Performance

Overall performance was extremely disappointing. Few of the division’s financial targets were achieved. Revenue was 1,2% lower at R9,3 billion (R9,4 billion). Trading profit fell by 25% to R592,7 million (R790,1 million).

Businesses became strongly cash-generative and debtors’ management improved, with teams working hard to deliver savings and efficiencies.

Recessionary factors had particularly severe effects on the performance of our electrical wholesale division and furniture businesses.

Benchmarks

Budgets are prepared by each branch or individual operation and consolidated throughout the business up to divisional level. The key yardstick is the pattern of previous years. No blanket targets are set. Each operation is considered individually and appropriate goals agreed. Visibly fair goal-setting is crucial as the division has a strong incentivisation culture.

Benchmarking against industry or international norms is also undertaken. For example, a business such as Afcom scrutinises the performance of listed companies in South Africa’s packaging industry while tapping information from its international brand principals.

With the exception of Kolok, revenue and profit goals for the year were not met, though some businesses put in a strong first quarter performance. In many cases, expense management targets were either met or exceeded.

Strategic dynamics

The international financial crisis hit home in October, when volumes fell across the business. Extreme falls in metal prices had a particularly severe effect as Voltex, a major contributor to profit, is vulnerable to sudden shifts in the copper and steel price. Both are denominated in US dollars. This means another variable, the rand-dollar exchange rate, has material effects on margins.

Plummeting business and consumer confidence also contributed to deteriorating performance. Official figures detailing South Africa’s descent into recession confirmed the experience of all business units that demand was depressed in both the business-to-business and business-to-consumer environments.

Interest rate cuts were not early enough or steep enough to prompt increased second-half spending. Towards our year-end, some commentators pointed to “green shoots” of recovery. These were not apparent at an operational level. Trading conditions remained under severe pressure.

Industry dynamics The principal factor influencing the electrical equipment supply sector is the copper price. This fell from R63 900 a tonne in June 2008 to R38 306 a tonne in June 2009. The intra-year low of R30 644 a tonne occurred in January. Trading opportunities created in previous years by a strengthening trend fell away. Simultaneously, demand from many contractors fell. Private-sector infrastructure development contracted by more than 60%. At the same time, reduced industrial output and lower levels of mining activity eased pressure on Eskom capacity, creating short-term electricity supply “security” for South African businesses and consumers. The result was an immediate drop in demand for energy-saving solutions and products. The furniture, stationery and packaging businesses were affected by lower consumer and corporate spending and contraction in the manufacturing sector. Despite these pressures, stationery operations performed well.

Lower inflation and, in some cases, the onset of deflation encouraged de-stocking by many customers, while a stronger rand in the second half prompted opportunistic importers to bring in specific lines at reduced prices, creating further margin squeeze.

Brand dynamics

Brand strategy is based largely on the strength of our corporate brands. Voltex consolidates four previously well known electrical trading and supply companies, but in recent years the Voltex name has come to the fore and is synonymous with SABS-compliant quality, value and reliability. After successfully establishing the strength of the Voltex name, increasing emphasis is given to the development of Voltex private brands. This is a key element in the divisional strategy for combating cheap imports.

Afcom manufactures and distributes under licence the products of the world’s leading suppliers of strapping, fastening, packaging and associated solutions, including brands such as Signode, Strapex, Ramset and Sellotape.

Our furniture and stationery business is driven by the most respected brands in South Africa. Recent research showed that Waltons is the best known brand in the country. A company such as Kolok is the trusted supplier of the HP consumables range.

Quality and value for money are central to the division’s value proposition and are demonstrated by our brand bouquet.

Operational dynamics

Motivation of branch personnel in an extremely testing environment became a priority as the year progressed.

As a result of copper price weakness, dealing with substantial and sudden price deflation became the focus area for Voltex. Stock write-downs were unavoidable as the copper price continued to decline. This helped to combat sagging branch activity levels.

Retrenchments were avoided at Voltex by hiring only when absolutely necessary. In some other businesses, retrenchments occurred.

Credit management became another focus area.

Capital and operational expenditure were strictly controlled, though training investment was maintained.

New initiatives

The major initiative is the development of a new ERP solution. The system has been scoped and specified. Preparations are under way for roll-out across Voltex. The Waltons initiative is nearing completion, with Gauteng, Namibia and Free State about to come on line.

Business conditions delayed the implementation of the Voltex Solutions initiative, but the model has been developed and staff buy-in obtained for a radically different approach to marketing of electrical equipment and expertise. Increasingly, the role of the traditional “order-taker” will be supplemented by the proactive solution-provider able to offer turnkey solutions from project design to project completion. Voltex Solutions will drive this approach.

Voltex continually monitors the development of new technology. To this end, an agreement has been reached with an overseas research and development concern for the licence, distribution and further development rights to a computerised energy management system. The system ensures energy is used to optimum efficiency in residential and commercial installations. It is envisaged that this system will result in the “pull-through” of additional product offerings.

Implementation of Eskom’s latest tariff increases will sharpen retail demand for this Voltex range extension.

Optiplan, a Johannesburg-based specialist in paper-based information management systems, has been acquired and will form the core element of a new Waltons filing division. Optiplan already has national reach, facilitating the roll-out of the new offering across the Waltons footprint.

The remaining 24% stake in Versalec, the Gauteng cable distributor, has been purchased; completing a highly successful acquisition.

New branches were opened at Kolok Polokwane and Voltex Overstrand and Voltex Brackenfell. Waltons opened three branches in the Western Cape, one in KwaZulu-Natal, one in Eastern Cape and one in Free State.

No new divisional structures were introduced, though our businesses have become leaner as a result of staff attrition, the managing down of inventories and the concentration of resources on activities offering most opportunity.