RELIANCE ON KEY CAPITALS
GOVERNANCE AND LEADERSHIP
Chief Executive Officer’s report
The Hulamin Rolled Products team improved safety performance and efficiencies after years of consistent effort in lean manufacturing, continuous improvement, process control and asset care. These improvements resulted in higher production throughput, improved yields, lower unit costs and higher volumes of our most profitable products.
In this report I describe the substantial progress achieved across most key measures achieved in 2016 as well as give some insights to our planning for the year ahead. After a year of consistent manufacturing performance, a weaker Rand against the US Dollar (particularly in the first half), strong sales and improved capital discipline and cash flows, our efforts at building on to the solid manufacturing performance in the second half of 2015 paid off handsomely. Although there were a number of notable changes to our management team, these passed seamlessly; the business performed more consistently than in almost any year in its history.
OVERVIEW OF 2016 OPERATIONS
Sales volumes for the year to 31 December 2016 totalled 232 000 tons, almost 20% higher than the corresponding period’s 198 000 tons. This was split between Hulamin Rolled Products at 214 000 tons and Hulamin Extrusions’ 18 000 tons. Disruptions to both electricity and gas supplies in 2015 impacted negatively on manufacturing output. Learning from the disruptions in 2015, we took extraordinary measure to mitigate likely disruptions to gas energy supply and benefitted from a year of few external disturbances. In addition, the Hulamin Rolled Products team improved efficiencies after years of consistent effort in lean manufacturing, continuous improvement, process control and asset care. These improvements resulted in higher production throughput, improved yields, lower unit costs and higher volumes of our most profitable products.
After a slow start to 2016, local sales of beverage can stock improved markedly during the year. In addition, we booked additional export can stock sales (largely to can makers in North Africa). This allowed us to source larger volumes of aluminium scrap and to increase the efficiency of the recycling plant, commissioned in 2015. Furthermore, we were able to support an increasing number of entrepreneurs who have entered the market for collecting, consolidating, transporting, processing and trading scrap aluminium.
During 2016, the operational benefits of having increased rolling slab supply flexibility from Isizinda Aluminium began to flow into Hulamin Rolled Products. The Isizinda team performed extremely well in 2016, increasing the volume of slab produced from 97 000 tons (annualised) in 2015 to 112 000 tons in 2016. The benefits of having the additional slab supply from Isizinda include lower inventory, more flexible scrap consumption, a wider product range, better yields and improved customer offerings.
Hulamin Extrusions and Hulamin Containers both performed consistently well in 2016. In Hulamin Extrusions, the business kicked off major turnaround actions including approving a powder coating investment and the repositioning of the business, driven by a revised “go-to-market” strategy.
CHANGES TO THE EXECUTIVE AND MANAGEMENT
In February, CFO David Austin, made us aware of his desire to pursue other interests. After approximately three years leading the Hulamin finance team, at the end of April we said goodbye and wished him well in his new ventures. Anton Krull, who had been with us for a period of seven years prior to leaving at the end of December 2015 to progress his career, accepted our offer to return as CFO.
During 2014 and 2015, Hector Molale fulfilled the dual role of Group Executive, Corporate Affairs and Managing Director of Hulamin Extrusions. In 2016, we decided that the strategic challenges were such that an additional executive resource was justified and began the process of recruitment. In the preceding period, I decided to deploy Hector into the sole focus of the Hulamin Extrusions turnaround. I was particularly delighted thereafter when Ayanda Mngadi, who has strong roots in Pietermaritzburg, after spending many years in Government, accepted our offer to join Hulamin in June 2016 as the Executive for Corporate Affairs.
In January 2017, Clayton Fisher was appointed to the Hulamin Executive Committee to lead the areas of Strategy and Supply Chain. Clayton has been with the Hulamin for eight years in a range of sales, procurement and planning roles following a previous career experience in consulting.
During the year, we commenced a feasibility study for a large automotive investment. Such is the strategic magnitude and market priority of the project that focused high level sales/market resources are required. I therefore deployed Darryl Weisz, Rolled Products Sales and Marketing Executive into this project role. Ian Smith has been given temporary responsibility for the sales and marketing of Rolled Products during this period. At the same time, I also refocused Frank Bradford’s role into strategic metal sourcing, ahead of the need to secure long term metal supply once the existing primary metal supply arrangements come to an end in 2019. Marlon Reddy has been given the operational responsibility for our metal operations on a temporary basis.
While I continue to lead all aspects of the organisation, including these strategic projects, Moses Mkhize will provide specific leadership in Rolled Products, and Rodney Green-Thompson has been given temporary operational leadership responsibility for our manufacturing operations. Paulinah Xaba, Mzimtsha Maku and Callum Stewart have been temporarily invited to attend and participate in strategic and operational business decision making.
We have also made appointment to and expanded the roles of the Management Committees in both Hulamin Extrusions and Hulamin Rolled Products. This expanded leadership team of skilled leaders have adapted particularly quickly. In addition to the functional benefits described above, I am convinced that their increased exposure and experience will benefit Hulamin for many years to come.
