🔒 Can De Ruyter rescue Eskom? Alec Hogg, Erik Smuts probe his Nampak performance

After a long search, André de Ruyter, former CEO of Nampak, was appointed as CEO of troubled power utility Eskom. His appointment came as a bit of a surprise. His name was whittled down from a list of more than 140 and he scored the top job at Eskom following an interview. But there are questions about whether he is the right person to save Eskom – which ultimately means improving business conditions in South Africa, as Eskom’s drag on the economy is widely regarded as one of the country’s biggest challenges. BizNews founder and editor-in-chief Alec Hogg spoke to Erik Smuts, De Ruyter’s Nampak successor – and long-time Nampak colleague – for insights on whether De Ruyter really has the business acumen needed to successfully pull off a major restructuring. Hogg also asks the uncomfortable questions about unusual accounting items in Nampak’s financial reports that have raised eyebrows among the investment community. – Jackie Cameron

It’s a warm welcome to Erik Smuts, the new CEO of Nampak. Erik, you’ve been… I don’t know if you can call it thrown a hospital pass but there’s lots of focus on you because of your predecessor, Andre de Ruyter who has now gone to Eskom and everybody’s looking into what he was doing before. They’ve looked at Nampak and said but Nampak is a negative 10-bagger. It’s a company in a lot of trouble etc. and you’re the guy who’s now stepped up to the plate. You’ve been with Nampak a long time. 
___STEADY_PAYWALL___

First of all, thanks Alec. I’ve been with Nampak for 23 years, so definitely not new to the company but obviously new to the position. 

You know Andre?

Yes, very well.

And, is he going to save us?

I don’t think any one person can save us, but let me tell you what; Andre is one of the best/capable people I’ve ever worked for so I’ve got a lot of faith in what he can do for the country.

There are many who are saying yes, he comes across well. He’s got wonderful emotional intelligence, but Nampak hasn’t been a shining success story while he was there. You’ve been around for a long time at the company. What’s been going on that’s really affected the value of investments?

Alec, long before Andre joined the company, one’s got to look at the history. It probably started in about 2005. If you look at subsequent to South Africa opening up to the rest of the world, historically, we had very high market shares in most of the businesses we operate in. Nampak has basically been a combination of many different businesses and that was really at a time when in South Africa, the only way you could grow was to combine different businesses and try and create some economies of scale through management/managing altogether and lowering your overhead cost. So, in a low growth environment, what we started doing – and most other companies in South Africa – is to say, “In this environment, how can we grow?” So, first of all, people looked at earning hard currency. Now, you’ll probably find that’s a term that hasn’t been used for a very long time but we started looking outside of our borders. We started first of all, from a beverage can operation; we started exporting big volumes into neighbouring territories and then later on, we had a growing market in Angola. So, at one point in time, the Angolan government came to us and actually asked us if we want to invest in a plant in Angola. We then started doing a feasibility study. Volumes were going up. We were getting quite dependent on some of those volumes and then, one of our major customers there put their entire business out to tender, so we were already supplying significant volumes in there. One of our big competitors – Ball Corporation – were also supplying big volumes in there and we’ve actually then gone head-to-head against them in a tender to see who will win the business, knowing that the person or the company that’s not going to get the business will actually lose a substantial portion of their business. We managed to win that tender against them in 2007 and that is actually when the investment into the rest of Africa started. So, it was quite a drawn-out process at that point in time to get all the approvals in place etc. The Nampak board took a decision right from the start. We’re not going to engage in anything that’s unethical or that type of thing so we decided not to take shortcuts which, in the end, cost us a lot of time so it took a couple of years to get all those approvals in place. Eventually, the plant was constructed.

Was that because you often have to bribe people to get things done – or more rapidly? They do get done eventually, but it just takes a long time.

I think a lot of these economies have got a reputation for that type of thing. We took a very deliberate decision. We’re not going to engage in any of that and I think that’s definitely a decision that worked out well for us where we find a lot of other companies or other players decided to take shortcuts and eventually, they paid a heavy price. As I said, we decided not to do so when we started operating, we were left alone so I think that in the end, it was a very good decision.

