1.57:1 0% · ChemSpec’s decision to enter the decorative coatings market necessitates the...

Organisational overviewChemSpec integrated annual report 201301B

Scope and boundaryPerformance highlights 02

OrganisatiOnal OverviewBusiness overview 04Group structure 06Global footprint 06 History 07Products 08Chairman’s report 16Chief executive officer’s report 18Stakeholder engagement 20

valUe PrOPOsitiOnVision 22Culture and philosophy 24Market outlook/current business environment 26Business proposition 26Opportunities and risks 28Strategic approach 29Integrated business strategy 30Integrated business model 32What it means to win 36Key performance indicators 38 Future outlook 42

gOvernanCeDirectorship 46Sustainability overview 50Corporate governance 51Risks 60Audit, Risk and Compliance (ARC) Committee report 62

PerFOrManCe Economic performance – Financial director’s report 66Social performance 72Environmental performance 75Remuneration 76

FinanCial resUltsDirectors’ responsibility statement 82Preparer of financial statements 82Certificate by the company secretary 83Independent auditor’s report 83Condensed consolidated statement of financial position 84Condensed consolidated statement of financial performance 85Condensed consolidated statement of comprehensive income 85Condensed consolidated statement of cash flows 86Condensed consolidated statement of changes in equity 87Condensed consolidated segmental analysis 88Notes to the abridged annual financial statements 89Shareholders’ profile 95

annexure 96Corporate information 98

IndexScope and boundary

01

02

03

04

05

ChemSpec’s integrated reporting aims to provide a concise narrative to show how the group’s strategy, governance, performance and prospects, in the context of its external environment, are leading to the creation of value in the short, medium and long term.

Disclosure of information is guided by principles of materiality, conciseness, reliability, completeness, consistency and comparability. (These principles are set out in greater detail in the Annexure.)

This integrated report has been prepared primarily to assist providers of financial capital in making their capital allocation assessments. At the same time, it is intended to meet the needs of a wider group of stakeholders in the business who will be interested in ChemSpec’s ability to create value over time.

This is our third integrated annual report and continues our journey towards fully integrating ChemSpec’s reporting on financial and non-financial performance.

Information describing ChemSpec’s operations has been provided on the basis of creating an understanding of the group’s business activities among its key stakeholders, shareholders, investors and investment analysts, employees, trade unions, regulators including the JSE Limited, customers, suppliers, service providers, government and communities. Our integrated annual report conforms to the requirements of local and international statutory and reporting frameworks, including the South African Companies Act, No 71 of 2008 (the Companies Act), the JSE Listings Requirements and International Financial Reporting Standards (IFRS).

In our integrated reporting process, we continue to use the King Report on Governance for South Africa 2009 (“King III”), Global Reporting Initiative (GRI) framework and guidelines for sustainability reporting, including the Consultation Draft of the International Integrated Reporting Framework issued by the International Integrated Reporting Council in 2013.

This integrated annual report contains certain forward-looking statements relating to the financial performance and position of the group. All forward-looking statements are solely based on the views and considerations of the directors. They concern risk and uncertainty as they relate to events and circumstances in the future. Factors that could cause actual results to differ materially from those in forward-looking statements include, but are not limited to, global and national economic and market conditions, competitive conditions and regulatory factors. These forward-looking statements have not been reviewed or reported on by the external auditors.

This integrated annual report has been approved by the ChemSpec board of directors and has been signed off by the chairman, Mr Ivan Clark, and the chief executive officer, Mr Baron Schreuder.

WebsiteA full set of reporting publications, including our 2013 final results presentation and this integrated report, can be found on our website at www.chemspecpaint.com.

FeedbackWe invite feedback on our report and its content and ask that you contact us at [email protected].

Chemical specialities limited(Formerly RZT Zelpy 4547 and then Chemical Specialities (Pty) Limited)(Registration number 2005/039947/06)(the “company”, the “group” or “ChemSpec”)Integrated annual report for the year ended 31 March 2013

ChemSpec integrated annual report 20130302

Performance highlights

financial non-financial

Performance highlights

current ratio(2012: 2.19:1)

lead coverage in decorative coatings (2012: 0%)0%

11,7%employee turnover(2012: 12,5%)

carbon footprint (2012: 0,51)tons CO2 equivalent per ton production

0,30

R471million

revenue up 24% (2012: R381 million)

R31million

loss for the period(2012: R14 million)

2,89cents

basic loss per share up 35%(2012: 2,13 cents)

56% debt/equity (2012: 22%)

1.57:1

01OrganisatiOnal Overview

Business overview 04Group structure 06Global footprint 06History 07Products 08Chairman’s report 16Chief executive officer’s report 18Stakeholder engagement 20

05Organisational overviewChemSpec integrated annual report 2013

04

ChemSpec is one of Africa’s largest coatings companies, manufacturing and distributing a comprehensive range of high technology industrial, decorative and automotive paint systems. We have a solid 56-year track record proudly earned in both domestic and international markets. Our company is headquartered at our world-class manufacturing facility in Canelands, Durban, South Africa.

We have built an excellent reputation among our customers, suppliers, staff and the communities in which we operate.

We are a responsible corporate citizen committed to operating at the highest levels of integrity and ethics.

We partner with international and local market leaders in the coatings industry to further enhance our product offering in the local market.

Our passion for innovation, continuous improvement and imaginative application of the latest technologies in our ranges enables us to compete globally with the largest coatings companies in the world.

Bus

ines

s ov

ervi

ew

Organisational overviewChemSpec integrated annual report 201307

2013

To build leadership in the business, ChemSpec appoints Baron Schreuder as CEO and starts a concerted drive into the decorative market. The company now produces decorative and woodfinish private label brands for some major retail groups. In a strategic move to bolster decorative paint capacity, the company purchases the Turnkey Paint Solutions factory in Gauteng, along with a supply contract for the Jack’s Paint private label brands.

2012

Clark Investments, the Industrial Development Corporation (IDC) and the Buchan family take significant shareholdings in ChemSpec alongside RMB Corvest and with other shareholders, recapitalise the business through a specific issue and rights issue. ChemSpec is appointed as the distributor of the Sikkens range of automotive refinish products by AkzoNobel, the world’s largest coatings company. Sikkens is widely considered to be the leading global brand in this category and is the official technology partner of the McLaren Formula 1 team. ChemSpec signs a full licence agreement with Hesse Lignal GmBH, Germany’s biggest wood coatings company and a global leader in woodfinish technologies. The agreement allows a full transfer of product development and production techniques between the companies.

2011

The Mica group purchases the House of Paint retail outlets from ChemSpec, with the goal of growing the brand and franchising the outlets. ChemSpec produces private label brands for Mica and they become an important partner for us.

2010

ChemSpec purchases the Canelands facility from Dow Agrosciences and consolidates all four of its previous factories at this new location. Extensive investment in the facility sees the creation of a new resin plant, QC laboratories, solvent tank farm and international training centre. The new home of ChemSpec is born.

