Sephaku Holdings Limited is a building and construction materials company
Sephaku Holdings Limited (SepHold or the group) is a JSE-listed company that offers investors a portfolio of assets focused on the building and construction materials industry. The group invests in modern, efficient capacity in the South African cement manufacturing sector.
The cement manufacturing sector is a primary contributor to infrastructure development, and presents current and prospective opportunities. SepHold is well positioned to generate earnings growth and create value for shareholders by taking advantage of these.
The group has one subsidiary, Métier Mixed Concrete Proprietary Limited (Métier), and one associate, Dangote Cement South Africa Proprietary Limited (CEMENT). Métier and CEMENT facilitate sustainable long-term growth through their competitive advantages:
SepHold provides strategic leadership to its subsidiary and associate in achieving the group’s objectives. Refer to our business overviews and leadership section for more information.
| 1 | Earnings before interest, tax, depreciation and amortisation. |
| 2 | Earnings before interest and tax. |
This 2017 integrated annual review (review) reports on the SepHold companies, which comprise the 100%‑owned Métier Mixed Concrete Proprietary Limited (Métier or subsidiary) and the 36%‑owned Dangote Cement South Africa Proprietary Limited (CEMENT or associate). Together with SepHold, they are referred to as the group.
This review is our primary report to our stakeholders and covers the period 1 April 2016 to 31 March 2017 (the year). CEMENT has a 31 December year‑end as a subsidiary of Dangote Cement Plc (DCP). The equity‑accounted profit included in this review relates to CEMENT’s 2016 financial year, which covers the period 1 January 2016 to 31 December 2016.
There has been no significant change to the group’s size and structure since the 2016 integrated annual review.
The review provides an overview of the context in which the group operates, its business strategy, and the material risks and opportunities that drive the strategy. It discusses the operational, financial, environmental and social performance of the group, and how these contribute to value creation.
We use the International Integrated Reporting Council’s (IIRC) Integrated Reporting <IR> Framework to guide us in structuring our review. To ensure comparability, all significant information is reported on a like‑for‑like basis and there are no major restatements. During 2017 the group streamlined the allocation of segment expenses between the different business segments. Refer to note 39 in the annual financial statements.
The review provides an overview of the group, and highlights strategic matters and performance reviews. It complies with the Companies Act of South Africa, 71 of 2008, as amended (Companies Act) and the JSE Limited’s Listings Requirements, and applies the King Report on Governance for South Africa 2009 (King III).
FY 2017 Integrated Review
The annual financial statements contain the statutory financial results. They comply with International Financial Reporting Standards (IFRS) and the Companies Act. They are audited by Grant Thornton Johannesburg Partnership, whose unqualified audit report is available in our annual financial statements.
FY 2017 Financial StatementsThe following supplementary information is available on our website:
The board is responsible for overseeing the integrity and completeness of the integrated annual review and has applied its collective mind to the preparation and presentation of the review.
The board approved the 2017 integrated annual review on 17 August 2017, taking into consideration the completeness of the material matters dealt with and the reliability of data and information presented.
Opinions expressed in this review are, by nature, subject to known and unknown risks and uncertainties. Changing information or circumstances may cause the actual results, plans and objectives of SepHold to differ materially from those expressed or implied in any forward-looking statements. Undue reliance should not be placed on such opinions, forecasts or data.
No representation is made on the completeness or correctness of opinions, forecasts or data in this review. Neither SepHold nor any affiliates, advisors or representatives accept any responsibility for any loss arising from the use of any opinion, forecast or data in this review.
Forward-looking statements apply only at the date on which they are made and SepHold does not undertake any obligation to publicly update or revise any opinions or forward‑looking statements, whether to reflect new data or future events or circumstances. The financial information on which the forward-looking statements are based has not been audited or reported on by SepHold’s independent external auditors.
We welcome your feedback and comments. Any queries or suggestions on the content and form of this review should be directed to info@sepman.co.za.
The group is founded on the principles of entrepreneurship, innovation, resilience and empowerment. We subscribe to the values of respect, integrity, accountability, transparency and honesty. The board and management seek to balance the expectations of investors for reasonable capital growth. It acts responsibly concerning the interests of other stakeholders, including customers, employees, suppliers and contractors, communities, industry associations, government, and organised labour.
Entrepreneurship and resilience enabled SepHold’s founders to drive it towards its goal to be the first cement manufacturer in South Africa in over 80 years. These principles continue to resonate in the group as the competitive landscape intensifies and producers compete for market share. The group’s entities are successful in their respective markets due to: innovation in the configuration of their modern cement plants; specialised concrete manufacturing; and the implementation of the enterprise and supplier development programme at CEMENT. The group is committed to the transformation agenda and is progressing towards empowering the communities in the areas in which it operates.
SepHold is guided by a code of ethics, which recognises that, as a member of society, the group and its people have an obligation to act ethically. Our directors and employees conduct business relationships with stakeholders in line with the code of ethics. Although shareholders entrust management teams with the responsibility of looking after the financial and social wellbeing of the group, employees play an important role in abiding by and living the group’s values and ethics.
Refer to our operational structure for more detail.
SepHold listed on the JSE in 2009 as a multimineral entity and refined its strategy to focus on the building materials sector. The development of the limestone assets accelerated faster than other minerals, prompting SepHold to redefine its business strategy. The strategic acquisition of Métier in 2013 to complement cement manufacturing enabled the group to immediately generate income and benefit from synergies between CEMENT and Métier.
CEMENT specialises in manufacturing, marketing and distributing high-quality cementitious products to a broad range of users. Its integrated cement plant in Aganang and grinding plant in Delmas have a combined production capacity of 2,8 million tonnes per annum (mtpa) (Delmas 1,5 mtpa and Aganang 1,3 mtpa). Its products are well known and are available at major hardware retailers and numerous second‑tier distributors. The brand increased its market share among bulk cement users, particularly ready-mix concrete manufacturers.
CEMENT operates at steady-state production capacity and supplies primarily to Gauteng, Limpopo, Mpumalanga, North West and northern KwaZulu‑Natal markets. In the 2016 financial year, approximately 80% (2015: 80%) of sales volumes were in bagged cement. Gauteng continues to be the largest and most contested inland market.
Overall, 64% of CEMENT is owned by DCP, a Nigerian Stock Exchange-listed company with projects and operations in Nigeria and nine other African countries. Refer to www.dangcem.com for further information on DCP.
CEMENT categorises operations into cement manufacturing and exploration projects.
The cement manufacturing category comprises Aganang, Delmas and Sephaku Ash. Sephaku Ash primarily supplies fly ash as an extender for bagged cement.
The exploration projects category is constituted of the limestone resource assets at various stages of development, such as the Dwaalboom project, that provide a pipeline for growth.
Métier’s core business is manufacturing ready-mix concrete products for South African industrial, commercial and residential markets. The subsidiary’s vision is to be a highly trusted brand, an industry leader, and to build a lasting concrete legacy in South Africa.
Métier has 12 plants in two geographical locations. Métier’s head office and seven of its plants are in KwaZulu‑Natal, referred to as the eastern region, and five plants are in Gauteng, referred to as the northern region. In Gauteng, its 12th plant commenced production in March 2017.
The diversification of its plants by location enables Métier to reduce market concentration risk.
KwaZulu-Natal operations:
Plants are in the greater Durban and Pietermaritzburg areas.
Gauteng operations:
Plants are positioned to target active construction sites in the area. The regional administration office is in Midrand.
The group’s focus is on creating sustainable shareholder value by enhancing the four value creation pillars on which earnings and growth are based.
The board provides oversight and direction through strategic planning and establishing clear key performance indicators to measure the group’s operational performance.
SepHold’s leadership ensures the group achieves targeted performance by ensuring that the operations:
We have operations in the Gauteng, KwaZulu-Natal, North West and Mpumalanga provinces in South Africa.
The building materials industry experienced declining demand, particularly for bulk cement, due to a decrease in large-scale construction projects. Vertically integrated concrete manufacturers responded by increasing their supply to the diminishing market segment to support related cement manufacturers.
The impact of this competitive landscape was a sharp decrease in CEMENT’s bulk cement pricing, which was lowest in October 2016 at 15% below the January 2016 level. Following the price increases implemented in February 2017, the bulk cement pricing was, on average, 6% higher than January 2017 by the end of May 2017.
The bagged cement market was also under pressure with prices flat for the 2016 financial year. CEMENT recorded an average 3% price increase in May 2017 following the February 2017 increase.
The tough operational environment was exacerbated by 0,3% macroeconomic growth for the 2016 calendar year.
For more information on our responses to the challenging environment refer to the leadership reviews and operational reports (for Métier and CEMENT).
The group promotes and supports effective stakeholder engagement, and is committed to developing mutually beneficial relationships.
Our high-level objectives for stakeholder engagement are to:
The diagram below sets out how we engage with our stakeholders.
The table below highlights key stakeholder concerns and their link to our strategic objectives.
Our material matters are linked to our key risks, and are identified by executive management and the board. Matters arising from interactions with our stakeholders are considered during this process. We use internal deliberations in our strategic interactions and independent research to identify and assess material matters. We continuously monitor the external environment for trends signalling opportunities and risks that could impact our operations. Refer to our risk management processes for more detail.
Material matters are those that affect our value creation process and were assessed regarding:
The assessment below relates to the group’s material matters, how they impact the group, and how each is addressed. There are additional matters that only impact CEMENT, and these are listed separately as they are considered to materially impact the group.
Industry production capacity for cement is approximately 17 million tonnes against an estimated annual demand of 13 million tonnes. The excess capacity resulted in intense competition and lower prices for CEMENT. Similarly, the reduced levels of construction activity resulted in price competition in the mixed concrete sector.
Although CEMENT successfully maintained its sales volumes, the low pricing and profitability environment placed pressure on the maintenance of its loan covenants during the financial year. Refer to the loan covenant pressure material matter for more detail.
Métier’s understanding of the market and ability to secure profitable concrete supply deals enabled it to maintain its market share. The subsidiary enhanced its focus on managing the input costs and operational expenses to support margins. Métier increased the proportion of specialised concretes that provide higher margins per cubic metre in its product offering.
Métier:
CEMENT:
| 1 | CEMENT reporting for financial year 2018 will be for the 12 months ending December 2017. |
Affected strategic objectives
Maintain sales volumes
Maximise margins
Strengthen balance sheets
Increase free cash flow
Stakeholders concerned
Investors
Customers
Suppliers and contractors
SepHold is invested in the building materials sector through CEMENT and Métier, thereby concentrating the industry risk. SepHold owns 36% of CEMENT, which constitutes a major component of the group valuation.
The group is actively considering inter alia the acquisition of an aggregates entity to improve access to raw materials and diversify its portfolio. The board and executive management identified the targeted asset based on current and future market demand.
SepHold:
Métier:
| 1 | CEMENT reporting for financial year 2018 will be for the 12 months ending December 2017. |
Affected strategic objectives
Maximise margins
Strengthen balance sheets
Stakeholders concerned
Investors
Due to the technical nature of manufacturing cement and concrete products, the industry pool of technical skills is particularly small. The lack of skills could potentially limit the group’s ability to achieve its strategic objectives. It is essential to employ the right people and retain critical skills.
