GROUP MANAGING DIRECTOR’S REPORT

Notwithstanding the challenges presented by the unprecedented economic conditions of the last 18 months, the Group is confident it will reach its operational and financial targets in the current five-year cycle.

The effect of both declining commodity prices and the appreciation of the rand on the Group’s earnings, were highlighted during a year in which reduced demand for products in the declining agricultural, manufacturing and mining sectors placed pressure on margins and profitability.

Conditions continued to reflect the global recession that disrupted Omnia’s markets in 2009. The tough conditions were most keenly felt in the first half of the 2010 financial year.

In the face of challenging conditions, the Omnia Group continued both to provide its customers with high-value customised solutions, and to invest for the future in its areas of expertise. To achieve this meant reducing the Group’s cost base and refocusing certain operating units in the chemicals business for greater effectiveness. We continued to make, and integrate, strategic acquisitions and partnerships aimed at strengthening Omnia’s position in significant market sectors.

In the agricultural sector, the impact of the unusual buying patterns experienced in the first half of the 2009 financial year carried into the Group’s results for the 2010 financial year. As we reported last year, farmers stockpiled fertilizer in an attempt to avoid the run in prices over that six-month period. Prices tumbled as rapidly and unpredictably as they had risen, and the Group was left with substantial volumes of fertilizer stocks at the end of the prior financial period.

Although this inventory was fairly valued at the time at R9,45 to the US dollar, raw material prices continued to decline and the strengthening of the rand to R7,29 to the US dollar resulted in material stock write-downs. The Group’s fertilizer stocks were devalued by R350 million by the interim stage of the 2010 financial year. Further devaluations, albeit to a lesser degree, of fertilizer stock took place after September.

Within Protea Chemicals, a similar devaluation of polymer stocks resulted in trading at near zero margins and occasionally below original cost.

By the end of September 2009, which marked the end of the first half of the 2010 financial year, there were signs of a slow economic recovery.

Investing in our strategic position

Notwithstanding the challenges presented by the unprecedented economic circumstances of the last 18 months, we have continued to position the Group for a future in which the global importance of securing sustainable supplies of water, food and energy, can only heighten. The Group is well positioned in the maintenance and management of potable water, the maximisation and purification of water resources used in mining and manufacturing, and the provision of fertilizers to maximise food production.

OUR STRATEGY As a company which operates across defined economic sectors, each with its own distinctive characteristics, Omnia reinforces its competitive positioning by:   Focusing on unique market offerings that create value and, in so doing, earn a premium.   Providing specialised solutions to the chemical, mining and agricultural markets.   Concentrating on growing its international business.   Meeting international standards for Responsible Care in managing its operations.

The Group’s strategy to add value to the provision of such basic commodities, in which sustainability of supply is indivisible from global and regional wellbeing, augurs well for its growth prospects.

The World Economic Forum warns that many countries are on the verge of “water bankruptcy”. It predicts that the current situation, where one in three people globally is affected by water scarcity, could worsen. Population growth is expected to exacerbate the situation to the point where half the world’s population is faced with water shortages.

The Group is active in the water resources sector through Zetachem, which supplies water treatment chemicals used in the production of potable water. Complementing this business is Nalco Africa, a new associate between Omnia and Nalco of the USA, the world leader in industrial water treatment and process improvement. Established in early 2010, the associate company will assist its customers to reduce their consumption of energy, water and other natural resources, as well as minimise their environmental emissions.

The United Nations predicts that agricultural output will need to be doubled and food production increased by 70% to feed a world population expected to grow to 9 billion people by 2050. However, the increasing shortage of arable land, with land available for cultivation having reduced from just over 0,5 hectares per person in 1950 to 0,25 hectares per person in 2000, is hampering efforts to feed the world.

Africa lags behind the world in agricultural production. Inefficient agricultural techniques have resulted in arable land being lost to wind, water and soil erosion. As the quality of farming land has deteriorated, subsistence farmers have expanded their fields and deforested large tracts of land.

Agriculture, traditionally the economic base for many African countries, is moving steadily away from its origins as a subsistence activity geared to meet local needs. As investments in commercial farming increase and chemical fertilizers are introduced to boost yields per hectare, the importance of the sector as a base for growth and development within Africa will increase. Ultimately, due to the vast tracts of land still available for agriculture in underdeveloped countries, Africa could find itself becoming a net exporter of food.

Through the production and supply of its range of fertilizers and its commitment to mentoring and training of emerging farmers, Omnia is contributing to developing farming practices that support higher yields per hectare and sustainable crop production.

Investing in new technology to enable responsible growth

Omnia continues to focus on the use of energy efficient technologies and reducing the Group’s environmental impact. The implementation of new technology at Omnia’s Sasolburg plant has significantly reduced greenhouse gas emissions and has achieved a 63% reduction in the facility’s carbon footprint.

