Last checked at 24 Feb 2009 07:05
AECI LIMITED
(Incorporated in the Republic of South Africa)
(Registration No. 1924/002590/06)
Share code: AFE ISIN No.: ZAE000000220
("AECI" or "the Company")
REVIEWED CONDENSED CONSOLIDATED FINANCIAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2008
• Revenue from continuing operations +48% to R12,8 billion
• Dividend for the year +8% to 231c (final = 141c)
• Operating profit on continuing businesses +39%
• HEPS +16% to 412cIncome statement 2008 2007 % R millions R millions change Continuing operations Revenue(2) +48 12 849 8 710 Net operating costs 11 814 7 963 Profit from operations +39 1 035 747 Net (loss)/income from Pension Fund (13) 30employer surplus account Net (loss)/income from plan assets for (57) 36post-employment liabilities 965 813 Fair value adjustments on derivative (16) 5instruments Interest paid (net of costs capitalised) (233) (159) Interest received 28 28 Income from associates and investments 13 12 757 699 Impairment of goodwill (42) (20) Other impairments and disposals (4) (32) Profit before tax 711 647 Tax (238) (246) Net profit from continuing operations 473 401 Net (loss)/profit from discontinued (94) 66operations Profit before tax 154 56 Closure costs (204) (117) Impairments and disposals (56) 98 Tax 12 29 Net profit 379 467 Attributable to preference and minority 6 (12)shareholders Profit attributable to ordinary 385 455shareholders Headline earnings are derived from: Profit attributable to ordinary 385 455shareholders Impairment of goodwill 42 20 Other impairments and disposals before tax 60 (66) Surplus on disposal of property, plant and (38) *equipment Tax effects of the above items (6) (17) Headline earnings 443 392 Per ordinary share (cents): Headline earnings +16 412 355 Diluted headline earnings(3) 410 352 Attributable earnings 358 412 Diluted attributable earnings(3) 356 408 Continuing earnings 445 352 Diluted continuing earnings(3) 443 349 Dividends declared +8 231 213 Dividends paid 231 213 Ordinary shares (millions)(4) - in issue 107 110 - weighted average number of shares 108 110 - diluted weighted average number of shares 108 111(3)
*nominal amount
Balance sheet at 31 December 2008
2008 2007 R millions R millions Assets Non-current assets 4 510 3 557 Property, plant and equipment 2 431 1 567 Investment property 422 411 Goodwill 1 013 986 Pension Fund surplus 213 226 Investments 98 124 Deferred tax 333 243 Current assets 6 441 4 699 Inventory 2 795 1 580 Accounts receivable 3 188 2 024 Assets classified as held for sale 14 667 Cash and cash equivalents 444 428 Total assets 10 951 8 256 Equity and liabilities Ordinary capital and reserves 3 852 3 788 Preference capital and minority interest in 117 141subsidiaries Total shareholders' interest 3 969 3 929 Non-current liabilities 2 385 954 Deferred tax 61 78 Non-current borrowings 1 745 502 Non-current provisions 579 374 Current liabilities 4 597 3 373 Accounts payable 3 225 2 021 Current borrowings 1 058 927 Liabilities classified as held for sale - 250 Tax payable 314 175 Total equity and liabilities 10 951 8 256Industry segment analysis Revenue Profit from Net assets operations 2008 2007 2008 2007 2008 2007 R millions R millions R millions Continuing operations Mining solutions 4 052 2 698 248 163 1 963 1 386 Specialty chemicals 8 434 5 618 851 570 3 992 2 824 Property 432 450 45 75 524 497 Specialty fibres 282 189 49 (10) 184 143(USA) Group services, (351) (245) (158) (51) (155) (94)intergroup and other 12 849 8 710 1 035 747 6 508 4 756 Discontinued operations Decorative coatings - 654 - 44 - (5) Specialty chemicals - 15 - (3) - - Specialty fibres 1 464 1 949 155 19 116 213 14 313 11 328 1 190 807 6 624 4 964
Net assets consist of property, plant, equipment, investment property and goodwill, inventory, accounts receivable less accounts payable.
