South Africa needs more CEOs like Ketso Gordhan – particularly in the mining sector where the massive gap between the top income earners and the workers has led to strikes and violent labour unrest. Gordhan, a former politician, decided to chop R1m off his salary after hearing that staff at PPC weren’t happy about the disparity between executive incomes and pay for other employees. This move has paid off. Cement producer PPC (JSE: PPC) reports that business is booming across the continent. Expect more good news to come out of PPC as it expands operations in African countries with exciting growth prospects. The forward-thinking CEO speaks to Alec Hogg and Gugulethu Mfuphi on the CNBC Power Lunch show. – JC
ALEC HOGG: Cement maker PPC released interim results today with plans to boost its production capacity by 75 percent, targeting projects across Africa. Ketso Gordhan, Chief Executive of PPC joins us for a look at the numbers. Before we talk about the numbers though, I was reading Tony Leon’s book ‘Opposite Mandela’. He’s coming in later this week or early next week. He was telling us about – you come out of that in glowing terms – how you and Max Sisulu were the Brains Trust along with Tito and Trevor at the time of the transition.
KETSO GORDHAN: Yes, we were the Economic Policy Department and we had the tough task of saying that nationalisation is not really on the agenda. Mixed economy is a more likely sort of policy for the ANC, and lots of engagement between business and government.
ALEC HOGG: Do you keep that soul? Do you still have that activist’s heart?
KETSO GORDHAN: Absolutely, and that’s the basis on which I love the PPC job, because it gives you an opportunity to use what is a great business and a strong platform to do the right thing.
ALEC HOGG: You’re doing it internally at PPC – and I hope we have time to talk about how you’re adjusting the pay scales – but also the Africa story. There aren’t many companies that are making the kind of investments that you are, in other parts of the continent.
KETSO GORDHAN: We are clearly vindicated in our strategy a couple of years ago to say South Africa’s going to be ex-growth or low-growth and we have to look beyond our borders. The African story is not very well understood until you go to the ground, so the PPC team is spending a huge amount of time understanding what’s happening in these various geographies. We announced five projects and I’m very pleased to say four of them are now under construction. Once we get Algeria going, those five projects combined (their project value) is just of $1bn, so that’s quite a clear-cut statement about what we think the prospects for PPC are outside of South Africa. The average growth in those five countries is six-point-two-five percent GDP growth.
GUGULETHU MFUPHI: Those are large numbers when you compare them to South Africa.
KETSO GORDHAN: Yes.
GUGULETHU MFUPHI: Walk us through the experience on the ground. So often, we hear about the African strategy but generally, these areas have unique nuances. You’re faced with indigenisation issues in Zimbabwe as well as other factors in other places on the continent.
KETSO GORDHAN: I think the South African experience prepares us well because all these countries have a BEE-type requirement, whether you call it localisation or indigenisation. In Algeria, there’s a simple rule, which says you cannot own more than 49 percent. You can have control. You can even appoint the Chairman, but you can’t own more than 49 percent. Our South African experience has therefore prepared us well for how to fund our partners or how to involve our partners in the decision-making around building our plants. The DRC has probably been the most interesting experience for us. It’s a huge country, 80 million people, three million tons of cement in demand, and only half-a-million produced locally. It’s a very poor country. It’s one of the 10 poorest countries in the world, but it has huge potential. Anybody who drives through the streets of Kinshasa can literally smell the potential, but you need to be there. You need to be on the ground. We work with a local partner. The IFC, which has a strong mandate to develop the private sector on the continent, has become our partner because they understand our medium-term strategy and are keen to partner us. They are providing half of the debt for the DRC project and have taken a 10 percent equity stake in the business.
ALEC HOGG: It’s interesting in that you’re investing 50 percent of your market cap in these operations. What kind of margins are you expecting to generate there? Is it superior to South Africa?
KETSO GORDHAN: They’re very superior, but they are all superior to South Africa. In the DRC, we will probably touch a 50 percent EBITDA margin. The payback is roughly five years, so we’ll get our money back in five years. We’re effectively putting our Rand exposure into the DRC. If you take out the debt that’s off the balance sheet, it’s been raised as project finance. We’re putting in R1bn and in a steady state, that business generates R1bn of EBITDA annually.
ALEC HOGG: Big opportunities. What about Aliko Dangote and other competitors?
KETSO GORDHAN: I think the other competitors are going to be there. There are 15 to 20 million tons of opportunity. We’d like to get our hands on five or six. Dangote and the other players can have the rest. There’s enough to go around. Our strategy is not to go way beyond a 14 to 15 million-ton player. We are currently an 8 million ton company, so if we can double the size of the business over the next five years, I think we would be quite satisfied with our expansions.
ALEC HOGG: What about margins here in South Africa?
KETSO GORDHAN: Margins here in South Africa are still healthy. Despite the more competitive environment, we’re still going to make about a 28 percent EBITDA margin. Compared to many other businesses, it’s still very attractive. In the first half, we had slightly less than optimal results and the two very measurable impacts from the platinum strike and the rain. We can recover from the rain, but we can’t recover from the strike.
GUGULETHU MFUPHI: Let’s pick your brain on that one because, obviously, the executive pay is still a huge issue following the comments made by Chris Griffith. You’re known for having slashed your salary as well as freezing executive pay at PPC.
KETSO GORDHAN: I’m a believer that our problems are solvable, but it’s a give-and-take. More importantly, it’s talking to each other and understanding each other as human beings. The more separate we are, the less opportunity there is to solve our problems. I’ve spent many hours on the shop floor in PPC talking to ordinary workers. I was convinced when they told me that they were underpaid and we did something about it. When I started only 18 months ago, my salary was 120 times the lowest salary. On the 1st of October this year, its 1:40 and clearly, we want to improve it even beyond that. However, it does require an element of sacrifice. Has my quality of life changed by giving up R1m in a salary increase? No. Has the workers’ quality of life at the bottom improved? Absolutely – yes, so that’s a very compelling reason to do it. I would love to see us move a large chunk of money from the top to the bottom. It’s good for our economy. It’s good for our labour relations. I think the productivity can’t happen immediately. It’s a lag, and the lag is not because of an unwillingness. It’s because of skills and training, and it’s because we need to change the climate in the workplace. Once you start treating people like people and they can see the upside… I’ve explained to the PPC workers: if the company can double its value by 2019, your BEE shares – unencumbered – are worth R2bn.
ALEC HOGG: I’m sorry. I interrupted you. You did say you had a second point.
KETSO GORDHAN: The second point, which is much more important for me… I think the symbolic thing was sorting out the salary gap. The more important thing is talking, understanding each other, and making sure that the gap between our employees and us is minimal. I do a roadshow twice a year where I go and talk to every staff member. They have an opportunity for an hour/hour-and-a-half talk, to ask any question they have, and I answer it to the best of my abilities. Most importantly, I answer it honestly. ‘Do you think we’re going to get a bigger bonus this year?’ ‘No, here are the numbers. Here’s the explanation. If you want a bigger bonus, this is what we have to achieve’, so it’s very transparent and people understand it.
ALEC HOGG: Ketso, I know because we bumped into each other at the slow lounge in the airport enough times to know that you do a lot of travelling.
KETSO GORDHAN: Yes.
ALEC HOGG: That was Ketso Gordhan. He is the Chief Executive of PPC.
