| Tue 25 Mar 2003, 10:24 | | AG Industries Limited - Unaudited Interim Results |
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AG INDUSTRIES LIMITED
(Formerly Africa Glass Industries Limited)
Registration No. 1980/004051/06
("AGI" or "the Group")
Share Code: AGI
ISIN: ZAE000039467
UNAUDITED INTERIM RESULTS FOR THE 6 MONTHS ENDED 31 DECEMBER 2002
TRANSITIONARY PERIOD
* EXCEPTIONALLY STRONG DOMESTIC GROWTH
* FINISHED PRODUCT EXPORT CAMPAIGN UNDERWAY
* RECORD OPERATING PROFIT BEFORE FOREIGN EXCHANGE
* FOREIGN EXCHANGE AND FINANCE COSTS TEMPER EARNINGS
REVENUE up 37%
HEADLINE OPERATING PROFIT BEFORE FOREIGN EXCHANGE up 34%
INCREASE IN FINANCE COSTS AND FALL IN FOREIGN EXCHANGE EARNINGS R 19.2m
HEADLINE EARNINGS down 23%
HEADLINE RETURN ON EQUITY 16%
SALIENT FEATURES
DOMESTIC MARKETS STRONG
* Record domestic performance
* Exceptional finished product growth
* Margin pressure in commodity glass distribution market due to strong
Rand and imports
INTERNATIONAL PERFORMANCE IMPACTED BY RESTRUCTURE, DEVELOPMENT COSTS AND
FOREIGN EXCHANGE
* Costly re-engineering of USA business into finished goods distributor
completed
* First phase finished goods export campaign product development complete
* Finished product exports commence
* Export campaign development costs impact on margins and returns
* Financial benefits of restructure and development yet to flow
* R 12,2 million fall in foreign exchange earnings impacts
international performance
STRONG FINANCIAL PERFORMANCE CONSTRAINED BY FOREIGN EXCHANGE AND FINANCE COSTS
* Headline operating profit before foreign exchange up 34%
* R 12,2 million fall in foreign exchange earnings
* R 6,9 million increase in net finance costs as projected
STRONG CASHFLOW
* Strong operating cash flows
* Improved working capital cycle
INTERIM RESULTS FOR THE 6 MONTHS ENDED 31 DECEMBER 2002
CONSOLIDATED INCOME STATEMENT
Unaudited Audited
six months ended year ended
31 December 30 June
2002 2001 2002 Change %
R"000 R"000 R"000
Revenue 528 344 386 594 829 956 37
Operating profit before
depreciation
and foreign exchange 60 501 44 982 108 501 35
(loss)/gain
Depreciation (9 502) (6 471) (14 878)
Other amortisation (377) (665) (1 204)
Headline operating profit
before
foreign exchange (loss)/gain 50 622 37 846 92 419 34
Operating margin 9,6% 9,8% 11,1%
Foreign exchange (loss)/gain (2 976) 9 267 5 941
Headline operating profit 47 646 47 113 98 360 1
Profit on disposal of
property,
plant and equipment 104 346 583
Goodwill amortised (4 245) (3 489) (7 526)
Profit from operations 43 505 43 970 91 417 (1)
Net financing costs (10 628) (3 690) (11 445)
Income from associates 1 184 1 741 2 540
Profit before taxation 34 061 42 021 82 512 (19)
Taxation (12 843) (13 268) (24 550)
- normal activities (12 812) (13 164) (24 375)
- headline adjustments (31) (104) (175)
Profit after taxation 21 218 28 753 57 962 (26)
Minority interest (912) (340) 34
Profit for the period 20 306 28 413 57 996 (29)
Profit on disposal of
property,
plant and equipment (73) (242) (408)
Goodwill amortised 4 245 3 489 7 526
Goodwill amortised in - - 51
associates
Headline earnings 24 478 31 660 65 165 (23)
STATISTICS
Number of ordinary shares in 195 478 195 478 195 478
issue ("000)
Weighted average number of
ordinary shares in issue 195 478 195 478 195 478
("000)
Basic earnings per ordinary
share
(cents) 10,4 14,5 29,7
Headline earnings per ordinary
share (cents) 12,5 16,2 33,3
Dividend paid
Dividend per ordinary share 7,5* 6,5 6,5
(cents)
* Dividend declared in respect of year ended 30 June 2002.
