Construction Products Africa

ORRIE FENN OPERATING PLATFORM EXECUTIVE

Construction Products africa OPERATING CONDITIONS REMAINED CHALLENGING WITH LITTLE UPTURN IN INFRASTRUCTURAL SPEND. COMPETITION IN ALL MARKETS INTENSIFIED.

In the prevailing economic climate the focus remained on cost containment and efficiency improvements, resulting in an improved profit performance compared to the previous year.

Leadership

There were few changes in leadership under platform executive Orrie Fenn, with Phillip Hechter, Paul Deppe, Trevor Barnard and Albert Weber responsible for Much Asphalt, Hall Longmore, Rocla and Building Products (Technicrete & Ocon Brick) respectively. Rob Noonan retired as managing director of the Steel Business and from Murray & Roberts Limited, while Roy Robins was appointed platform finance/commercial executive. Gary Steinmetz continued to lead UCW under the chairmanship of Ian Henstock.

Performance

Health and safety was again a key focus area for the platform as it fully adopted the DuPont safety mantra that “every incident is preventable”.

At the end of the reporting period all entities, with the exception of UCW, had qualified for OHSAS 18001 accreditation. There were no fatalities and the overall lost time injury frequency rate (“LTIFR”) improved from 3.9 to 2.6 with Technicrete achieving a zero LTIFR.

Construction Products Africa returned an EBIT of R197 million (2011: R192 million).

On the construction products side, revenue increased marginally to R3,2 billion but on generally reduced volumes which translated into increased pressure on margins. However, given the disappointing underperformance by Hall Longmore and tough market conditions, a satisfactory operating margin of 5% was maintained across the platform. EBIT of R156 million compared favourably with the R75 million reported in FY2011.

On the industrial products side, as a result of the completion of the Transnet coal-line and iron-ore locomotive contracts, UCW experienced a reduction in revenue and operating profit for the year. Notwithstanding this, UCW managed to generate an 8% operating margin.

Individual businesses maintained leadership in their respective markets. The disposal of the Steel Business was achieved after year-end. The bitumen shortage impacted on Much Asphalt’s results but was mitigated to an extent by alternative sourcing of material and recycling.

Technicrete and Rocla were successful in launching new value-added products.

The ongoing turmoil in the roads sector, resulting from public and political opposition to the Gauteng Freeway Improvement Project (“GFIP”), impacted on a number of entities within the platform. The anticipated go-ahead for the N1/N2 Winelands toll road project failed to materialise and sentiment towards road and related infrastructural investment worsened markedly.

MUCH ASPHALT

Much Asphalt’s LTIFR improved to 4.3 (2011: 5.2).

The company performed well during the year, marginally growing revenue despite a 10% reduction in volumes, in the process producing a number of environmental achievements.

In line with tougher market conditions, operating profit reduced by 9%. The company succeeded in retaining its share of a crowded market which has significantly contracted since the pre-2010 FIFA World Cup™ infrastructural boom.

A constraint on growth was the ongoing shortage of bitumen which has resulted from ageing refineries, unscheduled breakdowns and their focus on the production of other products. To offset this growing supply constraint, Much Asphalt and a strategic partner imported their first two shipments of bitumen amounting to some 10 000 tonnes. This proved to be extremely successful and will be expanded in future, as the shortage of bitumen supply is not expected to improve as local refineries age. As the company grows imports it will require greater storage capacity which is being investigated actively.

Recycling of asphalt was a notable success in the last year, alleviating to an extent the bitumen shortage, and adding significantly to Much Asphalt’s bottom line with concomitant environmental benefits. Other environmental achievements included:

	The expansion of warm mix capacity. Both the Benoni and Durban plants have been modified to produce warm mix, a product that is more energy efficient to manufacture and for which the market is showing increased acceptance
	During the year the Benoni facility was successfully migrated to clean-burning liquid gas. Not only has this cut carbon emissions in line with world benchmarks, it has reduced fuel costs at the facility by more than 30%
	The largest single item (some R6 million) in the capital expenditure budget was a further investment in crushing and screening equipment for the asphalt recycling initiative. Further capital expenditure related to bag-house filter infrastructure to reduce dust emissions

Government’s commitments to significant infrastructure spend and its declaration that the SA National Roads Agency (“SANRAL”) will command an expanded role in road development, maintenance and management augurs well for Much Asphalt.

