Chief executive officer’s report

Overview 

I have pleasure in submitting my report to shareholders on the results and activities of KAP International for the year ended 31 December 2004.

New businesses have been successfully integrated and a 44% increase in headline earnings per share to 35,86 cents for the financial year ended 31 December 2004 has been achieved. This has been accomplished by solid operating performance, cost cutting and the acquisition of new businesses effective 1 July 2004.

The acquisitions, concluded during the second half of 2004, successfully transformed the group into a holding company of diversified industrial and consumer manufacturing companies. These include fresh and canned meat, automotive and leather products, footwear, speciality fibres, bottle resin, automotive components and towelling products.

Performance

Revenue and earnings

The group's headline earnings for the year grew to R105 million (2003: R9 million) and revenue increased from R616 million to R1, 9 billion in 2004.

Existing businesses generated a 69% growth in revenue and a 95% increase in operating profit. The improved performance of these businesses was achieved through

• the disposal of loss making subsidiaries;
• eliminating a head office structure to improve decision making and reduce costs;
• empowering management teams to take decisions;
• settling all outstanding litigation;
• concluding a rights issue to strengthen the balance sheet, and
• improving operational efficiencies and cutting costs.

The group however, needed to grow substantially to warrant being listed. This was achieved through the consolidation of certain of the Daun group's investments in South Africa. With effect from 1 July 2004 the group acquired Hosaf Fibres, Glodina, Jordan & Co. and the automotive and footwear operating entities of Feltex from Daun & Cie AG. These businesses were selected because they had been "turned around" and were now profitable. The board has a good understanding of them and believes that they carry limited risk and offer good prospects for future growth in earnings. The acquired businesses added R1 billion to revenue and R79 million to operating profit for the six-month period from 1 July 2004.

The group adopted IFRS 3 business combinations. This resulted in negative goodwill of R190 million being accounted for in income for the year ended 31 December 2004. The taxation charge was low in relation to reported profits due to the utilisation of assessed losses and the creation of deferred taxation assets.

Balance sheet

Shareholders' funds grew from R204 to R879 million as a result of the new shares issued to fund the acquisitions and the results for the year. A 34% return on shareholders' interest was achieved. The net asset value per share improved from 121 to 210 cents per share despite the number of shares in issue increasing from 168 to 418 million. Cash of R114 million was generated from operations (2003: R18 million) and net interest- bearing debt to equity remained a stable 22% (2003:16%).

Dividends

The board has declared a capitalisation share award with a cash alternative of 5 cents per share. The dividend cover is 5,03 times. The policy of the group is to have a payout ratio of 20% of headline earnings and to declare dividends annually with no interim dividend.

Operational overview

Industrial division

This comprises automotive, industrial footwear and Hosaf Fibres who all supply products into the industrial sector of the economy.

Car and light commercial vehicle sales in South Africa hit a record high of 450 000 units for 2004, a 22% increase over the previous year which resulted in a 7% increase in local vehicle build to 434 000 units. The market growth had a positive impact on the financial performance of the automotive division. Annualised turnover increases and efficiency improvements produced a substantially higher contribution to profits. All divisions except Wayne Rubber increased their profit contributions. Total investment in new plant and equipment amounted to R24 million representing a major investment in the 2004 and 2005 new car models.

The industrial footwear division continues to generate acceptable returns through tight cost control and excellent marketing of its brands.

Hosaf Fibres suffered from the difficult conditions experienced by the polyester industry worldwide. Despite these adverse conditions, the division achieved a modest profit. Long term plans have been implemented to reduce operating costs and to increase production flexibility and capacity.

Consumer division

This comprises fashion and sport footwear, Bull Brands Foods and Glodina towels who all supply the retail sector of the economy.

The fashion and sport footwear division achieved increased profits mainly as a result of improved margins and buoyant consumer demand for fashion footwear. The strong Rand has been of benefit by reducing the cost of imported materials and product. A consistent focus on nurturing and developing strong brands has been a core driver of this division.

The operating results of Bull Brand Foods for the year reflected a significant improvement. The cannery continued its acceptable growth in earnings and the fresh meat division recorded a pleasing turnaround following the collapse of local red meat prices during 2003. The turnaround was as a result of meat prices stabilising, reduced costs in purchasing cattle for the feedlots, increased volume that generated economies of scale and improved operating efficiencies and cost control.

Over the last three years Glodina consistently improved its financial performance. This has been achieved mainly through the introduction of capital for investment in new plant and equipment, significant improvements in operating efficiencies and staff morale, cost cutting and effective raw material sourcing.

Corporate action

The group acquired Hosaf, Glodina, Jordan & Co and the automotive and footwear operating entities of Feltex with effect from 1 July 2004. The effect of these acquisitions is explained under the revenue and earnings section of this report.

Following the acquisitions, the company changed its name to KAP International Holdings Limited, and was moved to the Diversified Industrial sector of the JSE Securities Exchange South Africa to better reflect the nature of the group.

Corporate governance

The directors endorse the principles advocated by the Code of Corporate Practice and Conduct set out in the King report on Corporate Governance (King II). During the period under review the board has made significant progress in its efforts to comply with the Code in full and by year end complied in all material aspects. Governance issues are dealt with more comprehensively in the Corporate Governance section of this annual report.

Black economic empowerment

The group is committed to black economic empowerment. Training and development of staff has been prioritised to increase the skills base of our human resources. This not only improves operating efficiencies and the quality of our products, but also assists in developing a management team which is representative of the demographics of the regions in which the group operates. Various procurement and social responsibility programmes are in place at operational levels. Motseng Investment Holdings (Proprietary) Limited, with whom we have built a relationship over the past two years, has acquired an initial 14 million shares in KAP (3,35% equity stake).

Directorate

Messrs C L Campher and A Z Keyser resigned with effect 12 November 2004. The board thanks both directors for their valuable contribution and looks forward to their continued positive input in their respective operational responsibilities as chief executives of Bull Brand Foods and Feltex Automotive Leathers. Messrs M J Jooste, J B Magwaza, F Möller, I N Moloto and S H Nomvete were appointed as non-executive directors with effect 12 November 2004. Mr C E Daun was appointed non-executive chairman.

Prospects

The industrial business is anticipated to grow in line with further volume growth in vehicle build in South Africa. The consumer business is expected to continue to benefit from strong retail demand. KAP International is thus well placed to achieve further growth in earnings for 2005.

Appreciation

I would like to thank our executive team and management who have delivered sound operating profits. Our people are key to our success and I have enjoyed the manner in which they, at all levels, have met the challenges of the past year.

To my colleagues on the board, I express my sincere appreciation for your support and wise counsel. Rob Radford, my fellow executive director, in particular, has played a key role during these challenging times and continues to competently lead his management team.

The group enjoys a broad customer base and will seek to further improve its service to better meet their requirements. We thank our loyal customers for their continued support.

We appreciate and are fortunate to have the suppliers and financiers who provide the group with the opportunities to achieve our goals. Our sustainable growth and success depends on the continued commitment of staff, customers, suppliers and financiers and we look forward to maintaining and enhancing good relationships based on trust.

P C T Schouten
Chief executive officer