| Fri 15 May 2009, 17:13 | | SER / SRN - Seardel - Audited Results For The 9 Month Period Ended 31 March 2009 |
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SER / SRN - Seardel - Audited Results For The 9 Month Period Ended 31 March 2009
SEARDEL INVESTMENT CORPORATION LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1968/011249/06)
Share code: SER & ISIN Code: ZAE000029815
Share code: SRN & ISIN Code: ZAE000030144
("Seardel" or "the company" or "the group")
AUDITED RESULTS FOR THE 9 MONTH PERIOD ENDED 31 MARCH 2009
CONSOLIDATED INCOME STATEMENT
Rand thousands
AUDITED FOR AUDITED FOR
PERIOD ENDED YEAR ENDED
31 MARCH 2009 30 JUNE 2008
Revenue 2 883 102 3 867 565
Cost of revenue (2 476 676) (3 145 843)
Gross profit 406 426 721 722
Other income 84 056 90 021
Distribution costs (283 808) (341 461)
Administrative and other expenses (339 225) (485 158)
Operating loss before impairments and (132 551) (14 876)
restructuring and retrenchment costs
Impairment of assets (82 522) (108 693)
Restructuring and retrenchment costs (26 819) (41 886)
Operating loss before finance costs (241 892) (165 455)
Finance income 18 859 31 134
Finance expenses (86 494) (112 779)
Share of losses from joint venture (2 503) (9 181)
Loss before taxation (312 030) (256 281)
Income tax expense 27 470 72 212
Loss for the period/year (284 560) (184 069)
Attributable to:
Equity holders of the parent (279 344) (178 842)
Minority interest (5 216) (5 227)
Loss for the period/year (284 560) (184 069)
STATISTICS PER SHARE
In cents, where applicable
Weighted average number of shares in issue 443,253 90 048
(`000)
Weighted average number of diluted shares in 443,253 90 232
issue (`000)
Number of shares in issue (`000) 702,946 89 620
Basic loss (63.0) (198.6)
Diluted loss (63.0) (198.2)
Headline loss (45.6) (111.0)
Diluted headline loss (45.6) (110.8)
RECONCILIATION BETWEEN LOSS AND HEADLINE LOSS
Rand thousands
Loss attributable to equity holders of the (279 344) (178 842)
parent
Impairment of assets 82 522 108 693
Insurance claim ( 55) -
Surplus on disposal of property, plant and (7 733) (988)
equipment
Release of negative goodwill ( 926) -
Loss on disposal of property, plant and 3 616 1 844
equipment
Tax effect of adjustments (30 673)
Headline loss (201 920) (99 966)
CONSOLIDATED BALANCE SHEET
Rand thousands
AUDITED AUDITED
AS AT PERIOD AS AT YEAR
ENDED ENDED
31 MARCH 2009 30 JUNE 2009
ASSETS
Non-current assets 1 031 644 1 131 726
Property, plant and equipment 969 526 1 036 413
Intangible assets 21 490 33 283
Interest in subsidiary companies - -
Interest in joint ventures - 18 000
Other investments 1 442 2 405
Long-term receivables 35 412 35 189
Deferred tax asset 3 774 6 436
Current assets 1 558 351 1 781 887
Inventories 754 354 848 142
Trade and other receivables 769 100 879 069
Non-current assets held for sale 26 818 10 146
Current tax asset 129 1 664
Cash and cash equivalents 7 950 42 866
TOTAL ASSETS 2 589 995 2 913 613
EQUITY AND LIABILITIES
Total equity 1 409 413 1 396 839
Share capital and share premium 303 969 6 130
Treasury shares (14 610) (16 250)
Reserves 1 119 590 1 400 353
Total equity attributable to equity holders 1 408 949 1 390 233
Minority interest 464 6 606
Non-current liabilities 257 099 261 941
Interest-bearing liabilities 168 397 106 409
Post employment medical aid benefits 80 831 89 182
Deferred royalty payment - 21 998
Deferred tax liability 7 420 43 912
Operating lease accruals 451 440
Current liabilities 923 483 1 254 833
Interest-bearing liabilities 40 357 331 471
Post employment medical aid benefits 4 346 -
Deferred royalty payment 45 172 23 249
Trade and other payables 558 359 704 500
Provisions 12 057 38 404
Bank overdrafts 259 660 147 143
Current tax liability 3 532 10 066
TOTAL LIABILITIES 1 180 582 1 516 774
