Chemicals division review

Gavin Brimacombe Managing director, Chemicals division

Financial performance

Financial highlights

* Restated

Financial performance

Manufacturing output growth in South Africa remained modest, and tenuous – failing to recover fully from the marked output reduction in the prior year. This was a function of weak domestic demand, import substitution of locally manufactured goods and a poor export performance from the manufacturing sector – all closely linked to the continued strength of the rand.

In this environment, we were pleased to maintain volumes. A reduction in unit pricing, the increase in international prices from mid-2010 being mitigated by rand strength, and some margin compression led to a reduced gross profit contribution. Overheads were similar to the previous year, as the benefit of restructuring operating costs achieved this year only took effect in the latter part of the year, and was thus insufficient to offset the reduction in gross profit. The net result has been a 58% reduction in operating profit to R64 million (2010: R152 million). Working capital was well managed, ending the year at R252 million (2010: R264 million).

Operational performance

This year the global chemical market moved from a recovery to an expansionary phase. In response, international chemical prices increased from mid-2010. These price increases were supported by feedstock and energy input costs arising from steadily increasing oil prices during the period.

The strength of the rand offset much of these price increases and, as a consequence, we saw a reduction in average unit prices over the prior period. The volatility of currency markets, relative to the timing of international purchases, added to the complexity of managing unit prices.

In calendar 2010, South African manufacturing activity grew by 4,9% (year on year) – modest relative to the 12,9% (year on year) decline in 2009. However, not all subsectors contributed equally and to have achieved any volume growth has thus been a satisfactory performance.

Given the tight market circumstances, much of the focus during the year was on cost containment and efficiency improvements.

A key initiative this year was finalising the new ERP system implementation started in the previous year. As seems inevitable with such an implementation, and despite detailed and intensive planning, this stressed the business, and in some cases, as a result, our customer service levels were unsatisfactory. The system is now meeting expectations. Customer service levels have improved, albeit not to the demanding levels targeted. We anticipate that further enhancements to our new system will in time lead to it becoming a significant competitive advantage and a point of meaningful customer service differentiation.

A full warehousing and logistics capacity and performance review led to the closure of a number of rented facilities to consolidate our operations in our owned facilities – with attractive unit operating cost benefits achieved.

Staff numbers were strictly managed throughout the year. An increase in employee numbers outside South Africa was offset by a reduction in South Africa. The net effect was a reduction of some 5% in total headcount by the end of the year.

Our ongoing commitment to conform to the highest safety, health, environmental and quality standards of handling chemical products has led to the independent accreditation of all our major sites as meeting international Responsible Care® benchmarks. Additionally, a number of our sites have been IMS (Integrated Management System) certified by external auditors, with the balance due to be accredited later in 2011.

A new sales team training, coaching and performance management initiative was launched during the year. The full roll-out will extend over the next few years and is clearly focused on enhancing the measurable value we provide to our customers.

The activities of our sourcing team based in Shanghai, China, continued to add significant value to developing our key relationships with major chemical producers in China, and the broader south-east Asia. As such, volumes sourced from that region have continued to grow attractively, as the strategic nature of these relationships strengthens.

Outlook

The South African manufacturing sector is expected to improve next year but still has some way to go to reach the pre-crisis activity levels. We will remain focused on improving our operational performance and efficiencies, and growing volumes in selected geographic and industry sector markets. Cost containment and margin management, particularly in a continued rand strength environment, will also be key to our performance.