• Persistent power outages severely impacted Willdale's profitability
  • Sales volumes declined due to supply-side challenges and intense competition
  • Willdale demonstrated resilience with positive net cash flows and a focus on higher-margin products

Harare - Persistent power outages throughout the year had a profound and adverse effect on the production and sales volumes of Willdale Limited, a prominent brick manufacturer. Consequently, the company's operating profitability suffered a significant blow, as evidenced by a staggering increase in operating loss from ZWL1.25 billion in the previous year to an alarming ZWL6.9 billion. In spite of an impressive surge in revenue, reaching an astounding ZWL37 billion in 2023, representing an extraordinary growth rate of 106% compared to the preceding year, Willdale faced an array of formidable challenges. The relentless electricity challenges, aggravated by escalating operating expenses and an inhospitable business environment, dealt a severe blow to the company's earnings and cash flow. Moreover, the revenue figure was further marred by distortions stemming from exchange rate fluctuations, with exchange losses accounting for a substantial 21% of revenue, an exponential increase from the mere 2% recorded in 2022. These losses can be directly attributed to the volatile nature of exchange rates vis-à-vis foreign currency-denominated balances, exacerbating the financial strain endured by Willdale Limited.

Despite a relatively robust demand for bricks, fueled by housing development, the construction of educational facilities, and shopping centers, Willdale Limited encountered a setback in sales volumes, which were 5% lower than the previous year. This decline can be attributed to supply-side challenges arising from persistent electricity shortages. Compounding the issue is the absence of significant barriers to entry in the local market, which has witnessed a surge in Chinese clay product manufacturers over the past decade. Consequently, Willdale operates within a fiercely competitive landscape, contending with more than 35 registered manufacturers of bricks and clay-related products. This intense competition, coupled with the cyclicality of the industry, results in volatile and narrow profit margins. Presently, Willdale lacks a sustainable competitive advantage, pricing power, and relies heavily on non-cash items such as fair value adjustments to generate profits. Notably, in 2022 and 2023, 75% and 50% of its profit before tax, respectively, originated from monetary gains rather than operational activities.

Collectively, these factors indicate a business of subpar quality, lacking the ability to generate meaningful value for its shareholders. Willdale's business model is inherently seasonal, with recurring struggles during the third quarter due to the adverse impact of rains. This year, however, there were high expectations for improved performance due to a drought-induced surge in brick demand. Regrettably, electricity challenges, particularly during the last quarter of the year, adversely affected businesses across the board, and Willdale was no exception. Despite these challenges, it is worth noting that the company strategically focused on higher-margin brick types, aiming to drive profitability and achieve improved financial performance. This deliberate approach resulted in successful margin expansion, further bolstering their financial position.

Despite the numerous operational and economic challenges confronted by Willdale, the company demonstrated resilience by generating positive net cash flows of ZWL3.6 billion from its operations. This marked a notable increase from ZWL1.38 billion in the previous year. Moreover, the cash conversion ratio, averaging 1.25 between 2015 and 2022, indicates a commendable ability to convert profits into cash flow. This healthy cash flow position enables the company to readily finance capital expenditure requirements while maintaining a low debt ratio. Furthermore, the company's financial position appears robust, with a Free Cash Flow (FCF) to Debt ratio of 2.95. This indicates that Willdale has a substantial capacity to generate cash flow that exceeds its debt obligations, further bolstering its financial stability. However, it is important to acknowledge that despite the reasonable capital expenditure demands, the company continues to face challenges in controlling its operating costs, coupled with a challenging operating environment. These factors present ongoing obstacles to the company's growth and profitability.

The company's Sales/Capital ratio, averaging 86% between 2015 and 2022, signifies that, on average, the business generates 86 cents in sales for every dollar invested. This indicates relatively low Return on Invested Capital (ROIC) margins, as evidenced by negative returns between 2015 and 2017, and an average of 11% between 2018 and 2022. These figures are in comparison to a weighted average cost of capital of approximately 40% in the later period, highlighting the challenges faced in achieving favorable returns on invested capital.

On a positive note, Willdale places a strong emphasis on the impact of its operations on the environment and society, as well as its staff. The company has implemented comprehensive mechanisms to monitor and manage this impact across its value chain. A significant milestone was reached in October 2023 when the company obtained ISO certification in quality, environment, and occupational health and safety, specifically ISO9001, ISO14001, and ISO45001. This certification underscores Willdale's commitment to sustainable operations and the provision of high-quality products that meet the needs of its customers.

Despite the challenges encountered, the company remains dedicated to adapting and improving its operations in order to overcome obstacles and maintain its position in the market.

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