The group implemented benchmarked remuneration structures and long-term incentive schemes to attract and retain key skills. CEMENT implemented training for critical technical skills for employees with requisite aptitude and commitment. Métier continued implementing mentoring and executive development training to ensure employees are equipped to achieve performance targets.
Métier:
CEMENT:
| 1 | CEMENT reporting for financial year 2018 will be for the 12 months ending December 2017. |
Affected strategic objectives
Maintain sales volumes
Improve cost efficiencies
Stakeholders concerned
Investors
Employees
Organised labour
Industry associations
The challenging macroeconomic environment has resulted in viability challenges for several customers due to lower levels of profitability. The smaller-sized companies are particularly challenged in managing their cash flows, resulting in a higher incidence of late payments. This risk requires significant monitoring and management by senior management.
Métier was exposed to this risk during the year because it directly supplies the construction sector, which has a high prevalence of small-scale companies. The subsidiary was diligent in monitoring its debtors and ensured that defaulters did not receive further supply. CEMENT supplied over 80% of its product in bags to major retailers and distributors, and therefore had limited exposure to construction companies.
The group improved its debtor management processes to include a rigorous credit approval procedure with the provision of guarantees.
Métier:
CEMENT:
| 1 | CEMENT reporting for financial year 2018 will be for the calendar year ending December 2017. |
Affected strategic objectives
Strengthen balance sheets
Increase free cash flow
Stakeholders concerned
Investors
Customers
The price competition experienced in the cement industry has been intensifying since the entry of CEMENT in 2014 and, subsequently, a new entrant in early 2016. The lower pricing regime has negatively impacted the profitability and sustainability of the industry. Pressure on profitability reduces CEMENT’s value proposition to providers of financial capital. The competition is still strong, but pricing has stabilised since February 2017.
CEMENT supported margins by implementing the differentiation marketing strategy, and pursued cost-reduction efforts and increased its customer service level to protect its sales volumes.
| 1 | CEMENT reporting for financial year 2018 will be for the calendar year ending December 2017. |
Affected strategic objectives
Maintain sales volumes
Maximise margins
Strengthen balance sheets
Stakeholders concerned
Investors
Customers
The highly competitive landscape and downward pressure on pricing resulted in CEMENT’s loan covenants, particularly the debt service cover ratio, being increasingly under pressure.
CEMENT is negotiating with lenders to review the debt repayment profile without changing the original repayment period.
| 1 | CEMENT reporting for financial year 2018 will be for the calendar year ending December 2017. |
Affected strategic objectives
Increase free cash flow
Strengthen balance sheets
Stakeholders concerned
Investors
Persistent macroeconomic pressures, high youth unemployment rates in the areas in which CEMENT operates, and challenges in local service delivery levels, resulted in increased tension between communities and businesses. The communities demand employment and opportunities for enterprise and supplier development to alleviate poverty.
CEMENT implemented a comprehensive stakeholder engagement plan involving all levels of management. A dedicated team engaged regularly with the local community leadership structures and government authorities to accurately identify matters requiring intervention and align all parties involved.
CEMENT fulfilled its agreed enterprise and supplier development targets for the year, including awarding long-term logistics contracts to 12 beneficiaries on 10 August 2016 to supply raw materials transportation services.
The EDP has created 203 indirect jobs at Aganang and Delmas since inception. The beneficiaries of the programme are regularly trained on business management skills including cash flow management, sales and marketing.
| 1 | CEMENT reporting for financial year 2018 will be for the calendar year ending December 2017. |
Affected strategic objectives
Improve cost efficiencies
Stakeholders concerned
Communities
Government
Industry associations
Overall equipment effectiveness (OEE) is a reliable standard for measuring manufacturing productivity. OEE incorporates plant availability, product quality and plant output performance into a single measure. CEMENT considers it a good metric for predicting production shortfalls, benchmarking progress and improving the productivity of manufacturing equipment.
Consistently improving OEE rates ensures that the plant can adequately supply good-quality product to meet customers’ requirements. Maximising OEE is imperative in an excess demand scenario, in which the plant operates at full capacity. Although sufficient finished product inventory can reduce the impact of shortfalls in the OEE, it is prudent to strive for the targeted rates to enable CEMENT to respond to any demand increase.
Due to having a single kiln plant, it is vital to monitor and continuously improve kiln OEE. The net OEE for the year ended December 2016 was 78% against a target of 96%. 50% of the variance against the target was due to latent defects in specific components of the plant, which were resolved before the plant handover from the construction company, Sinoma, and considered in the final closure agreement. The total production output was well aligned to the demand, and therefore had no impact on the associate’s profitability. The mills’ net OEE was between 115% and 130% at both Aganang and Delmas plants due to performance exceeding design on all factors.
CEMENT continued to improve the plant maintenance protocols to ensure the early detection of plant performance anomalies. This significantly reduced the probability of unexpected plant downtime, which could impact production output.
The associate increased the storage facilities of semi-finished and finished products to ensure continuous cement supply to customer orders in the unlikely event of unplanned stoppage.
| 1 | CEMENT reporting for financial year 2018 will be for the calendar year ending December 2017. |
Affected strategic objectives
Maximise margins
Increase free cash flow
Improve cost efficiencies
Stakeholders concerned
Investors
Employees
Customers
Suppliers and contractors
Labour unions are an important stakeholder of any business as they provide structure for employee engagement in matters that require intensive negotiation, such as remuneration and working conditions.
CEMENT embraced the unionisation of plant employees and proactively established an engagement framework with AMCU. AMCU was involved in the restructuring process at Aganang to improve plant efficiencies and profitability.
| 1 | CEMENT reporting for financial year 2018 will be for the 12 months ending December 2017. |
Affected strategic objectives
Maximise margins
Improve cost efficiencies
Stakeholders concerned
Employees
Organised labour
Brent Williams
Chairman
Dr Lelau Mohuba
Chief executive officer
Dear stakeholders,
Our review addresses the frequently asked questions from our stakeholders. We trust that our responses will provide clarity on how we dealt with our material matters and created value.
It was another tough year characterised by continued demand/supply imbalances in the building materials sector. Predictions of macroeconomic headwinds, such as interest rate hikes, defined the beginning of the year. The gross domestic product (GDP) growth rate forecast lowered to 0,7% from 1,3%1.
The South African economy avoided a recession in the 2016 calendar year. The GDP growth of 0,3%2 was the weakest rate in seven years. The projected GDP growth rate for the 2017 calendar year increased to between 1,1%3 and 1,2%4 at the start of the year. This change was due to the expected recovery in the mining and agricultural sectors, a result of the global commodity price increases and the end of the drought.
Ratings agencies (Standard & Poor’s and Fitch Ratings) downgraded South Africa’s sovereign debt in April 2017. The downgrade was expected, and its long-term impact remains unclear.
The mixed concrete sector experienced increased price competition, especially in Gauteng, resulting in downward pressure on margins. The continued decline in the initiation of large-scale construction projects and new entrants in key markets drove the competition. The most aggressive competitors were the vertically integrated suppliers that provide a captive market for the linked cement and aggregates manufacturers. The KwaZulu-Natal market experienced a decrease in construction activity in the second half of the year, which led to overcapacity in the market.
The cement market remained highly fragmented, due to manufacturers using price competition to defend their sales volumes. The prices of bagged cement stabilised at the end of the 2016 calendar year. Contestation continues in the bulk cement market, as there are limited new significant construction projects.
During the 2016 calendar year, price competition characterised the market, reflected in the Econometrix estimate of a 5,6%5 decline in total cement sales volume demand to 13 million tonnes, excluding imports. Import volumes decreased by 53% to 389 000 tonnes for the calendar year ended December 20166.
Econometrix forecast a decline of 1,4% in demand growth for the 2017 calendar year, due to reduced investment in the building environment. Notwithstanding persistent headwinds for the foreseeable future, the potential increase in infrastructure expenditure by government to stimulate the economy could increase the cement price.
| 1 | International Monetary Fund, World Economic Outlook Update: Subdued demand, diminished prospects, 19 January 2016. |
| 2 | Statistics South Africa, Gross Domestic Product, First Quarter 2017, 6 June 2017. |
| 3 | World Bank Group, Global Economic Prospects: Weak investment in uncertain times, January 2017. |
| 4 | Reserve Bank of South Africa, Monetary Policy Review, April 2017. |
| 5 | Econometrix Quarterly Cement Outlook, Q2 2017, June 2017. |
| 6 | South African Revenue Service, trade statistics, April 2017. |
Métier and CEMENT demonstrated the ability to withstand the turbulent economic and market environment. Their understanding of the market enabled them to adapt successfully to the dynamic landscape.
Despite a 3,9% decline in revenue, Métier’s net profit increased by 7,3%. Métier’s ability to secure profitable concrete supply deals enabled it to maintain its share of the market.
Métier maintained its operating margin, due to the geographical diversification of its plants and manufacturing of specialised concretes. Métier’s performance demonstrated management’s mettle through the reduction in the cost of sales by 5,2%, and operational expenses by 3,7% to support margins.
In the south of Gauteng, an additional 12th plant commenced production in March 2017. This new plant aligns to the subsidiary’s overall strategy, and will increase its footprint. This increase will reduce over-reliance on growth nodes and diversify the customer base.
CEMENT’s revenue was comparatively flat year-on?year in spite of an increase of 4% in sales volumes. The net profit increased to R68,9 million, of which R24,8 million was equity accounted for by SepHold.
Bulk cement pricing was particularly impacted by price competition, but saw an upward trend in the fourth quarter of 2016. As illustrated in the indexed average pricing graph below, bagged cement pricing was mainly flat in calendar 2016. Bagged cement led the market, at between 70% and 80% of sales volumes, due to limited activity in the bulk use market. CEMENT focused on achieving an optimal product mix in its markets to maintain its sales volumes.
The application of a price differentiation model for provincial markets enabled CEMENT to reduce the downward pressure on margins. Efforts to lower operational costs by improving efficiencies continued through the optimisation programme. Although the continued decrease in prices limited the positive impact on the EBITDA margin, CEMENT achieved 50% of the targeted R115 million cost saving by December 2016. CEMENT aims to complete the programme by the end of December 2017.
The material matters are detailed here, with a summary of the top-three matters below.
The competence and expertise of our management teams have enabled the group to navigate the highly competitive landscape. The group increased the cement sales volumes through shrewd marketing and excellent service. Métier’s integrated service excellence is a key component of its operating model. The subsidiary secured complex supply orders that require high-quality concretes, timeous deliveries and intensive after-sales service.
We continue to apply our founding principles of entrepreneurship and innovation to carve deals across the strategic areas of our operations. The group is securely entrenched in the retail distribution channel, and has established solid relationships with key customers; partnered with the communities to share mutually beneficial value; and built robust relationships with key suppliers. These deals strengthened the group’s future sustainability.
SepHold’s efforts are focused on ensuring that sound leadership, sustainability and good corporate citizenship are entrenched in its structures, policies and practices. The board is committed to good corporate governance practices, and dedicates time to reviewing policies, processes and operational strategies. The focus going forward is to develop detailed key performance indicators that align to the group’s strategic objectives, and ensure the success of operations.
