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Manufacturing

  R million F2011   F2010  
  Revenue 868   866  
  Total operating profit 26   87  
  Core operating margin 26   82  
  Core operating margin (%) 3   10  
  PP&E* 160   163  
  Capital expenditure 32   23  
  Employees (pax) 1 175   1 166  

* Property, plant and equipment and investment property.

 
John wallace
John Wallace

Manufacturing contributed 9.4% (2010: 7.6%) to group revenue and 5.2% (2010: 9.9%) to group total operating profit.

Fibre Cement manufactures a range of fibre cement roofing and cladding products which are used in residential and industrial building applications.

Steel manufactures a range of steel products which are used in applications within the construction industry, as well as spiral-welded steel pipes used for bulk water transfer schemes.

  • Market review - Fibre Cement

    Fibre Cement

    The South African market has remained particularly challenging throughout the financial year as the joint forces of one of the deepest building recessions on record and a continued tightness in bank credit drove volumes and pricing down.

    Everite’s core market is in the residential sector, which is in one of its most severe downturns (as can be seen from the graph on the right). As building plans passed is a leading indicator of future activity, the expectation is that the residential market will remain subdued for at least the next six to 12 months. The number of buildings completed (larger than 80 m2) is at its lowest point in the past 31 years. The trend for building plans passed, which indicates future activity, is also at a low.

    However, it does appear to indicate a bottoming of the decline. The graph below depicts transfer duty paid in constant inflation accounted terms and indicates that the combined effects of the National Credit Act and the global financial meltdown coincided to drive activity in the building market to its lowest point in two decades.

    Everite also serves the public sector by providing roofing material for low-cost housing and complete modular structures for transitional and temporary solutions for government. Although this sector is less affected by the market downturn, government has missed its committed housing delivery targets, which impacted the number of houses delivered.

    The construction downturn has also left the industry with significant over-capacity, which has resulted in pressure on pricing and the potential of business failures and market consolidation.

  • Market review - Steel

    Steel

    The Steel business unit also suffered from volume and margin pressure which was compounded by the reinforcing steel shortage created by issues at Mittal’s Newcastle plant. The shortfall is only expected to be recovered by August 2011. In the interim, many players were forced to import steel to prevent operational delays on construction sites. Steel pricing climbed steadily during the second half of F2011, reflecting the global economic demand and the supply imbalance in South Africa.

    The combined impact of reduced activity, price erosion due to Rand strength, growing import competition and an oversupply of locally manufactured products created the perfect storm within the manufacturing sector for building materials. Volumes and margins fell throughout the second semester as the sector attempted to survive through cost control and efficiency gains where possible.

  • Financial overview

       
    Year ended
    30 June 2011
      Year ended
    30 June 2010
     
      Revenue (R’000)
    867 523
      866 221  
      Total operating margin (%)
    3.0
      10.0  
      Core operating margin (%)
    3.0
      9.5  

    The cluster produced disappointing results in a market where both private and public sector conditions remained weak.

    Revenue remained unchanged at R867,5 million (2010: R866,2 million). The reported core operating profit for the year of R26,3 million was materially lower than the prior year of R82,3 million. This resulted in a core operating margin of 3.0% (2010: 9.5%).

    The Fibre Cement business unit achieved reasonable returns by establishing alternative income streams, whilst removing costs within the traditional business model. In the year under review, further progress was made in developing the group’s Advanced Building Technologies (ABT) product offering into the housing and building market. This is set to become a significant source of off-take volumes for the Fibre Cement business.

    Group Five Pipe benefited from increasing – although still erratic – demand for bulk water transport systems. The group’s Structural Steel business unit suffered from low volumes, increasing steel prices and poor results on one contract, which materially affected the cluster’s performance.

  • Delivery

    Key focus areas   Desired results   Status
    Fibre Cement/ABT        
    Continue to implement process
    improvements within the Fibre Cement plant, as efficiency gains will be a prerequisite to maintain margins.
      Reduce the cost of production, thereby lowering the breakeven point for the business to ensure margin retention.   Good progress across all factory disciplines led to meaningful cost savings and efficiency gains. This focus area continues to receive attention due to the constant pressure on margins.
    Develop ABT market to include focused private market opportunities in South Africa and the rest of Africa for mining and building contracts.   Shed the dependence on pure public sector contract delivery, as well as increase the overall returns from ABT.   Received the required approvals for our permanent structures and progressed to marketing the new offering.
    Service excellence through using our developed supply chain model to better serve the fragmented building merchant market.   Protect Fibre Cement from growing import volumes due to the continued strength of the Rand.   We have one of the better service records with our highly fragmented client base and have achieved our “cost to serve” targets.
    New product development to create alternative products and structures.   To maintain returns as traditional volumes remain depressed and to position the businesses for growth as the economic recovery takes hold.   We developed a new export range of products specific to country needs, with some early success. We also have a number of new developments in the planning stage.
    Seek additional technology partnerships.   Grow our suite of ABT structures, as well as improve current processes to increase overall returns.   We have very successfully developed new international partnerships in Asia, Australia and South America.
    Steel        
    Improved factory and process controls (physical and ERP upgrades).   Reduced cost of conversion and greater factory recoveries.   Achieved success within BRI and Group Five Pipe, but have struggled with the complexity of three business streams in Structural Steel with reduced market activity impacting economies of scale.
    Improved steel procurement practices through optimising hedging opportunities.   Optimised stockholding (while cognisant of working capital levels) in a dynamic pricing environment to protect from margin erosion when steel prices fall and to maximise returns when prices rise.   Reinforcing volumes have grown, which allowed volume leveraging on price where possible. However, the market steel shortage negated many of our effort
    Develop and grow external client focus based on success of inter-group supply.   Grow business unit volumes and returns due to improving economies of scale as we evolve from an internal transfer pricing model to generating acceptable commercial returns through both internal and external supply.   Work was secured externally. However, excess supply of reinforcing and structural steel led to margins coming under extreme pressure, which negated the expected gains from volume growth
    Grow and develop the mesh business into new market segments.   Further develop the commodity range of products offered, which generates a more predictable return to a pure rebar business.   We acquired additional highly automated capacity and will commission the new equipment in the first quarter of F2012. This will enable entry into a countercyclical industry.
    Improve health and safety in each business unit.   Achieve group targets.   Disabling injury frequency rate (DIFR) improved across the cluster.
  • Material issues within the business and how these have been managed

