Turnall Holdings has re-sized its business operations to align with the current level of working capital while seeking further funding. The move which is directed at cutting operational costs entails the subsequent placement of its Harare sheet making plant under care and maintenance as well as retrenchment of staff.
Turnall managing director Caleb Musodza told analysts a total of 80 employees had been retrenched and the operation which took effect in July will enable the company to meet current and short term market requirements while also producing an acceptable gross margin and optimising the use of working capital.
Musodza added that downsizing of operations was an imperative move as the company is currently failing to secure loans from local banks as a result of a weak balance sheet.
Turnall incurred a $1.8 mln loss for the half year ended 30 June 2016 on the back of inadequate funding for operations as well as foreign payments challenges which resulted in low production levels. This was against a profit of $399 754 in the comparable year ago period. Sales volumes at 18 480 tonnes declined 37% from 29 435 tonnes recorded last year. Revenue at $8.73 mln was 38% below prior year in line with volume decline.
Gross profit margins declined to 9% in the first half from 22% in prior year. During the period under review capacity utilisation at 20% also contributed to the decline in gross profit.
“Capacity utilization was at 20% and we experienced erratic raw material supply and payments to foreign suppliers as a result of the loss incurred. Total equity declined 39% to $3.37 mln in the first half from $5.52 mln in the first half of 2016 as a result of the loss incurred,” said FD Kenias Horonga.
“Reclassification of FBC management fees, additional CABS Dimaf loan of $1 mln and repayments of loans since the start of year of $1.1 mln resulted in a 46% increase in the loans figure to $8.29 mln from $5.66 mln in 2015 while payables declined 10% to $23,82mln in H1 from $26,54mln in 2015,”added Horonga.
Looking forward Musodza said he expected a positive revenue base in the last half of the year although funds are going to be weighed down by once off retrenchment costs and impairment costs. As such the company was expected to only return to profitability in 2017 and beyond.
“F16 is expected to deliver positive operating profit, but an overall loss position due to the once off retrenchment and plant impairment cost. Based on the implemented streamlined operations setup, projections into the financial year 2017 and beyond show a steady growth in profitability,” he said.
Musodza said the company had secured Dimaf funding in May and although the funds came a little late than expected, the capital injection had doubled the company’s production.
He added that Turnall had successfully recovered a debt amounting to $800 000, which had been previously written off.
“We deployed Dimaf funding to improve our working capital position and production has been on an upward trend since May. We are now producing twice in terms of tonnage than the first four months of the year.
“We however also faced challenges in terms of foreign raw materials repayments, we import fibre from Russia and materials from Italy but foreign currency problems had an impact and production was below than we expected,” he said.
Our Thoughts on Turnall
Just when the market was expecting a turnaround from Turnall, the latest results all but showed that the company is far from fully recovering. Coupled with that a lot of corporate governance issues are being raised at the moment (perhaps by bitter employees) ranging from asset stripping to mismanagement of funds. With a negative working capital, amounting to $13 mln, the company is failing to fund its operations. Efforts to get funding through other financial channels have also failed to bear fruit because the company has a weak balance sheet. The Group has a current ratio of less than 0.50.
With insufficient working capital, coupled with difficulties in obtaining foreign exchange, production has not been up to the desired levels. The result has been an increase in production costs per unit thus significantly eroding margins from 22% to 9%. Insufficient working capital can easily lead to limited production as was the case in the first five months of the year. Such a scenario will have a negative impact on the company’s stakeholders such as suppliers, customers and bankers etc.
Fortunately, management seems to be equal to the task and has since adopted a lean business model. To that effect one sheet-making machine has been put under care and maintenance. Other cost cutting measures including retrenchments have also been implemented and the company is now targeting a return to operating profit by year end. Unfortunately, the inevitable decision to adopt a lean business model means Turnall is giving away market share. Once the market is accustomed to a different product it will be very difficult for Turnall to regain that market share as was the case with other companies such as Cairns.
The focus in the medium term needs to be shifted towards growing the export market so that there is meaningful contribution to group revenue. This is the company’s future and we strongly advocate for the company to incline itself business model towards the export markets. Tanzania, Angola, DRC, and other countries within the region have been investing heavily in capital projects and present some opportunities for growth.