2009

ChemSpec purchases Montana Products in Ohio, USA, a 30-year old business specialising in automotive refinishing. Using this strategic footing, the company launches Metalux and Hydrolux into the USA market.

2007

In a management buy-out, ChemSpec is purchased from the Dykins family. Eight months later the company is listed on the JSE AltX exchange.

1997

The first shipment of Metalux automotive paint is exported to Australia. At the same time ChemSpec Australia opens its headquarters and distribution centre in Sydney.

1992

ChemSpec’s decision to enter the decorative coatings market necessitates the acquisition of a new plant in Phoenix outside Durban. This facility also houses the production line for the Formula 40 range.

1988

The Metalux automotive refinish system is launched in South Africa. Produced in a purpose-made factory in Jaco Place, the range is continually refined to keep abreast of advances in this highly technical product category.

1968

ChemSpec having once again outgrown its premises, a new site is purchased in Edwin Swales Drive. Parts of the existing building are retained but this is the start of the real growth of ChemSpec. Production of automotive refinish paints and ancillary products begins.

1964

Larger premises are required and a new site is established off Umbilo Road. The company is becoming well-established in the Durban area as a manufacturer and supplier of industrial and woodfinish coatings.

1957

Peter Dykins names his newly formed company Chemical Specialities and starts producing textile chemicals and blended solvents, as well as a compact range of woodfinish and industrial coatings at a small facility off Umbilo Road in Durban.

Global footprint

History

Our company’s journey began in a kitchen pantry in 1956 when Peter Dykins, a talented chemist and restless experimenter, started to make industrial paint at his home. He was convinced he could produce coatings superior to those available on the market at the time.

Canadarevenue:

R5m

Mexicorevenue:R0.5m

spainrevenue:R0.2m

tanzaniarevenue:R0.3m

Zimbabwerevenue:

R2mPuerto rico

revenue:R10m Botswana

revenue: R20memployees: 35

australiarevenue: R29memployees: 11

newZealandrevenue:

R5m

Fijirevenue:

R1m

Usarevenue: R105memployees: 60

south africarevenue: R285memployees: 561

namibiarevenue: R8memployees: 16

Group structure

Chemical specialities limited (south africa)

99.999% 100% 100% 100%

100%100%100%100%

Chemspec Coatings (Pty) ltd (australia)

Chemspec Botswana (Pty) ltd (Botswana)

Chemical specialities namibia (Pty) ltd (namibia)

Chemspec Properties Usa, llC (Usa)

Paint & abrasive Usa, inc. (Usa)

Chemspec specialities HDC (Pty) ltd

Chemspec Paint and abrasive (Pty) ltd

Chemspec Usa, inc. (Usa)

06

business partners and channels

Aut

omot

ive

Dec

orat

ive

Excl

usiv

e br

ands

Woo

dfini

shIn

dust

rial

Products

Partners Own brands USA only

08ChemSpec integrated annual report 2013

09Organisational overview


Sikkens

SpecrylicPlus

Hydrolux AutoPaint

Metalux Formula 40

Metalux CV Metacryl

SpecrylicMontana

“A” brand automotive paint system with original equipment manufacturer (OEM) approvals for warranty repair work. Sophisticated colour tools and databases for all international car and motorcycle colours. Both the water-borne and solvent-borne products feature the latest technologies for the highest quality repair, every time. Sikkens is the official technology partner of the McLaren Formula 1 team.

This latest technology water-borne basecoat and two components (2K) colour toner system meets the latest environmental legislation. Ideal for premium bodyshops that want an environmentally friendly advantage and conduct out of warranty repairs.

“A” brand quality, but without OEM approvals. The ideal system for the highest quality, out of warranty refinish repairs. Full lifetime warranty. Complete automotive refinish system with easy to use computer-controlled colour and the world’s largest colour swatch collection. Saves time and money with every job.

Focused on the volume fleet and commercial vehicle market, Metalux CV offers a complete system from primers to basecoats and clear coats. Great value 2K product range. Computer-controlled colour and range of basecoat and 2K colour swatches.

“Value” brand for entry level body shops and retail counter mixes. Proven quality and durability. Excellent gloss holdout and colour intensity for a high quality repair, Specrylic offers excellent value to this growing sector of the market.

Newly developed range for retail stores, this basecoat and 2K toner system delivers outstanding colour matching capabilities at a competitive price. Easimix software and over 12 000 colour swatches deliver easy to use colour matching.

“Basics” automotive paint brand – compact system of primer, 2K paint and clear coat for informal and DIY repairs. Also suitable for general spray-painting of furniture, metalwork and other substrates.

Bodyshop essentials – all the accessories, polishes, body fillers and solvents that are used by panel beaters. The range has been developed to provide bodyshops with class-leading products to deliver the professional finish that customers rely on.

This new USA range offers outstanding value due to the use of the latest high solids technologies which deliver a superior finish at a lower input cost. The range is focused on the volume fleet and industrial market where large quantities of paint are used to paint everything from trucks and buses to signage.

Manufactured by our USA facility in Ohio, this range offers an extensive selection of coatings that feature the high-tech, user-friendly performance and competitive value desired by today’s professional refinishers. Based on the many years of repeat business with satisfied customers, the Montana Big Sky automotive refinish brand has a history of uncompromised quality and proven product performance.

automotive refinishProducts continued

11


Hesse Lignal

Professional Woodfinish

Transocean Coatings

Industrial Coatings WoodSure

ChemSpec has recently been appointed as official licensee to Germany’s biggest wood coatings company. The licence agreement allows a full transfer of technology between the companies, from product development to production techniques. The Hesse Lignal range boasts over 40 000 different product formulations, from the finest quality stains and lacquers for furniture and fittings, to robust and durable varnishes for floors and building materials. Hesse Lignal was founded in 1910, and has pioneered many global firsts in the interior timber coatings category. They are widely considered to be the most dynamic player in the global market.

From exquisite natural wood kitchens and furniture to the very latest high gloss finishes, ChemSpec’s Woodfinish product range has a specialised coating to protect and enhance all timber products. These products are widely used in the kitchen cupboard, furniture, coffin and shopfitting sectors, as well as by DIY enthusiasts. The recently signed licence agreement with Hesse Lignal results in a new range of specialised international coatings being added to the range.

ChemSpec has partnered with Transocean Coatings, the world-wide association of paint producers, as their official licensed partner in SA. The association develops, manufactures and sells antifoulings, anticorrosives and many more coatings for ships, offshore installations, industrial facilities and yachts. Transocean’s concept is that wherever in the world you are, you can rely on Transocean to deliver factory-fresh products at competitive prices. Since 1959, Transocean Coatings’ extensive research and development has yielded a range of the highest quality coatings.

From primers and solvents to specialised quick-dry (QD) coatings, ChemSpec’s industrial product range is used in a wide sector of building and manufacturing industries. Constant innovation and the production of customised formulations enable us to compete at the top of this category.