In line with Omnia’s investment in new technology, is the authorised construction of an additional nitric acid complex. At a cost of R1,4 billion, the plant will be partially financed through a R1 billion equity programme in the form of a rights and claw back offer.

The development of the complex will significantly enhance the Group’s capacity to produce nitric acid and ammonium nitrate. The world-class technology involved, represents one of Omnia’s largest investments yet, and demonstrates the Group’s commitment to, and confidence in, South Africa’s mining and agriculture sectors at a time when few other projects of this magnitude are being undertaken.

Adjacent to the existing plant, the new complex will more than double present capacity.

Investing in specialised skills and customer service

Omnia’s major strength lies in its ability to provide differentiated offerings supported by specialised knowledge and expert advice. The Group’s skills base, which includes chemical engineers, mining engineers, agronomists and other specialists, has contributed to the Group establishing a reputation as a “knowledge leader” in its areas of operation. This has led to strong relationships with customers – a point of major differentiation between Omnia and its competitors.

In addition, the Group is investing in enabling technology to ensure that the expertise of our people is supported by the highest standards of customer service. Omnia has continued with the installation of the sophisticated QAD software system, which will enable operating efficiencies and improved customer service by providing a standardised information and transactional platform across the Group.

Financial and operating performance

Group revenue for the year under review decreased by 21% to R8,8 billion (2009: R11 billion) and an operating profit of R58 million was recorded (2009: R491 million). Basic earnings per share were down by 89% to 122,0 cents (2009: 1 107,4 cents), and headline earnings per share fell to 80,6 cents (2009: 1 114,2 cents).

Total running expenses net of other income decreased by 6% to R1,1 billion (2009: R1,2 billion).

Carbon credits, generated since 2008, were sold for the first time during the year under review.

Chemicals

Protea Chemicals operated in a challenging environment characterised by decreasing commodity prices and a strengthening rand, which squeezed margins and resulted in the write-down of higher priced stocks in the polymers business.

Revenue contracted by 26% to R3,3 billion (2009: R4,5 billion) with a corresponding reduction in operating profit of 23% to R152 million (2009: R198 million). The operating profit margin was maintained at 4,5%. However, if the profit on contribution of business to Nalco is excluded, this fell to 4%.

The assets of the EcoGypsum™ plant, which commenced production during the 2009 financial year and produces gypsum for cement manufacture and use in cement board (EnviroGypsum™), were incorporated into Protea Chemicals during the year. This gave the chemicals business full financial responsibility for this manufacturing unit.

The acquisition of Highchem in East Africa and its incorporation into the polymers business was concluded. However, production problems at Sasol Polymers, a key supplier to the business, negatively impacted results.

During the year, the Group acquired Petroleum Fine Products. The company produces petroleum jelly, a mainstay product in the consumer care field, and technical oil. The business will be integrated into Protea Chemicals’ Consumer Care division.

The acquisition is in line with the Group’s strategy to strengthen vertical integration within Omnia’s businesses to improve margins. It is consistent with the Group’s stated intention to reinforce the chemicals business through an increased focus on product manufacturing, rather than confining its activities to distribution. This will enable Omnia to take advantage of opportunities within its areas of interest as they arise.

Mining

With the decline in global demand during the second half of the 2009 financial year for many of the commodities mined within South Africa, several of the Mining division’s major customers cut back production. This had a knock-on effect on purchases of explosives, which decreased orders placed with the Group. The price of ammonium nitrate, one of the main raw materials of explosives manufactured by Omnia, declined sharply in late 2008, after reaching record highs. This resulted in margins being squeezed.

Sales of mining chemicals were disappointing with volumes, particularly to uranium mines, not meeting expectations. However, this decline is expected to be temporary as global energy demand drives the demand for uranium used in nuclear energy plants.

The diversified nature of its activities shielded the Mining division from the worst effects of the recession until markets began to improve towards year end. Revenue for the period reduced by 16% to R1,8 billion (2009: R2,1 billion). Operating profit of R212 million (2009: R269 million) was 21% below that of an extraordinary 2009 financial year, with the operating margin declining marginally from 12,7% for the year ended 31 March 2009 to 11,9% for the year under review.

The slow but steady rally in commodity prices, which is being fuelled by demand for coal from the energy sector and developing countries such as China and India, bodes well for an improved performance in the next financial year. The demand for bulk explosives, although lower compared to last year, has shown good signs of recovery.

The division commenced production of shocktube at the Losberg facility. This will add a new dimension to the company by enabling it to rapidly and flexibly respond to demand and deliver on customer orders as required.

Volume growth and profitability will be assisted by the growing acceptance of shocktube technology for use in deep level mining. Traditionally dominated by standard “cap and cord” technology, this sector has begun to appreciate the advantages of shocktube technology, which include safety improvements, better control of explosions and higher ore yield.

