Kap Industrial: We are building significant resilience into our system

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SIMON BROWN: I’m chatting with Gary Chaplin, CEO of Kap Industrial Holdings. Results for six months ending December. Revenue up 12%, headline earnings down 17%. Gary, I appreciate the time today. The revenue up 12% and HEPS down 17% really tells a story of what’s been a tough, tough six months.

Let’s touch on load shedding. For your operations, a lot of which is manufacturing, load shedding must be nothing short of a nightmare.

GARY CHAPLIN: Hi Simon, and thanks for having me on your show. Yes, it’s been a tough six months and I suppose the story is around revenue growth in order to recover cost increases, but certainly [in] a subdued volume and demand environment – and a lot of that is driven by load shedding. So yes, very, very tough. We’ve managed to operate most of our plants relatively effectively, but the downstream impact is significant on our customers, on retailers. Obviously that drives lower consumer demand which we’ve really felt through our businesses.

SIMON BROWN: I take that point and maybe the impact – not on you, but in that chain somewhere. You mentioned the revenue. You’ve been able to push through some cost increases to recover increased input costs.

GARY CHAPLIN: We have, Simon. This has been coming for some time. We saw cost escalation in the prior year already. That’s been something that we’ve been actively working on. And if you go through and unpack our results, in most of our divisions our sales volumes have actually been lower, which kind of illustrates what we’ve managed to achieve in terms of recovering cost increases, because most of that revenue increase is actually cost recovery.

SIMON BROWN: I hear you on that – and therefore not increasing margin. It’s not increasing profits to a degree. Inventory also up almost R1 billion on H1 one versus the previous H1. I imagine some of that is higher pricing. I imagine some of that is also, to your point, your downstream customers ordering more softly, more cautiously.

GARY CHAPLIN: Correct. So two elements: obviously the higher commodity pricing coming through in our costs in inventory, as well as in our sales, which sits in debtors. So both of those are elevated through prices. But then also we did have volume increase in inventories, primarily as a result of softer demand.

SIMON BROWN: Okay. So somewhat softer there. PG Bison – I was going to say your brand best known, but actually you’ve got a bunch of fairly well-known brands. They’re doing fairly well. You’ve been expanding. You had a delay on one of the new plants there, but that’s still operating fairly well and fairly robustly, notwithstanding tough conditions.

GARY CHAPLIN: Yes. PG Bison had a very good six months in the context of the environment. I think it illustrates in one sense the strength of that business, but in another sense we’ve done a lot of work over an extended period just in terms of marketing that business and creating consumer demand. A lot of that product actually ends up in informal markets, which I think is a good illustration of the resilience of those markets, which I think we often underestimate. That drove a lot of PG Bison’s continued demand, we believe.

SIMON BROWN: That has been [so] when over the years we’ve been chatting around results. PG Bison – you talk around that repositioning, you talk around picking up in terms of adding capacity there. That strategy, which has been – I don’t know – long term or medium term, really is paying those benefits and, as you say, creating awareness, creating demand in the markets, and creating much export demand as well.

GARY CHAPLIN: Yes. We actually grew our exports in this half as well. So I think through creating production capacity, creating consumer demand, enabling our customers – just the combination of those factors collectively has supported the results.

SIMON BROWN: Feltex, I was going to say it’s small in your life, but it has a R1 billion revenue, which was up very chunkily. Operating profit more than doubled at almost R100 million. That’s selling into the automotive. I’m asking this question so I can get perhaps some sight into some of the automotive companies out there. You’ve seen conditions sort of improving because that was again a really tough pandemic and even post-pandemic because of the supply chain troubles in that industry.

GARY CHAPLIN: We have seen improvements, Simon. It’s not back to pre-Covid levels yet. There’s still a fair amount of variability, but overall volumes are up, and certainly improving levels of consistency. I think one of the difficulties we had previously was just significant variability in demand, and that’s starting to stabilise, albeit at a slightly lower level. But certainly a more sustainable, more manageable situation.

SIMON BROWN: Looking forward for the next six months – you’re six weeks, seven weeks perhaps, into the second half of the year – it looks tough out there still. We are sitting here, as we speak, with Stage 6 load shedding. It’s not suddenly getting easier. It’s almost, dare I say, kind of the new normal.

GARY CHAPLIN: Yes, Simon, we are concerned about load shedding. At Level 4 I think the economy can operate. At Level 6 it gets very challenging downstream from us. And at Stage 8 I think it’s going to be crippling for the economy and for consumers and individuals. So that’s a big concern for us. We are building a significant kind of resilience into our system to be able to continue operating through various levels of load shedding and other infrastructure impacts, so water, security, etc. Those are part of our mitigation plans, together with looking for opportunities of where we can grow, trying to open up new export markets so that we can continue producing and continue selling our product.

SIMON BROWN: I take the point. A lot of that challenge is downstream, which of course is largely out of your hands.

We’ll leave it there. Gary Chaplin, CEO of Kap Industrial Holdings, I always appreciate the time.

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