BUSINESS DAY TV: Cement producer PPC has reported a 93% drop in full-year headline profit to 7c as a result of high finance costs relating to bond repayment obligations. But with cement sales volumes in SA up a pedestrian 2%, tough market conditions are exerting pressure too.
Joining me now in the News Leader studio is PPC CEO Darryll Castle.
Darryll, group revenue is up 5% but net profit attributable to PPC shareholders [declined] 88%; we’ve had headline earnings per share down 93%, and you’ve attributed the bulk of that to the liquidity crisis following S&P’s credit downgrade of PPCs status to junk. Talk us through what that downgrade has cost you.
DARRYLL CASTLE: What happened with the downgrade is that it forced us to redeem our bond programme, so we had to borrow money very urgently to be able to make an offer to bondholders. That cost us a lot of money, in the order of R168m, to do that. Then, of course, we had to do a capital raise to repay the money that we had borrowed, and the capital raise in itself was expensive, regarding the fees. But it also diluted shareholders who had to give us more capital.
But the capital raise actually went quite well, we raised R4bn and we were able to reduce our debt. A lot of those costs have come through in these results along with a couple of other one-off financial costs, like [an] IFRS charge around the unwinding of our BEE scheme, and that’s why the bottom line is impacted quite severely, particularly in relation to our operating profit line, which was much less impacted.
BDTV: With anomalies out of the way, now you’re sitting with a balance sheet that is looking stronger. You’ve de-risked the company leaving you, as you alluded to, lightly geared. How much of that pressure now starts to abate given the operating environment and things on an operational level?
DC: On an operational level, particularly in SA, we’ve stabilised. I wouldn’t say its necessarily going to be massively positive going forward, because we’re more geared to the economy and we’ve seen some of the numbers in the last few days. But we are hoping that price stability has come to the market after the new entrants having come in over the last two years. And we’re doing really well on the costs side, so I believe we can stabilise our margins in SA which, of course, will stand us in good stead.
But the story for us, going forward, is the delivery of our projects in Africa and we need to make sure that we don’t need to put too much money into Africa as we turn those operations to profitability.
BDTV: Let’s home in, then, on the kind of spend you’re looking at because one wonders if you’re going to be able to stick to this low gearing level moving forward, given all those operations you’ve become more reliant on in your rest of Africa operations.
DC: In each operation, we have debt in each project and, by and large, each project will be able to finance its own debt, so they won’t be looking towards PPC to put new money in. Of course, the one exception to that is the DRC which is a very big operation where we’ve got over R170m to service ... and we’re coming into a market that is particularly under pressure.
We’re waiting for elections in the DRC and there is not much new money being committed in terms of investment coming into the DRC until the elections happen. So we expect quite a tough market until that happens and, certainly, we probably won’t be able to generate sufficient cash to be able to repay our interest in capital repayments in the short term. So we do expect some inflows into the DRC. But other than that, the projects are fairly stable.
BDTV: Fairly stable … do you foresee things staying on track and within timeline and budget, moving forward?
DC: Absolutely. The key thing is that all the big projects in Africa have been delivered. So, essentially, other than the tail-end of capital spend, the projects are behind us and it’s really an inflection point for PPC. We no longer have to wonder if PPC can deliver projects on time and on budget in Africa. We’ve now finished projects in the DRC, in Ethiopia, in Zimbabwe, and previously in Rwanda. So that’s four big projects that are behind us. From here, it’s about the execution of the business plan and getting sufficient volume at the right price in each of those businesses so that we become cash-positive.
BDTV: And that’s something, as you alluded to earlier, a challenge to achieve in the South African market right now. Let’s bring things back home because it’s a competitive landscape; it’s seen you force prices lower over the period. Are you anticipating more downside on the pricing side of things?
DC: No, we’re thinking that pricing has bottomed. We are seeing some strength in pricing in SA. It’s questionable whether the pricing strength will match inflation, but we certainly think that we can continue to beat inflation on the cost side of the equation, and that’s why I think we can probably see stability in margins in the South African business.
BDTV: You say stability in margins, you mentioned stability in volumes as well. Where does that stability in volumes actually come through, because 2% volume sales [is] still very tepid?
DC: Its tepid, it’s not great, we’d love it to be better but we don’t see, at this point, volumes going backwards which is important to us. So if the economy is growing at around 1%, I know we’ve moved into a recessionary environment, but going forward there is still an outlook of some growth, which should result in similar levels of cement growth, and that’s okay for us.
That allows us to grow our volumes a little bit, which certainly helps dilute some of our costs, so that’s good. Obviously, we would prefer a much stronger environment, but we can live with the one we’re in.
BDTV: Absolutely. And, of course, PPC is negotiating a possible merger with AfriSam as well. What does that do to your competitive muscle within this landscape, and where do those negotiations sit now?
DC: Firstly, where they sit is that we’re in the process of negotiating with AfriSam, doing our work around understanding things like merger ratios, doing due diligences, and there are also a whole bunch of conditions that have to be complied with before we can move ahead with a merger, or even take it to our board for consideration. So, as management, we’re working on getting all that work in place and only then will we know if we have a merger. So we expect that within the next few months.
Then there’s the whole Competition Commission process, which can take anything from six months to a year. So the actual merger is probably a year away at least at this point and, hopefully, by that time we’ll be coming into a more vibrant economic situation. But once we get there we believe it’s much better for the state of the industry because we do take a chunk of costs out. There are synergies by putting these two operations together.
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