TOTAL EQUITY AND LIABILITIES 2 589 995 2 913 613
Net asset value (excluding intangible assets) 1 387 459 1 356 950
Net asset value per share after treasury 197 1 514
shares (cents)
CONSOLIDATED CASH FLOW STATEMENT
Rand thousands
AUDITED FOR AUDITED FOR
PERIOD ENDED YEAR ENDED
31 MARCH 2009 30 JUNE 2008
NET CASH FLOW FROM OPERATING ACTIVITIES (162 040) 6 023
Cash generated from operations (78 301) 85 807
Working capital changes (397) 27 624
Finance income 18 859 31 134
Finance expenses (86 494) (112 779)
Taxation paid (12 865) (11 104)
Dividend paid - (10 821)
Proceeds on sale of treasury shares 109 -
Contributions for post employment medical (2 951) (3 838)
benefits
NET CASH FLOW FROM INVESTING ACTIVITIES (56 616) (78 608)
Additions to property, plant and equipment (73 811) (103 735)
Proceeds on disposal of property, plant and 19 714 27 876
equipment
Acquisition of intangible asset - (8 493)
(Increase)/decrease in non-current (223) 20 315
receivables
Investment income 234 165
Advances to joint venture (20) (14 736)
Business combinations (2 510) -
NET CASH FLOW FROM FINANCING ACTIVITIES 71 223 (142 813)
Increase/(decrease) in non-current borrowings 64 498 (713)
Increase in current borrowings - 109 794
Decrease in current borrowings (199 333) (48 837)
Reclassification of short term loan to bank (91 781) (77 000)
overdraft
Reclassification of 13 month notice facility - (122 849)
to bank overdraft
Proceeds on share options exercised - 85
Share repurchases - (3 293)
Rights issue 297 839 -
NET DECREASE IN CASH AND CASH EQUIVALENTS (147 433) (215 398)
Cash and cash equivalents at beginning of (104 277) 111 121
period/year
CASH AND CASH EQUIVALENTS AT END OF (251 710) (104 277)
PERIOD/YEAR
STATEMENT OF RECOGNISED INCOME AND EXPENSE
Rand thousands
AUDITED FOR AUDITED FOR
THE PERIOD THE YEAR
ENDED 31 ENDED 30
MARCH 2009 JUNE 2009
Revaluation of land and buildings (7 206) 34 800
Revaluation of investments (963) 53
Post employment medical benefit - actuarial 8 256 (16 084)
gain/(loss)
Taxation on income recognised directly in (1 506) 23 242
equity
Income and expense recognised directly in (1 419) 42 011
equity
Loss for the period/year (284 560) (184 069)
Total recognised income and expense for the (285 979) (142 058)
period/year
Attributable to:
Equity holders of the parent (280 763) (136 831)
Minority interest (5 216) (5 227)
Total recognised income and expense for the (285 979) (142 058)
period/year
CAPITAL AND RESERVES
Group
Rand thousands
Share Share Treasury Other
Capital Premium Shares Reserves
Balance 30 June 2007 5 943 187 (13 042) 187 795
Total recognised income and expense - - - 53 591
Share repurchases - - (3 293) -
Share options exercised - - 85 -
Dividend - - - -
Balance 30 June 2008 5 943 187 (16 250) 241 386
Total recognised income and expense - - - (7 363)
Share issue - -
153 264 144 575
Share disposals - - 1 640 -
Balance 31 March 2009 (14 610) 234 023
159 207 144 762
CAPITAL AND RESERVES (continued)
Group
Rand thousands
Retained Minority
Income Total Interest Total
Balance 30 June 2007 1 360 210 1 541 093 11 833 1 552 926
Total recognised income and (190 422) (136 831) (5 227) (142 058)
expense
Share repurchases - (3 293) - (3 293)
Share options exercised - 85 - 85
Dividend (10 821) (10 821) (10 821)
Balance 30 June 2008 1 158 967 1 390 233 6 606 1 396 839
Total recognised income and (273 400) (280 763) (5 216) (285 979)
expense
Acquisition of minority interest - - (926) (926)
Share issue - 297 839 - 297 839
Share disposals - 1 640 - 1 640
Balance 31 March 2009 885 567 1 408 949 464 1 409 413
SEGMENTAL REPORT
Period ended 31 March 2009
Rand thousands
Apparel Office
and automation
household and
consumer
BUSINESS SEGMENTS Textiles textiles electronic
s
Segment revenue