As one of South Africa’s leading manufacturers and beneficiators of raw materials, we are particularly sensitive to our context. We find ourselves in a region and country plagued by inequality, social injustice and racism. At Hulamin we have gone through a period of serious self-reflection and concluded the following:
“As a listed corporate, we will contribute to a new, sustainable economic order in South Africa that reflects the demographic reality of our country and which addresses poverty, inequality, social justice and racism.”
We are committed to driving this change from within.
A PLEASING SET OF FINANCIAL RESULTS
Turnover increased to R10,1 billion (2015 R8,4 billion) as a result of the stronger sales, weaker currency and firmer aluminium prices (in US Dollars). The Rand weakened by 15% to an average of R14.73/USD, increasing Rand revenues and improving Hulamin’s international cost competitiveness (measured in US Dollars).
The price we pay for aluminium includes the US Dollar London Metal Exchange price as well as a relevant international geographic premium. After a massive decline in regional geographic premiums in 2015, these premiums remained stable during 2016. Hulamin is 50% exposed to movements in the US Dollar value of its aluminium inventory. This is known as the metal price lag effect which is reported in Rand. The LME Aluminium price began to firm in the second half of 2016, resulting in a full year metal price lag benefit of R50 million. In 2015 we reported a metal price lag loss of R161 million, a year-on-year positive movement of R211 million.
Manufacturing costs in total were 14% higher than the prior year, as a result of local inflation, the increased volume and by higher US Dollar denominated costs such as gas, rolling oils and other metal related costs Variable and semi-variable cost components were driven higher by the 19% increase in sales and production volumes. Costs from the Isizinda joint venture were once again consolidated. Earnings before interest and taxation (EBIT) were 110% higher compared to the prior year.
Hulamin showed improved cash flows and capital discipline during 2016. A net cash inflow of R398 million reduced borrowings to a manageable level of R577 million. This improvement was underpinned by operating cash flow that amounted to R679 million. Capital expenditure amounted to R321 million. The total capital expenditure for 2016 included the final payments of R22 million relating to the recycling project. R57 million was received in 2016 from a government grant relating to the Manufacturing Competitiveness Enhancement Programme (MCEP) claim submitted in 2015.
IMPROVED OPERATING PERFORMANCE
Production volumes and efficiencies improved throughout the year, particularly in the second half. Although the ongoing productivity improvements contributed significantly to the increased sales and production volumes, we achieved important improvements across a number of measures. These include the two high priority measures of safety and yield/recovery.
In 2014, we identified opportunities to improve Hulamin’s safety performance compared to international benchmarks. These improvements included inter alia risk mitigation actions focusing on pedestrian/moving equipment interface, working at heights, lock out/tag outs, behavioral safety and the safety of contract workers on the Hulamin sites. I am particularly pleased that the efforts of all Hulamin management resulted in exceptional performance in 2016. The Group achieved a Total recordable Incident Frequency Rate of 0.27 injuries per 200 000 working hours. The compares very favourably with “best in world”.
The second area where we achieved great progress in 2016 was in the area of product quality and yield. Product yield is a measure of the ratio of the finishing mass sold to a customer divided by the starting mass into the manufacturing process, and is thus closely related to quality. As such it is a very good proxy for the efficiency of the entire process. An improvement in yield results in higher sales volume and lower unit cost and is therefore very beneficial. In this set of results, I am thus particularly pleased with the 5% year-on-year improvement in overall yield in Rolled Products, despite a more challenging product mix in 2016. This aggregate improvement was achieved thanks to numerous bottom-up improvement programmes including asset care and maintenance, process control, problem solving and continuous improvement etc.
With improved performance in 2016, we have started looking at how to carry this momentum into future growth and sustainable performance improvement. A three pillar revision to the Hulamin Strategic plan was approved in 2016. These three pillars include:
|a.||Strengthening the core (of the business)|
|The basis for long term performance and growth remains inside the operation. As a manufacturing business located in Southern Africa, much of the basis for future success will remain embedded in the operations. Ensuring a low cost, high skilled technologically flexible operation will remain important as long as Hulamin is a beneficiator of aluminium.|
|b.||Growing rolling margins|
|As the world continues to become more competitive, Hulamin focus on its customers and their needs will become increasingly important. We will increase our focus on improving rolling margins (selling prices). These reflect the value we provide to our customers and the choices we make about what customers to serve and what markets we choose to compete in.|
|c.||Investing in assets of tomorrow|
|It is clear that the assets of the past will not be sufficient to build and grow our business into the future. We are considering a range of opportunities to significantly uplift our offering in terms of high value products, the service we offer our customers and the extent to which we differentiate ourselves from the competition. In our highly capital, skill and technology intensive business this clearly equates to people, equipment and know-how.|
After a much improved year in 2016, The Hulamin management team and I are committed to Hulamin’s sustainable growth and improvement. We look forward to the future with a business that is well placed to face the numerous challenges of our industry, country and world.
23 February 2017
Chief Executive Officer