Omnia hits the right notes implementing a turnaround strategy

Over the past two years, we have seen plenty of companies head towards financial distress because they are struggling to adjust to the new operational environment that has been caused by Covid. Many companies tried to fight their way out of their distress through the implementation of turnaround strategies that addressed their operational model. However, as we have seen, implementing an effective turnaround strategy takes time, planning and patience.

Omnia has been a company that has set the bar in its field for many years. I started my career in print journalism at a prominent mining and engineering magazine and website in 2007. At the time, Omnia was setting the bar in an industry that was at the peak of a massive commodity boom. This boom decreased in 2008 with the Global Financial Crisis but was reignited when China implemented its ambitious infrastructure build programme.

The mining and engineering industry is facing massive challenges again. The Pandemic has forced many infrastructure projects to be shelved, the global movement towards Net Zero is forcing mining companies to address their business models and the move towards a digital economy has proven that there is little need for massive infrastructure projects to be built in the future.

With these challenges in mind, it is impressive that Omnia is making significant headway in the implementation of its turnaround strategy. I recently read a News24 article which discusses this strategy in more detail.

The good fruits of an effective turnaround strategy

The News24 article points out that Omnia’s turnaround strategy has proven to be a success, with its annual earnings increasing by more than 86%.

The chemicals producer’s results for the year ended 31 March 2022 showed that its headline earnings per share had jumped from to 361 cents in 2021, to 672 cents.

Omnia’s business includes chemical products used in mining, as well as fertilisers.

Both the group’s agriculture and mining divisions benefited from a higher commodity price environment.

“These results reflect the ongoing disciplined execution of our strategy in an increasingly complex and uncertain trading environment. Our teams performed well and focused on customer needs whilst leveraging the strength of our integrated supply chain and manufacturing capabilities,” CEO Seelan Gobalsamy said.

Gobalsamy has been steering the group through its turnaround, since his appointment in 2019.

Omnia declared a final gross cash dividend of 275 cents, up from 200 cents in 2021. The group also declared a special gross dividend of 525 cents per ordinary share.

Debt restructuring plays a key role in the restructuring strategy

Gobalsamy told Engineering News and Mining Weekly in 2020 that the movement to the fix and renew phase of the turnaround strategy followed the group’s “very difficult patch” in 2018 and 2019 where the company needed to do a debt restructure and a rights issue, which resulted in a new management team coming in and the company needing to develop “a fixed and stabilised plan” for the business. The first phase of the strategy was to stabilise the balance sheet and deal with the company’s debt and capital structure, with the second phase focused on fixing and turning around business operations.

The article points out that Omnia’s key businesses in Southern Africa have also been consolidated into a South African Development Community (SADC) market facing unit with manufacturing and supply chain being separated to enhance production excellence, while businesses requiring additional investment have been split from the core business.

In a statement on 24 November 2020, Gobalsamy said the group was “well positioned to capitalise on growth opportunities”, which marks a key pillar of Omnia’s strategy that will be driven by appropriate capital allocation.

Gobalsamy said these opportunities will likely be in Omnia’s core businesses – agriculture and mining – which the company will look to expand and grow. Additionally, Omnia will consider investing in and expanding the production and distribution capabilities of its Australia and Brazil agriculture businesses.

Delivering a resilient performance

The Engineering News article points out that during the April 2020 to September 2020 period, the group further delivered a resilient performance in “an exceptionally challenging and uncertain local and international operating environment”, which reflects the benefits of continued execution against its strategic objectives, the company said in a statement.

Throughout the Covid-19 pandemic, Omnia continued its delivery of essential services, including primary chemicals and solutions for the agriculture, mining, manufacturing and fuel sectors, which play an essential role in food security, economic stability and the livelihoods of people globally.

The article adds that key achievements during the first half of the year included improvements in sustainability metrics, a review and refocus of key operating businesses, further improvements in net working capital management and margins, increased cash generation and lower capital expenditure.

“In line with our turnaround plan, we delivered a resilient performance in a challenging operating environment, both locally and internationally. The results demonstrate the ability of our leadership and management teams to act swiftly and decisively to continue delivering on commitments made to our customers, shareholders and other stakeholders,” Gobalsamy commented.

Cashing in

The Engineering News article points out that Omnia’s revenue from continuing operations for the period was stable at R8.2-billion, while its operating profit increased by 25% to R341-million, benefitting from ongoing targeted expense savings for the year.