Additional board members strengthened the group’s skills base. Our new board members will help us achieve the next level of growth, and represent a milestone in achieving our gender diversity target. Ms MJ Janse van Rensburg was appointed as chairperson of the audit and risk committee in September 2016. Her experience and knowledge have already resulted in key improvements in the group’s control environment and reporting. Ms B Maluleke was appointed in November 2016. She has a wealth of experience in corporate finance and business law. Refer to the directors’ full curricula vitae.
Our EDP fulfils transformation objectives through employment, economic empowerment and training. The programme resulted in the success of 12 small businesses in Aganang and seven in Delmas.
To enhance the sustainability of the EDP transport beneficiaries, CEMENT awarded long-term logistics contracts to 12 beneficiaries on 10 August 2016 to supply raw materials transportation services.
The contracts were divided into seven for Lichtenburg and five for Delmas-based beneficiaries, based on their capacity and potential. The trucking opportunities for local small and medium-sized enterprises (SMEs) have an estimated total annual revenue of between R80 million and R100 million. Refer to the EDP section for more information on its participants.
The economic growth prospects have been subdued since the beginning of the new financial year. Economic and political uncertainty could impact growth prospects, and we are cautiously optimistic about the industry’s growth.
CEMENT will pursue a disciplined pricing policy at targeted sales volumes, and optimise product and geographic sales mixes to achieve the best margins.
Métier will strengthen its marketing team to extract further value from the technical experts, who are renowned for innovative products. Management will enhance the strong relationships with suppliers, with the objective of achieving competitive pricing for key inputs. Métier will explore backward integration opportunities to secure essential raw materials.
SepHold will focus on developing the targeted opportunity in the aggregates sector, and continue to evaluate growth opportunities through expansion and downstream opportunities.
We anticipate that cement demand will be in line with Econometrix estimates. Demand, excluding imports, is anticipated to contract by 2,1% in calendar 2017; however, positive growth of 0,4% is expected for 2018.
We await the outcome of merger discussions between AfriSam and PPC. The merger could have a positive impact if it results in a more efficient and profitable sector that attracts investors. With no new cement manufacturers on the horizon, we anticipate that pricing will continue to stabilise.
Our gratitude goes to our group employees and management teams, and the board and executive committee for their resourceful and exceptional oversight of SepHold. Our performance in challenging circumstances is evidence of their diligence and commitment to the group.
We thank Mr MG Mahlare, whose nine-year term as an independent non-executive director came to an end on 22 September 2016. His invaluable contribution was instrumental to the success of the group over his tenure on the board. His effective leadership as the chairperson of the audit and risk committee ensured that the group complied with regulatory requirements and applied best practice.
Finally, we would like to extend thanks to our shareholders, customers, suppliers and contractors, the communities in which we operate, and the government bodies who entrust to us their continued service, support, loyalty and investment. We are committed to delivering on your expectations, and we wish to thank you for your ongoing support.
Brent Williams
Chairman
Dr Lelau Mohuba
Chief executive officer
Neil Crafford-Lazarus
Financial director
The year was defined by intense price competition, which placed significant demand on the group finance functions to closely manage the debt covenant ratios at Métier and CEMENT.
The group revenue, primarily from the subsidiary’s activities, decreased by 3,9% from R874,3 million to R839,9 million as a result of lower prices and reduced demand in the mixed concrete market. The 5,2% reduction in the cost of sales to R483,7 million was partly due to Métier’s efforts to control input costs to support margins. The group operating profit was flat year-on-year at R84,7 million (2016: R84,2 million).
Métier achieved an operating margin of 12,9% (2016: 12,7%) as a result of its plant footprint and the manufacture of specialised concretes. Métier’s net profit increased by 7,3% from R62,8 million to R67,4 million, mainly due to a R4,6 million fair value adjustment on the depreciation expense, implying flat net profit like-for-like.
Following positive results for the last two years, Métier paid a R50 million dividend to SepHold, and reduced its overall bank debt by R87,0 million to R215,9 million.
The 2016 financial year was CEMENT’s first year of full production. Equity-accounted profit was R24,8 million (2015: R18,2 million) with sales revenue comparatively flat at R2,28 billion (2015: R2,29 billion). The associate’s sales volume increased by 4%, but the average price per tonne decreased by 4,6% year-on-year.
The EBITDA margin increased to 23,1% (2015: 21,9%) and net profit increased to R68,9 million (2015: R50,4 million), including once-off income from the closure agreement with Sinoma on the final handover of the plants.
The income covered additional required repairs, resulting in the maintenance cost component at 4% of total cost, higher than the targeted 1,2%. It also accounted for loss of profits during the maintenance period and downtime to replace the cracked kiln shaft roller.
Efforts to lower operational costs by improving efficiencies continued through the optimisation programme. The continued decrease in prices limited the positive impact of the programme on the EBITDA margin. The associate achieved 50% (R57 million) of the targeted R115 million cost saving by the end of December 2016.
It is envisaged that the bulk of additional savings to achieve the target will be derived from purchasing a fleet for inbound and outbound transportation of raw materials between Aganang and Delmas. The fleet, at an approximate cost of R100 million, could result in substantial savings, and a short payback period. The funding will be finalised after lenders review CEMENT’s debt. CEMENT aims to complete the programme by the end of December 2017.
| 1 | CEMENT has a December year-end as a subsidiary of Dangote Cement Plc. |
Non-current assets were 8,9% higher, mainly due to the R14,4 million expenditure on the construction of an office, workshop, storeroom and laboratory building for Métier in Gauteng, and a R48,6 million SepHold equity investment in CEMENT to relieve pressure on debt covenants. The R25 million decrease in total liabilities was principally due to the reduction in Métier debt by R35,2 million (2016: R52,1 million).
Although CEMENT achieved volume growth, declining prices placed pressure on the debt service cover ratio, requiring a R134,9 million equity injection by SepHold and DCP. The ratio for the year was 1,23 short of the required 1,30. SepHold’s contribution was funded by the R50 million dividend pay-out from Métier. The 3,8% increase in SepHold’s total assets and the increase in net cash outflow from investing activities was essentially due to the R48,6 million equity investment.
CEMENT repaid the required R342,8 million principal and R246,9 million interest instalments in 2016. By the end of May 2017, the associate had paid R171,4 million and R112,1 million in requisite principal and interest instalments, respectively, and the re-sculpting of the debt was under negotiation with lenders.
At the time of the conclusion of this report, the associate was well advanced in negotiations with the lenders to review the capital repayment profile without changing the original payment period so as to reduce pressure on the ratio going forward.
The cash generated from operations of R97 million resulted in net cash inflow from operating activities of R60,8 million after the deduction of finance costs of R24,3 million, interest income of R7,2 million, and taxation of R19 million.
As reported in the DCP results announcement on 28 April 2017 for its first quarter ended 31 March 2017, CEMENT revenue decreased to R501 million (first quarter 2016: R519 million). The sales volumes were 3,6% lower for the first quarter year?on-year, mainly due to high rainfall and competitors. The associate implemented price increases in February 2017 that were sustained in most markets. By the end of May 2017, the prices indexed from January 2017 were 3% higher for bagged cement and 6% higher for bulk cement. These CEMENT quarterly results will be accounted for in the SepHold interim financial results for the six months ending 30 September 2017.
SepHold aims to develop the opportunity in the aggregates sector. Post year-end, a joint-venture agreement between SepHold and an existing operator was finalised to develop a new quarry in KwaZulu‑Natal to supply aggregates required by the respective operations of both partners. Commencement of the quarry operations is subject to regulatory approval, which is expected by the second quarter of the 2018 calendar year.
Métier will focus on developing strong relationships with its suppliers to achieve competitive pricing for key inputs to improve margins. In a similar vein, CEMENT will pursue a disciplined pricing policy at targeted sales volumes and optimise the sales mix to achieve the best margins.
I would like to thank the Métier and CEMENT management teams for their continued commitment to achieving optimal margins in a highly contested market. They have demonstrated discipline in their approach to marketing and cost management. I would like to extend a special thank you to the finance individuals for their cooperation and dedication to achieve stated goals.
Neil Crafford-Lazarus
Financial director
To be a highly trusted brand and industry leader building a lasting concrete legacy in South Africa.
Partnering with customers to enable success on their concrete projects through innovative solutions.
Based on the Métier Way ethos and the customer’s experience of the company’s products and services:
Métier operates in the northern (Gauteng) and eastern (KwaZulu-Natal) regions. Based on a research report by Industry Insight¹ on the construction activity for the 12-month period ended March 2017, for projects worth R650 000 and above, Gauteng recorded the highest value of awarded projects at R25 billion (25%). The second-highest value of awarded projects was for KwaZulu-Natal at R19,1 billion. Due to the high values of the projects awarded, the competition was, and continues to be, fierce. The slowdown in construction projects further exacerbated the competition, leading to manufacturers using pricing to secure tenders. The lower pricing on bulk cement as a result of cement manufacturers’ competition resulted in an increase in the number of independent mixed concrete manufacturers.
Métier’s technical expertise in specialised concretes, cost management focus and renowned customer service enabled the subsidiary to maintain its market share.
1 Industry Insight, Construction industry forecast baseline report, March 2017.
An additional plant in Denver, south of Gauteng, started production in March 2017. The new plant, which will diversify Métier’s customer base in the northern region, is in line with the subsidiary’s long?term growth strategy. It will increase the geographical footprint in Gauteng, thereby reducing regional pressure in the areas in which Métier operates.
The geographical diversification of Métier’s plants and the manufacture of specialised concretes enabled the subsidiary to maintain operating margin levels of 12,9% (2016: 12,7%). The subsidiary reduced cost of sales by 5,2% to R483,7 million and operational expenses by 3,7% to R250,4 million to support margins. Following positive financial results for the last two years, Métier paid a R50 million dividend to SepHold. It reduced its overall bank debt obligations by R87 million to R215,9 million. The subsidiary was awarded complex supply orders that required high technical skills. As a result of high service levels and technical ability, Métier is often re?awarded orders.
The subsidiary continues to reinforce the Métier Way ethos in its daily operational activities. The executive committee identified areas to entrench this approach over the next few years. To improve the application of the Métier Way, the executive committee led a process of revising the mission, vision and values statements during the year.
The Métier Way is a high-performance culture that promotes the components of the subsidiary’s brand of service, quality and reliability. This culture is characterised by:
WJ du Toit has been the managing director since March 2016. 2017 marked a year in which, through exceptional leadership, he sharpened the focus of the executive committee on achieving the company’s strategic goals. The operating environment required a coherent and responsive leadership team able to swiftly harness any lucrative supply opportunities.
Equipping the executive committee included the team completing the emotional intelligence and Myers Briggs Type Indicator assessments to enable it to use its combined strength to perpetuate Métier’s success.
The leadership team’s key focus was on strengthening operating procedures to facilitate effective and efficient ways to sustain Métier’s market share and positioning. Being cognisant of the fact that any business is as successful as the people who drive it, the executive committee reorganised employees based on several factors, including experience, to ensure that the right people are employed in the right functions.
Legend
Women
Men
Managing director
NDip (Civil Engineering) (Technikon Pretoria)
Jürgens has a wealth of experience in the mining and building materials industries gained over the past 24 years. He has held senior management positions in several aggregates and ready-mix businesses in South Africa, Botswana and Lesotho. He was appointed as managing director on 1 March 2016.
