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Freeworld Coatings Limited - Audited Results And Cash Dividend

Published on 2009-11-23. Author : SpecialChem

"In continuing tough recessionary economic conditions, Freeworld Coatings produced a solid set of results for the year. We continue to invest in the business with over R100 million in capital investment over the past year and the recent launch of three new exciting product ranges. We also remain focused on achieving greater efficiencies across the business. With the strong portfolio of coatings brands, the company is well positioned to benefit from any upturn in the economy when it comes."

COMMENTARY TRADING ENVIRONMENT

The trading environment, post the global financial crisis, has been particularly difficult given the resultant impact on both economic conditions and the availability of credit reducing consumer discretionary spending and impacting demand for paint products. Product mix changes accompanied single digit volume decline.

At the time of releasing our 2008 results, our prognosis for 2009 was that it will be a tough year, and that whilst the slow down in consumer spending will impact our targets in the Decorative Coatings segment, this would be offset, at least to some extent, by continued increases in public infrastructure spending. In this area the pace of spending has slowed and in some instances been delayed.

FINANCIAL RESULTS

Against the prevailing economic conditions, we believe that these results represent a solid performance, and must express our sincere appreciation to all the staff for their efforts and dedication. The uncertainty and increased volatility in financial markets and in particular currency markets has had a significant impact on the Group's result and consequently we are reflecting both EBITDA excluding and including fair value adjustments on financial instruments as separate line items.

Income statement

Revenue from operations for the financial year to September at R2,7 billion is in line with that achieved last year, which in itself was an all time high for the Group.

EBITDA excluding fair value adjustments on financial instruments at R425 million is only 5% down on last year's record result of R449 million. Input costs remained at relatively high levels for the most part of the year, and with market conditions being difficult, prices were held firm and not increased with costs being absorbed so as not to further impact demand. Management's focus on managing the expense base paid dividends and limited the decline in the EBITDA margin, excluding fair value adjustments, to 100 basis points (15,7% vs 16,7%).

The Group has a long established policy of taking forward cover for imported raw materials and capital expenditure items, which in the past has served us well. However, the strengthening of the Rand in this financial year resulted in the Group recording a mark to market fair value loss on financial instruments of R26,2 million as against last year's profit of R15,4 million. Operating profit at R322 million is 19% down on last year due to a 5% lower trading result, a R9 million higher depreciation charge as a consequence of the capex programme, and the negative mark to market fair value adjustments on financial instruments. If these fair value adjustments were excluded, on a comparable basis, operating profit would be 9% lower at R348 million.

Net finance costs, as a consequence of reduction in JIBAR, coupled with a slightly lower level of borrowings are 5% down on last year.

The effective tax rate at 31,7%, excluding STC, compares adversely against last year's rate of 28,8%, which included a rate change adjustment, following the reduction in the corporate tax rate, of R8,7 million, equivalent to 3.1% of profit before tax.

Income from associates at R8,6 million is substantially lower than last year's after tax income of R22,4 million.

A major contributor to this shortfall was the performance of DuPont Freeworld which supplies OEM paint products as it was severely impacted by the motor manufacturers cutting back significantly on unit builds. Net profit at R147 million is 32% down on last year, due in the main to a pre tax R42 million adverse swing in mark to market fair value adjustments to financial instruments, a R14 million shortfall in after tax profits from associates, together with a 5% lower trading result.

Earnings per share at 70 cents is 34% lower, based on 203,9 million shares in issue as against last year's weighted average of 201,1 million shares. The directors have declared a final dividend of 7 cents per share as Freeworld Coatings is positioned as a growth company. Dividends declared for the year total 12 cents, which the directors consider to be prudent, particularly in the prevailing economic climate.

Balance sheet

Total assets as at 30 September at R4,5 billion are in line with last year, with the reduction in inventories compensating for higher property, plant and equipment due to the capex programme, and higher trade and other receivables. Interest bearing debt (net of cash) at R831 million has reduced by R42 million, and translates into a debt to equity ratio of 29%.

Cash flow and capital expenditure

Cash generated from operations amounted to R375 million with the cash inflow from operating activities of R150 million being used to acquire property, plant and equipment totalling R101 million and intangibles of R22 million, the bulk of the latter being attributable to the Company exercising its option to acquire the intellectual property rights of Napier Environmental Technologies for North America to complement its existing rights for the rest of the world.

Our R101 million investment in capital expenditure includes expenditure on the new raw material warehouse and material handling equipment at Mogale City, the finished goods warehouse in Mobeni, the Syspro ERP system for the Automotive business and the usual phased replacement of outdated equipment. Freeworld Coatings plans to continue the rejuvenation of its sites in South Africa in the next few years.

SEGMENTAL COMMENT

Decorative Coatings

The Decorative Coatings segment had a challenging year given the tough economic conditions. This impact was felt across all sectors including both retail and trade. A significant part of the challenge related to adverse movements in oil, exchange rates and commodity prices which were not recoverable in the market place.

Building on a strong performance last year, the export and African operations posted a solid result with turnover increasing by 8,3%. Operating profit was impacted by some adverse currency exchange movements, particularly relating to Zambia. The China project showed creditable growth in the circumstances. Overall turnover for the Decorative Segment at R2 billion ended at similar levels to last year with EBITDA excluding fair value adjustments at R296,3 million only being 3% down on last year's record profit.

Performance Coatings

All businesses within the Performance Coatings segment have felt the effect of the economic slowdown both locally and in the rest of the world. Turnover increased slightly by 1% to R1 billion for the first time with EBITDA excluding fair value adjustments, due to margin pressure, particularly with customers abroad, reducing by 13% to R129,5 million.

The wholly owned automotive business, which primarily manufactures and distributes automotive refinish products, did not entirely escape the general economic downturn. Whilst sales were 3% higher than last year, price recoveries were insufficient to offset input cost increases. Our colourant business achieved a reasonable performance despite the particularly tough trading environment, with turnover being slightly lower than last year. With almost 50% of the sales in foreign countries and close to 65% of input costs denominated in foreign currency, the business has significant exposure to the Rand exchange rate. The strengthening of the Rand against the US$ and the Euro had a negative impact on both turnover and margins.

Complementary products had a mixed result with the Hamilton Brands business achieving a solid result, whilst the Midas/Earthcote business, which is largely exposed to the trade sector in the Western Cape, was affected by economic conditions and inclement weather.

OUTLOOK

There are signs of a recovery in the global economy, however, conditions remain delicately poised as there is still a degree of concern over global financial markets and the pace of economic recovery. Given this uncertainty it is important that the Group retains its firm focus on limiting input costs and continues with productivity improvements in order to reset aspects of our expense base and allow us a trading platform to add volumes without losing margin.

Overall, we are well positioned to take advantage of any upturn when it comes, as we have strong brands, a comprehensive product range and a wide distribution both in South Africa and surrounding territories. We continually evaluate the extension of our footprint, and a number of specific opportunities are currently being evaluated, including some outside of South Africa. The business will continue to pursue suitable acquisition opportunities that fit its strategic direction. The year ahead will, like 2009, be challenging but we remain optimistic that we will continue to perform competitively.

Source: Freeworld Coatings Limited


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