Omnia’s earnings before interest, taxes, depreciation and amortisation (Ebitda) from continuing operations, excluding impairments, increased by 11% to R742-million, while headline earnings per share (HEPS) from continuing operations came in at 141c – an increase of 228% on the HEPS of 43c reported for the prior comparable period.

The article adds that, as at the end of September 2020, Omnia’s net debt decreased by R1.4-billion and stood at R1.9-billion, excluding R77-million from the agricultural biological division, compared with R3.3-billion in the prior period.

This improvement was underpinned by a consistent increase in cash generated from operations of R768-million, where net working capital reduced by a further R900-million from R4.6-billion in the prior period to R3.7-billion, excluding R332-million relating to the agriculture biological division.

“Our concerted efforts to entrench sustainable business practices returned an improved safety performance and empowerment rating as well as reduced greenhouse-gas emissions and hazardous waste volumes,” added Gobalsamy, noting that “Omnia will continue to implement responsible turnaround strategies to ensure meaningful and sustainable value creation for all stakeholders”.

Safety is a major role player in the turnaround strategy

The Engineering News article points out that Omnia stated that its proven safety record allows it to compete effectively in key markets, with the group having achieved a recordable case rate (RCR) of 0.30 compared with 0.52 in the prior period, and BME having attained an “enviable” RCR of 0.05.

Omnia’s carbon footprint remained a priority in the period, and the replacement of the EnviNOx catalyst resulted in carbon dioxide emissions equivalent reducing by two-thirds to 150 000 t for the period from March to September.

The article added that post period-end (September 2020), Omnia announced another milestone in that it is now a Level 2 broad-based black economic empowerment contributor, having achieved supplier recognition of 125% and full scores for ownership, enterprise and supplier development and socioeconomic development.

In this regard, Gobalsamy said “transformation is a key focus of Omnia’s turnaround and stabilisation plan, not only to strengthen our competitive position, but because we are committed to drive the transformation of South Africa’s business sector. Going forward, Omnia will continue to focus on improving this position”.

The article pointed out that the nitrophosphate plant in South Africa reached capacity of above 82% following successful modifications. The production for offtake from the mining division increased in line with new business being secured.

Selling assets is important in a turnaround strategy

In October 2020, Omnia announced its intention to dispose of Oro Agri to Rovensa, a Europe-headquartered business.

The Engineering News article points out that the sale, which at the time remained subject to approval by Omnia’s shareholders in December 2020, would generate aggregate cash proceeds of about $146.9-million, thereby de-risking the group’s balance sheet.

Commenting on the proposed Oro Agri disposal, Gobalsamy said the board undertook a comprehensive review of Oro Agri as part of the group’s broader strategy, and that the board resolved to accept Rovensa’s offer, subject to shareholder approval.

In conversation with Engineering News and Mining Weekly, he refers to the sale of Omnia’s Oro Agri business (bought for $100-million 18 months ago), which puts Omnia in “a very positive space” to capture organic and inorganic opportunities for growth, and allows Omnia to consider resuming its dividend and, potentially, a special dividend or share buy-back post year-end in March 2021.

“We believe that Oro Agri’s risk profile, the attractive price offered by Rovensa and the opportunity to de-risk our capital structure, outweigh Oro Agri’s long-term potential which would require significant investment to realise,” he added in the separate statement on 24 November 2020.

Key success factors

Bearing in mind the troubles we have witnessed over the past few weeks with the Comair saga that led to its BRPs filing for a provisional liquidation, and the visible signs of continued struggles at Eskom, one would be tempted to think that a successful turnaround strategy in the current environment is an exception rather than the norm.

However, just as we are using the South African Airways business rescue and the Comair liquidation as industry case studies about the challenges of implementing a business rescue, we can use the Omnia business turnaround strategy as a case study about successfully addressing structural challenges.

A few key highlights are important to note:

• debt restructuring is a massive challenge in the current environment and can be a detractor of value. Mango is facing a debt bill of R2,85 billion to creditors and R183-million in un-flown air tickets. Liquidity issues destroyed Comair and threatens to be a major hurdle when it comes to the value of the liquidation as the company faces estimated creditor claims of R1.6 billion. Addressing liquidity at the early stages of financial distress is key;
• the separation of Omnia’s manufacturing and supply chain units in SADC to enhance production excellence was a bold move that ultimately bore fruit. Plenty of literature has been written about the need to modernise and locally supply chains to address the current challenges presented by the global supply chain crisis;
• less is more. Selling assets, even if they are performing assets, is an important success factor in a turnaround strategy as it funds the strategy.

What can turnaround professionals learn from the Omnia turnaround strategy that will benefit their clients?