National maintenance manager
BSc Hons (Environmental Management) (University of Natal), NHDip (Civil Engineering) (Technikon Natal)
Doug has extensive experience in construction and project management gained from over 26 years with Bosch & Associates Consulting Engineers, Murray & Roberts, and his own construction business. Doug joined Métier on 1 November 2015.
Regional manager, eastern region
NDip (Civil Engineering) (Technikon Natal)
Gregg has extensive experience in the ready-mix concrete and aggregates industry. He held various management positions in the technical, production and commercial departments of Lafarge South Africa for 10 years. Gregg is a civil technician and concrete technologist. He joined Métier on 1 June 2007.
Regional manager, northern region
NHDip (Civil Engineering) (Technikon Witwatersrand)
Glen has extensive experience in the ready-mix concrete and aggregates industry. He held various senior positions in the technical, production and commercial sectors at a building materials entity for 16 years. He joined Métier on 1 June 2011 to contribute to the expansion and establishment of Métier’s footprint in Gauteng.
Financial manager
BAcc (Rhodes University), CA(SA)
Stacey is a qualified chartered accountant with five years of commercial management experience. She has accounting, tax and financial experience from eight years with KPMG. Stacey is responsible for all administrative and financial aspects of the business. She was appointed on 1 October 2015.
Human resource manager
BSocSci (Hons) (University of KwaZulu-Natal), Cert: Retail Management (University of South Africa), Cert: Practical Labour Law (University of Cape Town), Cert: Advanced Human Resource Management (University of Cape Town)
Ceri has extensive experience in human resources gained from eight years with the Foschini retail group. She joined Métier with a focus on training, human development, employee performance and talent management. Ceri was appointed on 1 July 2013.
Métier’s workforce increased by 6% mainly due to commissioning the Denver batch plant and staffing the laboratory in the northern region. This resulted in an increase in male employees by 15, while the female complement remained flat across all races.
Employee complement
Métier prides itself in providing a conducive environment in which employees can up-skill and develop within the company. This is evident by the 16 promotions of two white men, one Indian man and 13 African men processed during the year.
Métier’s employee turnover rate improved to 10,12% (2016: 21,36%). The improvement implies that the subsidiary has enhanced its ability to attract and retain good talent in the company. In order to preserve the lower turnover rate, the human capital focus over the next 12 to 18 months will be to develop and apply the employee value proposition as defined in the revised value statement that promotes the ethos that people matter.
In line with its high-performance culture, Métier ensured its employees were afforded opportunities for growth and skills development through strategically aligned training and development programmes. This included individual performance development discussions and internal training. The interventions ensured that employees operated at the expected optimal level.
Métier invested R815 398 (2016: R824 488) in training and 145 employees (2016: 153) participated, 80 (2016: 65) of whom are historically disadvantaged individuals. A total of 83 employees attained certification in health and safety, and the balance completed training in leadership, technical and people management skills.
Of particular mention are two employees who were individually trained in ISO 9001 and advanced human resources management.
The subsidiary is completing full accreditation of several courses through the Transport Education Training Authority, and aims to establish in-house training centres that will start operating in early 2018. This training will ensure continued service excellence.
The subsidiary’s employee educational assistance policy seeks to motivate employees to further their education in the field of study relevant to their respective positions and/or Métier’s strategic direction. Employees most aligned to the policy objectives were awarded financial assistance.
Métier engaged a leadership coaching organisation to train a selected number of employees at management level. The programme commenced in May 2015 and was completed in July 2016. The main objectives of the programme were to:
Métier’s two-year employment equity (EE) plan, which commenced in September 2016, seeks to identify growth and development opportunities to designated employees, namely historically disadvantaged South Africans (HDSAs), by ensuring equitable human resources policies and procedures. The plan provides achievable targets towards fair demographic representation across the different occupational categories and levels in the organisation.
To date, Métier has achieved its targets in the employment of black women and people with disabilities. Significant progress has been made in improving representation of women at middle and junior management levels. There remain opportunities to address current imbalances in occupational categories in which there are groups which are either under or over-represented.
Going forward, Metier will be improving HDSA representation at senior and middle management levels, and will prioritise promoting from within the company. Metier will focus on employing black men at middle and senior management as well as coloured men and women across all occupational categories. The EE plan will enable the subsidiary to gradually address employment inequalities without adverse impact on the operational viability of the company in the long term.
Métier’s commitment to a zero-harm working environment was demonstrated by several awareness and safety training initiatives, which included extensively using toolbox talks. A total of 93 toolbox sessions were held between February and November 2016 for all Métier operations collectively. These regular talks dealt with general safety and compliance matters, with an emphasis on those relating to common incidents. Safety induction is mandatory for new employees, and refresher sessions are regularly held at sites, during which safety procedures are reinforced. The subsidiary has a health and safety policy that focuses on the structure of the safety system, training, incident recording and legislation.
Métier strives to comply with the Occupational Health and Safety Act, 85 of 1993, at all operations and consequently the subsidiary had zero fatalities (2016: 0) and 13 lost time safety incidents (2016: 15) resulting in 842 hours of lost time. The subsidiary recorded a lost time injury rate frequency of 0,05 during the year.
Métier is committed to the transformation charter and complies with the Employment Equity Act, 55 of 1998. The subsidiary has a level 6 Broad-Based Black Economic Empowerment (B-BBEE) certificate awarded on 28 July 2017. Refer to the table above for employee equity statistics.
Métier believes that good stewardship mitigates the negative environmental impact of operations. The subsidiary regularly consults with the relevant authorities on environmental matters, such as plant water run-off, to minimise the impact to the surrounding areas. Métier engages experts to develop the environmental management programme for all plants to ensure that they operate within the legislative framework. The health, safety and environment manager conducted 36 audits to ensure the effectiveness of the environmental programme. Early detection of emerging environmental issues will help the subsidiary to immediately implement corrective action.
Métier closely monitored and controlled dust emissions and wash water sediment, which are the only two material outputs with potential environmental impact. The bulk of the plant run-off water was recycled for use in production, and dust was maintained at levels well below the regulatory limits through mist sprayers, sprinklers and dust curtains.
Due to Métier conscientiously managing plants, the subsidiary complies with the regulatory requirements. The applicable licences are as follows:
Métier is determined to retain its market position as one of the key leaders in specialised concrete products. This will require adaptiveness and agility in understanding the current and emerging customer segments. The subsidiary will focus on strengthening its marketing function to complement the technical team, which is industry renowned for innovative products.
Métier is developing a supply network model to ensure optimal financial performance. This will require Métier management to hone its negotiation skills to ensure the continued supply of key inputs at competitive pricing. The subsidiary will explore backward integration opportunities to secure essential raw materials. Geographical expansion opportunities will be evaluated on an ongoing basis in line with Métier’s strategic intent.
Passionate, engaged employees who love what they do.
Being the best in the industry by offering innovative solutions.
Addressing and exceeding the needs and expectations of all stakeholders by creating and continuously developing value that did not exist before.
CEMENT is a producer with modern manufacturing technologies and skills in critical functions, including production, distribution and sales. The associate’s success in the fiercely competitive building materials sector was achieved through the key enablers described below. The enablers contributed to the CEMENT value creation process by ensuring that the company remains competitive and maintains acceptable sales volumes.
CEMENT’s plants have the latest production technology and are efficient, with an average of 0,3 man hours per tonne sold. Modern technology enables CEMENT to manufacture a good quality, strong brand of cement that competes well with the brands that historically supplied the markets.
The use of a large modern rotary kiln equipped with a five-stage preheater and a pre-calciner enables CEMENT to reduce the cost of production and minimise carbon emissions inherent in the cement manufacturing process. Aganang has the largest single kiln in South Africa, with a capacity of 6 000 tonnes of clinker produced per day. The energy efficiency of CEMENT’s core operations is between 85 and 90 kWh/tonne of cement, depending on product mix.
Industry domestic produced cement sales tonnes decreased by 2,7 % to 12,6 million tonnes for 2016 on a year-on-year basis, as estimated by Econometrix1. Total sales volumes decreased by 5,6% to approximately 13 million, including an estimated 390 kt (2015: 820 kt) of imports. Imports volumes from Pakistan decreased by 90% to 77 kt while imports from China increased by 300% to 311 kt due to tariffs imposed by the International Trade Administration Commission (ITAC) in December 2015, which were specific to Pakistan.
1 Econometrix Quarterly Cement Outlook, Q2 2017, June 2017.
The market comprises mainly bagged cement at between 70% and 80% due to limited activity in the bulk use market. Gauteng is the largest cement demand market, estimated at 4 million tonnes per annum (mtpa), and is therefore highly contested through competitive pricing, resulting in lower margins.
The South African construction industry continues to transform from being dominated by the major construction companies to having numerous second and third-tier businesses. Based on CEMENT’s research, this transformation was largely influenced by the macroeconomic downturn conducive for companies with the ability to accept small construction projects. In addition, a proactive government campaign to promote job creation through SMEs, with a particular emphasis on black economic empowerment, resulted in the increase of construction companies, targeting government projects such as provincial schools, hospitals and water storage facilities.
The competitive environment and changes to the customer characteristics propagated dynamic and geographically differentiated pricing, with manufacturers focusing on improving efficiencies and marketing efforts.
The operational challenges during the financial year ended December 2016 were as follows:
CEMENT achieved an increase of 4% in sales volumes for the financial year ended December 2016 in a competitive environment. It defended its position as one of the major cement producers in South Africa. The associate’s average cement price decreased by 4,6% resulting in flat revenue at R2,28 billion (2015: R2,29 billion). The EBITDA margin increased to 23,1% (2015: 21,9 %) and net profit increased by 37% to R68,9 million (2015: R50,4 million).
As illustrated in the graph, the average pricing for bagged cement indexed from January 2016 to the end of December 2016 was mainly flat. The average bulk cement pricing was 13% lower by the end of December 2016; however, it has been on an upward trend since January 2017. When indexed to January 2017 (below), an increase in average pricing of 3% for bagged cement and 6% for bulk cement was recorded by May 2017.
The plants performed well in terms of the overall equipment effectiveness of the mills at both Aganang and Delmas. The plants combined achieved a net OEE of 115% to 130% for the mills as a result of the excellent performance against specification.
The integrated plant achieved a kiln net OEE of 78% (target: 96%) which was the same as recorded for the previous year. The 9% of the 18% variance against the budgeted net OEE was due to some latent defects on specific components of the plant, which were resolved with Sinoma during the plant handover. The plant production output was in line with demand and therefore the variance did not impact the associate’s profitability.
The programme was initiated in November 2015 to target four operational areas, namely logistics, raw materials, production and sales, for enhancing cost efficiencies. Optimising these functions was collectively targeted to improve the EBITDA margin by 5% to 7% in the foreseeable future. Although the continued decrease in prices limited the positive impact on the EBITDA margin, the associate achieved R57 million (50%) of the targeted R115 million cost saving by the end of December 2016. CEMENT aims to complete the programme by the end of December 2017.
The total employee complement as at 31 December 2016 was 399 including 14 learnerships. The learnerships are in the technical and administrative support functions. Nine of the 14 learners were sponsored by the Mining Qualifications Authority.
The employee turnover rate was consistent with the previous year at 10,9%, mainly because of the departure of employees with less than two years’ tenure in the semi-skilled category. A lower turnover rate was recorded for the professional category, which comprises employees who occupy core functions at below 1% (2015: 5%). The reasons for resignation included relocation, entrepreneurial ventures, higher remuneration and career growth prospects.
