1 page 10 Pretoria Portland Cement Company Limited Annual Report 2008
2 Pretoria Portland Cement Company Limited Annual Report 2008 page 11 SUSTAINABILITY REVIEW MANAGEMENT REVIEW GROUP OVERVIEW FINANCIAL REVIEW tons of cement estimated to be used on the Gautrain project
3 page 12 Pretoria Portland Cement Company Limited Annual Report 2008 Chairman s report Martin Shaw The approval of the broad-based black economic empowerment transaction, the commissioning of a kiln, record-breaking cement production and a further improvement in employee safety statistics are a few of this year s achievements.
4 Pretoria Portland Cement Company Limited Annual Report 2008 page 13 The past year has seen the attainment of a number of significant milestones: the shareholder approval of the broad-based black economic empowerment transaction, the commissioning of the first new kiln in PPC in 23 years, record-breaking cement production and, within this busy environment, a further improvement in employee safety statistics. In achieving these milestones the PPC team has again demonstrated their commitment to excellence in all that they do. Group results Group revenue grew by 12% to R6,2 billion (2007: R5,6 billion) in line with inflation. Group operating profits increased by 7% to R2,3 billion and headline earnings grew by 8% to 283 cents per share. The group operating margin declined to 37,2% (2007: 39,1%) due to the impact of unprecedented energy price increases in the second half. Cash flow and dividends Cash flow was again strong with cash generated from operations increasing by 16% to R2,5 billion. A total dividend of 225 cents per share has been declared (2007: 205 cents). No special dividend has been declared after the R753 million acquisition of treasury shares completed this year to minimise the dilutionary effect of the 15% BEE transaction. Economic environment The continuing financial markets crisis has had an negative impact on the global economy, resulting in many of the world s largest financial institutions receiving government assistance. The magnitude of this problem has now raised expectations of recession in many of the major economies. South Africa, like other emerging markets, has experienced a severe weakening in the local stock market and its currency. Higher inflation, high interest rates and substantially higher energy costs have put GDP growth targets under pressure. The sustainable supply of electricity to many industries, especially mining, will also hamper growth plans. Notwithstanding this, we believe the government will continue with its infrastructure and affordable-housing programmes. Construction has started on two new coal-fired power stations, Medupi and Kusile, two pumped-storage schemes, new airports and major road expansions and upgrades, to mention but a few. Cement overview After seven consecutive years of strong growth, the regional industry cement demand has showed, for the first time, a small negative growth of -1,6% year on year. This was due mainly to the continued drop in demand from the formal residential sector, but despite the delays in commencement of many of the aforementioned infrastructure projects, demand from that sector virtually offset the residential market decline. All existing manufacturing units ran at full capacity throughout the year and imports into the Eastern Cape were discontinued from January Significant increases in diesel, coal and electricity prices exceeded the producer price inflation index and exerted pressure on operating margins, particularly in the last quarter of the year. Although crude oil prices have recently shown a sharp decrease in dollar terms, the local price of coal has been much more resilient. Appointment of Bheki Sibiya as the first black chairman of PPC This, combined with the weakening of the rand, will mean continued cost pressure for 2009 despite the benefits from the more efficient new Dwaalboom kiln line. These factors will result in cement price increases in excess of official inflation levels in the year ahead. Cement-expansion projects The Dwaalboom kiln 2 was successfully commissioned in September 2008 and, although later than planned, it was commendably within budget. The project was delayed for various reasons, including shortages of skilled staff experienced by the contractors as the project neared completion and work stoppages when situations arose that would have compromised safety. I am pleased to report that during October 2008 the PPC team, together with equipment supplier FL Smidth, successfully demonstrated the kiln s production capability. This is indeed a remarkable achievement for such a large and complex project and bears testimony to the care taken in both the design and selection of contractors and equipment, and the professionalism of project execution. I would like to acknowledge and thank all who worked so enthusiastically and tirelessly on this project. FINANCIAL REVIEW SUSTAINABILITY REVIEW MANAGEMENT REVIEW GROUP OVERVIEW
