REVIEW OF OPERATIONS: SANS TECHNICAL FIBERS

SANS Technical Fibers (STF) is a North Carolina-based nylon fiber manufacturer which serves the North American market with specialty yarn solutions. Following the closure of SANS Fibres at Bellville, Cape Town, STF is expanding its business to supply selected global markets with its specific range of products. The fibers are used in automotive end uses, including under-the-hood applications, in end-use fabrics including specific types of parachutes as well as in a wide range of industrial applications. STF is the global leader in nylon 66 sewing threads and is the main supplier of yarn to the largest international sewing thread producers.

The business' manufacturing facility in Stoneville, North Carolina, was commissioned in 2002 initially to serve the North American Free Trade Agreement region. Following the Bellville shutdown, STF transitioned selected global customers to US production.

STF's strategy is to:

• maintain its position as the largest and most diverse global supplier of nylon 66 sewing threads, setting the global benchmark;
• continue to specialise its offerings to the automotive industry;
• produce nylon 66 products fulfilling specific North American market needs;
• constantly reduce the cost of manufacture to provide customers with an ever-improving value proposition;
• grow the business and innovate products to meet customers' future needs; and
• provide the best in industry service levels to customers.

BUSINESS ENVIRONMENT

The US recession's effect on the automotive industry was particularly severe as the unit sales rate almost halved at the start of 2009. All suppliers to automotive manufacturers saw a severe reduction in demand as car companies depleted the inventory pipeline. Other industrial sales dropped, albeit to a lesser degree. The "cash for clunkers" programme introduced later in the year coincided with the bottoming out of inventory cycles and local US business revived to some degree. Increased exports gained momentum in the second half-year and helped STF run at good capacity utilisation rates.

Polymer raw material costs continued to increase in line with oil price trends. Because of depressed demand there was a surplus in light denier nylon 66 capacity, especially in Asia. This, combined with very high inventory levels at customers, made margin recovery a challenge. Towards year-end, supply and demand moved partially to a more balanced position.

FINANCIAL PERFORMANCE

Financial performance: SANS Technical Fibers (Rm)

Compared to 2008, sales volumes were down 12% and revenue decreased by 25%, a creditable performance in the context of a depressed global market. STF increased its market share in these most unfavourable conditions. Overall, North American sales volumes declined by 20% with automotive and industrial markets faring worse than others. Increased exports in the second half of the year contributed positively. Revenue fell to US$27 million, compared to US$36 million in the prior year.

Working capital was managed aggressively to strengthen the balance sheet. Non-cash working capital as a ratio of revenue decreased from 24% in 2008 to 13%. Cash working capital increased to 26% of revenue at year-end, from 5% at the end of 2008.

Capital expenditure was contained at US$1,4 million, the majority of which was spent within the AECI Group and related to the transfer of plant and equipment from Bellville. It is expected that capital expenditure for 2010 will be about US$3 million, primarily for the installation and commissioning of new capacity.

REVIEW OF OPERATIONS

2009 saw depressed demand in the first third of the year followed by full plant rates in the final third. This presented challenges opposite labour, inventory and the control of manufacturing processes. The sharp escalations in raw material prices made it difficult for the business to pass on increases to customers in a depressed environment.

NORTH AMERICA

Sales into automotive end uses declined markedly, but started recovering again at year-end. A slow deterioration has been noted in this sector over the past few years. However, a reversal of the trend is expected in 2010.

Other industrial end uses also reflected the slowing of the economy. Across all North American suppliers of technical nylon fibers, volumes declined by about 20% year-on-year.

INTERNATIONAL

STF continue to supply an extensive and diverse set of international customers in Asia, Europe and South America.

With the introduction of new polymer types at Stoneville, STF enhanced its offering into applications such as under-the-hood automotive products, sewing threads, and narrow and broad woven fabrics. Superior white, low shrink yarn for the shoe and leather manufacturing industries continues to be offered.

The company expects to grow its business in Asia and Europe from its current base as the new capacity expansion comes on line later in 2010. It is expected that more than 40% of sales will be to customers outside of North America by the end of 2010.

PROJECTS, PRODUCTS AND TECHNOLOGY

An expansion project currently underway will increase capacity by 30%. This expansion is extremely cost effective as it entailed moving modern machinery from SANS Fibres at Bellville and relocating it to an existing facility in the USA. Additional service and ancillary equipment is also being moved which will further enhance product quality and reduce manufacturing costs. US$3 million has been approved for this and project completion is expected in the fourth quarter of 2010.

The product range has been expanded to include heavier and lighter denier specialty nylon products. Capability now includes the manufacture of parachute yarns.

SAFETY, HEALTH AND ENVIRONMENT

On 1 October 2009, STF achieved 1 million employee hours worked with no lost-time injury or illness. As a result a "Million-Hour" safety award is expected from the North Carolina Department of Labor.

During the year, STF rolled out its new "Commitment to Environmental Sustainability". The programme focuses on reducing waste and inefficiencies. This includes fiber waste recycling, returnable packaging, and co-operative waste reduction work with customers.

OUTLOOK

STF is poised to benefit from the recovery in the global automotive business and from expansion of its export business. Indications are that excess capacity will wind down and, therefore, some tightness in the market is expected. Capacity utilisation should be high and this will be more conducive to margin recovery.

Margins suffered in 2009 as Asian suppliers were eager to gain sales volume at low prices. Asian manufacturers also cancelled some planned light denier expansions as the economic crisis took hold.

The shutdown of SANS Fibres at Bellville caused some shortage of supply but this was masked by the severe economic downturn as well as by the high inventory levels supplied to large customers before the plant's closure.

Business in North America is expected to recover in 2010 and 2011 as GDP growth resumes.

Automotive units should increase over the previous year but there will be an added benefit of no crisis pipeline destocking.

STF's capacity expansion will come on stream in the fourth quarter of 2010 and sales will ramp-up through 2011. Although there is evidence of a slow economic recovery, capacity utilisation in the fibers industry is not yet at levels recorded prior to the global crisis.

Through an expansion project currently underway, STF's capacity will increase by 30%.

STF will continue its innovative approach to providing products that meet customers' needs.