External sales 1 247 775 1 304 486 149 349
Inter-segment sales (these (42 408) - -
transactions are at arm`s length)
1 205 367 1 304 486 149 349
Segment results
Operating (loss)/profit before (136 628) (102 127) 7 124
finance costs
BUSINESS SEGMENTS Toys Other Total
Segment revenue
External sales 223 900 - 2 925 510
Inter-segment sales (these - - (42 408)
transactions are at arm`s length)
223 900 - 2 883 102
Segment results
Operating profit/(loss) before 39 735 (49 996) (241 892)
finance costs
SEGMENTAL REPORT
Year ended 30 June 2008
Rand thousands
Apparel Office
and automation
household and
consumer
BUSINESS SEGMENTS Textiles textiles electronic
s
Segment revenue
External sales 1 774 863 1 692 752 203 773
Inter-segment sales (these (71724) 1 322 -
transactions are at arm`s length)
1 703 139 1 694 074 203 773
Segment results
Operating (loss)/profit before (52 865) (105 347) 11 042
finance costs
BUSINESS SEGMENTS Toys Other Total
Segment revenue
External sales 266 579 - 3 937 967
Inter-segment sales (these - - (70 402)
transactions are at arm`s length)
266 579 - 3 867 565
Segment results
Operating profit/(loss) before 38 717 (57 002) (165 455)
finance costs
Notes
Basis of preparation
The consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards
(IFRS), specifically IAS 34 (Interim financial reporting),
and its interpretations adopted by the International
Accounting Standards Board (IASB), as well as the South
African Companies Act, 1973 and the Listings Requirements of
the JSE Limited. These consolidated financial statements
have been audited by the company`s auditors, KPMG Inc., and
their unqualified audit opinion is available for inspection
at the company`s registered office.
Change in accounting policies
The basis of segmentation has been changed to reflect the
changes effected during the restructuring of the group. The
segment previously referred to as Industrial Products has
been incorporated under Textiles and the results of
Oceanair, the Seardel head office and the effect of
consolidation entries is now separately disclosed. The
accounting policies adopted are in all other respects is
consistent with those applied in the preparation of the
group`s annual financial statements for the year ended 30
June 2008.
Business combinations
With effect from 1 October 2008, the group acquired the
remaining 25.1% interest in Seartec Trading (Pty) Ltd with
the result that Seartec Trading (Pty) Ltd became a wholly-
owned subsidiary of Seardel Investment Corporation Limited.
Impairments
During the period the following categories of assets were
impaired:
Rand thousands 2009 2008
Property, plant and 64 890 87 852
equipment
Assets held for sale 7 632 4 028
Intangible assets 10 000 16 813
Total 82 522 108 693
Deferred taxation
Tax losses have been recognised in Seardel Group Trading
(Pty) Ltd and Brits Automotive Systems (Pty) Ltd to the
extent of the taxable temporary differences existing in
those entities. Deferred tax assets in respect of Val Hau et
Cie (Pty) Ltd, Seartec Trading (Pty) Ltd and Frame
Industrials (Pty) Ltd continue to be recognised. The
directors have considered the future profitability of these
deferred tax assets and on the basis that they are projected
to produce taxable income in the foreseeable future, these
deferred tax assets are considered fully recoverable.
Revaluations
Land and buildings were revalued effective 31 March 2009 to
fair value by independent valuers, David Newham Property
Management Co. (Pty) Ltd and reflect a fair value of R528
million (2008: R548 million). In arriving at the fair value
of the land and buildings, consideration was given to their
rental producing capacity taking into account their
location, structure and the rental producing capacity of
similar buildings in similar locations.