5 page 14 Pretoria Portland Cement Company Limited Annual Report 2008 Chairman s report continued The Ntšhafatso new mill project at Hercules is progressing well and according to plan. The proposed expansion at our Riebeeck factory in the Western Cape has experienced further delays with the environmental impact assessment process. Significant progress has been made this year, with PPC addressing the main issues raised. We hope that conclusion of the process can be achieved by the middle of Lime and aggregates Demand for burnt lime was only marginally up on the previous year because of lengthy maintenance shutdowns at some key customers operations. This, combined with large increases in coal and diesel costs, has resulted in a challenging year for the lime business. Major supply contracts do make allowance for these cost increases to be recovered at the time of the next price review anniversaries, of which the main ones are occurring at the beginning of January Our aggregates business has benefited from increased demand volumes, especially in Botswana, and achieved good growth in operating profit. The R39 million expansion project at Laezonia was completed within budget and successfully commissioned in August Zimbabwe The worsening situation in Zimbabwe continues to put our staff and operations under extreme pressure. Ongoing shortages of key production inputs such as coal and electricity and continued price control on cement have made it impossible to operate with any semblance of normality. But Porthold continues to produce cement, albeit at reduced capacity, and has maintained exports to earn the foreign exchange required for the procurement of imported inputs. Broad-based black economic empowerment I am pleased to report that the empowerment transaction and associated Scheme of Arrangement were approved by the shareholders at the two meetings held on 11 November 2008 and will become effective on 15 December The transaction will result in 15% of the ordinary share capital of PPC being held by our new black shareholders. The scheme comprises two elements, namely equity ownership by employees, community and industry associations through the establishment of trusts and a community services grouping, and a consortium of four strategic black partners. The largest individual stake of 2% was allocated to the establishment of a Construction Industry Associations Trust to benefit members of existing and future black construction industry and related associations. Furthermore, an external trust with a 1% stake has been established, to develop technical and management skills of black individuals in the cement, lime and aggregates manufacturing, mining, construction and related industries. The strategic black partners were chosen because of their experience and involvement in the wider construction and mining arena and their ability to add value to PPC. Some have their own broad-based black components such as black women and youth among their stakeholders. Although the completion of this very broad-based transaction and its funding took almost two years to complete, the result fully embraces BBBEE. We are proud of the fact that more than 3,5 million black South Africans will benefit directly from their stake in PPC. We believe the result is a very sustainable transaction with significant value creation in the future for all the stakeholders. I would like to take this opportunity to acknowledge and thank all those who strived tirelessly to construct this carefully formulated transaction and to welcome our new shareholders and partners to the company. The company is now in the final stages of engaging with the Department of Mineral and Energy Affairs to secure conversion of its old order mining rights in terms of the act. Thereafter, work must start to ensure that the next target of 26% black equity ownership is equally successfully implemented. Safety and environmental commitment Safety of our staff and contractors remains PPC s top priority and we are pleased to report that our good safety record further improved over the past year, in particular on the major project construction sites. PPC remains committed to its sustainability and environmental policies and to this end has initiated a number of projects to improve the environmental performance of our facilities. In August 2008 we announced the R70 million rand project to reduce dust emissions at our De Hoek factory in the Western Cape. This is in addition to the R40 million already spent on other dust-emission reduction projects such as the projects at Lime Acres and Port Elizabeth. Social investment This year PPC continued to build on its efforts to empower communities by ensuring all its initiatives are sustainable and by continuing its emphasis in the areas of education, training and job creation.