CONSOLIDATED BALANCE SHEET
Unaudited Audited
six months ended year ended
31 December 30 June
2002 2001 2002
R"000 R"000 R"000
ASSETS
Non-current assets
Property, plant and equipment 81 872 67 758 88 430
Intangible assets 140 598 156 513 153 696
Investments and loans 15 610 14 793 15 347
Deferred taxation assets 6 722 5 698 4 821
Current assets
Bank balances and cash 36 643 15 807 31 443
Other current assets 360 828 330 243 325 389
Total assets 642 273 590 812 619 126
EQUITY AND LIABILITIES
Shareholders" equity
Ordinary shareholders" equity 307 406 304 580 312 407
Minority shareholders" interest
Outside shareholders" interest 2 095 2 795 1 284
Non-current liabilities
Shareholders" loans 1 330 2 417 1 512
Deferred taxation liabilities 5 745 5 310 8 399
Long-term interest bearing debt 46 617 29 918 44 204
Other long-term borrowings - 407 -
Current liabilities
Short-term interest bearing debt 112 670 78 703 83 536
Amounts due to vendors within one 528 695 6 088
year
Other current liabilities 165 882 165 987 161 696
Total equity and liabilities 642 273 590 812 619 126
Net asset value per ordinary share 157 156 160
(cents)
ADDITIONAL INFORMATION
Capital expenditure for the period 9 428 39 670 92 100
Capital expenditure committed
or authorised 8 598 15 479 18 003
Directors" valuation of
investments and loans 15 610 14 793 15 347
Finance and operating lease
commitments 217 934 156 447 225 167
Interest capitalised 74 102 309
Contingent liabilities 30 558 2 924 29 332
ABRIDGED CONSOLIDATED CASH FLOW STATEMENT
Unaudited Audited
six months ended year ended
31 December 30 June
2002 2001 2002
R"000 R"000 R"000
Cash flows from operations 57 525 54 249 114 442
Cash flows from operations before
foreign exchange (loss)/gain 60 501 44 982 108 501
Foreign exchange (loss)/gain (2 976) 9 267 5 941
Working capital changes (45 630) (28 054) (36 127)
Net financing costs, dividends
and taxation paid (29 635) (21 797) (45 553)
Net cash (outflow)/inflow from
operating activities (17 740) 4 398 32 762
Net capital expenditure (3 788) (17 977) (51 570)
Dividend received from associate 446 - -
Decrease in investments and loans 118 85 103
Acquisition of subsidiaries (23) (18 816) (36 667)
Net cash outflow from
investing activities (3 247) (36 708) (88 134)
Net cash (outflow)/inflow from
financing activities (8 144) 103 35 780
Net decrease in cash equivalents (29 131) (32 207) (19 592)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Share Non- Group Total
capital and distributable retained shareholders
premium reserves earnings equity
R"000 R"000 R"000 R"000
Balance at
31 December 2001 108 776 56 676 139 128 304 580
Movement in reserves - (21 185) (571) (21 756)
Profit for the - - 29 583 29 583
period
Balance at 30 June 108 776 35 491 168 140 312 407
2002
Movement in reserves - (10 264) (382) (10 646)
Profit for the - - 20 306 20 306
period
Ordinary dividend - - (14 661) (14 661)
Balance at
31 December 2002 108 776 25 227 173 403 307 406
GROUP SEGMENTAL ANALYSIS
Southern Europe Eliminations/ Total
Africa and the headline R"000
R"000 USA earnings
R"000 adjustments
R"000
Geographical
Revenue :
Period ended
31 December 2002 528 009 132 200 (131 865) 528 344
% to total 80 20
Period ended
31 December 2001 360 130 128 654 (102 190) 386 594
% to total 74 26
Year ended 30 June 780 591 287 119 (237 754) 829 956
2002
% to total 73 27
Result :
Profit/(loss) from
operations
Period ended
31 December 2002 51 388 (3 742) (4 141) 43 505
% to total 108 (8)
Period ended
31 December 2001 34 488 12 625 (3 143) 43 970
% to total 73 27
Year ended 30 June 75 967 22 393 (6 943) 91 417
2002
% to total 77 23
Unaudited Audited
six months ended year ended
31 December 30 June
2002 % 2001 % 2002 %
R"000 R"000 R"000
Business segment
Revenue :
Unbeneficiated products 266 785 40 209 620 43 477 453 45
Value added products
- Glass 88 217 13 81 157 17 148 631 14
- Aluminium 294 807 45 198 007 40 441 626 41
Services 10 400 2 - - - -
660 209 100 488 784 100 1 067 710 100
Inter-segment sales (131 865) (102 190) (237 754)
eliminated
528 344 386 594 829 956
COMMENTARY
FOCUS FOR THE PERIOD
For the period under review, the focus of the Group was to strengthen the local
business, and to entrench the changes initiated in the international operations
in prior periods. These changes prepare the businesses for the Group"s finished
product export campaign. International changes included re-engineering the
Group"s USA business to convert it from a narrow-margined distributor of
commodity-type glass products into a higher margin aluminium and glass finished
product distributor. Aluminium and glass finished products include shower
doors, bath enclosures, hurricane resistant patio doors and windows. The
changes had consequences for the operating margin in international operations
during the period, and little financial benefit accrued during the period from
the finished product export campaign. The campaign"s first phase product range
was completed during the period and initial deliveries have been made.