BME, which has led the field in the use of shocktube technology in open cast mines, is well positioned to benefit from this transition and is expected to substantially increase its market share.

Another example of BME leading innovation in explosives application technology, is its home-grown development of electronic delay detonator technology. Rated as one of the most advanced systems of its type in the world, this user-friendly system will enable mines to make further safety gains, reduce ore extraction costs, and increase operational efficiency and productivity.

Agriculture

During the 2010 financial year, fertilizer selling prices decreased significantly by an average of 35%. As a result, divisional revenue fell by 17% to R3,7 billion (2009: R4,5 billion). Due to the challenging trading conditions and inventory write-down detailed previously, an operating loss of R85 million was recorded for the period (2009: R410 million profit).

The market conditions that led to farmers stockpiling fertilizer began to abate as raw material prices returned to more realistic levels, bringing some stability to a previously highly volatile market. During the current financial year, farmers reverted to traditional buying patterns and confidence has returned to the industry as a result of good maize crops. Sugar production, which has been ramped up to take advantage of high prices, will add impetus to sales.

As Omnia is one of only two South African suppliers of a complete range of granular, liquid and speciality fertilizers, the benefits of a recovery in agricultural prosperity will be significant.

The division will continue to support growth within the agricultural sector by assisting farmers with the technical expertise required to increase crop yields and improve the fertility of their soil. Omnia’s ability to offer its customers the best agronomic advice in all aspects of effective crop production will continue to be a major competitive differentiator.

Running the business for long-term success

Omnia believes that it has an obligation to the society from which it derives its success to be an exemplary corporate citizen. The Group activates this belief by applying sustainable practices across its operations, adopting sound employment policies and by running the business for long-term success. In so doing, the Group contributes positively to building a brighter future for all South Africans.

In line with our positioning as a “knowledge leader” in our areas of focus, we invest significantly in training and development opportunities for our employees, particularly those discriminated against in the past. Besides the strategic importance of maintaining a learning culture within the Group, this investment represents a tangible contribution to building the skills base required to position South Africa as the economic powerhouse of Africa.

More broadly, the Group plays a part in improving the conditions and economic prospects in the communities in which it operates through focused initiatives designed to support activities that are aligned to its areas of operational focus. Further details are contained within the sustainability report on pages 34 to 64.

The Group’s commitment to managing its environmental impacts finds expression in the adoption of environment friendly production practices and cleaner technologies, as well as the steady reduction of the company’s carbon footprint.

The sustainability report provides a comprehensive overview of the Group’s governance and management practices, impacts and contributions in the economic, social and environmental spheres.

Prospects for growth

During the year under review, the Omnia Group entered the first year of a new five-year planning cycle. Although the unprecedented events of 2009 have proved challenging to the business, we are confident we will reach our operational and financial targets over the five-year cycle. This confidence stems from the Group’s strong strategic positioning in sectors vital to future development.

A factor that must be considered, however, is the continuing strength of the rand. Should this continue, it would impact on the translation of the results of our international operations, export markets and sales volumes, and ultimately the overall performance of the Group.

On the positive side, the indications are that market conditions will continue to improve going forward.

The 14-month period of negative growth in manufacturing output ended in July 2009. The positive statistics since then augur well for the Chemicals division, although rand strength will be a constraint and could limit the benefit of the upturn in manufacturing.

The signing of several key agreements by the Mining division will provide the impetus for an improved performance going forward. The increasing demand for platinum, copper, iron ore and coal should bolster this outlook.

The improved agricultural environment, with the growing focus on biofuels, should continue to buoy the fertilizer industry. The division’s strong position in Africa is an avenue for future growth and increased sales.

In addition, the financial structuring of the nitric acid complex will preserve Omnia’s strong balance sheet, which will be used to finance suitable growth opportunities while safeguarding the Group from further volatility in world financial markets.

We will continue to assess acquisitions prudently and make careful investments to strengthen our strategic position.

Appreciation

During the year under review, Omnia regrettably lost the services of Edu Cloete, joint managing director of the Chemicals division. A highly respected leader and colleague, Edu took early retirement bringing to an end his substantial contribution to the company over many years. Edu’s dedication to Omnia is highly appreciated and we wish him well in his retirement.

My thanks to my colleagues on the board who make their support and wisdom available at all times, and to my management team whose dedication and skill helped steer the Group through stormy seas into calmer waters. I salute the persistence and positive attitude of all our people. I extend special thanks to Delwin Eggers who announced his retirement with effect from 31 August 2010. His contribution to the executive team has been invaluable.

To our customers, who have remained loyal to Omnia through one of the most challenging periods in its history, we extend our highest appreciation. We look forward to building on our valued partnerships during the year ahead.

RB Humphris
Group managing director