The System 22 brand was launched in Australia in 2013 and brings the technology from the USA Montana 2K products to the heavy equipment and industrial sectors. The product range features a host of OEM brand colours and a series of tintable colours for a wide variety of heavy duty applications.

Our flagship range of decorative paint uses the latest pigment technologies to deliver a durable finish across all product types. The range is fully compatible with the NCS international colour matching system, thus ensuring an accurate colour match every time. The range includes a full complement of undercoat and preparation products, premium quality PVA emulsions and a wide offering of specialised coatings.

This range is aimed directly at the professional contractors’ market. Using our wealth of experience, we have developed the range to offer the ideal blend of quality and value. The system includes the most commonly used preparation and topcoat products, and is perfect for the high calibre contractor looking to give their customers a truly professional finish.

Developed as a value brand for the volume contractor sector, this range offers quality products at a more affordable price point than the ChemSpec Professional range. It also features a wide variety of preparation and topcoat products that are durable and easy to apply.

By utilising our 30 years’ experience in professional woodfinish, we are able to bring high quality, proven products to the contractor, consumer and DIY categories. The range consists of varnishes, wood dressings, stains and sealers – all optimised for ease of use and featuring all the technologies that have made our professional woodfinish range so successful.

industrial and woodfinish decorativeProducts continued

Contractors’ choice

ChemSpec Professional

DeCo designer paint


Jack’s Paint

Mica Hardware

Build it

ChemSpec produces Jack’s Paint’s three private label brands that are retailed through all their outlets across South Africa. The Panache brand is their premium offering and includes a wide selection of PVA emulsions, enamels and a selection of preparatory products. The Artisan and Coverkopte brands are aimed at the contractor and entry-level markets.

ChemSpec manufactures a range of spray paint, car care and DIY automotive refinish products and entry-level automotive paint under Build it’s private label brands. We have also just launched a range of woodfinish coatings under their Urban private label brand.

We manufacture three private labels for the Mica Group. The TradeMark decorative range features an assortment of high quality basics such as PVA’s, primers and enamels. The Embark woodfinish range utilises our extensive experience in professionalwood coatings to bring high quality DIY products to the consumer market. The Earthtone textured paint range is available in two different texture levels and features a selection of the most popular natural colours.

exclusive brandsProducts continued

15Organisational overview


Chairman’s report

Dear Shareholder

BACKGROUNDOver the last two years we have been busy restoring ChemSpec to a viable business from the absolute mess it was in.

It has been an exhilarating but testing period in the history of this fine 56-year old company and one in which some bold decisions and actions were required.

Fortune favours the brave, and particularly so if it is combined with a huge amount of effort and commitment and a return to sound business practice.

Since its low of 30 cents and a rights issue at 40 cents, the share is currently trading at around 50 cents.

For a cost to shareholders of R45 million (5,02 cents per share), the losses over the two-year period, we have been able to turn ChemSpec into a respectable company with outstanding prospects for the future, although we are still a few months off completion of the turnaround.

In last year’s report I said that shareholders should not expect a one-day wonder but that we were confident of rewarding patient investors in the medium to long term. I am no less buoyant this year. We look forward to the future, confident that we will be able to reward stakeholders with ample returns on their investments, sustained over the long term.

I really would like shareholders to see this loss as a base-setter for a prosperous future rather than as a negative, and also not to expect an immediate turn to profits but rather a near-term full recovery, which will happen.

Fortune favours the brave, and particularly so if it is combined with a huge amount of effort and commitment and a return to sound business practice.

• Routes to market We have a broad route to market presence covering South Africa,

Africa, USA and Australasia, some of which is embryonic in terms of present penetration and provides room for further expansion both domestically and internationally.

• Brand prominence We are bringing new focus to bear on the branding of ChemSpec

products in order to ensure that they enjoy greater market visibility.

Operations

• Sales Sales are up 24% for the past year and we are reasonably certain

that we will achieve substantial sales increases from our base of just under R500 million in the current year. We thank our customers for their loyal support and will continue to look for ways to provide better service to them.

• Overhead base We have taken an aggressive approach in our turnaround programme

and have increased our overhead base ahead of sales. The rate of increase in overheads should now diminish, having provided us with the base from which to reach sales targets and at the same time take further strategic growth decisions.

• Finance cost With the assistance of the IDC, we are borrowing capital for expansion

at competitive rates. We have received good support from our financiers and thank them for the confidence they have shown in ChemSpec.

Status• Financial position In light of the expected improvement in performance and limited

capital expenditure requirements our current financial position should be adequate.

• Partnerships We have developed strong strategic alliances with the best

international players in the industry and are extremely proud of these alliances.

• South African We are a wholly South African company in which the Industrial

Development Corporation is a major shareholder. We know how to do business in Africa. We will be improving our BEE rating and empowerment in general so that we can truly say we are proudly South African and play a genuine role in transformation in our country. We have the base from which to achieve this.

• International ability Our auto refinish brands are well-established in the areas we trade in

internationally and provide us with growth opportunities in sales and manufacturing, particularly as the value of the Rand weakens against major currencies.

Culture• Success We have an attitude of winning, being the best,

and are developing as an industry leader.

• ‘Good goes with good’ We have a philosophy that ‘good goes with

good’ or more simply put, ‘birds of a feather flock together’. As we gain the trust of all those associated with ChemSpec in one way or another, we will establish good long-term business relationships with all the fine people who have the same high standard approach to business.

CHANGE OF DIRECTORATETim Dykins resigned as an executive director and Tim McClure resigned as an independent non-executive director during the year. I would like to personally thank both Tim Dykins and Tim McClure for their invaluable assistance while they were with us. We also welcome Ms Thina Siwendu as an independent non-executive director and look forward to benefiting from her wealth of experience in corporate governance and black economic empowerment.

THANKSI thank my fellow board members for their strategic input and support. I thank our Chief Executive Officer, Baron Schreuder, for the warm spirit in which he has embraced his role at ChemSpec. He is a first-class Chief Executive Officer. I also thank Bruce Mackinnon, our Chief Operating Officer, for his role as Chief Executive Officer during our earlier phases of turnaround and for the positive way he has embraced change. I also thank our executive team, the wonderful people of ChemSpec and our customers, suppliers and financiers for their support and for being part of the intense effort which is so needed in turning a company around.

CONCLUSIONThis exciting journey of success at ChemSpec is only just beginning. We have almost completed setting the platform. Please be patient.

We know that we will deliver first-class returns for our shareholders but will not be rushed. I hope you stay for the ride. I am.

Ivan ClarkChairman

I have personally taken ChemSpec to heart and with my family’s shareholding currently standing at around 17%, I am certain there are great things yet to come from this company.

CURRENT POSITIONCorporate• Corporate governance We have now reached a standard of corporate governance that we

believe is required of a good public company, having moved forward from the previous structures and processes which we came to see as unsatisfactory.

Resources• Executive team It is my belief that we have assembled by far the best executive team

in the industry. This has taken quite some effort and I know will bear fruit in the short term. I thank my executives for joining a great team and wish them good luck into the future.