CEMENT remains committed to retaining employees, with particular emphasis on those with critical skills, and to effectively managing talent. To this end, the long-term retention scheme was fully implemented to secure the skills of targeted employees. Learning interventions, including on-the-job training, classroom training and seminars, were done. Management development programmes to build a succession pipeline were implemented for employees identified for critical positions. The associate has a relatively young, experienced workforce with an average age of 35 years.
A 360-degree assessment tool was administered on the executive committee to determine leadership effectiveness and identify any developmental initiatives required. The assessment revealed that CEMENT has competent managers who understand the strategy and are committed to achieving the business objectives. To address the key concerns highlighted by employees during the climate survey implemented in the previous year, the executive committee conducted three roadshows to all operations during the year. The objectives of the roadshows were to:
Legend
Women
Men
Chief executive officer
BCom (Accounting), Executive Development Programme (PRISM) for Global Leaders (Switzerland)
Pieter has extensive experience in the cement industry and assumed his position as chief executive officer of CEMENT on 1 May 2007.
Finance director
BSc (Hons) (Economics) (Ahmadu Bello University, Nigeria), FCA (Fellow of the Institute of Chartered Accountants of Nigeria)
Suleiman started his career with the then Price Waterhouse. He joined the Dangote group in 1991 as head of internal audit and financial services. Suleiman is employed by Dangote Industries Limited (Nigeria) as executive director (finance). He is on a fixed contract at Dangote Cement South Africa as the finance director since 21 August 2014. Suleiman has over 33 years of experience and has retired as a member of several boards in the Dangote group.
Executive manager operations
BEng (Metallurgical Engineering) (University of Pretoria), Young MDP (INSEAD, France), MDP (Duke University, USA)
Duan completed his graduate engineer training at De Beers before joining Blue Circle Cement. He was involved with Blue Circle Cement’s integration into Lafarge in 1996. He subsequently worked for PPC before joining CEMENT on 1 January 2008.
Executive manager projects
BEng (Mechanical) (PUCHE), MDP (PUCHE), LDP (GIBS)
Heinrich started his career as a project engineer and maintenance manager at Mittal (Iscor) before joining Lafarge, where he held various positions. Heinrich joined CEMENT on 1 June 2008.
Chief financial officer
BCom (Hons) (University of Pretoria), CTA (University of South Africa), CA(SA)
Gay has experience in several fields, ranging from finance, operations and risk management. She previously worked for Clover Danone before joining CEMENT on 1 July 2009.
Executive manager organisation performance
MPhil (RAU), BA (Hons), BAED (University of Venda)
Robert is a social scientist with a career that spans 16 years. He has extensive experience in managing and implementing social transformation. Robert worked for the De Beers group for over five years, where he was part of the team responsible for driving the company’s transformation process and its corporate social responsibility programme. Robert joined CEMENT on 1 April 2009, and was appointed to this position on 1 November 2016.
Company secretary
Jennifer has been employed by various legal practices as a paralegal. She was previously company secretary for the Platmin group. Jennifer joined CEMENT on 1 August 2010.
Head of internal audit
BCom (Accounting) (University of KwaZulu-Natal), AG (SA)
Alfred completed his SICA articles in 2003 before assuming the internal audit role at Imperial Group and Nampak. He later moved to Ernst & Young (EY), where he was responsible for managing internal audit engagements in various sectors across sub-Saharan Africa. He joined CEMENT on 1 January 2015, and was appointed to this position on 1 August 2017.
Head of risk
BCom (Economics) (University of Pretoria), Postgrad Cert (Risk Management) (University of Johannesburg), Postgrad Dip (Hons) (Risk Management) (Unisa)
Mziwake has 12 years of experience in enterprise risk management (ERM) ranging from establishing ERM programmes to maturing ERM programmes. He has a successful track record in implementing ERM in various southern African countries, including South Africa, Namibia, Zambia and Botswana. Mziwake joined CEMENT on 1 March 2016 after holding various risk management roles in the energy, chemicals, banking and insurance industries.
CEMENT recognises the long-term benefits of up-skilling employees, and has invested R5 million (2015: R4 million) in employee training, which represents 2,2% of the 2016 financial year’s payroll costs. CEMENT’s expenditure target for training and development over the next four years continues to be 3% of the annual payroll. The skills development programme included disability learnerships, internships and mentorships.
Job coaching and mentoring are acknowledged as crucial components in the development of all employees, and critical for succession planning. In this regard, the company identified and trained 12 managers in various functions as coaches and mentors during the year.
Supervisors were targeted for management development programmes as they drive strategy, and it is imperative that they are capacitated in leadership skills. All employees, including contractors, were trained on safety, with the aim to minimise workplace incidents and prevent injuries.
The CEMENT five-year employment equity (EE) plan that commenced in September 2013 represents the ongoing and sustained commitment to the elimination of discrimination and to achieve equitable representation. CEMENT strives for a workplace that reflects the national economically active population across all occupational levels.
CEMENT made good progress towards attaining its EE goals, and in some instances exceeded the targets for the representation of black individuals and people with disabilities. However, the progress towards gender representation of women was less satisfying due to lack of skills. The review and analysis of the employment equity confirmed that African women in particular remain under-represented at most occupational levels, particularly at junior management. African men are under-represented at top and senior management, therefore a majority of these men were placed into the long-term incentive scheme to increase the pool for succession.
Employment equity targets as at December 2016
CEMENT recognises that employees are entitled to freedom of association and respects their right to collective bargaining. At the end of 2016, AMCU secured a membership of 70% of the employees at Delmas and 51% at Aganang plant. AMCU was given the statutory organisational rights at both operations. CEMENT plans to afford AMCU central bargaining rights to streamline negotiation processes for employees.
There were no fatalities at any of CEMENT’s operations (2016: 0). The lost-time injury frequency rates were 0,19 at Aganang (2015: 0,11), zero at Delmas (2015: 0) and zero at Sephaku Ash (2015: 0).
CEMENT remains committed to preventing injuries and ensuring the wellbeing of employees through a health and safety monitoring system. The monitoring system was regularly reviewed during the year to ensure compliance to all safety rules. Furthermore, the protection of plant visitors was given priority. The health and safety objectives were reviewed regularly, particularly as they relate to dealing with potential risks. CEMENT continued to apply the wellness framework, employee assistance programme, promote a healthy lifestyle for employees and to assist those failing to achieve their tasks due to personal and/or work-related challenges. The programme aims to provide the following services to employees and their immediate families:
Managers, supervisors and team leaders receive comprehensive briefing and training from external facilitators to enable them to adequately deal with cases they encounter in their daily operations.
CEMENT achieved full points on enterprise and supplier development as well as socio-economic development elements for the B-BBEE certification. The company dropped from a level 5 B-BBEE status due to increased compliance targets related to ownership, skills development and employment equity as stipulated in the revised codes. CEMENT is required to achieve a 40% sub-minimum in all three priority elements, with non-compliance penalised by being discounted one level. The associate did not achieve the required sub?minimum on ownership and was therefore discounted to a level 6.
Torosesha, the broad-based empowerment structure established in 2014, has yet to finalise the election of two community-based directors to participate on its board. The election process was planned for the end of 2016 but was suspended due to illegal protests by the community over various matters, including job creation in the area. The Department of Rural Development and Land Reform committed to intervene on the impasse to enable CEMENT to finalise the structure in the 2017 calendar year. The North West Premier set up a task team to resolve these community leadership issues.
Torosesha owns 15% of the ordinary shares in Sephaku Development Proprietary Limited (SepDev), which is a subsidiary of CEMENT, and generates income from mining activities. This income will be used to implement community development initiatives when the board of directors is constituted and the requisite statutory processes are complete. The directors of Torosesha will be responsible for identifying how the income from SepDev is used in line with its memorandum of incorporation for the benefit of communities of Verdwaal and Springbokpan.
CEMENT is committed to active community engagement and to making a sustainable contribution to the communities in which it operates.
The EDP is aimed at developing SMEs in the communities where CEMENT operates.
CEMENT invested R83,6 million (2015: R46,4 million), through procurement opportunities from the EDP participants, for services including transport, plant cleaning and catering. These enterprises employed a total of 203 individuals, of which 23% were female and 56% were below 35 years old.
The beneficiaries of the programme were regularly trained on business management skills, including cash flow management, sales and marketing. They were equipped with knowledge of the regulatory requirements, such as tax compliance, through structured coaching and mentorship. Selected beneficiaries are supported through grants, early payment of invoices within 15 to 20 days, and facilitation of access to funding.
To enhance the sustainability of the EDP transport beneficiaries, CEMENT awarded long-term logistics contracts to supply raw materials transportation services. Seven of the beneficiaries are from Lichtenburg and five from Delmas, selected based on their capacity and potential to carry out the task. These trucking opportunities have an estimated total annual revenue of between R80 million and R100 million, translating to approximately R430 million over a five-year period.
EDP beneficiaries’ profiles
| Category | Number of jobs created |
Details |
| Logistics and transportation | 122 | 19 beneficiaries identified:
|
| Plant cleaning and cement recoveries | 50 | Two beneficiaries identified, one for each plant:
|
| Office support cleaning | 14 |
|
| Catering | 17 | Two beneficiaries identified, one for each plant:
|
| Total jobs created | 203 |
The social and labour plan (SLP) is a regulatory requirement of the Mineral and Petroleum Resources Development Act, 28 of 2002 (MPRDA). It is essentially an implementation document consisting of strategies and targets on how the associate will contribute to employment creation and advancement of the socioeconomic welfare of HDSAs in the local communities in which it operates. The SLP has a five-year tenure to ensure relevance to the prevailing socioeconomic issues at any given time. CEMENT achieved two milestones against its initial SLP as detailed below, and completed the new SLP to cover the period 2017 to 2021, commencing in the fourth quarter of 2017.
Final implementation update on initial SLP projects
| Project name | Status | Comments |
| Pallet handling and repair facility | Completed December 2016 |
|
| Verdwaal bakery and community hall | Completed December 2016 |
|
The new SLP for the period 2017 to 2021 will focus on the development of a brick and block manufacturing facility; sports and recreational facility; and agro-processing facilities.
CEMENT continued to offer skills development opportunities in line with the SLP as detailed in the table below.
| Initiative | Progress to date |
| Graduate training programme |
|
| Women development programme |
|
| Apprentice training and learnerships |
|
| Bursaries and internships |
|
| Educational support |
|
| Leadership skills training |
|
| Key challenge | Response |
Lack of legitimate community leadership structures to enable conclusive decisions on key matters, including:
This community leadership vacuum limited the extent of engagement, which often culminated in community protests due to lack of information. |
CEMENT engaged provincial and national government officials to facilitate the reconstitution of community leadership structures by the end of 2017. The Minister of Rural Development and Land Reform committed to support CEMENT by ensuring the community leadership structures are formalised to effectively implement community investment initiatives. The department commenced a process to establish a communal property association within Kopano. CEMENT continues to engage the communities through Kopano Community Authority, the department and the Ditsobotla municipality, until legitimate community structures are re?established. The North West Premier established a task team to accelerate the processes of establishing leadership structures. |
| Deterioration of the Aganang access road | The access roads to and from the Aganang plant are degraded as a result of the volume of haulage traffic between Aganang and Lichtenburg. The Department of Public Works and Roads committed to mend the road during the previous year as it is a hazard to drivers. Numerous employees use the road to the Aganang plant on a continuous basis. CEMENT plans to take legal action to compel authorities to attend to the road urgently. |
CEMENT is committed to achieving a high standard of environmental performance and to upholding sound principles of sustainable development. The company believes that robust environmental management systems with a proactive approach to addressing the challenges and harnessing opportunities of climate change, are fundamental to overall operational success. The environmental policy commitment includes:
Cement manufacturing is highly regulated by laws governing the environment. CEMENT strives to improve compliance with the requisite legislation and complies with all environmental licences and permits.
