Growth in the Healthcare business, the efficiencies of restructuring and plant reliability are the three things Afrox Managing Director Schalk Venter attributes to a successful 2019, following the release of the company’s annual financials earlier today.
Sub-Saharan Africa’s leading industrial gases and welding company highlighted an increase in revenue to R6.09bn ($397.6m) and an increase of 45.5% in EBIT.
In its results, Afrox attributed its increased revenue to volume growth in certain sectors of the business and successful recovery of cost inflation from effective pricing management.
gasworld caught up with Venter and Matthias Vogt Afrox Financial Director, earlier today to find out more.
gasworld (GW): These are clearly a good set of results, with the increase in EBIT clearly most striking at 45%. The increase in EBIT is attributed to growth in the Healthcare business, recovery of cost inflation via pricing, efficiencies from restructuring and improved plant performance.
We have two questions related to this: firstly, what restructuring was Afrox able to undertake in the last year, and how has plant performance improved? Is this as a result of new technology, digitisation or other factors?
Schalk Venter (SV): It’s certainly a good set of results, we agree. EBIT is attributed to all the factors that you mentioned.
But we must stress another point which is the non-repeat of a special item of the value of R107bn that we had in 2018. This was the repairment of certain facilities of R55m and of course then some provisions for restructuring, so that is not repeating.
The good thing about this is if you discount that out, the EBIT increase is 23%, so it is substantially higher than the previous year. So, it’s not on the back of non-repeat once off costs, this is a clear improvement in operating profitability. It’s a new platform.
We view this as sustainable, given the volumes staying in the same corridor that we had last year.
I think that’s the great thing about this as well. It’s a clear indication of improvement in operating profitability and you mentioned the factors there and we view this as sustainable.
We did review our leadership structure. The top 150 people out of 2,200, we had a look at that and said well let’s look at span of control, that we don’t have one on one reporting, that we have at least one on six, one on seven.
We looked at double heading in certain areas for people also to grow and give exposure and growth into their careers, that was a good result.
We also took a look at outsourcing some activities. Not so much for real big savings but for efficiency, so we could focus on different things that we are supposed to do really well and let the outsourcing party take care of what they are supposed to do really well.
From a plant point of view, if you look at the last half of 2018, that was a tough six months from July to December because we had plant unreliability.
This time we’ve had a very focused engineering intervention on all our ASU’s. We ran a programme, which is still ongoing, on repairing potential problems not problems that occurred.
We’re trying to be proactive in fixing and looking at more intense maintenance programs, more predictive maintenance, or process safety problems that could arise.
The things you’ve mentioned, not so much new technology, but some factors of digitisation and modernisation included because several plants we have now moved to remote operating control (ROC), where we used to have people controlling it, we have now switched it over to ROC and manage it by automatic piloting from a global centre of control.
That is maybe what’s really helped us last year: the growth in the healthcare business, the efficiencies of restructuring and plant reliability.
GW: We note that the net cash position of Afrox has improved year-on-year, up to R184m by the close of 2019. What does this mean for Afrox – what does a strong cash position enable? And is such a position important in a relatively weakened economy like those of Southern Africa?
Matthias Vogt (MV): It’s for everybody a difficult question particularly in Southern Africa where the opportunities for profit of investments not necessarily applicable.
However, I can tell you we are constantly searching for investments and albeit they might have been fairly small in the past, just looking at healthcare which was a total investment of R150m, and maybe another R70m in cylinders, but it’s something that more or less goes in the overs and unders of our end of capex spend, which has not come down.
I think to really answer your question, we believe that there are big investments in the South African economy in the next years to come for Afrox as we look quite carefully in the industrial environment.
We see that there needs to be some reinvestments in the near future, be it either on regulation changes like emission regulations, or be it on equipment that’s getting too old and unproductive as it hasn’t been replaced for a long time.
We hope to put in an investment in the next one to two years so we would be relaxed about having that money on the account, it’s a good thing to have, and I would be confident that in the next year there will be an opportunity for a larger investment.
GW: We note in your outlook that the South African economy ‘remains weak and no significant turnaround is expected in the short-term’. What’s creating this weak economy, and do you see a turnaround in the mid to long-term?
SV: I generally don’t see a turnaround in the economy in the next years I think it will be further consolidation.
We need to understand that there might be some positive impacts outside of Africa which might give a push maybe in certain sectors in South Africa in the long term because there will be cheaper energy available, so that will always help the economies.
I think South Africa is lacking in general cheap energy despite the LPG which we are selling as one of the market participants.
The turnaround will require so many things to fall in place that it’s very difficult to forecast when that will happen.
Irrespective of what the world economy is doing whether it goes up or down, South Africa seems not to participate in these cycles anymore. So it is a little bit outside of the global supply chain and I think that needs to be critically observed how the economy in general is moving towards to.
Having said that again you have an infrastructure, you have a supply of gas, petrol, energy and that will always remain in South Africa, and Afrox is focusing on that.
So irrespective of what the economy is doing, we need to orientate ourselves at that sectors where we can invest and generate earnings, and I think we have demonstrated that in the past.
GW: Finally, what’s the key message from these results that you want to leave our readers with?
SV: I think the key message is that the company in difficult conditions has repositioned itself over the past five years, because this journey has been coming from 2015. If you look at our results over the past five years, you’ll see a little bit of up and down but in general the trend is going in the right direction.
For example, we’ve improved our profitability, EBIT, from 7% ratio of sales in 2014 to 14.2% now.
In a difficult year for 2019, we’ve, excluding the non-repeat once off cost of 2018, shown strong growth on the back of efficiencies, the healthcare tender and plant efficiency and reliability.
If we look at our customer base, it shows Afrox is still a key player in the broader environment in South Africa and Africa.
I think over the past five years we’ve shown the ability to increase earnings and dividends as maybe a bit of an hedge in a difficult economic environment.
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