Certification was obtained for the Group"s unique hurricane resistant door, a
product forming part of the finished product export campaign"s second phase.
The certification is noteworthy given that the USA has recently legislated that
all new and refurbished buildings in certain states are required to comply with
stringent building codes regarding their resistance to hurricane conditions. A
new Kal-Kote decorative finish aluminium coating line was installed during the
period to meet the increased demand for wood grain and other coated aluminium
extrusions by both the export and domestic markets. Domestically, attention was
focused on increasing market share.
REVIEW
FINANCIAL PERFORMANCE
A buoyant South African economy sponsored an excellent performance in most
local divisions with some pressure on margins resulting from glass imports led
by a strengthened Rand. The European economy remained depressed and the USA
glass commodity market competitive with favourable international economic
conditions in the Group"s UK market alone. In this environment the Group"s 37%
organic revenue growth is creditable. Given the transitionary nature of the
period, the achievement of hard currency revenue growth, albeit only 3%, is
also considered creditable especially in light of the stage of development
reached in the Group"s international export campaign.
The restructure of the Group"s USA operation, the tight conditions encountered
in Europe and the low margins in the Group"s domestic glass commodity
distribution operation, which resulted from competitive imports, depressed the
Group"s operating margin. Nonetheless, headline operating profit before foreign
exchange grew by 34%. This bears testimony to the underlying health of the
Group"s business operations. However, the significant Rand strength encountered
during the period led to a fall of R 12,2 million in foreign exchange earnings
from a profit of R 9,2 million in the comparative period to a loss of R 3,0
million during the period under review. The effect was to reduce the growth of
34% in headline operating profit before foreign exchange to growth of 1% in
headline operating profit after accounting for foreign exchange losses.
As projected, higher finance costs were experienced during the period. The
full impact of gearing, which arose from earlier infrastructural development,
was borne for the first time during the period under review. The development in
question was, it will be recalled, a pre-requisite of the Group"s sustained
growth strategy of which the finished product export campaign is part. As the
flow of finished product is only now under way, little benefit has so far
accrued from the finished product export campaign. This has resulted in the
absorption of R 6,9 million in financing costs during the period under review
whilst the associated benefits in earnings will only be generated in future
periods.
Interest bearing debt to equity, as projected, rose to 40%. Although 9% higher
than the June 2002 level, this gearing ratio is nonetheless manageable.
Improved control of inventory and receivables contributed to increased asset
turnover. This and current strong operating cash flows will contain gearing
until the returns generated by infrastructural development and the export
effort begin to drive down borrowings.
Notwithstanding the tighter operating margin, excellent organic revenue growth,
the level of gearing and improved asset turnover contributed to a Headline
Return on Equity of 16%. This is considered satisfactory given the burden of
debt raised in prior periods to fund new infrastructure.