Cash flow statement 2008 2007 R millions R millions Cash generated by operations 1 590 1 122 Dividends received 12 12 Financing costs (276) (173) Interest received 30 30 Taxes paid (232) (196) Changes in working capital (921) (601) Expenditure relating to non-current provisions (71) (67) Expenditure relating to restructuring/retrenchments (103) (1) Cash available from operating activities 29 126 Dividends paid (250) (237) Cash applied to operating activities (221) (111) Cash (utilised in)/generated by investment (1 002) 74activities Proceeds from disposal of investments and 23 17businesses Proceeds from disposal of discontinued operations - 761 Investments (102) (59) Net capital expenditure (923) (645) Net cash utilised (1 223) (37) Cash effects of financing activities 1 136 108 (Decrease)/increase in cash and cash equivalents (87) 71 Cash and cash equivalents at the beginning of the 428 375year Translation gain/(loss) on cash and cash 90 (5)equivalents Classified as held for sale 13 (13) Cash and cash equivalents at the end of the year 444 428
Statement of changes in equity
2008 2007 R millions R millions Net profit for the year 379 467 Dividends paid (250) (237) Revaluation of derivative instruments 6 (1) Foreign currency translation differences net of 146 (8)deferred tax Changes in the Group (3) (17) Other * (2) Net increase in equity for the year before share 278 202repurchase Share repurchase (238) - Equity at the beginning of the year 3 929 3 727 Equity at the end of the year 3 969 3 929 Made up as follows: Issued ordinary capital 215 453 Non-distributable reserves 427 271 Surplus arising on revaluation of property, plant 240 243and equipment Foreign currency translation reserve net of 138 17deferred tax Other 49 11 Retained income 3 210 3 064 Preference capital 6 6 Minority interest 111 135 3 969 3 929*nominal amountOther salient features 2008 2007 R millions R millions Capital expenditure - property, plant and equipment 1 044 688 - expansion 683 381 - replacement 361 307 Capital commitments 978 1 251 - contracted for 550 340 - not contracted for 428 911 Future rentals on property, plant and equipment 317 253leased - payable within one year 144 77 - payable thereafter 173 176 Net contingent liabilities and guarantees 115 140 Net borrowings 2 359 1 001 Gearing (%) 59 25 Current assets to current liabilities 1,4 1,4 Net asset value per ordinary share (cents) 3 601 3 430 Depreciation - continuing operations 211 176 - discontinued operations 5 61Notes
(1) Basis of preparation and accounting policies
The reviewed condensed consolidated financial results have been prepared in accordance with the historic cost convention except for certain financial instruments, which have been stated at fair value.
Accounting policies have been applied consistently by all entities in the Group and are consistent with those applied in the previous financial year.
The reviewed condensed consolidated financial results and accounting policies comply with the Listings Requirements of the JSE Limited, International Financial Reporting Standards, the disclosure requirements of IAS 34 - Interim Financial Reporting and the South African Companies Act, 1973, as amended.
(2) Includes foreign sales of R3 379 million (2007: R1 722 million).
(3) Calculated in accordance with IAS33. The Company has purchased call options over AECI shares which will obviate the need for the Company to issue new shares in terms of the AECI share option scheme. In practice, therefore, there will be no future dilution.
(4) Net of 11 884 669 (2007: 10 311 120) treasury shares held by a subsidiary company.
(5) Discontinued operations
Following unsuccessful attempts to dispose of the SANS Fibres businesses, the decision was taken that SANS Technical Fibers, Stoneville, USA will run as a stand alone - and self-sustaining entity for the foreseeable future and has, therefore, been reclassified as a continuing operation with the comparative figures adjusted accordingly. The remaining South African businesses of SANS Fibres will discontinue manufacturing activities at the end of March 2009. As a result, closure costs and impairments in respect of these businesses amounting to R204 million before tax have been charged against income in the year to 31 December 2008.
(6) The auditors, KPMG Inc., have reviewed these condensed consolidated financial results. The auditors' unqualified review report is available for inspection at the Company's registered office.
(7) The reviewed condensed consolidated financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the consolidated annual financial statements for the year ended 31 December 2007.
