Hunyani operating profit below budget

Published: 10 March 2014

Hunyani Holdings Limited is facing considerable pressure on margins and is performing below budget at operating profit level due to various factors such as competition and shrinkage of market, group MD David Bain told the AGM.

"Competition is intense and the weak rand is exacerbating the situation. South African packaging companies are employing marginal costing strategies to gain export volumes at a time when the South African economy is also slowing. In addition the current liquidity situation is also contributing to weaker markets.

"The number of customers in the market is shrinking due to business closures. Overall there is therefore considerable pressure on margins and we"re below budget at operating profit level," he said.

However, he told the meeting that the group is expecting full year operating profit to be higher than 2013, expressing his serious concern about the current state of the country"s economy, "which could seriously impact the company if the current downturn worsens."

Bain indicated that the management of credit risk will be a key issue and will require close management.

He further noted that the group"s first quarter apart from Christmas is always quiet and they have shutdowns in January in terms of their preventative maintenance programme and volumes are therefore low.

"In terms of performance, we are on budget in volume terms but turnover is below budget. This is because there is downward pressures on price from customers who themselves are facing similar pressures," said Bain.

In response to the difficult environment, he pointed out that they are continuing with the restructuring programme that commenced a while ago.

Having concluded the process of selling or shutting non-performing entities, Hunyani is now focusing on investing in continuing operations under the Corporate Capital Plan and aggressively implementing cost reduction programmes.

"In terms of capital expenditure, we spent $2 million last year mostly in Cartons & Labels and Corrugated. We have identified several projects in corrugated mainly corrugated tobacco section which will be presented to the board shortly for consideration," he added.

Bain indicated that cost reduction has mainly been in the area of retrenchments.

Turning to divisions he stated that corrugated has had a pleasing start to the year with some unexpected tobacco orders contributing to higher than expected volumes.

He added that the growth in the local volume of tobacco grown will benefit the division in the second half of the year but growth is also expected in export volumes for both commercial and tobacco to Mozambique, Zambia and Malawi.

"Cartons and Labels division has had a difficult start to the year. It is still settling after the move from Bulawayo and employees are still making the difficult adjustment to life in Harare.

"The plant move was exceptionally well handled and we"re well positioned now in terms of technical capability with the new Roland printer. The speed-master printer will be commissioned later this month following a rebuild project," he added.

Bain said results are below expectations but the division is now profitable and well ahead of last year"s performance.

Flexible products unit, according to Bain, is also below budget and this in the main is due to intense competition on both bags and tobacco wrapping.

In terms of opportunities in this division, the firm has entered into a supply arrangement for tea sacks to Malawi with Nampak.

"This market is growing and we"re now also exploring possibilities with other sack products and tobacco wrapping…," he noted.

Hunyani"s joint venture, Softex, has just returned to profitability as pointed out by Bain, and they are forecasting a better than expected performance from this operation but this will be contingent on an improvement in the quality of tissue wadding that is being converted.

He noted that the situation on farms remains unchanged as operations at Mganga have ceased due to the presence of squatters.

Overall, he said the group hope to remain in a cash position for most of the year and "this should favourably impact finance income."

"Profit before tax will however, be behind the prior year because of one-off profits on property disposals which were earned in 2013," Bain added.
- zfn

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