6 Pretoria Portland Cement Company Limited Annual Report 2008 page 15 The PPC Academy extended its scope of learnerships with the launch of its Mining Academy in August 2008, and the PPC Graduate Academy commenced in January 2008 to enable new black graduates in the technical field to be fast-tracked into the succession pipeline. Through its Ntsika enterprise development Fund, PPC has this year partnered with three different projects to facilitate the development of entrepreneurs and the creation of employment. Corporate governance A number of important actions were completed during the past year. The first of these was the appointment of Tim Ross to the board as an independent nonexecutive director and as chairman of the audit committee on 17 July In my last report I indicated that I would remain as chairman until the completion of the empowerment transaction and until a black chairman had been appointed. The nominations committee completed a thorough search for black candidates for this important position. The final selection process was conducted by the chairman selection committee, consisting of all the non-executive directors, and culminated in the appointment of Bheki Sibiya as an independent non-executive director on 10 November 2008 and as chairman from 17 November As a result, I stood down as chairman from that date. In addition and in line with JSE Limited requirements, he assumed the chairmanship of the nominations committee from 17 November Ntombi Langa-Royds was appointed chairperson of the BEE and transformation committee and the remuneration committee with effect from 10 November Her appointment to these two positions replaces John Gomersall and myself as the chairmen of the two committees respectively. These appointments now align the board and its committee structures with corporate governance best practice. The nominations committee has commenced the process of identifying potential candidates for the position of CEO to take over from John Gomersall when he retires. The committee believes that an appropriate handover period should be allowed for during the transition of this important position. Reviews of the Board Charter, board committees terms of reference and the amendment or adoption of various policies were conducted during the year. The implementation of a formal programme for the continued training and development of the board and a new board performance evaluation approach, including the additional evaluation of the board chairman, company secretary and board committees, has been implemented. Prospects The current turmoil in global markets and predictions of recession during 2009 and 2010 in many of the major economies must have some impact on the South African economy. We believe this is likely to be less in the infrastructure-intensive sectors of the economy, but it would be foolhardy to expect that there would be no impact. In this environment, it is therefore almost impossible to give any definitive outlook for the year ahead. The company has examined different scenarios for cement demand, ranging from modest to negative growth, and has action plans in place that will be implemented as the actual scenario unfolds. Cement requirements for infrastructural projects will continue and although the most immediate are related to the 2010 Football World Cup, a myriad of other major projects will sustain demand until at least The commissioning of the Dwaalboom kiln 2 will allow PPC to further optimise operations and service to customers and supply export markets previously relinquished or supplied from imports such as Zambia and Mozambique. Appreciation My tenure as chairman has been relatively short, but during this time I have experienced being part of a team that never stops trying to create increasing value for all the company s stake holders. Team PPC continues to prove that at the heart of any great company are its people. My thanks and appreciation goes to the team and to the board for another solid performance during a busy year. I congratulate Bheki Sibiya on his appointment as chairman and wish him well in leading the board over the years ahead. Martin Shaw Chairman
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8 Pretoria Portland Cement Company Limited Annual Report 2008 page 17 GROUP OVERVIEW FINANCIAL REVIEW SUSTAINABILITY REVIEW MANAGEMENT REVIEW Affordable housing backlog to be eliminated by 2014
9 page 18 Pretoria Portland Cement Company Limited Annual Report 2008 Chief executive officer s report John Gomersall The key to sustainability in this modern world is focusing, nurturing, developing and empowering the human intellect of the company and using it better than your competitors. It is the most precious of all inputs to any human endeavour.