(8) The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Commentary
Performance
The Group's revenue from continuing operations grew by an impressive 48% to R12,8 billion (2007: R8,7 billion) on the back of rising commodity prices in the first nine months of the year, as well as volume growth in all of AECI's business segments other than property. Operating profit on continuing operations increased by 39% to over R1 billion - a performance similar to 2006. Unlike that year, however, no once-off major property transaction facilitated this achievement. Operating margins in respect of continuing operations were marginally lower at 8,3% (2007: 8,6%), primarily as a result of high commodity prices relating to sulphur and ammonia. Fixed costs remained well controlled. Headline earnings of R443 million, equivalent to 412 cents per ordinary share, increased by 16% compared to the previous year (2007: 355 cents per ordinary share).
Headline earnings per share were adversely impacted by costs associated with the closure of operations at SANS Fibres (SANS) in Bellville, Western Cape, communicated to the market in November 2008. These manufacturing operations will cease at the end of March 2009. Closure costs were calculated at R148 million after tax (R204 million before tax).
The Pension Fund employer surplus account and the plan assets for post-employment liabilities incurred losses of R70 million, compared with a profit of R66 million in 2007. This also had a negative effect on HEPS and was largely attributable to the significant fall in South African equity markets, where the Pension Fund invests a substantial portion of its assets, in the second half-year.
Notwithstanding the currently uncertain economic environment and the challenges that the Group faces in 2009, as detailed later in this commentary, AECI's Board of directors remains confident that the Company has a robust strategy and the correct focus to successfully meet these challenges. Accordingly, an increased final ordinary dividend of 150 cents per ordinary share (2007: 141 cents) has been declared. This brings the dividend for the year to 240 cents per share, compared with 213 cents in 2007.
Mining solutions
The mining solutions segment's pleasing revenue growth of 50% can be attributed to high commodity prices and volume growth in explosives. Much of the volume growth was delivered by the African subsidiaries of African Explosives Limited (AEL) while the company's Surface and Massive business in South Africa grew steadily. Customers in the South African Narrow Reef sector were plagued by electricity shortages early in the year and by the global slowdown towards the end of 2008, both factors impacting negatively on their volumes.
Operating profit increased by 52% year-on-year after taking into account a significant stock write down as a result of falling ammonia prices towards year-end. Operating margins, affected by the high price of ammonia, remained in line with the previous year at approximately 6%. This margin performance remains well below that of AEL's global peers.
AEL's international business recorded solid growth in South East Asia and additional global sales channels are being developed. Sustaining the trend set in 2007, the DetNet joint venture delivered significant growth in operating profit, with increased volumes and further improvements made to established and new offerings in its product range.
The capital investment plan remains on target to be completed in 2010. During the year, the business invested R389 million in capital projects, of which R132 million was spent on the Initiating Systems Automation Programme (ISAP). To date R408 million has been spent on the ISAP investment. A strategic review of this investment earlier in the year confirmed that its business case remains attractive. Capital investments of R101 million were also made in the rest of Africa and Indonesia to support the business's growth strategy.
Specialty chemicals
Chemical Services Limited (Chemserve) is the specialty chemical arm of AECI and its performance continued to exceed expectations, with growth in revenue of 50% from R5,6 billion in 2007 to R8,4 billion in 2008 and an increase in operating profit of 49% from R570 million in 2007 to R851 million in 2008. Revenue growth is attributable to the increase in commodity prices and volumes, primarily in the mining and agriculture sectors. Businesses in Chemserve serving market sectors such as consumer, automotive and manufacturing, delivered mixed results in respect of volume growth but were well managed and improved their margins. In addition to its exceptional revenue performance, Chemserve's fixed costs were well controlled. Operating margins remained at levels similar to those in the prior year. Chemserve continued to explore potential activities outside the African continent and has identified promising opportunities for 2009.
The capital expansion programme approved in 2007 progressed well, notwithstanding some timing delays and cost increases due to scope and design changes. During the year, R595 million was spent on various strategic growth projects. All projects have been reviewed and their business cases remain financially and strategically sound. The guar project and one of the two xanthate reactors were commissioned in the last quarter. Both are being ramped-up as planned. The sulphonation plant at Chloorkop, and the second xanthate reactor, the acrylamide and polyacrylamide plants as well as the carbon disulphide plant at Sasolburg will all be commissioned in 2009, as will the oleochemical plant in Brazil.