INTERNATIONAL OPERATIONS
During the period, the finished product export campaign"s first phase product
was introduced to international outlets. This included coated shower doors to
the UK market and ranges of tub enclosures and shower doors to the USA market
together with hurricane resistant glass. The Group"s newly developed hurricane
resistant door, a second phase export campaign product, was also certified in
the USA. In preparation for the introduction of higher margin finished goods,
the Group"s USA infrastructure was enhanced by the establishment of an
aluminium division and by the elimination of low margin sales, the latter
temporarily raising the overhead to revenue ratio there. Finally, Northern
European operations were trimmed to meet tighter market conditions. The
restructure of the USA and European operations, together with the R 12,2
million fall in foreign exchange earnings, depressed the performance of
International Operations during the period.
SOUTH AFRICAN OPERATIONS
Domestically, the Aluminium Division performed exceptionally with all its
operations, including fabrication, extrusion and merchanting, contributing to
the division"s growth and profitability. In particular, benefits accrued from
growth in the division"s window business. Despite margin pressure as a result
of competitive imports encouraged by a strengthened Rand, the Glass Division"s
distribution operation performed well, while the Glass Division"s manufacturing
operation began to enjoy the benefit of the Group"s export campaign. However,
no meaningful contribution can be attributed to the export campaign for the
period under review.
PROSPECTS
The growth for which AGI has prepared during the period under review and
previous periods is now beginning to manifest itself with the flow of export
campaign products well under way. While a continued improvement in the
contribution to the Group of this campaign is forecast, the benefits will grow
as the momentum of the campaign gathers and greater market penetration is
achieved with the introduction of second and third phase finished products to
the USA and European markets. Continued strong operating performance is,
therefore, expected. In the absence of further significant Rand strength, only
finance costs are likely to temper earnings growth. These will abate as export
campaign cash flows begin recouping the cost of prior period infrastructural
development.
INTERNATIONAL PROSPECTS
First phase export campaign products have been delivered and certain second
phase products developed and, where applicable, certified. Product
requirements in the USA market, notably, have been prioritised with the balance
of second phase product development nearing completion and the generation of
third phase products having commenced. Second phase products include various
aluminium components and an expanded range of doors amongst which is the
Group"s recently certified unique hurricane resistant door. Third phase
products include various types of windows, for which a ready demand has been
identified. The Aluminium Division established at the Group"s USA operation
will be a focal point in driving the Group"s finished products into the USA
market. Benefits are also expected from the restructure of the USA and
European operations, from a reduction in low margin sales in the USA operation
and from the output of new equipment to be commissioned shortly in that
operation.
SOUTH AFRICAN PROSPECTS
The South African home improvement market continues to be buoyant promising
good prospects for the Group"s value added flat glass products as well as door
and window finished goods. Further benefits for the Group"s manufacturing
division, as export campaign volumes increase, are also forecast. The
increased output of the Group"s new aluminium extrusion coating plant, which
applies wood grain and other decorative finishes to aluminium extrusions, will
allow the Group to meet the demand for this product, overcoming the capacity
constraint of the Group"s original plant. The glass commodity distribution
market is, however, expected to remain under pressure with imports continuing
to constrain margins in a strong Rand environment.
CONCLUSION
In all, an improved period is projected for the second half of the 2003
financial year with significant benefit from the Group"s finished product
export campaign to be realised in the 2004 and subsequent financial years.
ACCOUNTING POLICIES
The accounting policies have been consistently applied and comply with the
South African Statements of Generally Accepted Accounting Practice. In the
current period, Statement AC133 - Financial Instruments, was adopted for the
first time. No adjustments to comparative amounts were necessary.
For and on behalf of the board:
A.A. Barrell J.B. Rosenberg J.Martingano
Executive Chairman Group Financial Director Group Commercial Director
www.ag-industries.com
25 March 2003
DIRECTORS: A.A. Barrell (Executive Chairman), J.B. Rosenberg# (Financial),
J. Martingano, J.C. Saville, M.J.E. Geldenhuys, C.P. Kalil, H.R. Levin*,
B.E. Danoher, G.F.D*. Twigg*,T.Y. Worthington* *Non-Executive, Irish,
# Company Secretary
REGISTERED OFFICE: Corner Kruger Street and Mimetes Road, Denver, Extension
11, Johannesburg 2094 (P.O. Box 40443, Cleveland 2022)
TRANSFER SECRETARIES: Computershare Investor Services Limited, 11 Diagonal
Street, Johannesburg 2001 (P.O. Box 1053, Johannesburg 2000)