• Industry-specific workforce Reporting to this executive team is a workforce of dedicated people

with good knowledge and experience of the industry. Thanks to all you fine people for your loyalty and support.

• Production facilities We have developed an outstanding all-in-one production facility

at Canelands, KwaZulu-Natal, with capacity to accommodate our growth well into the future. Satellite facilities have been established in Johannesburg and Cape Town for decorative paint, to reduce logistic costs.

• Infrastructure We have a web of distribution networks which has been considerably

enlarged by acquiring a distribution agreement for Jack’s Paint’s with its 80 stores across South Africa. This will continue to grow.

• Products We now have a range of products covering decorative, auto refinish,

woodfinish and industrial, stretching over the full spectrum of customer needs.

This exciting journey of success at ChemSpec is only just beginning. We have almost completed setting the platform. Please be patient.

We know that we will deliver first-class returns for our shareholders but will not be rushed. I hope you stay for the ride. I am.

Ivan

Cla

rk


Chief Executive Officer’s report

Overview and highlightsIt has been an extremely busy yet exciting first three months for me since my appointment in January 2013. The business has responded positively to the introduction of a new Chief Executive Officer and the executive team has been hard at work preparing strategies and discussing tactics on how we can continue to grow the sales line at multiple double digit rates, increase margins and profitability and move the business into a sustainable cash-generating position.

The year to March 2013 must be seen as a year of investment in the future sustainability of this business by putting together a number of key investment strategies. Among the important steps forward that we managed to accomplish, we:

• acquired key leadership capacity in South Africa and Australia to help position the business for future growth and increased our sales resource in various territories;

• launched two new products into the MICA channel, further enhancing our relationship and standing with them;

• acquired the Jack’s Paints supply contract as well as the assets of Turnkey Paint Solutions (Pty) Ltd (a division of Kansai Plascon). These acquisitions will add manufacturing capacity in Johannesburg for the decorative business, sales turnover and, more importantly, open up new access to the market;

• bedded down the Sikkens automotive brand and the relationship with AkzoNobel, investing R12 million in the business;

• invested in mixing banks and colour systems for future growth within the automotive business;

The business is in good shape, with a positive outlook amongst its employees, great infrastructure in place and beneficial strategic partnerships with major global players. These factors together set up a sound platform for successful growth.

• commissioned a new resin plant and solvent blending capacity which will help to reduce our input costs in future;

• opened and invested in a new depot in Colorado, USA, in order to open up distribution in the western states;

• invested in upgrading our global IT platform to allow improved information visibility and supply chain enhancements;

• invested in green/eco R&D in both automotive and decorative technology areas.

The business is in good shape, with a positive outlook amongst its employees, great infrastructure in place and beneficial strategic partnerships with major global players. These factors together set up a sound platform for successful growth.

Results Regrettably, ChemSpec incurred a loss of R31 million for the year ended March 2013 compared with a loss of R14 million for the previous year. The second half of the year was tougher than expected, with periods of slower trade in the USA and Australia businesses and some margin issues in South Africa, against the background of a longer-term decision taken by the board to increase leadership capability and sales resource capacity in anticipation of stronger performance. The result was poorer performance than expected for the second half, which momentarily halted our progress.

While this is undoubtedly disappointing for shareholders, I must stress that the business is still in a turnaround phase where unforeseen market circumstances will inevitably affect short-term performance. On the other hand, there are a number of very positive opportunities for the business which will ensure improved trading and financial results and future sustainability.

Trading results Revenue increased by 24% to R471 million, but margins fell as a result of increased cost push inflation through rand weakness, together with oil price and general commodity price increases from suppliers. Overhead costs were up by 34%. Finance costs were much improved as the benefit from the rights issue started coming through.

The South African and African operations, which comprise almost 70% of the business, performed well and grew by more than 30%. Margins were unfortunately adversely affected by the weakening exchange rate, exacerbated by a strong oil price and further exacerbated by product mix issues in the industrial and decorative businesses. These issues have been addressed wherever possible and margins are already showing improvement.

The USA business had an excellent first half year in which it grew by more than 30%. This was followed by a weak second half, resulting from generally poorer trading conditions in the automotive sector (experienced more significantly by the majors) and the severe impact of super-storm Sandy on our largest customer in the US (±$450 000 lost sales), leaving us with flat sales on last year. Overhead costs were slightly higher due to strategic increases in our sales resource.

Australia showed flat sales on last year primarily as a result of some quality-related issues caused by raw material variations. These have since been resolved and we look forward to better growth opportunities.

Financial positionThe financial structure of the group remains healthy.

At year-end our debt to equity ratio was 56% and our current ratio was 1.57:1.

Available unutilised finance facilities at year-end totalled R55 million.

Working capital increased by R31,5 million as a result of increased business.

The business case for ChemspecWe have all the right markers in place to accelerate our continuing development into a sustainable and successful coatings company.

• We have a first class production facility at Canelands, KwaZulu-Natal, a new facility in Cleveland, Gauteng (resulting from the Jack’s Paint’s supply contract acquisition), as well as a production facility in the USA.

• We have developed partnerships with world leaders whose specific product offerings together with our own products allow us to offer our customers a wider range of products to meet their requirements.

• We have a good management team in place and teams of dedicated people in all our operations.

• We have been regaining market share selectively by focusing on economic returns.

• We are reviewing our product offering, improving our marketing drive and focusing on supply chain excellence to ensure a sustainable supply situation.

• We have a customer base that is supportive of our business strategies.

DividendNo dividends were declared or paid during the year (2012: nil).

ProspectsChemSpec is a good, sound business offering a host of opportunities. The Jack’s Paint contract acquisition for the manufacture of its exclusive decorative paint brands has added value in that sector of the business and we will continue to improve our position in its 80 stores countrywide. We are developing numerous other opportunities in the decorative sector.

The automotive and industrial businesses in South Africa are growing and partner technology is allowing us to change the mix of this category to improve margin and price mix.

Opportunities in Africa are being tested with all three technology and brand portfolio platforms. The US business is stable and self-sustaining, with significant growth prospects in the short to medium term. The Australian business is poised for growth, though this may take a little longer.

Shareholders are asked to be patient as we develop our business platform. The business requires a strategic and methodical plan that will take time to implement, but which will allow sustainable growth through building brands and relationships, both of which are earned through consistency and credibility. We have to approach this in a measured way and there is still much to do.

ChemSpec has adopted austerity measures on top of its growth plan and is expected to continue to improve its results in the coming year.

AppreciationWe thank all our customers for their continuing belief in us, allowing us the opportunity to rebuild this business. We thank our suppliers for their continued support and belief in our ability to meet their requirements. We thank our shareholders for their patience and continued endorsement of our plans. Last, but certainly not least, we thank our valued employees for working tirelessly to improve this business for all our stakeholders.

Finally, I thank my executive team for so quickly responding to my leadership and participating fully in devising and implementing the plans we have laid out for the future.