Intangibles
During the prior year the group concluded an agreement to
manufacture and distribute certain clothing products for the
FIFA 2010 World Cup. In terms of this agreement a guaranteed
minimum royalty is payable to the licensor. This royalty has
been recognised as an intangible asset. Based on current
projections of sales and related production, this asset has
been impaired as shown in note 4 above.
Non-current assets held for sale
Following the commitment from management, the following
assets have been reflected as non-current assets held for
sale:
Rand thousands 2009 2008
Land and buildings 7 555 3 377
Plant and machinery 11 263 6 769
Investments 8 000 -
Total 26 818 10 146
Commitments
Net capital expenditure during the period under review
amounted to R73.8 million (2008: R103 million). There are
further commitments in respect of contracted capital
expenditure as at 31 March 2009 of R6.4 million.
Foreign currency commitments as at 31 March 2009 amounted to
R170 million (2008: R267 million) of which R35 million
(2008: R168 million) were uncovered.
Contingencies
The company has contingent liabilities amounting to R4
million relating to royalty claims.
Change in comparatives
The deferred royalty payment due within 12 months has been
separately disclosed on the face of the balance sheet.
Previously these were included in trade and other payables.
Securitisation of assets
Lenders to the group have undertaken to maintain the
existing facilities until at least 30 June 2010. Security
has been provided to a special purpose company (Seardel
Security (Pty) Ltd), which has guaranteed the obligations of
the group companies in favour of the lenders and which in
turn is indemnified by the group companies.
Post balance sheet events
The group has made the decision in principle, subject to the
outcome of the required consultation process with interested
parties, to close four manufacturing operations that
comprises the Frame Division`s vertical pipeline being
spinning, weaving, finishing and denim divisions. The
divisions are situated in KwaZulu-Natal and the financial
results are reported within the textile operating segment.
Revenue totalling R790 million and loss before taxation
totalling R127 million pertaining to the four divisions,
have been included in the income statement.
COMMENT ON RESULTS AND CORPORATE ACTIONS
Overview
The period under review was significant in the life of
Seardel. As reported on in the June 2008 annual financial
statements, the pressures brought to bear on the group
resulted in it breaching its funding covenants. To save
itself from almost inevitable liquidation, the group
required a recapitalisation. A rights issue was concluded on
27 October 2008 which saw Hosken Consolidated Investments
Limited ("HCI") become the controlling shareholder with a
71% shareholding. As a result of the successful conclusion
of the rights issue and the provision of security, the
group`s commercial funders, who have combined facilities
with the group in excess of R750 million, have agreed to
leave their facilities in place until 30 June 2010 provided
that the group does not breach any of its facility terms.
Since HCI has taken control, significant changes have been
made to the senior management ranks and the board has been
reconstituted. Seardel has commenced with an extensive
restructuring program, the main thrusts of which include:
- Improving efficiencies through the adoption of world class
manufacturing practices;
- Eliminating low margin turnover by setting margin hurdle
rates and if necessary, right-sizing the group. The industry
is characterised by long lead times and so the benefit of
this initiative will take some time to filter through;
- Looking to increase market share in higher margin areas;
- Reducing working capital levels throughout the value
chain;
- Increasing production flexibility to enable quicker
turnaround times and shorter runs in line with international
retail trends. In order to achieve this goal, factory
layouts need to be redesigned and work needs to be done on
refining the group`s supply chain management practices and
expertise;
- Moving from a decentralised strategy to a more centralised
approach;
- Unlocking economies of scale through factory
consolidations;
- Ensuring that the existing assets of the group generate
satisfactory long term returns and that future capital is
only allocated to projects where there is a high degree of
confidence in the expected returns; and
- Allocating finance costs to each division based on the
levels of capital employed in order to better reflect the
actual contribution of these divisions and the design of
individual bonus structures that reward management for
outperformance taking into account the capital under their
management.