10 Pretoria Portland Cement Company Limited Annual Report 2008 page 19 The focus on sustainability has increased in recent years and is perhaps even more critical in the current world economic turbulence. PPC has thrived and grown for more than 116 years through many uncertain economic and political times. The company s strong foundations provide the platform for continued success over the next 100 years has been a challenging year but Team PPC has risen to the occasion and is proud to report on another year of outstanding achievements. Among these were record cement production, a further improvement in our safety statistics, the approval of the broad-based black economic empowerment transaction and the commissioning of the new kiln at Dwaalboom. Cement demand Industry regional sales were slightly down on the previous year, with strong growth experienced in the Eastern Cape and Mpumalanga, and the Gauteng and Western Cape markets showed a decline. In the Western Cape, we estimate that approximately 160,000 tons of PPC sales were lost due to the excessively wet winter. The cement industry imported more than 1 million tons of clinker and cement during the year, indicating that usable industry capacity had been overstated. We believe that supply constraints resulted in demand for the year being somewhat understated. accounts for 15% of regional sales and, because this sector is not interest rate sensitive, it is still performing strongly. Cement demand for affordable housing projects should continue or even accelerate as a new government delivers on reducing the backlog of nearly three million housing units. Regional demand stabilised in a range of 1,2% to 1,6% year-on-year decline since March this year and, as we predicted last year, reflects that increased infrastructural sector demand has thus far virtually offset the residential sector decline. Major construction companies are still reporting record order books driven mainly by infrastructure related projects and this pipeline should help to support demand over the next year or two. Cement input costs increased significantly above the producer price index because of the excessive increases in energy costs GROUP OVERVIEW MANAGEMENT REVIEW SUSTAINABILITY REVIEW PPC s regional volumes were flat year on year. Our imports into the Port Elizabeth area were kept to a minimum in the first quarter of the year and we maintained our presence in Mozambique with imported Surebuild cement. Much has been written about the downturn in the formal residential construction sector, but research shows that this decline commenced as far back as the end of Demand in the rural market currently Operations overview: Cement All our production lines ran at high utilisation levels and the optimisation of our Western Cape capacity enabled us to discontinue importing into the Port Elizabeth area from January A total of tons of cement was transported into the inland and Gauteng regions from our Western Cape and Porthold operations. Although additional logistics costs were incurred on these movements, it was more beneficial for PPC to supply its own manufactured product. FINANCIAL REVIEW
11 page 20 Pretoria Portland Cement Company Limited Annual Report 2008 Chief executive officer s report continued Cement input costs increased significantly above the producer price index because of the excessive increases in energy costs as international energy demand drove coal and diesel prices to record levels during the second half of the financial year. The real price increase for electricity approved by NERSA and the increases in rail tariffs have also contributed to these alarming cost increases. Although the current international economic crisis has already had an impact on international prices for crude oil and coal, the local prices have been slow to react and it is expected to be a while before we see any significant reductions. Diesel is a typical case in point, because the reduction in the rand price of crude oil has not filtered through to the diesel price to the same extent that it has in the petrol price. Operations overview: Zimbabwe The situation in Zimbabwe has reached the point where, effectively, major parts of the economy including parastatals are only functioning in foreign currency. Zimbabwe urgently requires a political settlement to facilitate the economic reconstruction that is so desperately needed. Despite this situation, Porthold continues to produce cement, both for the domestic market and for export, to generate critical foreign currency earnings. Manufacturing capacity beyond 2010 The most modern cement kiln (Batsweledi) in southern Africa was completed within budget and commissioned at our Dwaalboom plant in September The kiln ran at warranted output within 30 days of its start-up. These inputs have a high weighting in the cost of manufacturing cement and we shall have to recover them in cement price increases. Hopefully, the local prices of these inputs will reduce and alleviate pressure on cement prices in the future. Operations overview: Lime and Aggregates Lime division also experienced extraordinary increases in coal, diesel and electricity prices, which put margins under pressure in the second half of the year. These increases should be recovered in terms of contract pricing adjustments in the future. In the year ahead, we expect weaker demand due to the production cutbacks announced by steel producers. Gauteng aggregate volumes improved with increased metallurgical dolomite stone demand resulting in good profit growth. Kgale quarry volumes in Botswana increased substantially after the continued investment in infrastructure and commercial development projects in southern Botswana. This is testament to the professional team work that occurred between all players on this project, extending from our own in-house project management, operations and technical teams to the equipment suppliers, especially FL Smidth, as well as engineering consultants and erection contractors. This kiln has the potential to be the most thermally and electrically efficient kiln in southern Africa. It is too soon to give precise figures, but the production to date indicates that the efficiencies will be significantly better than our older units. Coal consumption will be dramatically reduced through the use of an inline pre-calciner and six-stage pre-heater. Electrical energy-efficiency gains are achieved by the use of vertical roller mills and high-efficiency electric motors throughout the plant. On the environmental side, the use of bag filter technology has ensured that emissions are within international limits while requiring less than half the water consumption per ton of cement normally needed.