CEMENT’s environmental management strategy focuses on water consumption, energy efficiency and mitigating point and non-point source emissions. The Aganang and Delmas plants were designed to have limited environmental impact, with several mitigation measures developed for potential risks, such as dust and noise pollution. Water consumption and waste generation are monitored and measured periodically, in line with legislative requirements.
The potential reputational and financial implications of non-compliance with the evolving environmental regulatory framework are significant, as are the direct and indirect costs of ensuring compliance.
Monitoring programmes were developed to ensure that Aganang and Delmas plants comply with the permits below.
The purpose of the EMPR is to ensure that social and environmental impacts, risks and liabilities identified during the environmental impact assessment process are effectively managed during the construction, operational and closure phases of the mine.
An AEL was issued in terms of the National Environmental Management: Air Quality Act, which stipulates emission limits for nitrogen oxide, sulphur dioxide and particulate matter. The Aganang plant was originally issued with a provisional AEL, which was converted into a full licence in July 2016.
CEMENT recorded remarkable results due to the modern technology that enables the plants to perform well. The air emissions recorded were between 3 mg/Nm3 and 16 mg/Nm3 against the permit standard of 30 mg/Nm3 for dust.
Continuous emission monitors for the kiln and cooler stack were installed at Aganang and were commissioned in September 2016. They enable the plant to regularly monitor pollutants such as nitrogen dioxide, sulphur dioxide, hydrogen chloride and hydrogen fluoride as required by the AEL.
Fugitive dust emission plans were submitted to the authorities for all operations during the licensing process. The objective of these plans is to set up measures for dust control, primarily from process fugitive emission sources that include materials handling and raw milling. These plans are internally managed through routine audits and reports are submitted to authorities.
CEMENT recognises the importance of contributing to the current government water security measures, and adopts a holistic approach to water stewardship. The plants have IWULs from the Department of Water Affairs. CEMENT implemented the requirements of the licence, such as monitoring water balance, storm water management, and conducting internal and external audits. The operations have water balances in place to manage and optimise water use, and run closed circuit water systems to maximise recycling and minimise discharge into the environment.
Process and clean water were separated to enable the operations to recycle the former for further use at plants. Water quality was regularly monitored to assess the potential impact of the process water on the environment in the event of the use of the evaporation dam. The monitoring provides an early-warning system for when mitigation action is required, and to measure compliance with licence conditions. Monitoring was performed through ground water and surface water sampling.
CEMENT regularly monitored the quality of ground and surface water levels. The company performed bio-monitoring of aquatic environments when necessary.
CEMENT’s clean water consumption was recorded at 84 litres per tonne of clinker produced (2015: 85 litres per tonne).
The Aganang plant was awarded a waste licence in January 2016, which permits CEMENT to use energy-intensive materials, such as by?products from the steel manufacturing, energy and other industries. This can translate to a significant saving in energy consumption and a reduction in carbon footprint. To enhance the integrity of the waste management monitoring system, the CEMENT operations are registered on the South African waste information centre.
Non-process waste management at the plants required effectively monitoring three phases, namely sorting, recycling and disposal. These activities ensure compliance with the relevant waste legislation and minimise the impact on the natural environment and surrounding communities. Waste reports were compiled at all operations that detail the source, volume, type and disposal method of waste.
Domestic waste was disposed in licensed municipal landfill sites, or recycled through various external entities. Hazardous waste, such as used oil, was recycled through specialist service providers, and oil-contaminated material and used filters were delivered to registered waste-disposal facilities. CEMENT was awarded safe disposal certificates.
CEMENT supports the government’s drive towards becoming a low-carbon economy and continues to engage with industry bodies and policymakers to ensure that the proposed regulatory mechanisms achieve this goal while supporting local industry to be internationally competitive. CEMENT is actively involved in the consultative processes of establishing the appropriate tax regime, and several factors are still to be finalised to determine the reporting structure. As part of the voluntary reporting commitments under the Association for Cement Manufacturing Producers’ Sustainability Initiative, CEMENT submitted a carbon budget to the Department of Environmental Affairs that is well aligned to the stipulations of the carbon tax allowance.
There are several subordinate laws and regulations to the bill, highlighted below.
The carbon budget approach uses quantity-based policy instruments to achieve desired emission reduction outcomes at sector, sub-sector and company levels. To this end, CEMENT voluntarily submitted a carbon budget in 2016 to be reviewed by the relevant authorities, and approval is expected during the 2017 calendar year.
Government has yet to institute applicable legislation for compliance across all industries, including cement manufacturing, and is developing a position paper to align carbon tax, carbon budgets and desired emission reduction outcomes with the objective of refining the national emissions trajectory.
The regulations calculate emissions using the Intergovernmental Panel on Climate Change (IPCC) Guidelines for National Greenhouse Gas Inventories. Reporting is on a calendar year basis, with the initial reports due in March 2018.
CEMENT, as part of the industry lobby group, was actively involved in the consultative processes to determine the appropriate reporting framework. Companies are expected to report their GHG emissions for carbon dioxide, methane and nitrous oxide separately. CEMENT subsequently registered with the Department of Environmental Affairs to report on emissions.
The carbon tax bill makes provision for various tax-free allowances to reduce a company’s carbon tax liability. One of these allowances is on performance, also known as the z-factor, where entities can reduce their carbon tax liability by up to 5%. This applies if the company is performing better than an approved national sector or sub?sector benchmark to the GHG emissions. CEMENT is investigating projects to improve the carbon dioxide emission reduction plans to benefit from the proposed allowances. CEMENT is considering alternative fuels and energy-efficiency enhancing processes to address combustion-related emissions.
The allowance supports the recognition of prior voluntary effort in response to climate change mitigation. CEMENT, with other industry producers, is actively involved in refining these allowances.
CEMENT proactively measures its carbon footprint in terms of specific CO2 emissions and recorded between 800 tCO2 – 900 tCO2 per tonne of clinker produced during the year.
Following the challenge of establishing environment community engagement forums last year, CEMENT successfully implemented an improved stakeholder identification and engagement plan in the period under review. Working with the stakeholder engagement team, the environmental management team held stakeholder meetings with the communities at Verdwaal and Springbokpan and surrounding farmers to discuss new environmental initiatives, emissions and water management matters.
| Key challenge | Response |
| IWUL compliance The licence was issued with inconsistencies in the compliance conditions, which were acknowledged by the Department of Water Affairs. |
Although the required amendments on the licence do not impact CEMENT’s operations, the associate is keen to complete this administrative process. The amendment progressed slowly, but CEMENT believes that it will be completed by December 2017 through continuous and extensive engagement with the Department of Water Affairs and Sanitation authorities. |
| Establishing environmental management systems It is vital for CEMENT to establish best practice systems to manage environmental matters at all operations. |
CEMENT, as a subsidiary of DCP, adopted a three-year road map1 from 2016 for the development and implementation of robust sustainability methodology and reporting processes. This road map elaborates the steps to be followed by group companies towards a robust sustainability system. |
| 1 | Dangote Cement Plc annual report 2016 |
The final regulations in terms of the National Environmental Management Act, pertaining to financial provision for rehabilitation and closure for prospecting, exploration, mining or production operations, were published in January 2016.
Implementing the new regulations on financial provision for rehabilitation ensures that CEMENT complies with the National Environmental Management Act through appropriate funding mechanisms to provide adequately for various levels of rehabilitation. The cost of rehabilitation and closure is assessed annually by independent specialists in alignment with the requirements of relevant legislation, EMPR closure commitments, and applicable good practice.
The chairman and the board play a pivotal role in strategic planning and establishing clear benchmarks to measure SepHold’s strategic objectives. The chairman and company secretary ensure that a sound structure and framework are in place to enhance good corporate governance, improve internal controls and company performance.
The board ensures the existence of the necessary committee structures, with clear terms of reference that assist the committees in discharging their responsibilities and upholding the company’s ethics. This is cascaded down the group to ensure that management operates effectively.
The board recognises that good corporate governance emanates from effective, responsible leadership, which is characterised by the values of responsibility, accountability, fairness and transparency. The board is responsible for ensuring that management activity cultivates a culture of ethical conduct, and that the highest level of integrity permeates all aspects of the group’s business.
Its code of ethics provides guidance to all employees to ensure that they act with uncompromising honesty and integrity. The code is communicated to each employee at the time of engagement, and aims to guide every level of the business on expected behaviour and practices with reference to interaction with all material stakeholders. The group’s performance in this area is monitored using the number of instances of unethical behaviour detected by management or reported via the outsourced, anonymous whistle-blowing toll-free hotline.
SepHold recognises that the principles of good corporate governance and transparent, comprehensive business practices are essential to protect the interests of stakeholders. The group is committed to upholding good corporate governance in business dealings in respect of all stakeholders. This is critical to sustaining performance and preserving shareholder value. SepHold’s governance objectives enhance the benefits of being part of a broader group.
The board is responsible for the group’s compliance with applicable laws, rules, codes and standards. Compliance is an integral part of the group’s culture, and key to ensuring it achieves its strategy. SepHold complies with various codes and regulations, including the Companies Act, the JSE Listings Requirements and King III. Shareholders are referred to the King III compliant register. The board is satisfied that SepHold complied with all King III recommendations, and is assessing the provisions of King IV.
The board reviews and approves the strategic objectives and policies of the group, and provides overall strategic direction within a framework of incentives and controls. It ensures that management maintains an appropriate balance between promoting long-term sustainable growth and delivering short-term performance. The board-approved strategy remains robust and targets areas for growth, while maintaining sound controls and a strong focus on risk management. The board considered future trends and economic assumptions, and identified external trends, opportunities and risks that could impact the group’s growth ambitions. Refer to strategy overview for more detail.
The board delegates authority to the executive directors to manage SepHold’s business and affairs. The board regularly monitors and reviews the delegated authorities to align with best practice and takes into consideration the recommendations set out in King III. The audit and risk committee reviews the delegation of authority, and presents its findings to the board annually.
The board operates under an approved charter, which regulates the way business is conducted in line with the principles of sound corporate governance. The board charter is aligned to principles recommended by King III detailing the powers of the board, and provides that the board has ultimate accountability and responsibility for the group’s performance and affairs. The charter summarises corporate governance practices; defines the separate roles for the chairperson and the chief executive officer; and elaborates on the board’s expectations of the committee chairpersons and directors. The board is satisfied that it has fulfilled its responsibilities in accordance with the charter.
Board meetings are held quarterly. The agenda and relevant supporting documents are distributed to directors before each board meeting. During the meeting, the appropriate executive director explains and motivates business items where decisions should be taken by the board.