Subsequent events
On 9 April 2009, the group announced, on SENS, its intention
to close certain divisions within the Frame Textile Group`s
vertical pipeline, namely the spinning, weaving, finishing
and denim divisions. After having spent a number of months
evaluating the current performance, considering the
prospects of these divisions and stress testing a number of
restructuring alternatives, it became clear that there was
little that could be done, within management`s control, to
return these divisions to profitability. These divisions
have been significant loss makers for a number of years,
have been through a number of restructurings and significant
amounts of capital expenditure have been incurred in
attempts to stem the losses. However, it was apparent that
even at budgeted efficiencies that are considered world
class, these divisions were still predicting losses. We
believe that, in line with our stated objective of ensuring
that existing assets of the group generate satisfactory long
term returns for shareholders, we have been left with no
choice but to close these divisions. We can advise that
negotiations with interested parties, most notably the South
African Clothing and Textile Workers Union, are continuing
and we expect to bring this matter to finality shortly.
It is regrettable that the South African economy will lose
this production capability and capacity, as to recreate it
from start-up would require an investment of approximately
R1.5 billion thus making the decision to close irreversible.
The divisions earmarked for closure, made an operating loss
before interest of some R98 million in the period under
review. This loss is before accounting for specific closure
costs but includes asset impairments of R35 million and
increased inventory provisions of R12 million. The cost of
closing these divisions will affect the results to 31 March
2010 as it is estimated that retrenchment costs, provisions
for onerous contracts and ongoing operating losses to be
incurred during the shutdown period will be in the order of
R165 million. However, despite these costs, the release of
working capital and subsequent sale of the plant and
equipment will result in the closure being cash positive to
the group. It is anticipated that the closure of these
divisions will result in a net cash inflow of some R250
million although a large portion of this will only flow once
the plant and equipment is sold which, given the current
economic climate, is expected to take somewhere between 18
and 36 months. Furthermore, the properties occupied by these
divisions are owned by the group and will be surplus to
requirements. It has not yet been decided whether these
properties will be sold or leased.
Results
The financial year end has been changed from 30 June to 31
March to fall in line with Seardel`s holding company, HCI.
Accordingly, the period which has been presented is a 9
month period. Seardel recorded an attributable loss of R279
million for the period. However, this result has been
severely affected by a number of once-off costs that were
processed during the current period, most notably:
- An R83 million impairment of asset expense, R35 million of
which relates to a further impairment of the Frame vertical
pipeline assets arrived at based on an independent valuators
assessment of their net realisable value, given the current
market conditions. It is unlikely that these assets will be
sold into the local market and hence the ruling exchange
rate at the time of any sale is likely to have an effect on
the value received. R30 million of the impairment charge
relates to assets of divisions that have moved into a loss
making situation during the period. Accounting convention
dictates that, these assets need to be valued at the lower
of net realisable value or depreciated cost. Initiatives are
in place to address these divisions with a view to returning
them to profitability. R10 million of the impairment charge
relates to the write down of the intangible asset recognised
with respect to the FIFA contract, based on the latest
projections for this contract. A further R8 million relates
to a write down of the group`s interest in Sustainable Fibre
Solutions (Pty) Ltd ("SFS") a company which produces fibre
from Kenaf plant;
- A R42 million charge relating to the increased provisions
for obsolete inventory;
- R27 million worth of restructuring and retrenchment costs
were recognised during the period;
- A net R22 million foreign exchange loss was incurred due
to severe and rapid fluctuations in the exchange rate;
- An R11 million charge was processed with regard to
provisions for onerous contracts, the bulk of which relates
to a contract for the purchase of cotton to be delivered
after 31 March 2009, at prices above the closing price at
that date; and
- Doubtful debt provisions were increased by R10 million.
After adjusting for all the non-recurring items, Seardel
recorded a core loss of approximately R101 million of which
R68 million relates to finance charges. This leaves a core
operating loss of R33 million compared to a R2 million loss
for the 12 months to 30 June 2008. The increased core loss
is largely due to:
- a decline in gross margins due to an inability to pass
increasing input costs on to customers. If one excludes the
effect of the non-recurring items, gross margins have
declined by 3.5% from those achieved in the prior period. A
3.5% reduction in margin translates into a R94 million
reduction in profits. Work is being done to improve margins
through efficiency gains, procurement practices and the
elimination of low margin turnover; and
- distribution costs as a percentage of turnover have
increased by 1% resulting in a R29 million reduction in
profits.