12 Pretoria Portland Cement Company Limited Annual Report 2008 page 21 The safety record achieved during the 26-month construction period was outstanding. Only seven, mainly minor, lost-time injuries occurred over this period, in which more than five million man-hours were worked, reflecting the enormous effort of all team members to reduce the risk of injury. The Ntšhafatso new mill project at Hercules in Pretoria continues according to plan and the erection of the mill itself is now under way. This is also a latesttechnology vertical roller mill, which will improve electrical consumption per ton of cement produced significantly. The necessary additional electricity supply and electrical infrastructure is already completed. We do not anticipate that this project will add to PPC s capacity in the 2009 financial year. The new technology used in expansion and modernisation projects will enable PPC to reduce its direct and indirect carbon footprint The submission of the environmental impact assessment (EIA) report for the new plant near Riebeeck West was delayed for the completion of important further specialist studies and the granting of additional time to interested parties to submit comments. The EIA submission is expected shortly but it is unlikely that approvals will be forthcoming before mid This has been a thorough process and we are confident that all aspects of the EIA process have been conducted to our usual high standard. More about this process is contained in the environmental section (page 69). Human resources beyond 2010 PPC has always understood that the sustainability of the company and the country is directly dependant on the growth of its people s intellect, skills, attitudes and wellbeing, and so it should be no surprise that during this past year we continued to expand our capabilities to educate, train and uplift our people. We have further extended our PPC Academy to incorporate learnerships in the field of mining and have initiated a Graduate Development Academy. Ten new tertiary education learners were welcomed to PPC as part of the 2008 bursary intake and, in addition, 30% more apprentices were employed this year. Succession planning is one of the key pillars in our Kambuku people programme and I am pleased to report that four of our five new black executives came up through the PPC succession planning route. This is yet another example of how PPC has continued to sustainably transform the company. More detail on this progress is contained in the social section (page 78). Another aspect of ensuring a sustainable workforce is to entrench health and safety as top priorities in daily operations. The behavioural-based safety initiative has in the past two years shown major benefits and I am pleased to report that our lost-time injury frequency rate has reduced by 50% to only 1,5 losttime injuries (LTIs) per million man-hours worked. This number includes all contractors working on our sites for which we take responsibility and demonstrates our ability to share and inculcate our safety culture into their activities. Our ultimate aim remains zero injuries and our target for this year is to reduce our frequency further to less than 1 LTI per million manhours worked. FINANCIAL REVIEW SUSTAINABILITY REVIEW MANAGEMENT REVIEW GROUP OVERVIEW
13 page 22 Pretoria Portland Cement Company Limited Annual Report 2008 Chief executive officer s report continued Ensuring a better environment beyond 2010 We have maintained a high focus on this area of our business and have continued to make progress during the year. We now have a strong team of highly skilled and knowledgeable experts situated throughout PPC operations to monitor the implementation of the actions plans arising from our baseline environmental audits. To date, a number of projects have been completed or are in progress to reduce dust emissions. The announcement of the R70 million project to reduce emissions at our De Hoek factory is another example of PPC s commitment to improve its environmental performance. Further similar projects are currently under investigation to ensure continual improvement in the company s environmental standards and adherence to ever-tightening legislation. As new production lines come on stream and replace old equipment, we will move to unprecedented low emission levels from the modernised facilities. The proposed multi- billion rand new factory to replace the 50-year-old facility near Riebeeck West in the Western Cape is another example of modern technology making a huge difference to the environment. The new technology used in expansion and modernisation projects will enable PPC to reduce its direct and indirect carbon footprint and bring about a dramatic reduction in dust emission levels. The buy-back of 20,1 million shares at a cost of R753 million was