Geared for growth

chairman-ceo-reportYork has undergone a long process of restructuring its business for strong, sustainable growth in the future.

We intend to capitalise on the foundation built over this period as we enter a phase of expansion and investment, beginning to realise the benefits from the joint efforts of your board and management.

All of the capitals have been optimised towards this phase of York’s development.

Looking back on a century

This year, York celebrates its 100-year anniversary, a significant milestone for any company to achieve. It would not have been possible without the dedicated effort of all its people – staff, management and directors. I would therefore like to thank each person who played a role in shaping the character of York.

Looking back on a successful year

I am pleased to report on another successful year for York with substantial growth in revenue, profit and underlying assets. The Group continues its steady growth since 2011 and a realisation of the fruits of a solid foundation that has been built. In addition, underpinning this growth were better utilisation and application of costs while improving efficiency, reflecting sound business practices and processes within York:

  • Revenue increased by 15% over the previous year, with compounded growth since 2011 at 13% per annum;
  • Operating profit grew 27%, EBITDA 22% and net profit after tax by 135% in the last year, translating into an increase of 63% in core earnings per share and illustrating the increasing growth in headline earnings from R51 million in 2011 to R238 million in 2016;
  • York continues to generate cash from its operations, amounting to R285 million during this year an increase of 56% over the previous year; and a compounded increase of 9% since 2011; and
  • Underlying tangible net asset value is up 13% to 834 cents per share from a value of 602 cents in 2011 and a compounded increase of 7%.

Significant expansion in capacity and improved technology took place during these years in order to achieve these results.

Responding to general economic conditions

Economic forecasts expect a weak growth rate for South Africa in 2016. The lumber industry is not immune to this retraction, showing no growth in volume sold on a year-on-year basis.

York’s response has been to increase logistical and sales efforts, emphasising the significant role of our customers and their requirements, and through these, managed to increase lumber market share from 22,3% to 23,5%. Plywood market share, although not formally reported, also grew on the back of our Plywood Expansion Project, creating opportunities for export.

Our first export sales were concluded before the end of the current financial year and we continue to see significant opportunities in these markets.

We see both an opportunity and a challenge in the volatility of the Rand compared to all major trading partners: a challenge through the increased local cost of imported capital equipment, and an opportunity to earn foreign currency through the export of plywood should the Rand continue to weaken. Our financial risk policy is to hedge forward all foreign currency-denominated exposures to ensure that no undue risk impacts our expected revenues.

Management also renegotiated interestearned rates to optimise yields for shorter investment periods.

With a real possibility of recession looming in the year ahead, continued focus on cost efficiency, and ever-increasing productivity of assets, including working capital, will remain key focus areas. The risk of increased inflation should be mitigated through increased selling prices. During the past year, management achieved increased average selling prices by 9%, thereby outstripping inflation through an improvement in product mix.

The entrance of international competitors in the local South African market underscores the need to improve raw material value extraction, as well as enhanced production technology and processes, to optimise recovery. A broadening and enhancing of the revenue base from our assets has been a key strategic focus. Our strategy of expanding the revenue base by exploring biomass electricity opportunities through participation in the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), investing in remanufacturing opportunities, improving processing efficiency and raw material optimisation through yield improvements, is intended to counter this increased competitive threat while strengthening our ability to react expeditiously to market dynamics.

York remains committed to its strategy of expanding its revenue base by exploring biomass electricity opportunities through its participation in the REIPPPP.

Social issues

Better business decisions and resilient business performance are driven by groups of competent, high-calibre individuals with a mix of skills, experience and backgrounds. Our employees and contractors are treated equitably and with respect and are provided with a safe working environment. They are rewarded fairly through provision of above-average remuneration, together with opportunities to reach their potential and fulfilling careers with York.

Through the Company, we continue to engage with the communities in which we operate as our forests and operations touch the livelihoods of a large number of people.

During the year, we embarked on numerous activities to care for and uplift these communities in the face of service delivery issues and instances of abandonment by local authorities. These are described in more detail elsewhere in this integrated annual report.

Outlook

York’s future looks bright.

Your Board and management have created the capacity to capitalise on continued growth prospects, whilst ensuring that our biological asset is constantly being replenished, protected and improved.

The Plywood Expansion Project is nearing completion and, in the ensuing year, further project plans, which will continue our revenue growth strategy, are already in place in the event that the preferred bidder announcement for the Biomass Power Plant Project remains protracted. Our manufacturing resources will enable the Group to grow and expand in line with our strategies and benefit from operational efficiencies that have been implemented.

We have the intellectual, human and financial resources to ensure that the Company can deliver on this growth mandate and contribute further to its high standing as a responsible corporate citizen in the communities where it has an extremely valuable role to play.

Appreciation

I thank the Board of Directors for its knowledgeable contribution, support and active role in setting clear strategies within York. Over the past few years, the Board has been strengthened in experience and diversity. It works closely with York’s executive management to accomplish or complement its achievements by augmenting the vision of what can still be attained.

I believe our shareholders can be proud of the quality, commitment and capability of their directors and Company management. This team has grown over these past years working effectively as a team to achieve the current level of competence that will assure maximum value is created for all Company stakeholders.

I extend my gratitude specifically to our dynamic Chief Executive Officer, Pieter van Zyl, and his senior management team. This hand-picked team of extremely competent individuals has done all of us proud.