BC SchreuderChief Executive Officer

Baro

n Sc

hreu

der

Shareholders are asked to be patient as we develop our business platform. The business requires a strategic and methodical plan that will take time to implement, but which will allow sustainable growth through building brands and relationships, both of which are earned through consistency and credibility. We have to approach this in a measured way and there is still much to do.

20

Stakeholder engagement

Employee organisations and unionsChemSpec participates in various collective bargaining forums at industry level, whilst internally, forums like the employment equity/training committee ensures that ongoing consultation with staff on these important issues takes place.

We are members of the National Bargaining Council for the Chemical Industry by virtue of our membership of the Surface Coatings Industry Employers’ Association – a body that negotiates at centralised level for the employers in the surface coatings sector with the unions. Various unions are party to the council.

Climate change and environmental sustainabilityChemSpec engages with a range of specialist stakeholders in this area so as to stay abreast with best practices, as well as to contribute to the public policy debate, including:

• local communities and environmental non-governmental organisations during public participation processes that form part of all environmental impact assessments (EIAs) for new developments.

• professional sustainability, health, safety and environmental and climate change advisors, consultants and auditors.

Investor relationsThe group subscribes to a policy of open, frank and timely communication and values investor and shareholder interest as well as analysts and other financial audiences who have an interest in the company. The CEO ensures that this information is made available and the group’s website provides current and historical information, including the integrated annual report and financial performance. The group regularly communicates with shareholders and institutional investors through the medium of formal press releases, stock exchange news service (SENS) announcements and results presentations to analysts and shareholders. In addition to this, one-on-one meetings are arranged with institutional investors and all analyst queries are dealt with on an ongoing basis throughout the course of the year.

A key foundation of ChemSpec’s integrated approach to long-term business sustainability is its policy of continuous engagement with stakeholders both in terms of listening and responding to their needs and, wherever possible, positively influencing policy and direction in the societies within which it operates. ChemSpec is committed to building and maintaining open, sustainable relationships with a range of stakeholder groups, particularly in relation to long-term strategic direction and with a focus on sustainable practices. Over and above the focus on investor relations, ChemSpec’s stakeholder engagement can be summarised as follows:

Customers and employees• meetings with key customers and suppliers are

held regularly, both in South Africa and globally to gain insight and feedback on all aspects of our business from cradle to grave.

• the group’s website, intranet, brochures, newsletters, videos and presentations assist in communicating group services and new developments within the group.

• participation in relevant conferences, exhibitions and trade fairs, both locally and internationally, gives ChemSpec exposure and keeps the group abreast of industry issues and trends.

• customer and employee training is held regularly through our CARe training centres in Cape Town, Johannesburg and Durban. Product updates and various training courses on application of our products are shared through this forum.

Media• ChemSpec endeavours to keep the public

and all interested parties up to date with any developments in ChemSpec through broadcast, digital and print media. Press announcements, press conferences, editorials and interviews with ChemSpec’s CEO and other executives are arranged to facilitate this.

• representatives from the press are invited to investor feedback presentations, the annual general meeting and client functions.

Government departments/non-governmental organisation• ChemSpec is a member of the South African

Paint Manufacturers Association where it actively participates in meetings and discussion forums.

Organisational overview21


23

02

valUe PrOPOsitiOn

Vision 22Culture and philosophy 24Market outlook/current business environment 26Business proposition 26Opportunities and risks 28Strategic approach 29Integrated business strategy 30Integrated business model 32What it means to win 36Key performance indicators 38 Future outlook 42

To be respected as a global, best of breed South African owned coatings companyVi

sion

Value propositionChemSpec integrated annual report 201322

Value propositionChemSpec integrated annual report 201325

Culture and philosophyvalues Creating value through relationships

Values-driven leadership

Develop our people

Value our partners

Respect our environment

Sustainable wealth

management

Entirely customer focussed

• values-driven organisation

• embrace honesty, integrity and best practice

• to be the “best company to work for” and therefore a company that not only retains its key staff but also attracts industry experts to the company

• to develop a creative, safe and sustainable environment where all employees are equipped and motivated to deliver at optimum performance levels that will help to enhance living standards and pride in South Africans

• strong corporate social investment that helps to develop our fellow South Africans

To be respected as a global,

best of breed South African

owned coatings company

“ A sustainable ethical and growing business that is fair to all stakeholders”

• to clearly understand our customers

• to have state of the art supply chain capability

• to strive to have the highest service levels possible in support of our customers’ expectations which minimise competitor entry into our markets

• to maintain the highest quality standards for our products

• by our own innovation and by partnering with world leaders, offer products which will put us at an advantage to our competitors and therefore make us a market leader

• to have a strong focus on efficient manufacturing best practice

• to simplify our business and cut all forms of waste to a minimum

• to reduce our carbon footprint

• to manufacture environmentally friendly products

• to manufacture environmentally friendly products

• to reward patient shareholders with good share price appreciation by growing sustainably

• effective risk management

• to be a fully integrated South African company

• to partner with “best of breed” key strategic partners across the spectrum of our business

• to partner to create value by differentiation in the market and/or to enhance capabilities

• to always create a win/win relationship

24

“A new generation coatings company”


Market outlook/current business environment

The South African economy remains weak, due to the slow roll-out of infrastructure spend and delivery of services and social improvements. This has created unrest among labour, discouraged international mining and other interests from investing in South Africa, high unemployment and resultant high crime.

Despite all of the above the South African business community is resilient and is making the best of the opportunities arising from a broader consumer platform, mineral and agricultural wealth, strong business and banking platform and an emerging small business entrepreneurship which pushes on despite discouragements.

This resilient attitude, together with the current stock market boom and an emerging property market boom – when combined with a bigger spend on infrastructure by government – will develop a cocktail for good growth from 2014 onwards.

Business proposition

The world economy is shaking off the final woes of the recent major recession which has seen substantial shake-out of wealth, bloated companies and executives and has seen a more active part played by governments in the world economies.

Unless the current war-mongering in the East and in the Middle East becomes an all-out war, world economies should start to show good recovery as the USA begins a boom, the BRICS nations continue to grow substantially and Europe and the UK recover.

This should see a world economic mini-boom from mid-2014 onwards.

The South African coatings marketKansai Plascon and AkzoNobel (Dulux) will continue to seek leadership in the South African coatings market. They will continue to be challenged by those coatings companies that are well run, entrepreneurial and financially sound.

Other world players will seek to enter the market, particularly as a springboard into Africa, and will do this more likely through acquisition. The coatings industry may therefore see a period of consolidation.

South African coatings companies will have opportunities to expand into Africa.

ChemSpec is a new generation coatings company. As such we strive to clearly understand our customers’ needs. We build partnerships with our customers for competitive advantage. We fight the commoditisation of our brands and selectively choose and commit to our market channels. We embrace “green” and are a values-driven organisation.

ChemSpec provides a selection of coatings that enhances value and improves the lives of our consumers around the world. As a result, our consumers will reward us with sales, profit and value creation, enabling our people and their communities, our partners and our shareholders to prosper.