These factors have been partially offset by the fact that
administrative costs have been contained in the current
period. If one excludes non-recurring items, administration
costs for the current year are R94 million below that of the
preceding year on an annualised basis which reflects some of
the turnaround initiatives implemented to date.
Restructuring initiatives
Textiles
The textile division has been realigned around product
clusters which has resulted in Romatex Home Textiles, Desire
Quilted Products and Frame Manchester now all falling under
a household textile cluster. The group has invested some R6
million in an automated duvet and pillow line for this
cluster which raises the capacity for these products by some
65%. This plant was fully operational by the end of April
2009.
Brits Non-Woven, Frame Industrials, Frame Fibres and
Seardel`s interest in Brits Automotive Systems (Pty) Ltd now
all form part of the non-woven cluster. In the period under
review, some R26 million was invested to establish
production facilities in Gauteng, replace the inefficient
production lines in the Western Cape and upgrade the KwaZulu-
Natal facility. This cluster now has production facilities
in all its major markets and stands to benefit from greater
efficiencies and reduced transport costs. This cluster
interfaces with industrial markets as opposed to the retail
sector thereby offering the group a measure of
diversification. However, the markets in which it operates,
particularly the automotive sector, have been severely
affected by the economic downturn. In our view this cluster
should perform well once these sectors show signs of
recovery.
During the previous financial year, the Frame Knitting
division acquired the warp knitting business of Gregory
Knitting Mills in order to increase its product offering. We
can report that the move and integration of these plants
into the New Germany and Mobeni sites has been completed and
now forms part of the group`s knitting cluster.
Clothing
The group is far advanced in the consolidation of the
Charmfit, Cygnet and Cape Underwear divisions into a
composite lingerie and swimwear division, which is expected
to be fully operational as a single facility by June 2009.
This consolidation allows the group to smooth out the
production peaks and troughs due to seasonality, most
notably in the swimwear division, and enables the group to
eliminate lower margin turnover which was being used to fill
the factories in low demand periods. The consolidated
division has been renamed Intimate Apparel SA and has
secured the renewal of the licence to manufacture and
distribute Speedo swimwear products for the region until
2014.
Plans are in place to merge the Bonwit and Bibette ladies
formal wear divisions. At this stage it is not envisaged
that any production facilities will be closed, however, the
merger will result in overall costs being reduced.
We will continue to monitor all the group`s business units
to ensure that they have the prospect of making sustainable
profits for shareholders. Those with little prospect of
making sustainable profits will be restructured or closed.
Prima Toys ("Prima")
Turnover for the nine months to March 2009 has increased by
11% over the corresponding period last year. This increase
is contrary to the current economic trend and has been
achieved on improved market share. Market share is
dependent on many factors, not least of which includes being
the South African distributor for the majority of leading
international brands and characters and ensuring an
effective presence on the shop floor. Management`s efforts
include maintaining sound business relationships with
Prima`s existing principals and securing additional
principals and licensing contracts for new characters that
are released into the local market, especially when these
coincide with television and film releases.
Notwithstanding the shorter trading period and the economic
situation, Prima`s operating profit is some 2.6% higher than
the 12 month period to 30 June 2008. However, it must be
borne in mind that this is a very seasonal business and both
the 9 month period being reported on and the 12 month
comparative period include the peak trading season. Having
said this, the most pleasing aspect of Prima`s performance
is the fact that it managed to improve its operating profit
margin by some 3.2% despite the economic climate. This
improvement has been achieved on careful control of fixed
overheads and the elimination of unprofitable product lines
which has resulted in the closure of the last remaining
production facilities. As staff were redeployed, no
retrenchment costs were incurred.
However, the first quarter of 2009 has served to confirm
that we cannot expect to escape the tough economic times
unscathed. As a counter measure, we are placing greater
emphasis on bringing the correct mix of product in the right
volumes onto the market. Concentration on working capital
remains a priority. It is hoped that the reducing interest
rate and a relatively stronger currency will improve
consumer confidence in time for Prima`s peak trading period.