    Rand strength continued to erode margins

    The Rand remained stubbornly strong during the year, with a relative strengthening of around 11%. This was compounded by our internal cost inflation, high wage demands, excessive electricity increases and a cement industry intent on recovering volume declines through price increases.

    The challenge to the South African manufacturing industry is to remove cost through efficiency gains and technology improvements in an attempt to compete with import competition. We have mostly succeeded in maintaining our market share, although new importers continually attempt to gain or grow their market share. Strategically, we have continued to improve our service offering and product quality to ensure that price is not the key driver for securing material. We hold strategic stock and have the ability to supply complex orders to any distributor within three days.

    Equipment upgrades as market conditions vary

    Our plant capacity of certain products at our Fibre Cement business Everite was under pressure during the year as the demand for flat products grew, while profiled roofing products diminished.

    As the factory was built many decades ago, we started to upgrade our factory from 2006 with our first complete new line built. We are progressively upgrading all the factory equipment with internal skills.

    Over the past four years, we have improved the output of our flat sheet machines to ensure we have quick change capabilities to manufacture the lower volume range of fibre cement products. In the first quarter of F2012, we will complete an upgrade on our first multi-use machine. This will further reduce complexity and the cost of manufacture at Everite.

    New competitors enter the market

    During the financial year, a new Chinese competitor entered the South African fibre cement manufacturing market and an over-border competitor introduced non-asbestos technology in an attempt to penetrate the South African market.

    To counter the possible impact of this, Everite introduced a highly competitive export-orientated product range to further increase its base outside of South Africa in neighbouring markets. Early indications are positive, with repeat orders having been secured and growth in exports. The business is also focusing on its quality of service to further entrench brand loyalty around our range of products.

    The steel pipe market also experienced a new entrant within the spiral weld sector. The impact has been fairly immediate, with tender margins being eroded. However, we are securing good orders with our product differentiators, such as pipe design capability and several coating and lining alternatives.

    Within the reinforcing and fabricated steel markets, business failure in the industry is more prevalent as margins and volumes continue to fall. We will be downsizing our business where necessary.

    Waste reduction to limit environmental damage and improve returns

    The technology team has focused on the closure of the historic waste dump at our Klipriver site. As volumes of waste have been steadily falling, we are now in a position to close and rehabilitate the dump. Our focus on waste minimisation through our operations over the last eight years has resulted in a decrease in the cost of waste treatment,with the resultant decrease in the cost of production. With the dump closure and rehabilitation, the very last of the asbestos legacies at Everite will be finalised.

    Troublesome contract in Steel business unit

    The Steel business’ operating performance was adversely impacted by a poor contract where significant once-off non-recoverable costs were incurred on one contract. Structural changes to mitigate a future occurrence were put in place.

    Key achievements
    We acquired a new, highly automated, mesh manufacturing line within the BRI steel business unit which will be commissioned early in F2012 and will enable the business to enter an exciting and growing counter-cyclical market to reduce its dependence on the highly cyclical construction market
    We upgraded our coating capability at Group Five Pipe, which has made us market leaders in this particular process
    During the year, the Advanced Building Technologies (ABT) temporary unit product offering was improved, with a new permanent structure introduced. The business is delivering on its two-pronged strategy of growing the demand for fi bre cement volumes and creating good returns to shareholders. The sales team is focusing on developing the product for application in the private sector and has developed the structure to support this drive
  • Looking forward

    Key focus areas for F2012 Desired results
    Fibre Cement/ABT  
    Develop and grow the Fibre Cement export market into sub-Saharan Africa as local competition intensifi es and erodes local volumes.
    Increase volumes as local market remains weak to ensure optimal factory recoveries
    Further develop the ABT business within export and private markets to grow returns from the unit and to increase off-take of Fibre Cement products.
    With the technology well proven and product quality ensured, we expect to grow returns from this business unit
    Create greater market penetration with newly-developed Fibre Cement products.
    Market growth will create greater economies of scale through the manufacturing process, resulting in improved manufacturing recovery and margins
    Steel  
    Reposition our Steel business to generate improved returns as the current trading conditions and margins remain unattractive.
    Initially shrink the business to balance market volumes to installed capacity to create acceptable returns in recessionary markets
    Review the business to ensure an optimal structure
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