Our products bring authentic quality and beauty to everything they touch. We strive to be the best and are proud of what we do. We want our consumers to feel the same when they use our products. Simply put, our paint improves the lives of our consumers and brings them joy, pride and satisfaction every time they use it.

Chemical Specialities is a long-standing coatings business with a good name in the market. We are arguably the third largest coatings company in South Africa. Plascon (owned by Kansai Paints of Japan) and Dulux (owned by AkzoNobel of the Netherlands) are the leaders. We are therefore the major South African owned coatings company.

We see willingness among all our stakeholders for us to be successful. We have a strong executive team and good corporate governance, supported by a motivated team of coatings industry and support professionals.

We are entrepreneurial and have the advantage of being relatively small and nimble, enabling us to take advantage of opportunities in the coatings industry without any historic impediments. We are well-established locally in South Africa, we have knowledge of doing business in Africa and we have a long-standing international footprint that is a significant part of our business.

We have “best of breed” international and local partners and are developing relationships that we can build on for mutual success. These partnerships also enable us to bolster our already high quality and diverse product range.

We have extensive research and development capacity to enable us to do this. This ability to innovate has seen us develop our own intellectual property in the coatings industry, where our innovations compete well in their respective channels.

We have world-class manufacturing facilities in South Africa and the USA. We are developing our infrastructure and broadening our market channels.

We have implemented good corporate governance and have improved our corporate identity materially over the last two years.

We have a strong board of directors and shareholders that are supportive of our endeavours to turn the business around sustainably and who, along with the executive team, have endeavoured to generate the right culture, energy and enthusiasm in the business to meet the challenges that lie ahead.

26 Value proposition27

Value propositionChemSpec integrated annual report 201328 29

OPPORTUNITIES ACTION

To grow sales exponentially by taking back previously lost market share

A detailed sales plan to drive towards targets and close monitoring of actuals against targets

Be entrepreneurial and pro-active in the market to win business in spite of the weakness of the market

The coatings market is due for realignment, which may present the opportunity to seek out good merger and acquisition targets in all business divisions

ChemSpec has capacity and size to enable it to seize market opportunities and capitalise on opportunities in South Africa/BRICS/Africa

This will be driven by the “tone at the top” and directors will constantly re-enforce entrepreneurial drive and encourage decision- making

The executive team has good industry knowledge and long-standing local and international relationships in the market to seize these opportunities

We will continue to build significant relationships to gain market penetration

To maximise the opportunity presented by our strategic partners and to develop further strategic partnerships

Negotiate short- medium- and long-terms partnership agreements

To capitalise on being South African owned in a South African market

Our directors are well-respected business leaders and have influence in the business community to identify and secure a high level B-BBEE status and BEE shareholding.

Market our status as South African owned and pursue government sales opportunities

The above opportunities offer a high positive impact on the business. However, the nature of the opportunities is such that it is not possible to determine the likelihood of success in each. Further actions identified to take advantage of these opportunities are set out in this report.

RisksOur approach to identified risks is set out on pages 60 to 61 of this report.

Opportunities and risks

Our strategy is set against the background of our business proposition, market conditions and the opportunities and risks that we have identified.

ChemSpec continues with its turnaround strategy and has made substantial strides to full recovery although it is still in a loss-making position.

The business is geared for a larger turnover in terms of factory capacity and, in the execution of its strategy thus far, has almost completed the process of gearing itself up from a resource perspective.

To “jog” forward is simply not in the mould of the business we have created. Our overriding strategic goal is to move quickly in bringing acceptable sales and profits to the table.

A substantial increase in sales is an immediate priority and therefore we have set stretching targets for our sales teams. In addition, profits need to be accelerated to meet shareholder expectations and to provide a more meaningful investment case.

Our focus will be on building brands and relationships, both of which are earned through consistency and credibility. Accordingly, our “back of house” focus will be on improving efficiencies and providing excellent support to the sales drive. Our continued focus on innovation will support our brand building initiatives and keep us relevant in the markets in which we compete.

We will focus on our people with the aim of providing them with the various support structures needed for them to remain a highly committed and capable value driver of our business.

Strategic approach

We believe that our operations can only provide fair returns to shareholders on a sustainable basis if our people and systems can satisfy the needs of our customers within an environment of appropriate corporate governance, where risks are adequately identified and managed, and where we consider our impact on our stakeholders and the physical environment.

Broad-based Black Economic Empowerment (“B-BBEE”) is a key focus of our strategy to be a fully integrated South African company.

Capital adequacy continues to be a key strategic focus as we implement our plans and ensure that our capital resources are well-priced and sufficient for our needs. All these objectives are inter-related.

Our strategic approach is not a “quick fix”. It is a methodical plan which will take time to implement if we are to ensure that our growth is sustainable. We have to approach this in a measured way and there is still much to do.

Substantially increase sales and return to profitability and therefore sustainability

Our strategy is built on four key pillars:

• Sales and marketing excellence

• Innovation excellence

• Operational excellence

• Capital excellence

Each of these pillars has its own key strategic initiatives.

These key strategic initiatives will be supported by the key capital resources or value drivers in our business. They are our:

• Human capital

• Intellectual capital

• Manufacturing capability

• Environment

• Supply chain

• Customers and marketing

• Shareholders and financiers.

These are illustrated in greater detail in the following pages.

Overriding goal


• Product development requests• New product ranges specifications

• Customer relationships• Detailed sales plans• Sales pipeline

• Revenue growth• Margin• Customer satisfaction• Credit note analysis

• Product development response rates• Technology improvements – process – product• Product failure/return

• Manufacturing cost per litre• Operating expense ratios• Procurement cost index• Logistics cost per litre• Working capital ratios• Production efficiency

• Cash availability• Gearing• Cost of capital• EBITDA• Operating profit/EBIT• Forex exposure

• Headline earnings per share• Dividends per share• Return on equity

• Socio-economic development• B-BBEE score• Energy efficiency• Carbon footprint reduction• Recycling• Total waste disposal• Emissions survey results

• Customer relationships• Partner relationships• Market position

• Employee turnover• Safety• Reward• Skills development

• Procurement cost index• On time, in full, service

• Forecasts

value proposition value proposition

lead indicators lead indicators lead indicators lead indicators

lag indicators lag indicators lag indicators lag indicators

good corporate governance good corporate governance

enterprise risk management enterprise risk management

busi

ness

env

iron

men

t

key

perf

orm

ance

indi

cato

rs

wha

t it m

eans

to w

in

futu

re o

utlo

ok

value drivers: great relationships value drivers: great relationships value drivers: great relationships value drivers: great relationships

operational excellenceinnovation excellence

• Sales growth• Maximise market penetration through

effective marketing of our products • Structured pricing of our products• Customer service excellence• Strong technical support• Strong international partners

• Strong R&D capability• Innovative products• Continuous improvement• Brand leadership focus

• Efficient production processes• Procurement focus• Logistics optimisation• Fixed and variable cost improvement

initiatives• Working capital management• Decomplicate all aspects of our

business

sales and marketing excellenceopportunities

risks

capital excellence

• Strong shareholder equity• Sustainable cost-effective funding• Sufficient cash resources

people customers and partners

communities and environment shareholders

Integrated business strategy


woodfinish, industrial, automotive, decorative enamels and primers

decorative, water-borne automotive and woodfinish

industrial, marine and protective coatings

woodfinish

automotivewater-based production

at Canelands

solvent-based production

at Canelands

additional production

in Ohio

additional production

at tPs

decorative

resins

emulsions

commercial portfolios partners

national and international sales

channels local and exportproductiondesign and innovation

cons

umer

s/cu

stom

ers

valu

e dr

iver

s

solvent-based

waterbased

envirofriendly

mar

keti

ng o

f bra

nds

Focus on design and innovation of alternative environmentally friendly products through vOC reduction, ecologically sound raw materials and recycling of production solvents.

resins for certain ranges are made on-site at Canelands in the resin reactor facility.

