New CEO Andre de Ruyter driving Nampak deeper into high margin African countries
Despite the evidence released today of the contraction of South Africa's economy for the first time since 2009, the rest of the continent is truly booming which is undeniably highlighted for us by Andre de Ruyter. The new CEO of Nampak has a talk with Alec about Nampak's incredibly inviting prospects going forward. The company currently sees returns from the South African market of 8%, in stark opposition to this, Andre speaks of close to 20% returns on Nampak's Africa operations. And although Nampak warned against a contracted trading environment going forward in South Africa, which makes up three quarters of Nampak's revenue, it is clear that based on the groups expansion plans and lines into Africa, that the African growth story is a indeed a reality, Andre corroborates this when he acknowledges that 40% of Nampak's shareholders are now foreign investors. The positioning of Nampak's capital assets in Africa paints an exciting picture of possibility for those investors with their eye on the continent. – Lucy Ferreira
ANDRE DE RUYTER: Yes, Alec. We are clearly seeing that the consumer in South Africa is under pressure. Under these circumstances, the performance that we've managed to deliver from our South African business is quite creditable. We've managed to hang on to margins – slightly down to eight-point-five percent, but in terms of where our growth opportunities are going to come from, we are not looking at GDP growth in South Africa, but we are focusing, as you know, on the rest of the continent. We think that's where the story is going to be.
ALEC HOGG: It's quite interesting. The margins in South Africa are under half now of what you're generating in the rest of Africa, as you called it, and the rest of African business is already one quarter of your income. That tends to suggest that if you were going to make new investments, you wouldn't be putting them in the R.S.A.
ANDRE DE RUYTER: Well, I don't think that's quite true because we are investing heavily in South Africa as well. We are finishing the third last furnace, which is a R1.2bn project. That should be up and running towards the end of July of this year. We are completing the conversion of our steel beverage can lines to aluminium, which has a number of advantages in terms of energy efficiency, cost, and speed etcetera.
ALEC HOGG: And lighter, for the people who are drinking the beers.
ANDRE DE RUYTER: Exactly, so there's a weight saving there as well. Overall, I think we are going to maintain and sustain our operations in South Africa, but at essentially flat GDP growth rates. If you want to grow the business, you have to look elsewhere.
ALEC HOGG: But Andre, you're a capital allocator at the end of the day. That's what you executives do, and you have to allocate the capital where you get the best return. That was really my point. If you're making 8.5 percent margins in South Africa, 17.5 percent margins outside of the country and other parts of the continent, it's quite obvious where the capital's going or where it should go, anyway.
ANDRE DE RUYTER: That is true, except of course, South Africa is still a very substantial part of the overall revenue of Nampak.
ALEC HOGG: You have to keep it. You have to almost maintain what you have here.
ANDRE DE RUYTER: Exactly. We can't afford to ignore our base. We need to protect our base. We need to nurture it. We need to grow it to the extent possible, but you're quite right. We also need to look at where we allocate cash and resources to the elements in our portfolio, and we are continuously reviewing the different parts of our portfolio with a view to 'if it doesn't perform – fixing it, selling it, and closing it' – quite a rigorous approach.
ALEC HOGG: A lot has changed at Nampak over the past few years. You guys have been through tough times, but it seems as though everything seems to be pretty plain sailing now. Your shareholder base: has that changed much?
ANDRE DE RUYTER: Yes, it has. What we've seen is that we've had great success with international road show, particularly in the U.S. and the latest shareholder register reveals that we now have a foreign shareholder base of roundabout 40 percent, which I think is quite good for a company of Nampak's size and profile.
ALEC HOGG: So they're buying the Africa story.
ANDRE DE RUYTER: I think they buy the African story in a big way.
ALEC HOGG: As far as that's concerned, Nigeria seems to be the place where you're putting a lot of your emphasis.
ANDRE DE RUYTER: Correct. We just completed a R3.3bn acquisition of a beverage can line/plant in Nigeria in Agbara, which we're very excited about. In month one, the Nampak portfolio had already contributed to the bottom-line, which I think gives proof to the fact that this was a wise acquisition.
ALEC HOGG: That's interesting. You're an ex-Barlows company. Tiger Brands is an ex-Barlows company. You seem to be doing well in Nigeria. Tiger Brands is struggling. Why?
ANDRE DE RUYTER: It's difficult for me to speculate about what Tiger does or doesn't do, but I think the differentiating factor is that we supply to multinationals like Heineken, like SABMiller and Coca Cola, who take care of a lot of the risk that you typically find in Africa. I think the reason why foreign investors also like our story is because many of the risks typically associated with going into Africa, such as payment risk, regulatory risk, and customer development risk etcetera, are essentially mitigated by the fact that we run and industrial operation largely within our own control and we sell to large, solid, and stable customers.
ALEC HOGG: In the mining parlance, you're selling the picks and shovels.
ANDRE DE RUYTER: That's right.
ALEC HOGG: And they have to use them.
ANDRE DE RUYTER: Exactly.
ALEC HOGG: Angola is also an opportunity for you.
ANDRE DE RUYTER: Yes, Angola has demonstrated phenomenal growth. Angola is quite a success story. We initially went in there with a single beverage can line doing 770-million cans per annum. We're now in the process of installing a second line with a capacity of about one billion cans per annum. That should be up and running towards the end of this calendar year. That will then take us to a total capacity of one-point-seven billion cans and that is all consumed by the Angolan population. It shows that people have disposable income and they enjoy the luxuries of having properly packaged goods.