We expect to see superior performance from them as we position York for continued growth and expansion.

I wish all our stakeholders only the best in the coming year.

Dr Jim Myers
Chairman
23 September 2016

Investment in future growth

In 2016, York has delivered on its growth initiative with gratifying results.

100-year celebrations

This year marks York’s 100th anniversary and cause for celebration. With it comes an appreciation for all the contributions that have made York what it is today. As each year ring completes, it reflects a cycle of successes and challenges that provides the foundation for the tree to build on. I want to acknowledge and express my appreciation to everyone who has contributed to York’s 100 years of existence and for the character the Company prossesses today.

York’s logo symbolises these characteristics and inspires everyone to grow the business from this solid foundation.

The last year

In 2016, York delivered on its growth initiative with improved results:

Revenue grew by 15%
This was achieved through growth in market share, driven by targeted selling efforts, including expanding into the export market and earning foreign currency. York’s marketing strategy has achieved the desired results for 2016 and management will continue to explore strategic initiatives. The Wholesale division’s performance, in particular, was commendable.

EBITDA is up 22%
EBIDTA increased due to improved margins, through an improved product mix, better throughput at processing facilities, supported by a recovery in the lumber price index and overall increase in value recovery from plantations.

Net profit increased by 135%
This was achieved through fair value adjustments from maintaining a healthy biological asset, longterm cost of funding reduced and interest received on positive cash fl ow achieved throughout the year.

Cash generated from operations is 56% more than the previous year
Cash generation was enhanced by the reduction of stock levels with improved working capital management.

Underlying tangible net asset value is up 13%
The biological asset value increased, with growth exceeding harvesting. Capital expenditure of R283 million was predominantly driven by the Plywood Expansion Project. The benefits of this investment will start manifesting in the next financial year.

Staff and Board of Directors

The 2016 results were achieved through a dedicated and collective effort from all concerned. Personally, it is a great privilege and honour for me to be part of such a dynamic organisation. This dynamism shone through during our 100-year celebrations as the passion and dedication of York’s staff was clearly evident. York’s people really make the difference.

The Board of Directors has supported management throughout the year and provided the strategic leadership to channel that energy into results.

Growth strategy and outlook

York’s strategy is based on value creation through optimisation in order to unlock the value in the business thereby increasing the appeal to shareholders.

The strategy is consistent with prior years and 2016 has seen the execution of the first phase with the Plywood Expansion Project. Changing economic conditions, with a weakening local currency prominent during the financial year, has also highlighted plywood export opportunities, which are pursued. York will continue to add further value to plywood panels that will increase profitability and market share.

York submitted a binding bid under the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) and is awaiting Government announcement. The delay in the programme is a big concern and this has necessitated York re-prioritising the other growth initiatives. The outcome of the announcement will determine the timing of the next phase of the strategy. If the bid is successful and financial close can be achieved, York will build a 28MW biomass power station with 25MW sold into the grid under a 20-year Power Purchase Agreement. Not only will this contribute towards building an annuity income stream, but the synergy value for York’s forest will also improve the sustainability and yields from the plantation’s biological asset. Technical and environmental compliances are already in place for this project.

If, however, the Biomass Power Plant Project bid is unsuccessful, York will pursue various sawmill projects that will unlock strategic value for all stakeholders. These upgraded and new sawmills will provide an increase in value and safety margin and position York to be cost competitive in the international market. York continues to pursue and invest in its EBITDA-generating capabilities.

York will continue to investigate local, cross-border and international acquisition opportunities. A strategic filter is applied to all potential investments and it must meet the required criteria. Currently, the most important criterion is that it must be cash and EBITDA accretive to the current earnings base.

A further primary focus is on improving the quality of the biological asset. This is done through application of precision forestry practices and investing in genome improvement of old and new species. Forestry studies on growth sitespecies- matching and genome studies to improve wood properties are particularly exciting new developments that are being explored.

York has invested in its remanufacturing capabilities to add value to lower grade products. The securing of log supply in the short and long term remains a key management focus. This will be done, in part, through raw material supply, swop agreements and purchase of forestry assets.

York’s share price is trading at a substantial discount to the underlying tangible net asset value (a discount of 70% as at 30 June 2016) and this is an investment opportunity for the Company to yield more attractive and sustainable returns for its shareholders. The Company commenced with a share repurchase programme and by repurchasing York shares in the open market, the Company has reduced the number of issued shares and as such is distributing the benefit to all shareholders. At the end of the financial year, approximately 13 million shares were repurchased. York will continue to invest in its own shares going forward.

With a strong balance sheet and good cash generation, York is well positioned to deliver on its growth strategy.

York has updated its five-year business plan. Management has embraced the objectives and deliverables and is actively pursuing its fulfilment.

Future outlook

York’s summarised strategy will be focusing on the following six key areas to improve quality of earnings and diversification of revenue.

york-ceoreport-table

Gratitude

I am truly grateful to all of York’s people for their effort and dedication in the past year and their commitment to York’s exciting future.

I thank the Board of Directors, particularly our Chairman, Jim Myers, for their constant support and informed guidance in support of York’s growth strategy.

Pieter van Zyl
Chief Executive Officer
23 September 2016