The board, assisted by the remuneration and nomination committee, appoints directors through a formal, fair and transparent process. The committee consists of a majority of independent directors and is chaired by the board’s chairman.
Mr MG Mahlare retired in accordance with SepHold’s memorandum of incorporation on 22 September 2016. Mr Mahlare was replaced by Ms MJ Janse van Rensburg, who was appointed as an independent non-executive director on 22 September 2016. Ms van Rensburg chairs the audit and risk committee and is a member of the remuneration and nomination committee.
Ms B Maluleke was appointed to the board as an independent non-executive director on 9 November 2016. Ms Maluleke is a member of the audit and risk committee and the social and ethics committee.
Abbreviated curricula vitae of each member appear below.
Induction of directors is conducted through formal processes, whereby new appointees meet with the executive committee and the company secretary to gain an understanding of the group’s operations, business environment and sustainability matters. The induction includes a briefing on their broad fiduciary and statutory responsibilities, including the JSE Listings Requirements.
Training includes the provision of ongoing support and resources that are included in the respective committees’ meeting documentation. This enables the directors to extend their skills, knowledge and understanding of the group. Professional development and training is provided through regular updates on changes and proposed changes to laws and regulations affecting the group.
The board comprises 10 directors: three executives, two non-executives and five independent non-executives. The board is satisfied that it has the requisite balance of skills, knowledge, experience and diversity to make it effective.
The board, together with the remuneration and nominations committee, considers adversity in terms of race, gender and skills when appointments are made to the board. In this regard, as per the gender diversity policy, SepHold appointed two female members during the reporting period and achieved its 30% female representation target a year in advance.
Legend
Women
Men
Board and committee composition
| Director | Designation | Board | Audit and risk committee |
Remunera- tion and nomination committee |
Social and ethics committee |
Rotation schedule |
| B Williams | Independent non-executive director |
Chair- person |
–o | Chair- person# |
Chair- person |
2017 |
| RR Matjiu | Non-executive director |
Member | – | – | Member | 2018 |
| KJ Capes | Executive director | Member | Invitee | – | Member | |
| PF Fourie | Non-executive director |
Member | Invitee | – | Member | 2017 |
| MJ Janse van Rensburg |
Independent non-executive director |
Member | Chair- person* |
Member | – | 2019 |
| PM Makwana | Independent non-executive director |
Member | Member | Member | – | 2018 |
| MM Ngoasheng | Independent non-executive director |
Member | – | Chair- person |
– | 2019 |
| J Pitt | Alternative to Mr MM Ngoasheng |
– | – | – | – | – |
| B Maluleke | Independent non-executive director |
Member | Member | – | Member | 2020 |
| Dr L Mohuba | Chief executive officer |
Member | Member (ex officio) |
Member (ex officio) |
Invitee | |
| NR Crafford- Lazarus |
Financial director | Member | Member (ex officio) |
Member (ex officio) |
Invitee | |
| MG Mahlare | Independent non-executive director |
Member | Chair- person* |
Member | – |
| * | MG Mahlare was chairman of the audit and risk committee prior to his resignation as a SepHold director as of 22 September 2016. MJ Janse van Rensburg assumed the chairperson role upon his resignation. |
| # | B Williams chairs the committee meetings for portions that deal with nomination. |
| o | B Williams stepped down as a member of the audit and risk committee on 9 November 2016. |
Board and committee meeting attendance
| Board | Audit and risk committee |
Remuneration and nomination committee |
Social and ethics committee |
|
| Number of meetings | 4 | 3 | 3 | 2 |
| B Williams | 3 | 2 | 2 | |
| RR Matjiu | 4 | 2 | ||
| KJ Capes | 4 | 2 | ||
| PF Fourie | 2 | 2 | 2 | |
| MG Mahlare1 | 2 | 1 | 1 | |
| PM Makwana | 4 | 3 | 3 | |
| MM Ngoasheng | 2 | 2 | ||
| J Pitt | 1 | |||
| Dr L Mohuba | 4 | 3 | 3 | 2 |
| NR Crafford-Lazarus | 4 | 3 | 3 | 2 |
| MJ Janse van Rensburg2 | 2 | 2 | 1 | |
| B Maluleke3 | 1 | 1 |
| 1 | MG Mahlare resigned as of 22 September 2016. |
| 2 | MJ Janse van Rensburg was appointed on 22 September 2016. |
| 3 | B Maluleke was appointed on 9 November 2016. |
Chairman and independent non-executive director
BA (University of Cape Town), BProc (University of Western Cape), LLM (Harvard University Law School), Harvard Leadership Program (Harvard Business School)
Brent was appointed a director and chairman of SepHold on 3 March 2012. He was admitted as an attorney in 1992 and has held a number of key positions. He is currently the chief executive officer of Cliffe Dekker Hofmeyr.
Independent non-executive director
BCom (Accounting) (University of Fort Hare), BCompt (Hons) (University of South Africa)
Gustav was appointed a director of SepHold on 29 January 2009.
Gustav has held a number of positions at companies such as PricewaterhouseCoopers. He is currently a director at SEMA Integrated Risk Solutions, where he specialises in internal audit, corporate governance, risk management and management consulting.
Gustav resigned as a director of SepHold on 22 September 2016 because according to the memorandum of incorporation he was not eligible for re-election.
Independent non-executive director
BAdmin (University of Zululand), BAdmin (Hons) (University of Pretoria), PostDip: (Retailing Management) (University of Stirling Institute of Retail Studies), Kellogg’s Executive Development Programme
Mpho was appointed director of SepHold on 11 January 2013. He is the chairman of ArcelorMittal, and an independent non?executive director at Adcock Ingram Holdings Limited, Nedbank Group Limited and Nedbank Limited, among others. He also serves on a number of unlisted companies and trustee boards.
Independent non-executive director
BA (Economics and International Politics) (University of South Africa), BSocSci (Hons) (University of KwaZulu-Natal), MPhil (University of Sussex)
Moses was appointed a director of SepHold on 1 February 2008. He was instrumental in developing the industrial policy of the African National Congress and was economic advisor to President Thabo Mbeki from 1995 to 2000. He serves on a number of boards, including SA Breweries and Dimension Data.
Alternate director to Moses Modidima Ngoasheng
BCom, BAcc (Wits), CA(SA), CFA, Member of South African Institute of Chartered Accountants and Association for Investment Management and Research
Justin was appointed as an alternate director of SepHold on 21 August 2014. He co-founded Safika Resources and QuestCo in 2002 and is currently the managing director of Safika Resources.
Chief executive officer and executive director
MBChB (Nelson Mandela School of Medicine, former University of Natal)
Lelau was appointed a director and founding chairman of SepHold on 3 February 2005 and became CEO on 28 March 2012. He retired as a medical practitioner in 2001 after a 22-year career. His commercial career began in 2002 and since then he has served in various capacities in several entrepreneurial endeavours.
Financial director and executive director
BCompt (University of the Free State), BCompt (Hons) (University of South Africa), CA(SA)
Neil was appointed a director and CEO of SepHold on 1 June 2007 and became financial director on 28 March 2012. He started his career in mining finance in 1988. Since then, he has held various senior positions in taxation, business development and corporate finance with companies such as Anglo American Corporation, Gencor and BHP Billiton. He also served as financial director of Xstrata SA Proprietary Limited between 1998 and 2005.
Non-executive director
BA (Hons) (Social Work) (University of the North), MA (Medical Social Work) (University of Pretoria), Certification in Mining and Minerals (University of the Witwatersrand)
Rose was appointed a director of SepHold on 23 August 2005. She has extensive experience as a professional community and social worker in government and the private sector. She has served in a number of directorate positions and is a member of South African Women in Mining and the Business Women’s Association.
Executive director and business development director
Kenneth was appointed a director of SepHold on 29 July 2013. He was CEO of Métier until 9 November 2016.
Kenneth has extensive experience in the ready-mixed concrete and aggregates industry. Kenneth spent 20 years in a building materials entity, holding various management positions. He was directly involved in the development of the ready-mixed concrete and quarrying business as a general manager. Kenneth’s extensive knowledge, expertise and passion for concrete manufacture led him to become a co-founder of Métier in KwaZulu-Natal in 2007.
Non-executive director, chief executive officer (CEMENT)
BCom (Accounting), Executive Development Programme (PRISM) for Global Leaders (IMD, Switzerland)
Pieter was appointed director of SepHold on 20 November 2009. He has extensive experience in the cement industry and assumed the position of chief executive officer of CEMENT in May 2007.
Independent non-executive director
BCompt (University of the Free State), BCompt Hons (Unisa), CA(SA), Executive Programme in Strategy and Organisation (Stanford University Business School), TCTA Leadership Development Programme (GIBS), AltX Director Programme (JSE & WBS)
Martie was appointed as a director of SepHold on 22 September 2016. Between 1994 and 2008, she was the CFO (five years) and then CEO (10 years) of the Trans Caledon Tunnel Authority. She has served as non-executive director and member or chairman of audit committees for Bond Exchange of SA, Airports Company South Africa, Johannesburg Water SOC and Denel SOC. She is currently a non-executive director of the Development Bank of Southern Africa, the Independent Regulatory board of auditors and a non-executive member of the credit committee overseeing Africa and India at FirstRand Bank and Ashburton.
Independent non-executive director
BCom (Accounting) and LLB degrees (University of Cape Town), MBA (Kellogg School of Management at North-West University), Fellow of the African Leadership Initiative and the Aspen Global Leadership Network
Basani was appointed a director of SepHold on 9 November 2016. She has over 10 years of financial services experience in the areas of corporate finance, private banking and private equity. Basani was a director of Transcend Capital Proprietary Limited, a boutique corporate finance firm specialising in B-BBEE ownership advisory for multinationals. She was admitted as an attorney of the High Court after serving articles at Edward Nathan and Friedland (now Edward Nathan Sonnenbergs).
SepHold annually evaluates the effectiveness and performance of the board, its committees and individual directors. In May 2016, Acorim Proprietary Limited (Acorim) conducted an assessment of the performance and effectiveness of the board, committees and executives. A self-assessment will be performed during 2018 by way of individual questionnaires.
No major concerns were raised by any director in respect of the functioning of the board or any of its committees. The assessment monitored the board’s effectiveness as a team, how well the committees function and discharge their duties as stated in the respective charters or terms of reference, as well as the commitment and performance of individuals.
The results identified that the board performs well, with sufficient evidence of effectiveness. Following from the areas of focus the board further strengthened SepHold’s long-term strategic planning, related KPIs and succession planning.
The board specifically considers the independence of directors and their commitments on the date of appointment and annually thereafter. This evaluation is done to determine whether a director has sufficient time to discharge his or her duties effectively and is free from conflicts that cannot be managed satisfactorily.
Mr MM Ngoasheng has been a member of the board for nine years. Mr Ngoasheng’s independence has been scrutinised by the board with the assistance of the remuneration and nomination committee. Although he is a shareholder of SepHold through Safika Resources Proprietary Limited, the board is satisfied that his ownership constitutes a small portion of his overall wealth and is unlikely to influence his independence. The assessment highlighted that Mr Ngoasheng’s extensive knowledge in deal structuring and the building materials sector is valuable to SepHold’s strategic intent. The recent appointment of two independent non-executive directors balances his familiarity. The board values the depth of his experience and concluded that his independence of character and judgement is not in any way affected or impaired by his years of service to SepHold.
