KAP Industrial’s PG Bison bucks the trend

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SIMON BROWN: I’m chatting with Gary Chaplin, CEO of KAP. Year-end results [with] revenue up 6%. Heps down 43%, no dividend declared.

Gary, a tough year. A lot working against you. We’ll drill into some of the details, but load shedding, inflation, consumer pressure – I imagine even some of the tail end of the flood impact in KZN last year.

Read the full Sens announcement here.

GARY CHAPLIN: Yes, Simon. Thanks for having me on your show. A tough year for us coming off a record result last year. We did expect some moderation as a correction, but it was more than we expected. More subdued consumer environments, higher interest rates, polymer margins correcting more than we expected. So a tough environment, a tough set of results for us.

SIMON BROWN: PG Bison – you added capacity during the year. How close to full capacity are the plants able to operate at?

GARY CHAPLIN: Within our results? Obviously overall tough results, but certainly [there are] some areas that we are very positive and satisfied with, of which one is PG Bison. We expanded the plant last year by 14%, and we operated close to full capacity in this financial year.

In spite of the subdued local demand, we exported more than double what we exported in the prior year, which I think also talks to the competitiveness of that plant and the quality of our products being able to penetrate those export markets so rapidly.

So yes, PG – we are actually very pleased with their performance.

SIMON BROWN: Good numbers there. You made the point in the results that high load shedding hurt demand from your customers, hence the ability to turn to exports, but slightly less impressive margins there. Is that because of pricing, or is that simply the product you were exporting?

GARY CHAPLIN: A little bit of both. The export products are generally a non-value-added product, but a lower-margin product generally. And then in the domestic market slightly subdued demand again on the mix.

SIMON BROWN: Restonic – revenue up 1%. I must say I would’ve expected a tougher market. Consumers are under pressure [from] interest rates and inflation. I thought, considering, not a bad number.

GARY CHAPLIN: Yes, Simon. The volumes in Restonic were actually down, and what you see in the revenue growth is actually price increases to recover our cost increases – which we are very pleased about. So I think the management team there have done well to redesign their products, increasing their prices to start working back the margins that we’ve lost through rising raw material costs.

SIMON BROWN: Your Feltex – this is supplying into the automotive sector. As I understand this is sort of nudge bars, this is trimmings and details of floor mats and the like.

GARY CHAPLIN: Yes.

SIMON BROWN: And new regulations coming into the EU – I was digging around on the website – in 2025. Of course most of our vehicles are exported. You’re working to sort of get compliant with those new carbon-emission standards.

GARY CHAPLIN: Yes. That’s really led by the OEMs [original equipment manufacturers], so component suppliers into the OEMs. Where they export those products or those vehicles is kind of according to their strategy of where they manufacture and where they distribute. The components that we produce are largely transferable directly into NEVs or [neighbourhood] electric vehicles. In fact, the products that we do have a higher application in electric vehicles. So that whole transition will play into our strategy and our favour.

SIMON BROWN: Our vehicle exports are a fairly strong market. Your, I suppose, competitive edge there is expertise more than anything else.

GARY CHAPLIN: We have technology agreements and supply agreements with international component suppliers and we would do that across multiple OEMs, which gives us some benefit of scale that is not normal in other parts of the world.

We get benchmarked globally in terms of our competitiveness and we are able to operate at those levels. So I think longer term, as we have this transition with the OEMs into electric vehicles, we will just transition with them.

SIMON BROWN: Safripol – a record last year. An absolute knockout. You said when we chatted that you’d expected a weaker 2023. The one thing that really struck me [is that] your polymer plant, you say, is running 89% capacity utilisation; this despite a 38-day shutdown – usually running at, what, close to a hundred then?

GARY CHAPLIN: Yes. Generally all of our plants we operate at 100%. That’s what really extracts optimal efficiencies. In this period we had a 38-day breakdown, and we scaled back production in certain areas to try and match lower consumer demand. Although we did find margins retracting somewhat from the record highs of last year, what impacted on this business as well was the impact of load shedding on our customers, the converters. That had a significant impact.

SIMON BROWN: It was the same with PG Bison, where you are able to operate. But it’s your downstream customer that load shedding is hurting. They’re operating at a much lower capacity.

GARY CHAPLIN: Absolutely. That pointed us in the direction of exports. We targeted exports specifically to bring working capital levels down to a more normal kind of level and to maintain certain minimum production levels. So again, it was quite a positive that we were able to penetrate those export markets at short notice.

SIMON BROWN: How much of your products go short? Obviously Feltex to a degree. There’s some PG Bison as well, there’s Safripol. How much is heading beyond our borders?

GARY CHAPLIN: So at PG Bison we, I think, for the year got up to about 18%. For Safripol we got up to about 19%.

SIMON BROWN: Quite chunky. Unitrans, your mining, agri space, transport – agri poor, mining good. What minerals are you moving in Unitrans?

GARY CHAPLIN: Generally we do on-site logistics. So it’s the material on the mine site, and it’s generally high mineral content re-mining activities that we do.

SIMON BROWN: Gotcha. Last question, looking ahead, as we said a tough year. If I look at the issues, load shedding has eased off a bit, some inflation’s down, but interest rates remain high. Another tough operating environment in the year ahead.

GARY CHAPLIN: Yes, I think it will be, Simon, but I think a lot of the work that we have done in this past year will flow through into next year with the benefit. And also we’ve got some major projects being completed in this year and I think all of those will kind of flow through into an improved performance at the end of next year and into the following years thereafter.

SIMON BROWN: You’ve got another large expansion happening at PG Bison, if I recall.

GARY CHAPLIN: That’s right. It’s a major expansion. It’s almost a R2 billion expansion, increasing its capacity by 33% on a basis that [it] is the lowest-cost producer in southern Africa, and certainly globally competitive. So we are very excited about that.

SIMON BROWN: If my memory’s right, that’s about mid-year, so it won’t be so much in this financial year.

GARY CHAPLIN: It will actually only be commissioned in the fourth quarter of our financial year.

SIMON BROWN: Okay, gotcha. We’ll leave that there. KAP CEO Gary Chaplin, I always appreciate the time.