ANNUAL RESULTS – SEPTEMBER 2009

FINANCIAL HIGHLIGHTS

• Capacity utilisation increased by 75% in H2
• Revenue increased by 30% in H2
• Gross margin at 29%
• Operating costs increased by 74% in H2

Click here to download 2009 annual report

Click here to download Chairman's update 2008/2009

CHAIRMAN'S STATEMENT

The Zimbabwean economy has experienced significant economic downturn since 1998, with business registering decline in productivity. During this period, capacity utilisation in our factories declined from an average of 80% in 2002 to 10% in January 2009.

In line with reduction in productivity levels, the economy faced foreign currency shortages, which led to rapid devaluation of the Zimbabwe dollar, culminating in exceedingly high inflation levels. In July 2008 the government of Zimbabwe ceased reporting inflation statistics. Our business also experienced loss of working capital due in part to the price controls, which led to significant losses in the Mutare factory in 2008.

In order to bring stability to the economy the government of Zimbabwe formally adopted stable currencies, other than the Zimbabwe dollar, for the purposes of transactions within the economy, in February 2009. As a result, the business changed its functional and presentation currency from the Zimbabwe dollar to the United States dollar. This brought about stability in transacting and measurement of business performance.There remained challenges however, related to the conversion of Zimbabwe dollar transactions and balances to United States dollars, resulting in significant estimates being made in determining the opening financial position at October 2008. As a result these financial statements do not contain comparative information.

Accordingly, the financial statements carry an audit qualification to the extent of the respective statements indicating movements from 2008 to 2009, namely the cash flow statement and the statement of changes in equity.

GROUP- FINANCIAL

The results for the year are as could be expected, with an operating loss before interest of USD2.2 million being recorded. The performance is a reflection of the low capacity utilisation in the factories during the year and high operating costs which were misaligned with revenues, over a period which combined Zimbabwe dollar and United States dollar operations. Included in the loss for the year is manpower reorganisation costs of USD504 000 and a loss of USD1.5 million attributed to the Mutare factory which was not operating for the greater part of the year. Margins at 29% for the year were depressed by the negative contribution from the paper mills.

OPERATIONS

Capacity utilisation in the Group improved from 10% in the first quarter to 42% by the end of the fourth quarter. The low utilisation levels from the paper mills diluted the overall result. Net additional borrowings of USD3.97million were taken out in order to support the increased working capital requirement.

The newsprint machine resumed operations in August and was operational until year end. Regrettably, a decision had to be made to stop operations in early November as the plant was operating unprofitably due to continuous breakdowns. Since the newsprint and board machines have not been operating for the greater part of the year, a decision to impair the assets was taken.

The regional distribution units did not perform to expectation as they were affected by the global recession and the consequent fall in prices and demand.

The low volumes from the manufacturing divisions affected stock supplies to the trading divisions. Alternative plans were made to procure stocks from outside the Group and this enabled the battery business in Zimbabwe and Zambia to run profitably.

CAPITAL EXPENDITURE

Capital expenditure incurred in the year was limited due to cash constraints. Total capital expenditure, including replacement expenditure for the year, was USD422 000. The capital expenditure requirements from last year are therefore being carried forward and the future capital expenditure requirements include the Information Technology replacement programme and plant refurbishments.

The capital expenditure at the paper mills has been deferred until there is certainty regarding the stability of the paper mills’ operating costs in the current environment.

HUMANRESOURCES

Retention of critical staff remained a challenge throughout the year as remuneration levels were being determined by affordability. The low trading levels made it difficult to increase employees’ remuneration. However, the Group remains committed to reviewing the welfare status of the employees as business revenues improve in line with the expected recovery of the economy.

Health and Safety programmes and quality standards remain important. Despite the challenges in the business, the Group managed to retain the respective certifications.

DIVIDEND

As a result of the Group’s negative cash flow, directors are of the view that it is inappropriate to declare a dividend.

OUTLOOK

It is evident that the Group has gone through a turbulent period and this requires focus on both the balance sheet and operations. Due to the losses accumulated during the year, the Group’s cash flows were negatively affected and the business experienced working capital shortages. Recapitalisation of the balance sheet and rationalization of the business portfolios are key focus areas for the Group in the short term.

The prices of newsprint in the market have continued to fall, putting further pressure on margins. A review of Mutare Board & Paper Mills’ operations is underway in order to ascertain the viability of the operation in the current environment. In addition, feasibility studies are being undertaken on the alternative use of the timber plantations which represent a significant asset in the Group.

The trading environment has been gradually improving as is evidenced by the increased revenues. Demand for bulk tissue and converted tissue, stationery and batteries remains firm. Although competition continues to be stiff due to a proliferation of new brands, the Group’s brands are still strong and steady progress is being made towards regaining market share. Profitability should be restored in the coming year as more emphasis will be placed on the correct and efficient resource allocation to the business portfolios with the best return on investment in the short term.

The Board extends appreciation to all stakeholders for their support which has enabled the business to increase capacity utilisation in the short term. Long term the Board is considering alternative options of funding the business sustainably.

By order of the Board
P.M. Matupire
CHAIRMAN

24 November 2009