The group company secretary provides the board with guidance in respect of the discharge of directors’ duties and responsibilities, and regarding legislation, regulatory and governance procedures and requirements. The board has access to, and is aware of, the responsibilities and duties of the company secretary, and has committed itself to ensure that the group company secretary is afforded the support required to perform its duties. The group company secretary acts as secretary to the board-appointed committees.
The board is satisfied that Acorim, represented by Nikita Brocco, has the required knowledge, skill and discipline to perform the functions and duties of the group company secretary. The board concluded that Acorim maintains an arm’s-length relationship with the company and its board.
No Acorim employees are directors of the company, nor do they have any interests or relations that may affect independence. In making this assessment, the board considered the independence of Acorim directors, shareholders, employees, collective qualifications and track record.
The group uses several strategies, policies, processes and procedures to identify, measure, monitor, manage and report on all material risks to which the group is exposed. The enterprise risk management framework sets out the key principles that guide the implementation of risk management. The chief executive officer and financial director are the drivers of risk management.
To ensure the sustainability of the business, CEMENT and Métier executive committees implement and monitor their risk management policies and plans monthly, in line with the risk tolerance targets defined by the board. The plans provide a systematic, disciplined approach to evaluate and improve the effectiveness of risk management. They define the related internal controls, compliance and governance processes within the group.
To assist SepHold in the discharge of its duties and responsibilities in respect of risk management, the board’s audit and risk committee reviews the group’s risks, progress on their management, and the effectiveness of the management activities to address them. In assessing risk, SepHold reviews performance in terms of profit growth, return on investment and debt levels against targets set during the annual budget process.
SepHold’s material matters and risk areas are closely aligned. Refer to our material matters for more detail.
The board is satisfied that CEMENT and Métier maintain an effective ongoing risk assessment process, consisting of risk identification, quantification and evaluation. This assessment process identifies risks and measures their potential impact and likelihood. A systematic, documented, formal risk assessment is conducted at least annually, and is continually reviewed, updated and applied. The output of the assessments is presented to the board to provide a realistic perspective of material risks that the group encounters.
The board considers risk management as achieving an appropriate balance between realising opportunities for gains and minimising adverse impacts. The board is satisfied that no member of management has exceeded its authority or acted contrary to the board’s stated risk appetite nor, in so doing, exposed the group to unnecessary risk during the financial year and up to the date of this report.
The board is responsible for the group’s systems by evaluating the adequacy and effectiveness of the internal controls. The board evaluates the combined assurance processes of the subsidiary and associate at every meeting.
Métier’s first line of defence is the internal controls, which are driven by a customised logistics software system. The 12 plants each have a site management team that manages costs continually on a “rand per cubic metre of concrete” basis through the software system.
Its second line of defence is executive management control and internal audit. The SepHold financial director conducted quarterly internal audits.
Its third line of defence is the Métier board and committees in which the SepHold executive committee participates.
CEMENT has a five-line defence system. The first line of defence is the internal controls, whose close monitoring by management is the second line of defence. The third and fourth lines of defence are risk management, and internal and external audit, respectively. In 2016 CEMENT conducted 24 internal audits, two more than planned. The fifth line of defence is the Dangote Cement South Africa board and committee.
The SepHold audit and risk committee ensures the reliability of information and adherence to rules and regulations. An essential part of internal control is risk management and ?nancial reporting. The subsidiary and associate provide internal audit reports to the audit and risk committee for due consideration.
The independent external auditor, Grant Thornton, was recommended by the audit and risk committee and appointed by the shareholders, and is responsible for reporting on whether the annual financial statements are fairly presented in compliance with International Financial Reporting Standards (IFRS) and the Companies Act. The preparation of the annual financial statements remains the responsibility of the board.
CEMENT has a functional internal audit department that reports to its audit committee, on which SepHold is represented. Métier’s internal audit function is performed by SepHold’s financial director.
Due to the nature and size of head office, the accounting function is structured to accommodate current requirements and, as such, the audit and risk committee does not believe that an internal audit function is viable at this stage. The committee believes that new appointments should strengthen the accounting function and improve control through the division of duties. As such, this is better suited to the company’s needs than the performance of an internal audit function.
In addition to the regulatory requirements to which SepHold’s directors are subject, the board charter:
The members of the board are required to confirm their trading in SepHold shares and their compliance with the relevant requirements on a continual basis with the chairman or chief executive officer.
Declaration of interests is a standing agenda item at all board meetings. Directors are required to formally update their directorships and other relevant interests at least annually. The board appointment process includes an assessment of candidates’ other interests. Where directors have an interest in particular matters discussed at board or board committee meetings, the directors are recused from the meeting and required to leave the meeting room for the duration of the relevant discussion and/or decision.
Executive employees are advised, at least biannually, that trading in SepHold shares is prohibited when in possession of price-sensitive information.
The board delegates certain functions to various committees in which independent non-executive, executive and non-executive directors participate. The board subcommittees fulfil their obligations contained in the Companies Act, and the requirements contained in King III and in SepHold’s memorandum of incorporation. They execute further duties delegated to them by the board.
In discharging its duties, the board delegates authority to committees and individuals through clearly defined terms of reference, which it reviews regularly. The board maintains effective control through a well-developed governance framework that provides for the delegation of authority. The chairpersons of these committees, in conjunction with the board, are elected by the members of each committee.
The committee has specific statutory duties to shareholders. The role of the audit and risk committee is described in its charter. The committee chairman holds office for no longer than five consecutive years, unless the remuneration and nomination committee and the board have sound reason to determine otherwise.
The audit and risk committee was chaired by Mr MG Mahlare, an independent non?executive director, until 22 September 2016 when he resigned. Mr Mahlare attended the annual general meeting (AGM) to respond to shareholder queries and was replaced by Ms MJ Janse van Rensburg at the same AGM on 22 September 2016.
The following additional key matters received particular attention by the committee in the year:
The audit and risk committee considered and satisfied itself of the appropriateness of the expertise and experience of the financial director, Mr NR Crafford-Lazarus, whose curriculum vitae appears above. The audit and risk committee considered and satisfied itself of the appropriateness of the expertise, adequacy of the resources of SepHold’s financial function and the experience of the responsible senior members of management.
The directors are of the opinion that the business will remain a going concern in the year ahead. Their statement in this regard is contained in the directors’ approval to the financial statements.
Refer to the annual financial statements for the committee’s report.
The role of the social and ethics committee is described in its board-approved charter, which regulates the way business is conducted in line with the principles of sound corporate governance. The charter is aligned to principles recommended by King III, and details the role and responsibilities of the committee. The committee comprises three members of the SepHold board, and one non?executive director.
The social and ethics committee focuses its efforts on the operating companies by monitoring:
The social and ethics committee reports to shareholders at the AGM. The chairperson of the committee will attend the AGM to report back to shareholders.
The following additional key matters received particular attention by the committee in 2017:
The role of the remuneration and nomination committee is described in its charter. The board chairman, Mr B Williams, attends meetings to chair the portion that deals with nomination.
The following additional matters received particular attention by the committee in 2017:
SepHold’s remuneration practices reflect the dynamics of the market and context in which it operates. Remuneration plays a critical role in attracting and retaining high-performing individuals. It is also used to reinforce, encourage, promote superior performance and achieve the group’s goals. The group’s remuneration management is market-related, with market surveys and benchmarks applied to ensure competitiveness.
The board is responsible for making decisions regarding the remuneration of directors and the CEO. The CEO is responsible for decisions relating to total guaranteed remuneration and incentives of all employees. The remuneration and nomination committee receives these recommendations and advises the board on remuneration practices, long-term employee incentives, and submits policy amendments to the board for approval.
SepHold adopts a total reward strategy in remunerating all its employees. This is to ensure that all employees are appropriately rewarded and are made aware of the terms and conditions under which they are employed.
The remuneration framework ensures that SepHold:
Positioning of the total guaranteed package is based on an individual’s level of demonstrated competency, qualifications, experience and performance. The total guaranteed package of individuals new to the position will normally be at the low end of the pay range. With increased experience, learning and performance, the total guaranteed package will be adjusted based on the outcome of performance reviews.
The following summarises the performance measurement criteria:
The table below summarises the main components of the reward package for all SepHold employees. CEMENT, as a subsidiary of DCP, applies a different reward framework.
| Objective and practice | Award size and performance period | |
| Guaranteed pay |
|
|
| Short-term incentive |
|
|
| Long-term incentive |
|
|
The board-approved performance indicators, which measure and review executive management’s performance, will be measured and reviewed by SepHold going forward. The indicators are categorised into financial (75%) and non-financial measures (25%).
| Performance indicator |
Weighting (%) |
Performance condition detail |
Threshold (30%) |
Target (50%) |
Stretch (70%) |
| Financial measures | |||||
| Real growth in headline earnings per share (HEPS) | 35 | HEPS growth over the previous year in excess of inflation | Real HEPS growth of more than 0% | Real HEPS growth of 4% per annum | Real HEPS growth of ?8% |
| Earnings before interest, taxation, depreciation and amortisation (EBITDA) | 25 | The achievement of group EBITDA against budget. The definition as the proportionately consolidated EBITDA of the underlying subsidiaries less corporate costs. | 80% of budget achieved | 100% of budget achieved | ?120% of budget achieved |
| Total shareholder return (TSR) | 15 | TSR will be measured against a comparable set of 10 companies. | Seventh to eighth position | Fourth to sixth position | First to third position |
| Non-financial measures | |||||
| Safety, environment and transformation | 15 | The achievement of safety, environmental and transformation targets as determined by SepHold will be measured against a portfolio of evidence. | |||
| Achievement of strategic goals | 10 | The achievement of strategic goals as determined by SepHold will be measured against a portfolio of evidence. | |||
We aim to attract and retain suitably skilled and experienced non-executive directors. An appropriate level of competitive remuneration is required to reward them for their time and expertise. Non-executive directors are remunerated by way of an annual fee paid in recognition of membership of the board and its committees.
Non-executive directors, including the group chairperson, are not eligible to receive any other employment benefits, performance-related remuneration, or any form of compensation for loss of office.
The fee structure is reviewed periodically and benchmarked annually to ensure proposed fees are appropriate against the external market and support the attraction and retention of high-quality non?executive directors.
None of the directors has written service contracts with the company. Directors are employed by the board and rotate in terms of the memorandum of incorporation.
| Annual fee structure | Proposed 2018 R |
| Chairman of the board | 410 000 |
| Independent non-executive | 310 000 |
| * | Remuneration is paid by SepFluor Limited which is no longer an associate. The disclosure of the director is limited to share options vested during the period. |
| # | MG Mahlare resigned on 22 September 2016 |
| MJ Janse van Rensburg was appointed on 22 September 2016 | |
| B Maluleke was appointed on 9 November 2016 | |
| ± | PF Fourie is a non-executive director of SepHold and an executive director of CEMENT. Remuneration paid to him by CEMENT has therefore been disclosed above. |
Refer to note 19 of the annual financial statements for more details on share options and the vesting conditions. Beneficial shareholding of directors and associates is disclosed in the directors’ report of the annual financial statements.