completed during the year to minimise the dilution resulting from the broad-based black economic empowerment transaction. During this first year after the company s unbundling from Barloworld, significant effort has been made in improving investor communications. As at financial year-end, the company s foreign shareholder base had risen to 32%, up from 22% in Broad-based black economic empowerment The recently approved broad-based black economic empowerment transaction was the culmination of a long process that was necessary to ensure the original objectives of the transaction were realised. The first objective was to ensure that it was in accordance with the Mining Charter and the Department of Trade and Industry s codes of good practice. Secondly, to ensure as large a beneficiary base amongst our stakeholders as possible, which was achieved through the establishment of trusts involving employees, communities in which we operate and users of our product. In addition to this, the strategic black partners selected are either involved in construction or mining. Thirdly, to structure the transaction financing to keep funding cost to a minimum to ensure that the transaction was as sustainable as possible for the benefit of both our existing and our new BEE shareholders. Value for shareholders beyond 2010 This year has been another year of good cash flow returns to shareholders with cash generated from operations increasing by 16% to R2,5 billion. The total dividend declared for the year is up 10% to 225 cents per share. Finally, to ensure that the transaction minimised the dilutionary effect on existing shareholders. The resultant transaction structure, together with the share buy-back and scheme of arrangement, limited the dilution to only 5,3%.
14 Pretoria Portland Cement Company Limited Annual Report 2008 page 23 REAL social investment PPC applies the same logic to social investment initiatives as it does throughout its entire transformation philosophy is it REAL? REAL is a simple filter which ensures that all initiatives are Relevant, will Empower, will be Actualised and will Last into the future. This year a number of social investment projects were undertaken with the emphasis on job creation and skills development. Through our Ntsika enterprise development fund, we helped two businesses to improve their potential for sustainability beyond Comprehensive details of all our social investment projects this past year is included in the social section (page 94). Customers beyond 2010 Gross fixed capital formation (GFCF) during the second quarter of 2008 rose to 22% of GDP, the highest level in 20 years. Economists are now predicting it could reach 25%, the level of GFCF required to sustain the infrastructure of a growing economy, sooner than the government s target of This was reinforced in the recent medium-term policy statement that confirmed the R600 billion infrastructural investment over the next three years. Existing infrastructure projects such as Gauteng road projects, the Gautrain and World Cup 2010 facilities are in full swing and a number of new projects are just starting. These include the Medupi and Kusile power stations, two Eskom pumped-storage schemes, the Coega container quay and a number of hotels for the World Cup. Demand for cement could well maintain current levels despite continued weakness in the formal residential housing sector. Demand for cement for the rebuilding of the infrastructure will continue well beyond 2014, despite the negative global outlook for the next year or two. Some observers are already predicting that residential construction may see some modest recovery later in 2009 if interest rates are reduced as anticipated in tandem with trends around the world. We have examined a variety of cement scenarios unfolding over the next year or two and have simulated the actions we will take to optimise shareholder value creation in whatever scenario unfolds. Team PPC is ready to respond quickly to any situation that arises, which is key in uncertain times. Whichever scenario unfolds, PPC will continue to optimise the supply of cement to customers by using its wide geographic footprint and capacity flexibility. We have already revisited traditional export markets and have re-established the logistic channels to serve these markets from our own production again. Appreciation Our thanks go to Martin Shaw for his decisive and inspiring leadership during his tenure as chairman and our warm welcome and congratulations go to our new chairman, Bheki Sibiya. Finally, I would also like to thank Team PPC for the foundations they have laid this past year and for their unwavering commitment to generating value for all stakeholders. John Gomersall Chief executive officer FINANCIAL REVIEW SUSTAINABILITY REVIEW MANAGEMENT REVIEW GROUP OVERVIEW