So, of the Nampak business today; how much is in South Africa and in the rest of Africa particularly – given what’s happened to the oil price in the past 48 hours, Nigeria and Angola who are so heavily dependent – or all those economies who are so heavily dependent on oil?

Originally all our business came from South Arica. Over time, the strategy of moving into the rest of Africa – when we diversified our portfolio – and as of 2019, 70% of our trading income came from the rest of Africa. I have to just clarify that. Our trading income excludes some of the abnormal items, so that is looking more at the actual underlying business that does not necessarily show the final rands and cents.

Now, those abnormal items are something we saw Ann Crotty write about it in the Financial Mail. We’ve got Chris Logan who’s  coming on our show also criticising you on that. These items have been recurring on the income statement and yet, they’re still made into the abnormal column. You’re a Chartered Accountant. What’s going on here?

I think let’s first of all look at why they’re not included in trading income. Trading income is meant to reflect the underlying trading of the business. When you started looking at repatriation of funds etc.  is not what we classify as normal trading. What we try and do as well is give full disclosure to the users of financial instruments. We also have what we clearly define as trading income so that if anybody disagrees with a specific definition, we give all the information and the user can then make up his own mind as to what is abnormal, etc.

But Erik, the share price is just spiralling downwards. You’ve got big debt. Getting back to how I started – hospital pass. It looks like it to outsiders.

I certainly can see how it can look like that from the outside but I think that maybe if I can continue. After we made the initial investments into Africa, we actually had massive success so if you look at the execution of those first projects. They were very well-executed and the profitability actually showed. Thereafter, we made another big investment in Nigeria and if you look at the sentiment from the market, the share price shot up so our profitability increased as a result, coming from the rest of the Africa and it was clearly at that point in time – given the available information – that it was the right thing to do. The market applauded us for that strategy. The share price increased from roughly R15.00 per share to…I think it reached a height of about R45.00 per share. But then, something came from the outside, which we would like to say was unforeseeable and uncontrollable. So, the collapse of the oil price reversed a lot of the good fortunes of Nampak. At that point in time, there was not much we could do about it because you can’t go and uplift those investments. So, although they were really successful investments up to that point in time, the whole of Nampak’s future then changed dramatically. Instead of going into a growing situation, we were  then in a situation where we had to see how we could protect shareholders and that’s roughly the time when Andre came in. I think he came in around 2014 – which is exactly the time when the oil price collapsed  – so through his tenure, most of what he had to do was see how to protect further losses to shareholders.

It looks like you’ve got the same situation you have to deal with, with the way the oil price has gone down. Would you believe $28 over the weekend?

Absolutely. This is not the first time this has happened. If you recall during the financial crisis in 2008, the oil price also collapsed. It recovered very quickly and most of that was driven by the growing demand for oil from China. Of course, it happened again in 2014,  that was for a very different reason. That was probably due to the fact that you had new technology, the fracking in North America and shale gas etc. gave an alternative to oil and I think that’s changed the long-term prospect for oil to an extent. I think a lot of the recent slump is probably related to the coronavirus and  a disagreement between OPEC and some other countries. I think we’ll have to wait and see what’s going to happen from here but at the moment, it’s definitely a challenging situation to manage.

How do you manage through it? Have you got the reserves to keep going with the oil price at these levels?

I think the situation today – and what we faced a couple of years ago – is very different. Back then, we had to fund these economies to keep the raw material  and operations going. These economies have been through a similar situation now for quite some time so I think we’ve learned how to adapt. We’ve scaled back to the point that we need to. The mechanisms in the country are very different to what it was back then. I think it’s fair to say that in Angola and Nigeria, we’re now closer to a free-floating currency where before, I think it’s probably fair to say it was a lot more managed. So, we’re quite confident that we don’t need to invest further money into these economies. In Nigeria at the moment, there is no issue with getting funds out of the country – the same for Angola – but we will have to manage the situation as it’s unfolding and we’ll have to react to the situation at the time.

