Restructuring, re-tooling pays off for Art Corp in F16

Restructuring, re-tooling pays off for Art Corp in F16

HARARE – The successful restructuring and re-tooling of Art Holdings’ divisions saw the group report improved earnings in the year to September 30 with the trend expected to be supported by growing market share.

Chief executive officer Tapiwa Ameer told an analysts briefing that factory automation and raw material purchasing efficiencies across the group’s divisions has been the key turning point to group performance.

For the year, group revenue was flat at $29.8 mln while after tax profit recovered to $1.9 mln from a loss position of $590 000 in 2015.

“Following this performance we believe the group is now on solid base to sustain growth and profitability going ahead.” Ameer said growth in F17 will be anchored on growing the local market share currently at 50% as well as reclaiming lost market share in Zambia, which is at the moment the group’s largest export market.

“F2017 revenue is targeted at $35 mln supported by exports and efficient procurement of raw materials aided by shareholder Taesung Chemical Company Ltd,” he said adding that October and November had already shown traits the forecast could be attained.

According to the CEO, revenue growth in F16 had been offset by the 27% decline in Zambia against a 7% increase in Zimbabwean operations.

Chief Financial Officer Abisai Chingwecha said the greatest story behind the recovery of Art has been efficiencies and the re-tooling. He said this was also buoyed by a trading facility with Taesung which resulted in efficient procurement at reduced costs.

During the year, operating profit increased 93% to $3.7 mln while cash generated from operations increased to $5.5 mln from $5.4 mln in prior year. He said the cash generated was applied to the recapitalisation of the factories and repayment of expensive short terms debt, which as a result, reduced to $5.9 mln compared to $7 mln in prior year.

In terms of operations, Group CEO Ameer said following a $3 mln investment into the Batteries Division, the unit account for 67% of group revenue. Revenue was $19.79 mln compared to $19.323 mln in prior year while volumes at 333 000 was down from 339 000 in 2015 largely as a result of decline in volume in Zambia.

At Chloride Zimbabwe sales volumes went up 9% while in Zambia performance was affected by reduced economic activity in the run up to elections resulting in a 32% decrease.

Overall, the battery divisions recorded an operating profit of $2.9 mln up from $1.2 mln in 2015. Ameer said capacity utilisation at Chloride Zimbabwe is currently at 74% compared to 64% in 2015.

At Eversharp, revenue was at $4.551 mln compared to $5.226 mln in prior year as pen volumes at 46.4 mln were up from 43.4 mln in prior year.

Ameer said due to retooling at Eversharp, and efficiencies in procurement, capacity utilisation is seen increasing to over 88% from the current 63%. The unit posted an operating profit of $763 000 from $340 000 and increased profitability was a result of reduced cost of production following the commissioning of new equipment.

At the Plantations, Ameer said revenues were up 21% at 885 000 from 706 000 in prior year while volume went up 11%. He said profitability was however affected by fires that damaged a total of 402 ha resulting in a loss of $452 000 during the year.

The paper division saw revenue went down marginally at $4.565 mln compared to $4.573 mln in 2015 largely as a result of pricing to remain competitive. At Kadoma Paper Mills volumes were up 6% while Softex Tissue volumes were 9% lower than prior year but margins were firmer due to more efficient raw material procurement.

Looking ahead, the CEO said the group will open new regional markets particularly Malawi and Mozambique. The export market is projected to contribute 20% of current financial year revenue

Our Thoughts on Art Corporation

We have always argued that most Zimbabwean companies are not performing not because the economy is struggling (because imports are coming in and making money) but because of poor management, lack of working capital, use of antiquated machinery among other ills. Change that, and you are likely to see a better performing and profitable company.

Under the management of Richard Zirobwa everything about the company was heading south with an overall incorrect approach to business strategy, but when the company finally changed shareholders and eventually management we are now seeing the fruits even though it’s still early days yet. An injection of new capital for capex and raw materials seems to have done the trick while cost containment has been key this time around.

While we commend the company for improving efficiencies, we try not to celebrate gains made through cost cutting measures, because you can only cut costs to a certain extent. The cake has not grown and any further drop in the top line might be the difference between a profitable company and a loss making one. We have seen that with Dairibord where cost cutting and restructuring measures done over the years has not done much to improve the company’s fortunes because of a falling top line. It’s more worrying for Art because there now seem to be over reliance on the batteries business which now contributes 68% of revenue. Those who might remember, not so long ago the company’s core business were paper and stationery. Now it seems that the most revenue earner and profitable unit is the battery division, thanks to Zimbabwe’s consumers spending over $45million on average in vehicle imports and of course the SI 20!

However, if this business coughs – (its pricing is not competitive) – as it has done in Zambia where volumes are down 32%, then profitability will be threatened. Ironically management is forecasting FY17 turnover of $35 million based on performance in Zambia. In FY16 Zambia’s contribution was less than 10% so one has to be very optimistic to expect the same market to contribute 20% in FY16.

The group still has a lot of work to do at its paper business while debt, though slightly lower also remains a worry given the high cost of 15%.

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