Consumer Electronics
Trading conditions in the office automation industry were
extremely competitive with margins, as always, under
pressure. Turnover in some product lines declined as pricing
wasn`t always competitive. The sales of Sharp calculators
were strong once again this year and achieved good growth
during the "back to school" periods. The closure of the
Scripto division went ahead as planned at the end of
December 2008 and some R800 000 of closure costs were
incurred.
The division has concentrated on reducing infrastructure
costs during the past quarter which we believe will show
benefits in the year ahead. Sharp Corporation is continually
improving their line-up of copiers, cash registers and
calculators and continue to be recognised as a quality
product.
Working capital management has been greatly improved and
coupled with aggressive cost control resulted in a positive
operating cash-flow for the period.
Industry dynamics
Whilst fixing the issues internal to Seardel remains the key
focus, the textile and garment industry has been under
severe pressure with a number of companies either going into
liquidation or announcing their closure. As stated in
previous annual reports, it is recognised that the local
industry cannot compete with imports from the East without
effective subsidisation, protections or a combination of the
two. It is often touted that the local industry is
uncompetitive purely as a result of inefficiencies on the
part of local producers. This is a simplistic view as,
whilst there is certainly room for efficiency improvements
which is a truism for most local industries, the non-
competitiveness in this particular industry is a multi-
faceted problem. Some of the main issues facing the local
industry include:
- Subsidisation programs, including state owned firms, in
other parts of the world. The garment industry has the
ability to create employment for relatively little
investment with the cost per job created being one of the
lowest of all manufacturing sectors. Governments in
developing countries often use the industry as an employment
generator, particularly in areas of low economic activity
and subsidise the industry heavily both directly and
indirectly;
- Although we recognise that some of the local employment
conditions need to be reviewed to bring them in line with
other industries in our own territory, the necessity to pay
a living wage means that the local industry is required to
pay significantly higher wages than those paid in competing
countries, including neighbouring countries;
- The subsidisation programs and lower wage costs result in
international competitors achieving lower costs per unit
manufactured thereby attracting the large volumes generated
by international retailers which, in turn, results in longer
runs and greater efficiency;
- Very minimal protection is derived through logistics
costs. The cost of transporting textiles and garments from
overseas, as a percentage of purchase price, is minimal and
so the industry does not enjoy the same level of protection
from these costs as compared to certain other local
industries;
- The industry, particularly on the clothing side, is
characterised by relatively low barriers to entry, which is
compounded by low switching costs for customers;
- Some of our own economic policies have been detrimental to
the development of the local industry. It is our view that
the DCC scheme has been ineffective as a support mechanism
for the local manufacturing industry and has simply served
to subsidise fellow SACU members` export programs at the
expense of local manufacturers. The current SACU and SADC
arrangements are also problematic as these countries have
discrepant wage structures with very limited tariff
protection offered to local producers. In addition, import
tariffs were reduced quicker and further than was required
in terms of the World Trade Organisation agreements and well
ahead of the local industries ability to adapt to the
international competition;
- The import tariffs that are in place provide some
protection but the level of illegal and illicit imports is
such that these protections do not have the full effect. We
are encouraged by the work currently being done by SARS to
ensure compliance and this initiative has our full support.
However, this is an area that requires constant attention;
and
- The issue of illegality is not confined to imports. Within
the local market there is significant non-compliance to
bargaining council agreements which undermines the
competitiveness of compliant manufacturers. To this end,
Seardel is encouraged by the improved focus of the local
bargaining council compliance teams, but non-compliance is
widespread and will require a concerted effort to remedy.
Although most of the issues mentioned above are beyond the
control of the group, we are playing an active role in
trying to influence those we can.
We are hopeful that the recently publicised industry rescue
package is implemented without delay as it is clear that the
local clothing and textile industry is under enormous
pressure. The effects of the strengthening Rand and the
current economic climate effect on retail sales, have yet to
be fully absorbed by the industry. If this industry is lost,
it is likely to have severe social consequences for our
country, particularly in localised economies, such as the
Western Cape and KwaZulu-Natal, where there is a
concentration of clothing and textile manufacturers.
