Following release of the second quarter financial results of Lafarge Africa Plc, which show that its bottom line was negatively impacted by the devaluation of the naira , Kunle Aderinokun reports that despite lacklustre Q2 results , the cement giant seems poised for a return to profitability on the back of significant investment in its operations
Recently, Lafarge Africa Plc released its financial results for the second quarter (Q2) of this year, which revealed that it realised a total revenue of N107 billion. Were it for only the cost of sales and associated operating expenses, the company’s profit and loss account would ordinarily have been in the positive zone. But unforeseen circumstances soured its Q2 performance.
Besides the cost of sales N92.225 billion, which was reduced from N98 billion in the corresponding period of 2015 and N12.2 billion distribution/administrative and other expenses cut down from N14 billion of the previous year, its revenue of N30.18 billion also further dipped by N28.5 billion on account on the higher cost of servicing foreign currency loans after the naira’s effective devaluation . Of note is the diminished production as the cement company was significantly impacted by gas supply shortages in the South West & East Nigeria operations with occasional plant repair works.
Lafarge had issued a profit warning that its Q2 2016 earnings would be materially impacted by a N28.0billion unrealised foreign exchange loss.
In his comment on the results, the Chief Executive Officer, Lafarge Africa, Mr. Michel Puchercos, noted that, “In spite of the macroeconomic challenges and market uncertainties, our company will continue to deliver good performance with significant upsides to come as we conclude on the integration journey to form Lafarge Africa Plc. The new organisation is much stronger and better positioned to deliver operational excellence and improve value to our shareholders.”
Nevertheless, Lafarge Africa, the building solutions expert and major cement manufacturer, may have attained significant level of confidence and stability after taking stock of challenges, investments and assets acquisition for the second quarter of 2016.
Acquisition of 100% Shares of UNICEM
Lafarge moved up from being a majority shareholder (53%) in UNICEM in 2015 to acquiring the cement company fully during the first half of 2016.
UNICEM established in 2002 after acquiring the assets of former Calabar Cement Company (CalCemCo), is a Greenfield cement manufacturing plant at Mfamosing, Akamkpa Local Government, 40km north-east of Calabar, the Cross River State Capital.
The Mfamosing plant, a modern production facility with an annual production capacity of 2.5 million tons was inaugurated on May 2009, with an expanded product portfolio. UNICEM currently offers to customers’ two cement products catering for general purpose and specialized applications.
On September 2, 2014, UNICEM performed a ground breaking ceremony to raise its capacity by 2.5 million metric tons to double its production strength.
The new line Lafarge says, is expected to be completed and commissioned in the 4th quarter of this year.
Lafarge currently has a total of $495 million in external borrowing on its book which are debts contracted by UNICEM.
In a sign of confidence in UNICEM’s operations, Nigerian lenders last month bought into a N60 billion naira bond issuance by Lafarge Africa PLC to refinance the naira component of UNICEM’s debt.
The N60 Billion bond was raised successfully from the debt market, to refinance the UNICEM’s Naira denominated debt at a lower interest rate.
This was the largest corporate bond issuance in Nigeria.
Forex Reforms Impact
Given the current exchange rate environment, which has seen the dollar gaining against the naira and other international currencies, Lafarge says actions are being implemented to restructure and refinance the USD denominated debt.
These loans were largely used to fund the expansion projects which will add an additional 2.5MTpa cement capacity to the current production capacity of UNICEM as well as that of the group.
In a profit update of the company based on unaudited financial statements for the period ended 30th June 2016, made available to the Nigerian Stock Exchange (NSE), Lafarge said the adjustment in the value of the naira against the USD will not affect the manufacturer’s immediate cash flow.
It also noted that foreign exchange reforms put in place by the Central Bank of Nigeria recently will lead to higher cost of servicing foreign exchange loans in the short term, but in the long term allow a refinancing of external loans and thus significant interest payment savings.
The company says it sees the naira adjustment as a one-time occurrence which will lead to future benefits. However, in the short-term it was an opportunity which the company will seize to refinance the USD denominated component of Unicem’s debt by the end of 2016.
Lafarge believes the CBN’s reform of the interbank foreign exchange will improve foreign lenders confidence in the Nigerian market.
From Gas to Alternative Fuels
Lafarge recorded bold innovative steps in the period under review, which is capable of insulating the company from disruptions due to gas supply shortages, as it commenced migration to alternative energy fuels.
Specifically the company is on galloping speed to place as many of its plants as possible on alternative fuels, given a breach of gas infrastructure by militants in the Niger delta, which resulted in gas supply being restricted to 30 per cent of normal volumes in the company.
The company reported that the negative impact which lasted for only eight weeks and particularly affected operations in the Sagamu plant, would be forestalled in the future through the use of alternative sources of energy.
“Industrial operations were significantly impacted by gas supply shortages in the South West & East Nigeria operations with occasional plant repair works. As a result, EBITDA stood at N12 Billion, as against N48 Billion in H1 2015,” Puchercos stated.
The South African cement operations reported solid volume growth, with cement sales volume up by 8 per cent against H1 2015, and a steady aggregates volume in H1 2016. Overall sales was stable compared to H1 2015, reflecting the impact of the competitive pricing environment.
A Rewarding Future
Anticipating a cement market that will be mainly driven by the Individual Home Segment with a marginal contribution from the public sector, the building solutions expert say they expect the second half of the year to be more rewarding.
“We expect to benefit from the synergies of our integrated operations, in spite of the gas shortages. Our objective is to deliver innovative and good quality building solutions to meet the specific needs of our customers, while also achieving good value creation for our shareholders.
“The South African market will remain challenging, but with the reinforced sales team and route to market strategies, financial performance is expected to improve. In aggregates and concrete, the company will continue to benefit from its strong network to drive business growth.
“Our ReadyMix business will continue to secure high quality contracts to deliver strong performance in the second half of the year.
“Our objective is to deliver innovative and good quality building solutions to meet the specific needs of our customers, while also achieving good value creation for our shareholders,” Puchercos noted.