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Freeworld Coatings Limited audited results for the year ended 30 September 2007

Published on 2007-12-04. Author : SpecialChem

In the announcement released by Barloworld earlier informing Barloworld shareholders of the salient terms of the proposed unbundling of Barloworld's shareholding in Freeworld Coatings Limited ("Freeworld Coatings" or the "Company"), formerly the coatings division of Barloworld, Barloworld advised shareholders that a pre-listing statement in respect of Freeworld Coatings has been posted together with the unbundling circular of 8th November 2007. The unbundling circular and pre-listing statement are also available on Barloworld's website and at the registered office of Barloworld, being 180 Katherine Street, Sandton, 2146, Johannesburg, South Africa.

The pre-listing statement contains information relating to Freeworld Coatings, including detailed financial information for the three financial years ended 30 September 2007. As Barloworld will only be releasing its financial results, and hence Freeworld Coatings' financial results, after the posting of the pre-listing statement, Barloworld hereby releases the income statement, balance sheet and cash flow statement in respect of Freeworld Coatings for the three financial years ended 30 September 2007, as well as further information relating to Freeworld Coatings.

While the unbundling remains at the discretion of shareholders, this announcement and the pre-listing statement have been prepared on the assumptions that the ordinary resolutions proposed in the notice of general meeting forming part of the Barloworld unbundling circular will be passed at the general meeting of shareholders of Barloworld to be held on Friday, 23 November 2007, and to the extent applicable, will be registered, that the required exemption in relation to US securities legislation is obtained and that the unbundling by Barloworld of its investment in Freeworld Coatings, details of which are reflected in the Barloworld circular, will be implemented.

Should Barloworld shareholders approve the unbundling, the Issuer Services Division of the JSE Limited ("JSE") has approved the listing of the Freeworld Coatings ordinary shares in the Specialty Chemicals sub-sector of the "Chemicals" sector of the JSE lists under the name "Freeworld Coatings", with effect from the commencement of business on Monday, 3 December 2007.

Information related to Freeworld Coatings

Freeworld Coatings is a leader in the manufacture of decorative, automotive and industrial coatings in all Southern African territories. The Company is capable of providing full systems solutions and approaches across sectors ranging from architectural coatings to performance coatings and related products. Freeworld Coatings has factories in Durban, Port Elizabeth, Cape Town and Johannesburg and operations in Botswana, Malawi, Namibia, Swaziland and Zambia. Products are marketed and sold throughout these countries and other sub-Saharan African countries. The Company is also present in China and Australia and exports to a number of countries. Internationally, Freeworld Coatings is regarded as a world-class player and is currently the 31st largest coatings company in the world. Freeworld Coatings is well-positioned in terms of experience, product offering and access to leading edge technology to further grow and successfully expand its presence in chosen markets and geographical locations.

Market and brand leadership

Freeworld Coatings is a leading marketer of decorative, and automotive and industrial coatings in South Africa and throughout the Southern African region, supplying approximately 30% and 27% of the requirements of those markets, respectively.

Freeworld Coatings' products are regarded as iconic brands within the markets they serve, with a strong reputation for quality, and attract a loyal customer base. Freeworld Coatings supplies brands including Plascon, Plascon Professional, Crown, Polycell, Midas and Earthcote to consumers and commercial enterprises.

The Midas and Earthcote brands are marketed and sold through 54 franchise stores throughout South Africa with a further five located in Mauritius, Edinburgh, Antwerp, Amsterdam and Windhoek.

Within the industrial and furniture markets throughout Southern Africa the Company is well-known as a supplier of specialised coatings under the Plascon, Maeder and International brands.

In the automotive industry, Freeworld Coatings supplies both vehicle manufacturers and the refinish industries in Southern Africa with products under the Plascon, Spies Hecker, Standox and DuPont brands.

In addition, through International Chemical Corporation (Proprietary) Limited ("ICC"), Freeworld Coatings produces and supplies colourant systems throughout South Africa and exports them to an increasing number of countries.

Complementary products, which include a wide range of paint brushes and rollers, are marketed to commercial enterprises and the do-it-yourself market under the premier Hamilton Brush brand.

Established customer base

Freeworld Coatings operates successfully across many sectors of the South African economy, serving major customers with whom it has long-established relationships through well-developed supply channels. Major customers in the various channels include Iliad Africa Group, Massmart Group, Mica Hardware Group, Penny Pinchers Group, Spar Build-it, Murray & Roberts, Group Five, major asset owners such as Sanlam, Old Mutual and Investec, BMW, Ford, General Motors, Mercedes, Nissan, Toyota, Volkswagen, Afrox, Bell Equipment and Transnet.

Freeworld Coatings also counts a significant number of independently owned hardware and paint specialist outlets as customers, with a national footprint across South Africa.

Experienced management team

The Freeworld Coatings management team has an established track record and a strong base of experience, which is reflected by achieving top quintile returns (in comparison to its global peer group) and successfully integrating strategic acquisitions into the business. Since 2002 the management team has increased turnover from R1 288 million to R2 348 million and operating profit from R92.2 million to R383 million.