ALEC HOGG: Yes, that growth rate in Angola is quite something to behold. I suppose there would be other oil-based economies in Africa would be on a similar growth path.
ANDRE DE RUYTER: The fact that the Nigerian GDP has been restated, it proves your point that more and more companies and countries in Africa are realising their potential. We think this is great because we can play in that space.
ALEC HOGG: So where else do you have glaring opportunities?
ANDRE DE RUYTER: I think the glaring opportunity really lies in West Africa. That is the base for further expansion. The other one – having said that West Africa is really attractive – is in Ethiopia. Ethiopia has 90-million people, a rapidly growing economy, and typically, the sort of demand profile from the multinationals who are our customers, to set up shop there and requiring the same sort of products that we supply.
ALEC HOGG: So is that what happens? Coca Cola would go into Ethiopia for example and say 'goodness me. We're importing all our cans from other parts of the world, perhaps even from Nampak in South Africa. Come and build a plant here. We'll give you a long-term contract to provide cans to us'. Is it typically somewhere along those lines?
ANDRE DE RUYTER: Yes. What we do is we would firstly export from South Africa or from another country where we have manufacturing operations. Initially, the new country in and of itself, doesn't justify setting up a new manufacturing facility. Once we've gained sufficient scale there and once we have adequate commitments from our customers that they will in fact, buy our products – that is when we make the investment decision to go in, in a bigger way.
ALEC HOGG: How long does that typically take?
ANDRE DE RUYTER: It depends very much on the packaging substrate involved. In some instances, it takes you two/three years and in other instances, it can take much longer. It depends on the growth rate of course, of the economy as well.
ALEC HOGG: Where I'm getting to now…how many lines do you currently have in the water in Africa? Clearly, you have Nigeria, Angola, and South Africa all doing well, but do you have any other plants that you might be giving the go-ahead to, soon?
ANDRE DE RUYTER: For the moment, we are going to concentrate on the three countries that I've mentioned. We have operations in Kenya, Tanzania, Zambia, Swaziland, Botswana, and Zimbabwe. In those countries however, I think it's a question of optimising what we have, and slowly and steadily growing off the existing base, so no major step out acquisitions or Greenfields projects anticipated there.
ALEC HOGG: Do you have manufacturing plants in those countries?
ANDRE DE RUYTER: Yes. Absolutely.
ALEC HOGG: Are they old plants or are they state-of-the-art?
ANDRE DE RUYTER: No, they're rather modern.
ALEC HOGG: Just small…
ANDRE DE RUYTER: Smaller yes, because remember that marketing to multinational companies means that you have to comply with their standards, wherever you are in the world. We cannot go into an African country and provide something that is of a third-rate quality. We have to meet the customer's expectations and the consumers' expectations, that when they buy a can it's equivalent to a can they can get in South Africa or in the U.S.
ALEC HOGG: But obviously, those footholds give you bolt-on acquisition opportunities, which are always the best acquisitions, aren't they?
ANDRE DE RUYTER: Yes, that's right, and that's what we want to do. We want to leverage off the foundation businesses we have, build that, and expand that. These types of margins we're getting in Africa of 17/18 percent: that's what attracts our interest and our attention.
ALEC HOGG: So where's the hole in the portfolio?
ANDRE DE RUYTER: I think the hole in the portfolio is in our paper businesses. We have said in the past that these businesses are not necessarily strategic. If you look at a segmental analysis of the performance of those businesses, margins are rather low at two-point-four/two-point-five percent, so really not terribly attractive at all. If the right buyer comes along, we will consider what we do with that.
ALEC HOGG: And in the U.K? Those margins aren't great either at six percent. Is that just a function of a first world economy?
ANDRE DE RUYTER: Yes, I think it's a function of a first world economy, but also a function of the market we're in. It's a mature market [unclear 0:09:55.4] in Western Europe that you get lower returns and lower margins. It's a very handy cash cow for us, and a business that is able to deliver a neat little Rand hedge. You would have seen that in the prior year, the Rand/Sterling exchange rate was about 14. It's now close to 18 and that gives us (in Rand terms) a handy bump in our operating profits.
ALEC HOGG: So if we look at Nampak overall, three-quarters of your business is in South Africa. There the economy is struggling, but you have growth opportunities outside of South Africa, on the continent of Africa and a little Rand hedge sitting in the U.K.
ANDRE DE RUYTER: That's correct. That's the story.
ALEC HOGG: And if you were to look into the second half of the financial year…single digit growth as you've achieve this time around, or would you be aiming for higher?
ANDRE DE RUYTER: We obviously always aim to extract the most value that we can, from the business. I think there are incremental opportunities to extract further value from our South African operations. My predecessor, Andrew Marshall, left me a business in very good shape, so there are no obvious opportunities for us to go and extract substantial additional value. This is really a question of continuous improvement, focusing on the basics of the business – making sure that we engage with our suppliers. Get those prices right, engage with our customers, make sure we deliver a quality product at the right price that is competitive, and most importantly, focus internally on our operations and make sure these run as profitably as they can.
ALEC HOGG: So it's tweaking rather than anything revolutionary.
ANDRE DE RUYTER: Exactly.