Nampak was always a favourite amongst value investors because you had all these assets and you were trading at a discount to the value of the assets – even more so today. Are you able to give us some visibility about when you return to profitability? Your interim results showed a substantial loss and again, what shareholders are really interested in nowadays, is dividend streams. 

Yes. I think if you look historically, Nampak had quite a rich dividend policy and I think if you look at it in retrospect now, I think we all agree it’s been too rich. Hence, the reason why we cut it back especially since we were starting to deliver so much of our profits out of these economies that had restricted currency flows at the time. Clearly, that’s put quite a heavy burden on our balance sheet and we will only return to putting out a dividend once we know that we can service our debt properly. We made it clear at our year-end results that the first priority right now is to pay down some of our debt and specifically, the USD-denominated debt.

Tell us a bit about yourself. Apart from being a Chartered Accountant who studied here and internationally. You’ve been with Nampak for quite some time. Were you intimately involved with the Africa expansion?

Yes, so both the investments into Angola and Nigeria happened under my watch so different from some of my predecessors, I can’t blame this on anybody else. I was very involved in those at the time and I must be honest. I’m quite proud of what we achieved. Of course, if you look at the share price right now, it tells a very different story – different fortunes. Obviously, hindsight is 20/20 vision but in fairness, I think if you had to put those same investments in front of a responsible board today, given the information at the time, I think they’ll make exactly the same decision. So, if you look at Nampak over the years, clearly, we haven’t done everything well over its entire history. We’ve made some mistakes over the last couple of years. My personal motto is, “If you’re going to fail, fail forward and make sure you learn from it” and that’s certainly what we’re going to try and do.

Angola’s an interesting country right now. Not many South Africans are aware of the massive privatisation program that the new President is enacting there. Also, attacking corruption by exposing the former President’s daughter and her shenanigans. Is this something when you look five to 10 years ahead and with a normalised oil price, that could be a jewel in the Nampak crown?

Alec, definitely. If you look at our strategy going forward – and clearly, we can’t discuss this in detail until we’ve spoken and disclosed more to the market about it – but clearly, Nampak has got a very good footprint in Africa right now. Yes, it’s a challenging market but I think over time, that will really put us in a good position once those economies start recovering again. If you look at Angola, it was interesting. I visited Angola from about 2004 and it was remarkable. Every time you fly in, you can see the new investment and infrastructure and how it’s uplifted that country. Of course, thereafter, it’s gone into a slump again and now recently. It’s very brave of the new President to tackle corruption in the way he’s doing. I think it’s commendable and there’s clearly a new feeling on the ground that he’s serious about it. I think that’s the same for any economy anywhere in the world and specifically in Africa, it’s fantastic to see this type of leadership coming through.

Unfortunately, the oil price is not playing ball, but as you say, it could normalise. It should normalise one day.

Yes. We’ve obviously put a big bet on Africa. I think initially it paid off. Later now, with the collapse in the oil price, I think one can look at it differently. We are invested there right now. It doesn’t mean we’re going to invest further. I don’t think there’s a need. We’ve got a good footprint so  when the time comes and we need to look at other investment destinations; there are probably other places we also need to consider.

Chris Logan is going to be talking to us about something else later but Chris, I know you’ve done a lot of work on Nampak. Let’s not go into much detail here. Are you comfortable that you’ve been given new information, that you may have to reassess?

I think Erik gave some interesting context to the investment in Angola and Nigeria. I was particularly interested in his comments that they beat Ball in a tender for the Angolan business, because an advantage that a big company like Ball would bring to the party – in going into something like Angola for it’s scale, where the Angolan business would have been probably under a percent, so they would have been able to ride out this volatility. But I certainly think Erik’s given some great context in a rapidly developing story and I’d encourage him to do more of it. It’s very good.