Property managed by Heartland
Heartland's operating results of R45 million (2007: R75 million) net of remediation costs of R91 million (2007: R83 million) were in line with AECI's forecast at half-year. Heartland has continued to invest in infrastructure to make land ready for sale once the market recovers from its current depressed position. During the year the company disposed of 35 hectares of land (170 000m ² of commercial and industrial bulk rights). Heartland invests in bulk infrastructure in lieu of bulk services contributions and intends investing approximately R900 million over the next five years to release about 1 000 hectares of land for sale. This investment will be controlled and managed in line with expected market conditions over the period.
The properties at Modderfontein and Somerset West were valued at R2,5 billion at mid-year by an independent consultant. No adjustment to the balance sheet has been effected to realise this value.
Discontinued operations
AECI's decision to exit the industrial nylon fibres and the polyethylene terephthalate (PET) businesses of SANS Fibres (SANS) is in line with the Company's long-term strategy of growing its position as a leading supplier of specialty products and services to the mining and manufacturing sectors in Africa and other international geographies. After protracted but unsuccessful attempts to dispose of the businesses, the Board announced the contemplated closure of the Bellville businesses. Both will discontinue manufacturing activities at end-March 2009. The fibres business at Stoneville, USA, will be run as a stand-alone and self-sustaining entity for the foreseeable future. This business has been accounted for in continuing operations.
SANS, as a discontinued operation, delivered an operating profit of R155 million (2007: R19 million). This excellent performance is due to weakening of the local currency and an increased off-take of high margin product after the closure announcement. Closure costs of R204 million have been provided for in the 2008 accounts. The SANS property in Bellville will be disposed of in the foreseeable future.
Financial
The Group's gearing increased to 59% at year-end (2007: 25%). This increase is due to:
• capital spend exceeding R1 billion, largely to drive the growth strategies of the mining solutions and specialty chemicals segments;
• a net working capital increase of R921 million, owing mainly to increased revenue and the increased level of export revenue, where the trade cycle is much longer. The average working capital ratio to annual gross revenue deteriorated to 19,4% (2007: 17,8%);
• a share buy-back of just under 3% of the Company's issued ordinary share capital, at a cost of R238 million.
In the latter part of the year, the Group successfully negotiated term debt with various financial institutions and now has adequate funding to support its growth programme going forward. The increase in borrowings resulted in a decrease in headline earnings per share and earnings per share of approximately 69 cents.
Cash interest cover at 4,6 times (2007: 8,1 times) has deteriorated largely due to the capital spend and the working capital increase in line with revenue.
The post-employment medical aid liability was actuarially valued and an effective 0,5% adjustment of R123 million was required to increase the liability at year-end.
Directorate
In September, AECI welcomed Mark Kathan as financial director and chief financial officer. He succeeded Roger Williams who resigned in August for family reasons. At year-end, Lex van Vught retired as a non-executive member of the Board, after a 40 year career in the Group.
Outlook and strategic focus
It appears that the severe impacts of global recessionary trends will remain with us through 2009. The mining sector, AECI's area of focus, has already suffered adverse impacts. Lower commodity prices are resulting in lower returns for customers in this sector and those supplying the retail, manufacturing and automotive sectors have recorded some sharp declines in activity in recent months. The outlook for volume growth in 2009, therefore, is not promising.
The Company will need to be extremely vigilant of the overall business environment and avoid short-term decisions that could have adverse long-term impacts. 2009 will be a challenging year with much uncertainty and, therefore, the preservation of cash will be a priority. Specifically, the Board has asked AECI's management to:
• control working capital aggressively;
• progress key capital projects, while delaying replacement capital spend;
• apply cost leadership principles through all businesses and activities;
• maintain market share and margins through continued excellent service.
It is essential that the Company maintain its level of profitability in 2009and that it be well positioned for growth from 2010, when the environment isexpected to improve and the benefits of the capital investment programme beginto accrue.Fani Titi Graham Edwards Chairman Chief executive Woodmead, Sandton23 February 2009
Directors: F Titi (Chairman), GN Edwards (Chief executive)†, FPP Baker†, RMW Dunne*, S Engelbrecht, Z Fuphe, KM Kathan†, MJ Leeming, LM Nyhonyha, AC Parker.
†Executive *British Company secretary: A Kennedy
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