Nampak [JSE:NPK] expects the 21-day nationwide lockdown to impact its product lines related to alcohol and “smaller non-essential” packaging.
Africa’s largest packaging manufacturer on Monday issued a voluntary trading update for the five months ended 29 February 2020. It also provided projections on how the Covid-19 outbreak might impact its operations.
The group reported a R390 million loss for the financial year ended 30 September 2019. During the period Nampak implemented a turnaround strategy which involved cost containment measures as well as the disposal of non-core assets and unprofitable businesses, Fin24 previously reported.
In the update on Monday the group said a “significant number” of its factories would remain operational during the lockdown. Nampak said it does not yet anticipate major disruptions to its supply chain. “Detailed risk assessments of our inbound supply chain have so far indicated that there are minimal disruptions from our suppliers and that we currently have an adequate supply of raw materials in our businesses,” Nampak said.
According to the group the impact of the lockdown on consumer demand in SA is not yet known. Its food cans division Divfood is expected to experience a “temporary hike” in demand, as consumers stockpile on long life foods.
But the demand for beverage cans will be negatively impacted in the short term due to restriction on alcohol sales. “The primary impact of the lockdown will only be on product lines related to alcohol packaging and some smaller non-essential packaging products,” the update read. Alcohol and cigarettes are not regarded as essential items which will be available for sale during the lockdown period, Business Insider previously reported.
The overall impact on demand for its food and beverage cans will be known by the second half of the financial year, it said. A rationalisation process for Divfood will continue despite the expected spike in demand and the group has said retrenchment costs from this rationalisation process will be incurred.
“Outside of overall demand shifts in the economy, Nampak does not anticipate material impacts on demand for plastic and paper products,” the group added.
Nampak said it is “closely monitoring” the Covid-19 outbreak and adapting its business as required. It noted that the uncertainty of the situation also made it difficult to predict exactly how the group’s 2020 performance would be impacted.
Nampak added that uncertainty on supply chain disruption brought on by travel bans could significantly impact the group’s results. “As a significant proportion of all material used in our production processes is imported from foreign suppliers, potential changes in exchange rates, labour laws or policies affecting the cost or supply of goods could negatively impact our cost of production and the timely availability of the desired amount of raw materials,” Nampak said.
Delays in production or shipping of products could also negatively impact future operating results and cash flows, it warned. “The extent of the impact of Covid-19 on our business and financial results will depend largely on future developments, including the duration and spread of the outbreak and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted,” Nampak said.
For the past five months, the group’s major businesses, except for Bevcan Nigeria, showed “significant downward trends of revenue,” mainly attributed to weaker economic growth and a difficult trading environment in key markets, Nampak said. Operations in the rest of Africa in particular, have been more negatively impacted than South Africa. “Results for all operations in Zimbabwe will also be impacted by hyperinflationary accounting,” Nampak warned.
Rationalisation of businesses
During the period Nampak completed the disposals of Nigeria Cartons and Nampak plastics Europe. The glass disposal, which became effective of 28 February 2020, is expected to yield proceeds of R1.5 billion – which will be received on 31 March 2020. The total proceeds from all three disposals amount to R1.9 billion, the group said.
“The Nigerian competition authorities’ approval for the sale of the Cartons Nigeria business was received in January 2020 and proceeds of €29 million (about R571 million) have been received offshore with all conditions to this transaction having been fulfilled,” the update read.
The proceeds from the glass disposal and the Cartons Nigeria will be used to service debt.
The disposal of Nampak Plastics Europe was effectively disposed of on 13 December 2019. “This disposal will deliver future cash flow savings as a result of the group no longer being required to fund operating losses, major capital expenditure requirements and annual contributions to the offshore defined benefit pension fund,” the group said. The asset included a pension fund liability of R500 million.