Materials researchProduct innovationFormulation strategyspectec ingredientsPartner technologiesProcurement input

Maximising value to our customers by forging strong trade relationships with reputable raw materials suppliers to secure preferential trade terms and pricing models.

Chemspec Usa based in akron, Ohio, manufactures a wide range of automotive and industrial products for the Usa, Central american and australian markets.

Chemspec Usa, based in akron, Ohio, manufactures a wide range of automotive and industrial products for the Usa, Central american and australian markets.

cros

s-ov

er p

rodu

cts

raw

Mat

eria

lsP

rocu

rem

ent

Integrated business model

Canelands Industrial Park hosts both our main production facility of solvent- and water-based products, as well as our R&D laboratories where our products are formulated. In addition, the ChemSpec USA factory in Ohio also produces certain automotive and industrial product ranges. Our recent purchase of the TPS (Turnkey Paint Solutions) factory in Gauteng gives us increased capacity for the manufacture of decorative paint products.

People innovation Manufacturing environment supply chain Customers and marketing

shareholders and financiers

retail trade asset owners construction government

industry OeM’s trade coaters distributors

retail

industry OeM’s distributors

trade coaters government retail

bodyshopsindustry

OeM’s retail

distribution

distribution

distribution

distribution

QC

QC

QC

QC

QC

QC

sust

aini

ng

our

inte

grat

ed

busi

ness

mod

el

see page 34 for more information








SUPPLy CHAIN

ChemSpec’s supply chain capability is a key value driver as it strives to grow sales.

The primary objective is to support the business by delivering quality products at competitive prices at acceptable first time order rates whilst maintaining a sustainable GP margin.

This will be achieved through the successful integration of an S&OP process that aligns the sales, production and inventory plans by better predicting future stock requirements and thereby optimising resources, an aggressive procurement plan designed to measure buying fluctuations against an index to maintain keen input prices and margin, quality control through the application of regimental QC and ISO 9001 procedures and continuously reviewing logistics to ensure that we use the most effective and efficient method of getting our products to market.

CUSTOMERS AND MARKETING

This is currently ChemSpec’s most important value driver as we strive to significantly increase sales. We follow a brand portfolio lead strategic approach, focusing on the category and consumer insights, segmentation and brand architecture. This is supported by brand activation as a result of media planning, integrated brand campaigns and advertising.

A price positioning and trade terms strategy sets up a to-channel-plan. This is managed via brand performance. Our channel management and customer intelligence have supported by activity planning, customer service and account performance management.

Customer satisfaction measurement assists in category management and consumer insights. Our sales force management focuses on expertise, deployment, channel allocation and effectiveness measurement.

SHAREHOLDERS AND FINANCIERS

ChemSpec’s objectives when managing capital are to safeguard the business’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders; and to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk. The group sets the amount of capital in proportion to risk.

The group manages the capital structure and makes adjustments to optimise the debt and equity balance in the light of changes in economic conditions and the risk characteristics of the underlying assets. The group may adjust or maintain the capital structure to maximise value. The capital structure of the group consists of long- and short-term debt, which includes the borrowings, cash and cash equivalents and equity attributable to equity holders comprising issued capital, reserves and retained earnings.

PEOPLE

People are a vital capital in our business. Our people drive our organisation and are ultimately the cause of us living up to our vision, values and philosophy and achieving our strategic goals. We aim to clearly integrate our strategic goals with our people values, their behaviours, attitudes and beliefs. Creating our people capacity for the delivery of the strategy is a direct financial investment.

Our people strategy is applied uniformly to the whole organisation. It focuses on sustainable long-term capacity building and addresses organisational design, culture, values, commitment and the matching of resources to future needs.

Resourcing continues to be challenging, however, the business recognises that securing competitive advantage is only possible through the value created by the development of a highly committed and capable workforce. In return Chemspec seeks to build a culture and environment that rewards and encourages motivation, trust, teamwork and innovation.

INNOVATION

Our intellectual capital is a key value driver for our business and is an ongoing financial investment. Our labs provide new and improved products to our customers around the world, driven by environmental, health and cost reduction requirements, changing application methods or the need for improved performance. Our labs are designed to ensure strong cross-pollination of ideas and technology between product classes, allowing for fast and efficient innovation. Our good supplier relationships ensure quick feedback on the latest technical developments and raw material launches.

Our strategic partnerships with Hesse and Transocean provide cutting-edge technical know-how transfer.

We are currently developing products for the future. Water-borne technology is new and exciting and many customers are considering changing to these greener products. We provide products to meet the environmental laws around the world. Colour remains our innovative advantage and we continue to improve in this science. The paint market wants colour, and they want it “easily”. We are innovating constantly to meet this need.

MANUFACTURING

ChemSpec’s manufacturing capability is world-class and continues to strive for excellence to meet customer expectations and drive value for our business. We currently invest in our plant to improve efficiency and capacity. We apply processes that optimise plant usage, keeping abreast of technology developments and advances. We apply a responsible approach to our production processes and are mindful of the trade-off that our plant has on the environment. This is actively managed down.

We maintain a flexible manufacturing strategy to easily adapt to fit changing market requirements. This strategy allows us to customise products for customers and adapt to market changes more readily than competitors. We also are implementing plans to maximise production efficiencies for fast moving lines in an effort to reduce costs.

We are implementing procedures to make the manufacturing and distribution of products as efficient as possible to reduce inventory. We are developing processes to ensure that a high percentage of goods pass QC at the first pass.

ENVIRONMENT

ChemSpec is mindful of its negative impact on the environment, and improvements and progress are part of our everyday business.

The main areas of environmental focus are: waste reduction, greener product development and energy conservation. We continue to remove lead and hazardous materials from our paints. The woodfinish and industrial market is becoming more aware of the environment and this has allowed us to begin selling our water-borne products.

We are in the final stages of developing water-borne offerings for all solvent-based products. We are following the European trend in the decorative technology by developing low VOC and low odour products. These will be launched in the near future. Waste management is also a priority and is currently outsourced to a specialist to remove all recyclable material from our waste and dispose of any hazardous materials properly. Spill rates have improved, with systems in place to avoid any danger to the environment.