Strategy and Prospects

Freeworld Coatings is optimistic about the opportunities and growth prospects available in South Africa and internationally. The Company's strategy is to be a world-class, commercially sensible and socially responsible company with a presence in selected high growth multi-national geographies, in which all the products and solutions offered can become leaders in their respective markets.

The emerging middle class, post the 1994 elections, and the build up to the 2010 Soccer World Cup are also fuelling the Company's growth. Freeworld Coatings is well-positioned to benefit from the resulting increase in:

  • infrastructure spend;
  • housing development; and
  • vehicle sales,

to be achieved as a result of South Africa's economic growth.

Freeworld Coatings is intent on significantly growing its size and international presence in an industry which is undergoing rapid consolidation, thereby positioning itself over time as one of the largest global paint competitors.

In order to achieve this, Freeworld Coatings has developed a strategy which includes:

  • targeting selective acquisitions which complement and further its vision;
  • building its premium and other appropriate brands;
  • aligning the distribution channels to market;
  • lowering overall business system costs by internationally rolling out the new business model under development in China;
  • continued investment in research and development, as well as accessing world-class and leading coatings technology through its membership, inter alia, of the Coatings Research Group Institute and Nova groups;
  • further developing the role of tinting systems;
  • continually reviewing product ranges in terms of composition, characteristics and functionality;
  • focusing on innovation by fully capitalising on the research and development facilities in Alberton (new product development) and Stellenbosch (polymer research); and
  • further developing Freeworld Coatings' already well-established relationships with its international partners which include, inter alia, Akzo Nobel and DuPont.

Additional growth is also expected through partnerships with global textured coating manufacturers, providing access to the textured coating sector in regions where Freeworld Coatings currently has a presence.

With the ever increasing pressure from a regulatory and environmental perspective to reduce and ultimately eliminate volatile organic compounds ("VOC") from world coatings, the colourant business is ideally placed to leverage its "zero VOC technology" and know-how into other markets. Such markets will include Europe and Asia where stringent environmental targets have been legislated and which presents vast markets which Freeworld Coatings is successfully penetrating.

Freeworld Coatings' strategy is underpinned by the "value-based management" philosophy which seeks to create value for all its stakeholders including: shareholders, employees, customers, principals and suppliers as well as the communities in which the Company operates. Historically, the business has been achieving returns well in excess of its cost of capital, with a place in the top quintile of performers in the global coatings industry.

Historical Financial Information

The financial information set out below incorporates the effects of various acquisitions and disposals which took place during the period 2004 to 2007 and the effects of the corporatisation process to allow Barloworld to list and unbundle the Company separately on the JSE.

Basis of preparation

The financial information of Freeworld Coatings for the three years ended 30 September 2005, 30 September 2006 and 30 September 2007 is set out below. The financial statements are prepared in accordance with the accounting policies of the Company.


In 2007 revenue increased by 16% to R2 347 million buoyed by continued volume growth, particularly in the decorative segment and coupled with the results of the Company's automotive refinish distributor, Prostart Investments and the niche specialist coatings manufacturer, Midas Earthcote which were acquired during 2006, being recorded for a full year. Operating profit rose by 16.2% to R383 million, before fair value adjustments of R7.6 million and the operating margin remained at 16.3%.

The decorative coatings division performed strongly, recording a 14% increase in revenues and increased operating profit by 18% to R262 million. Barloworld Plascon returned another solid performance although it was a much tougher year in many respects. Overall, the market remained firm, despite a run of interest rate increases and volumes continued to improve. Margins however remained under pressure on the back of strong commodity and oil prices. The Company's ongoing investment in the brand resulted in a more than satisfactory performance from the Plascon flagship brands of Double Velvet, Wall & All, Velvaglo, Cashmere and Micatex. In addition, the Company also saw excellent growth in its economy brands. The industrial business had a very successful year, growing at 24% on the back of strong demand from the mobile machinery and protective coatings segments with roadmarking paint levelling out after last year's strong growth. The African territories also posted a very strong performance with turnover increasing by 18%.

The performance coatings division overall posted a solid result with operating profit increasing by 12% to R130 million. However, individual performances were mixed with colourants recording strong growth both domestically as well as into export markets. The automotive original equipment manufacturer sector experienced a difficult year due to the general slow down in vehicle sales, the component supply industry strike, and slower than planned for completion of the waterborne technology paint shops at Toyota and Volkswagen. The automotive refinish sector had a successful year marked by volume growth across the product range, the introduction of new products and technologies to the market and the completion of a development laboratory in Alberton. The Prostart distribution business, which was acquired last year, continues to more than meet expectations as a result of the broadening of the product base supply to the bodyshop industry. The Complementary products business comprising Hamilton Brush and Midas Earthcote posted solid returns, notwithstanding challenging market conditions.

The new warehouse facility for architectural/decorative coatings divisions and automotive coatings divisions in Port Elizabeth was completed, which will allow rationalisation of Freeworld Coatings logistical network in the Eastern Cape. The Mobeni Site upgrade included in the capex plans over the period 2006 - 2009 has continued through the year with improvements to workflow and the consolidation of sister companies on the site.

Source: Barloworld Limited

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