ROCLA

Rocla’s LTIFR deteriorated to 3.3 (2011: 2.3).

Rocla’s operational performance this year underscored the belief that the exceptional operating profits achieved in previous years are unlikely to be sustainable in future.

In an environment of heightened competition and with little government spend to stimulate the construction and infrastructure sectors, volumes increased by 7% while revenue declined by 11%. The business however remained profitable and generated strong cash.

Some 90% of Rocla’s income is derived either directly or indirectly from government spending. There was little activity in this regard and the ability of the public sector to implement infrastructural projects remains a major cause for concern. However towards the end of the year there were indications that the situation could be improving. This translated into an upturn in the number of projects, including those related to sanitation products, with a more positive outlook for future prospects.

As was the case in South Africa, Rocla Botswana experienced declining orders but returned robust profits, assisted by sales of special products. The Namibian market was similarly depressed.

In partnership with Murray & Roberts Construction, work began on opening a pipe and culvert manufacturing facility in Tete, Mozambique, which is scheduled to begin production in January 2013. Six new product lines have been introduced over the past two years, most finding favour with the market with some significant orders received for certain products. In the short term Rocla management intends targeting new product offerings in the renewable energy and water sectors.

Continuing efforts were made to right-size the business and to reduce costs and working capital requirements.

HALL LONGMORE

Hall Longmore’s LTIFR deteriorated to 3.1 (2011: 2.2).

Revenue remained flat on the previous year on volumes that were 11% down. Difficulties experienced on Sasol’s Gauteng National Pipeline (“GNP”) project, a fiercely competitive market and a shortage of orders, most notably for electric resistance welded (“ERW”) pipe, resulted in a significantly weaker performance than anticipated.

As stated in the previous year’s report, the significant orders received early in the latter half of the year for the Trans-Caledon Tunnel Authority’s Komati water pipeline and the GNP project for Sasol, ensured that the spiral plants at Wadeville and Duncanville were kept working at maximum capacity for most of the year. ERW work picked up towards the end of the year.

Notable achievements this year included:

	The awarding of ISO 14001 accreditation
	The successful industrialisation of the Bituguard pipe coating process used on the Komati pipeline project which bodes well for future business
	The completion of a two-year project to eradicate excess stock, thus freeing up cash
	The appointment of two international pipe distributors to promote the sales of coated ERW pipe primarily into Africa and the Middle East.

The order book is filling up but work still needs to be done to secure orders for the full year. Challenges and risks include the awarding of public sector tenders on time and the need to source additional ERW work.

BUILDING PRODUCTS (TECHNICRETE AND OCON BRICK)

Building Products turned in an excellent workplace safety performance: Technicrete’s LTIFR reached zero (2011: 1.7) while Ocon Brick’s was 2.2 (2011: 2.9), both sterling performances given the nature of the companies’ business.

Markets for both company’s products remained extremely competitive and it became increasingly difficult to pass on input cost increases to customers. In this environment, management again focused sharply on cost reduction and efficiency improvements which translated to the bottom line.

CONCRETE BED FOR BEIRA Every day the seabed at the port of Beira in Mozambique is shifted by strong tidal forces. The huge propellers and bow thrusters of ships berthing and leaving the port loaded with coal further disturb the seabed. To address the problems associated with a constantly shifting seabed, port authorities tasked German consultants Odebrecht International to come up with a solution. They turned to Technicrete. The solution designed by Odebrecht and Dutch engineering consultants DHV, executed by Technicrete, involved laying 35 000 concrete blocks assembled into 230 separate “mats” and covering an area of 3 200 m² of seabed. The Armorflex blocks were manufactured at Technicrete’s White River plant to a thickness of 220 mm, as opposed to the standard Armorflex thickness of 115 mm. Individual blocks were then “laced” together with polyrene, a rope made from a particularly strong chafe-resistant mix of polyester and nylon. Each mat consists of 152 blocks and weighs 5.8 tonnes. Measuring 5.9 m X 2.4 m, the mats were assembled in White River and transported to Mozambique on flatbed trucks. Taco Voogt, Technicrete’s product development manager, says: “It is very important that each mattress is correctly laid to fit snugly against its neighbour to ensure maximum effect.” According to Voogt, the area where the mats were laid is extremely muddy and so it was not considered advisable to use divers. “Laying all mats individually means performing the same operation 240 times without the aid of divers, obviously a very timeconsuming exercise. Therefore the possibility was investigated of linking the mats together to form bigger units, which could be laid in one operation or in a limited number of operations.” To join the mats together, four half blocks were left out on each side so that rebar could be threaded through end-loops protruding from the mats. The blocks were duly built and the mats assembled and deployed, ensuring that conditions in Beira port are now better than ever.