Grawood loan
The group has a R98 million loan from Grawood Investments
(Pty) Ltd ("Grawood") a company controlled by Dr Aaron
Searll, the group`s founder. Despite ongoing discussions
with the representatives of Grawood the group has as yet
been unable to reach any agreement as to the basis on which
Grawood may be afforded security for its loan account, nor
have any of the terms of such security been finalised.
Changes to the Board
Post the rights issue, Dr Aaron Searll, resigned as Chairman
and then from the board. Mr John Copelyn was appointed
Chairman and the board was reconstituted. Messrs Arthur
Jacobson and Russell Upton resigned from the board and the
following new appointments were made:
- Mr Stuart Queen was appointed Chief Financial Officer;
- Mr Anthony Dixon-Seager was appointed CEO-Clothing
Division;
- Mr Amon Ntuli was appointed an Executive Director; and
- Messrs Kevin Govender, Yunis Shaik and Mohammed Ahmed were
appointed Non-executive Directors.
The group`s Chief Executive Officer, Mr Walter Simeoni, is
due to retire in November 2009 and as part of its succession
planning, Mr Stuart Queen has been appointed CEO designate.
In April 2009, the group appointed Mr Gys Wege as the Chief
Financial Officer and Mr Anthony Dixon-Seager has been
appointed Chief Operating Officer with his role expanding to
include responsibility for the group`s textile operations in
addition to his current responsibilities.
Outlook
It is recognised that there are no quick fixes to a group of
this size and that losses are anticipated until the benefits
of turnaround come to fruition. Indeed, given the estimated
R165 million of costs relating to the closure of the
Spinning, Weaving, Finishing and Denim divisions, the group
will almost certainly record a further loss for the 12
months to 31 March 2010. A significant amount of work is
still required to be done to effect a turnaround and we
remain pragmatic in our views of the industry and the
current economic climate. However, we are pleased with the
progress made to date and remain optimistic that a
turnaround will be achieved.
Turnarounds often fail because management does not have
sufficient time to implement all the required strategies due
to a lack of liquidity. In Seardel`s case, the cash raised
on the rights issue as well as the work that has been done
to better control working capital means that the group is
currently well within its facility limits. Furthermore, the
proposed closure of the specific textile divisions is
predicted to release R250 million of cash to the group,
albeit over an extended period. There are also still
improvements than can be made to the working capital cycles.
Although the cash utilisation will build up towards the
Christmas period, projections show that the group should
remain well within its facility limits.
Appreciation
To turnaround a group of this size requires concerted effort
over a sustained period. Each member of staff at Seardel has
a role to play often requiring extended working hours and
focused commitment above and beyond usual requirements. The
directors and management of Seardel would like to thank all
the staff of the group who continue to work tirelessly to
effect the turnaround.
Dividend
The directors have resolved not to declare a dividend for
the 9 month period ended 31 March 2009.
For and on behalf of the board of directors
SA Queen
Chief Executive Officer - Designate
Cape Town
15 May 2009
DIRECTORS: J A Copelyn# BA(Hons) BProc (Chairman), Adv N N
Lazarus# SC (Deputy Chairman), W Simeoni* (Chief Executive
Officer) (Austrian), M H Ahmed# BSc (Accounting), A E Dixon-
Seager DipBus M(Hons) (Chief Operating Officer), T G (Kevin)
Govender#, A M Ntuli, S A Queen CA(SA) (Chief Executive
Officer - Designate), Y Shaik# BProc. (# indicates Non-
Executive)
Transfer Secretaries
Computershare Investor Services (Proprietary) Ltd, 70
Marshall Street, Johannesburg 2001. P O Box 61051,
Marshalltown 2107.
Administration
Secretary and registered office:
HCI Managerial Services (Proprietary) Ltd
1 Moorsom Avenue, corner Bofors Circle and
Moorsom Avenue, Epping Industria II, Cape Town 7460
Postal address: P O Box 524 Eppindust 7475
Telephone: +27-21-5055261
Telefax: +27-21-5350045
Internet: http://www.seardel.co.za
Auditors
KPMG Inc.
Sponsor
Java Capital (Proprietary) Ltd
Date: 15/05/2009 17:13:28 Produced by the JSE SENS Department.
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