“I am pleased to present the 2017 Lafarge Zambia results on behalf of the Board of Directors. Lafarge Zambia continues to demonstrate resilience in operational and financial performance despite the economic difficulties and competitive environment.” These were the opening words in Board Chairman Muna Hantuba’s letter to the board in the 2017 annual report. The statement in itself pretty much sums up what kind of a year that Lafarge had.
The first part of the year was marred with macro factors that included low liquidity, high interest rates and high rain fall. The upturn of the second part of the year was as a result of increased commodity prices on the global market. In addition, the Central banks easing of monetary policy rate helped to ease the liquidity issues that Muna eluded to. However, their operating costs saw an upward surge as the company began to grapple with the new rates on fuel and electricity. What was worse was one of their biggest export market’s (“Democratic Republic of Congo”) reduced its appetite for cement during the year as political turmoil continued to unravel.
Despite the K19m recorded as profit after tax, overall diluted earnings per share plummeted by 77% compared to their 2016 performance. According to the annual report, “Turnover for the year was K1,008,232 thousand (2016: K889,673 thousand) resulting in a 13% increase from 2016. In addition, net finance costs were K2,555 thousand (2016: K568 thousand). Exchange losses arising mainly from the translation into Kwacha of US dollar receivables, payables and cash balances denominated in US Dollars amounted to K8,657 thousand for the year (2016: K9,618 thousand) which was mainly due to the slight depreciation of the Kwacha in 2017.”
The AR further stated “Profit before tax for the year was K57,511 thousand (2016: K127,985 thousand). Profit before tax was 55% down from 2016 largely to the impairment charge of K22,179 thousand for the Chilanga 3 project which was discontinued, increase in production and distribution costs following the increase in fuel and power costs and high depreciation on assets following capitalisation. After providing for a taxation charge of K38,573 thousand (2016: K50,589 thousand), profit after tax was K18,938 thousand (2016: K77,397 thousand). The Company had no medium or long term obligations to financial institutions as at 31 December 2017 (2016: None).”
Chilanga 3 clearly gave Vincent Bouckaert’s management team a headache as they had to go through a process of recoverability of the assets associated to this project. According to the Annual Report “With a total amount of K62 million expended towards the project as at 31 December 2017, an amount of K22 million had been impaired whilst K35 million remained in capital work in progress pending certification for capitalisation.” This was necessitated following the merger between Lafarge Group and Holcim Group in 2015 which saw all major projects that were either at primary or initial stages being put on hold. This tends to happen when companies find suitors who have other strategic plans. We saw it with Zambeef selling of the ZamPalm asset to IDC following the entrance of CDC as a significant shareholder in the company whose desire was to focus on the core business.
Administrative expenses stood out on the income statement for 2017. Increased depreciation and impairment of Chilanga 3 feasibility study costs were the lion’s share of expenses. This gravely impacted their operating margin. Inventory management improved as the company saw less cement stock at the end of the year. This is indicative of their strategy to get closer to the consumer through their Binastore (formerly known as Kumanga local franchise) network. At present this Binastore network has 28 container and 13 affiliate stores. They target to open 2000 stores by 2021 (with 400 jobs being created in the process).
Going forward, key to their success will lie in strategic affiliations such as their partnership with block makers to make Lafarge certified contrete hollow blocks that conform to the set standards of the Zambia Bureau of Standards (ZABS). In addition, initiatives such as the Lafarge Home Builders Center will continue to create a customer focused experience that enables its customers to ensure best practices is the use of their products in their building projects. This is a strategy that is typical for companies that want their brand to be loved. Vincent and his team are determined to create a love mark for the Lafarge brand in Zambia.