Technicrete’s revenue increased 6% year on year on flat volumes, despite the closure of two factories in the previous year and one in the current year. EBIT improved by 68%, contributing to enhanced cash generation, although delays in public sector payments still remain a concern. The restructuring of Technicrete over the past two years means that the business is well positioned to exploit any upturn in the market.

A particular success this year was the securing and execution of a significant export order, placed by a German consultancy, specially designed and manufactured for use in the port of Beira, Mozambique.

Technicrete also successfully implemented the new paving standard SANS 1058:2012 at all operations, raising the quality standard on all its paving products, the effect of which can be measured against the sharp decline in the number of customer complaints. Technicrete’s latest customer satisfaction survey (which is conducted twice a year) received the highest scores for every performance dimension since the survey was first introduced six years ago.

The R1,2 million extension of the Polokwane tile factory was completed on time, safely and within budget. Manufacturing capacity will increase by 300 000 tiles per month on a single shift. The Roodepoort block plant in Polokwane was re-commissioned to manufacture products outside Technicrete’s normal product range.

At Ocon Brick revenue increased by 4% on clay brick sales of 171 million, 7% down on the prior year. However, it failed to match the profit reported last year, only breaking even due to high wastage factors on kilns that were built during the implementation of a second shift. With new senior management entrenched at Ocon Brick, a greater focus on new manufacturing and process techniques, tighter cost control and improved efficiencies already bearing fruit, which will return Ocon Brick to profitability as soon as practically possible.

Ocon Brick also received excellent ratings from its customer satisfaction survey across all performance dimensions.

To reduce the company’s contribution to the Group’s greenhouse-gas profile, an initiative is underway to reduce emissions by recycling waste brick material generated during the manufacturing process.

UCW

A particularly pleasing decline was achieved at UCW, with a LTIFR that fell from 5.1 to 2.5.

Apart from contributing to the Group’s operating profits, UCW ended the year cash-positive after paying down a debt of almost R70 million to the Group.

UCW successfully delivered the last of the Transnet 110 coal-line (19E) and 44 ore-line (15E) locomotives during the year, and started a follow-on order for an additional 32 ore-line locomotives.

Participation in the Passenger Rail Agency of South Africa’s (“Prasa”) General Overhaul and Upgrade programme contributed to revenue although initial difficulties were experienced in adapting to a change in specification from fixed scope to condition-based refurbishment work.

Industrial action forced management to shut the Nigel plant, resulting in two and a half weeks of lost production. Management has embarked on a concerted “New Era” programme to fundamentally alter and improve relations with the union members. A tornado which ripped through the Duduza/Nigel area resulted in the loss of a further week’s production while conditions at the plant were made safe.

Significant investments were made in training artisans and a cost of some R12 million was absorbed so as to retain scarce skills. It was considered advisable to incur this cost in anticipation of significant new business expected from both Transnet and Prasa in the short to medium term.

PROSPECTS

Expectations surrounding the South African Government’s planned investment in infrastructure have been tempered by continuing uncertainty over the timing and delivery of this investment.

During the year under review Rocla cemented its expansion into northern Mozambique. This limited but strategically important investment will be used as a launch pad and proving ground by other platform businesses seeking to gain a foothold in markets outside of South Africa.

Cost containment carried out over the past two years will stand the platform in good stead. These measures included the sharing of financial management services by Technicrete, Ocon Brick and Rocla, a development which had the added benefit of minimising risk.

Given its rigorous cost reductions Technicrete, in particular, is extremely well placed to exploit any upturn in overall construction spend.

Future prospects for Rocla and Hall Longmore give reason for cautious optimism. UCW is well positioned to exploit opportunities arising from an overdue large-scale investment in South African rolling stock.