Uganda Clays adopts radical reforms to thrive

In 2009, the firm posted a loss of Shs700 million due to a leap in company overheads after the establishment of its second factory in Kamonkoli in Eastern Uganda. The loss, however, did not come as a surprise because the firm undertook a pricey long term investment costing it Shs32 billion. But the capital consisted of about Shs25 billion borrowed from Standard Chartered Bank (SCB) and East African Development Bank (EADB) in 2008.

These loans doubled the 60-year old firm’s financial risk and put a strain on its profitability. As a result, the company’s liquidity and default risk profile had moved from “stable to adverse” requiring an urgent need to re-engineer the capital structure of the company, according to an analytical report by Renaissance Capital, a local stock brokerage firm.

Financial analysts castigated the firm’s management for taking on costly loans yet it could afford strategic rights issues similar to what the New Vision Printing and Publishing Company did in 2008.
Rights issues are used by listed companies to raise additional money by offering their shareholders more shares in exchange for interest free cash. But UCL opted for a rights issue to pay off its debts! The company has since paid Shs6.9 billion of the Shs15 billion loan including penalties that were on its books by close of 2010. But the loans were offset using a new one from the National Social Security Fund –its biggest shareholder with a 32 per cent controlling stake. The difference was that the first loans were priced at 18 per cent per annum while NSSF’s Shs11.5 billion is priced at 15 per cent per annum. These loans remain a major concern of other shareholders.

Light at the end of the tunnel
But the company is expected to return to profitability this year, the CEO told Business Power in his first major interview since he replaced Mr. John Wafula in January. “We will make profit even in the first quarter of this year. So far so good.” But for 2010, he revealed, the company is expected to post another loss.

The firm is set to announce its new financial results this April. “But in 2011, we are very optimistic we will make a profit,” he said. This should come as good news for the firm’s shareholders. Despite the good news, there will still be no dividend declared by the firm for the fourth year in a row.

But the firm is drawing its enthusiasm from the improved performance of its Kamonkoli factory –which was built strategically to serve the east, north, South Sudan and western Kenya effectively. Its major products are facing bricks and roofing tiles compared to the 40 products that the firm’s Kajjansi factory has been churning out.

According to Mr Rubaijaniza the factory has increased its revenue contribution to about 1 in every 4 shillings collected in revenue in the last two months. But it is expected to contribute Shs33.3 of every Shs100 the firm collects from the sale of its products. “We are supposed to sell Shs25 billion this year and Kamonkoli is supposed to contribute a third (Shs8.3 billion representing 33.3 per cent) of that,” he said. In 2009 the new factory contributed only 7 per cent or Shs7 of every Shs100 of the firm’s final revenue.

The main problem of the capital intensive plant was wastage of its products leading to a drop in sales in the face of high operational costs. New plants often produce a lot of waste but at (Uganda) Clays, the waste was really eating away the good clay.

The “new” line had a problem that was initially undetected by management. It warped the would-be-finished tiles like crazy. The managers of the firm later found out that the problem was on the palettes where the tiles sit before dispatch. “But we have modified all of them and now the recovery of tiles is between 80-95 per cent,” he said. Fixing the costly problem has enabled the firm to start offloading 20,000 tiles per week although that is about 70 per cent below production capacity per week. Mr Rubaijaniza’s target is to churn out 400,000 tiles and 430,000 fencing bricks from the new factory to arrive at the Shs8 billion mark.

Changes at Kajjansi
As he raises the profile of Kamonkoli, the CEO is also turning the tables on the Kajjansi plant in Wakiso district. Besides getting rid of its unproductive staff, the parent factory is also witnessing a reduction in product lines, and change in operations. All the non-core activities are being flashed out of the premises while the core activities are receiving the rewards of the new thrust.

As a starting point, he has reduced the number of products that Kajjansi churns out from 40 to 4 including; roofing tiles, facing bricks, maxi pans and quarry tiles. The retired 36 will now be produced on demand according to Mr Rubaijaniza.

The firm is also abolishing its costly business-to-consumer links by contracting distributors and agents to take over its retail operations. It is a distribution model used by world’s leading electronics and cosmetics companies. The new boss is bent on improving efficiencies at the two factories. “My strategy is to concentrate on efficiencies and think about the production of new products in the future. But for now, we want to concentrate on the production of profitable products.”

As part of the new strategy, the company has taken to outsourcing its non-core activities like distribution and retailing of products, loading and transportation of products, security and managing the staff canteen. The mastermind of the turnaround expects to save in excess of 28 per cent of UCL’s overheads, to boost its performance.

New distribution model
The firm has successfully tried out the cost effective distribution model with one agent at Banda in Kampala. The firm has been managing the distribution of its products and operation of its outlets in Kampala, Gulu, and Mbarara. Besides changes in ownership and administration, these distribution points will be increased from 4 to 50 across the country.

“This model is expected to save the company from costs such as; transportation, loading, insurance of products, employing staff and paying their utilities. “We calculated we will save Shs480 million every year and this should boost our profitability,” he said. However, like many other firms, it will not avoid the rising fuel prices because it uses furnace oil to run its Kajjansi operations. The cost has risen from Shs1, 200 to Shs1,700 a litre in two years. Besides its Uganda operations, UCL has also hatched a regional plan to deeply penetrate markets like; Kenya, South Sudan, Tanzania and Rwanda. It already has feeble operations in some of these markets but South Sudan was an underperformer as a result of the referendum that was held earlier this year.

The new distribution strategy is seen boosting UCL’s sales, supported by a new product awareness drive through its agents. Many Ugandans believe tiles are expensive and a reserve for the wealthy contrary to what Mr Rubaijaniza thinks. “These are affordable products. People are only unaware,” he said.

But there are affordable alternatives on the market which are a big threat to the firm’s market share. Companies like; Uganda Baati are manufacturing iron sheets that are designed like tiles. With these, new house builders can now afford decent lifestyles close to those of the rich living in tiled houses. According to the Annual Investors Companion 2011, a report by Renaissance Capital, roofing tiles contribute 50 per cent of UCL’s revenue. Yet tiling products from alternative markets continue to shrink the company’s roofing tile market share. “This was principally as a result of a slow response to demand over the previous 3-7 years which allowed room for substitutes.” But the CEO is confident, there is a class of people who know what they want and will always go for it.

Reforms on course
Based on its new strategic interventions, investment analysts like Mr Peter Okoed, Senior Portfolio Planner at Dyer and Blair Uganda believe the company is on track to good health. He said by dealing with the changes in management style and debt structure, the firm is moving in the right direction. “Mr Okoed added: “If Kamonkoli is reducing its wastage below 20 per cent that is a good sign.”