities tend to be very responsive to local industries: they would rather load-shed residential areas and agree with industry to shed some load, but still keep the balance of operations running.
It hasn’t been nearly as bad as it could have been, had the local authorities not been so responsible.
Can you quantify the cost of power cuts, though?
As part of the first furnace project at glass we invested R110-million in this UPS system, which is of course a significant capital outlay that we would not have had to incur in the absence of load-shedding. In other parts of our business, we have invested about R50-million in back-up generators.