Integrated business model continued

Sustaining our integrated business model

valu

e dr

iver

s


Our response to the business environment and opportunities that exist

SHAREHOLDERS ACTION

To reward patient shareholders and grow our share price well but sustainably in the medium to long term

STAKEHOLDERS

To be a company that all stakeholders are happy to be associated with Follow sound principles and be financially secure

SALES

To substantially increase our sales over the medium term Increase sales materially by mobilising our full sales resources

PROFITABILITy

To reach healthy profits in the medium to long term Substantially increase sales while holding margin and containing expenditure and working capital

PRODUCT

By our own innovation and by partnering with world leaders, offer products which will give us an advantage over our competitors and enable us to be a market leader, allowing our sales teams the ability to be superior on the playing field

Employ “best of breed” chemists and develop close relationships with leading world players

PEOPLE

To have a “best of breed” executive team who has a “get on with it/can do attitude” and who is highly professional and knowledgeable in their field of expertise. They are attracted to ChemSpec’s entrepreneurial culture and a competitive package

To have a pro-active, commercial team of professionals in their field supporting the organisation in all areas, including sales, marketing, research, manufacturing supply chain, and administration, who are attracted by a competitive package, work environment and ChemSpec’s “best company to work for” image

Retain good executives through positive, pro-active work environment and competitive packages

Retain good existing personnel through a positive, pro-active work environment, competitive packages, training and ability for career growth

SERVICE

To have the highest service levels possible in support of the organisation which meet all our stakeholder expectations and heads off competitor entry into our markets or to our people

To actually manage service levels by continuous development of our people and close monitoring of performance

PRODUCTION AND DEPOTS

To have state of the art production and depot facilities in all our major sales areas which will result in high quality well-priced products

To continuously upgrade and expand facilities as required, reducing logistics costs and improving efficiencies while maintaining company image

CORPORATE RESPONSIBILTy

To have a corporate culture that embraces honesty, integrity and best practice

To have a strong corporate social investment programme that helps develop fellow South Africans

To have a strong focus on respect for the environment through manufacturing best practice and environmentally friendly products

Continuously work on positive corporate culture and adherence to it

BLACK ECONOMIC EMPOWERMENT

To be a fully integrated South African company with at least a Level 4 rating

Eliminate shortfalls to improve score to achieve Level 4 rating

What it means to win

37Value proposition


Employee turnover results are improving annually as we continue to implement our integrated strategy and grow.

Skills advancement and corporate social investment remain priorities across all areas of the business. On the factory floor the design and implementation of the in-house developed ChemSpec Operator Training Programme has delivered improved efficiency and quality. Our technical and production staff is enrolled in South African Paint Manufacturers Association (SAPMA) paint technology programmes on a regular basis. The CARe Training Centre at Canelands has seen an unprecedented number of staff attend our technical courses.

We will strive to further enhance our broad-based black economic empowerment (B-BBEE) status and have already made some advancements in this area.

Safety is a priority in our business and we strive to implement policies and procedures to set appropriate standards and monitor compliance with health and safety standards.

ChemSpec uses key performance indicators (KPIs) to measure progress in implementing our strategy. Our KPIs support our strategic objective to maintain a sustainable, ethical and growing business that is fair to all stakeholders.

Financial KPIs Financial performance improved in 2013 with strong revenue growth of 24%.

Gross profit margin was negatively affected but is being restored to more acceptable levels after year-end.

2013 2012 2011 2010

Employee turnover (%) 11,70 12,50 14,50 18,50B-BBEE score 5 6 8 8Skills/socio-economic development (R’000) 1 754 1 299 593 809Safety (recorded injuries) 0 7 7 2Logistics incidents (incidents per million kilometres) 3,95 5,2 2,4 0,9Lead content in decorative coatings (%) 0 0 0 0Carbon footprint (tons CO2 equivalent per ton production) 0,30 0,51 * *

* Not measured.

2013 2012 2011 2010Rm Rm Rm Rm

Revenue 471 381 306 394Operating profit/(loss) from continuing operations (37) 7 (111) (35)Loss from continuing operations (30) (8) (100) (40)Loss for the period (31) (14) (110) (40)Headline loss from continuing operations (30) (7) (96) (40)Available facilities 55 115 31 45

Cents Cents Cents Centsper share per share per share per share

Headline loss (continuing) (2,84) (1,12) (25,43) (12,95)Loss (continuing) (2,83) (1,19) (26,55) (12,82)Net asset value 34 36 32 49

Revenue growth (%) 24 24 (22) (36)Gross profit margin (%) 37 41 31 43Operating profit margin (%) (8) 2 (36) (9)Earnings per share (continuing) growth (%) (138) 96 (107) (216)Headline earnings per share (continuing) growth (%) 154 96 (96) (309)Fixed asset turnover 1,7 1,6 1,4 1,79Net working capital to turnover1 (%) 35 35 24 15Current ratio 1,57 2,19 1,34 0,95Debt equity ratio2 (%) 56 22 76 75

1 Inventory + receivables – payables/revenue.2 Net of cash and cash equivalents and bank overdraft. Equity includes shareholders’ loans.

Operating costs grew as our human capital base was expanded.

The group posted a loss from continuing operations of R30 million (R31 million including discontinued operations) for the full year, which compares to a loss from continuing operations in the prior year of R8 million (R14 million including discontinued operations).

The balance sheet is stable as a result of the injection of sufficient cash through a specific issue of shares for cash and subsequent rights issue in the 2012 financial year. At year-end the group had available facilities of R55 million.

We offer a lead-free solution for all our product ranges. In the decorative range there is no choice, and the entire range is lead-free. We were the first coatings company in South Africa to remove lead from our decorative range, thereby protecting our customers from the harmful effects of the metal. This is not yet legislated and many of our competitors still offer the lower cost, but more harmful, lead products.

ChemSpec is the only company to have locally developed a fully volatile organic compound (VOC) compliant water-borne basecoat system which we manufacture in South Africa for local and international markets. We have commenced the measurement of our carbon footprint and will develop this further to manage and minimise negative effects we may have on the environment.

financial non-financialKey performance indicators


Long Medium Actual Actual Actual Actualterm term 2013 2012 2011 2010

SALES AND MARKETING ExCELLENCE Revenue growth (%) 10 to 15 20 to 30 24 24 (22) (36)Increase sales materially over the medium term, moderating in the long term

Margin (%) 40 39 38 41 31 43To maintain margins at 40% while growing revenue

OPERATIONAL ExCELLENCEWorking capital ratiosTo actively manage our working capital levels downward relative to revenue through supply chain improvements, control over receivables and supplier term improvements

Net working capital to turnover (%) 20 22 35 35 25 15

Inventory days (days) 90 150 236 237 218 157

Debtors days (days) 48 50 66 60 64 55

Creditors days (days) 95 95 117 108 166 153

Current ratio 2,00 2,00 1,57 2,19 1,37 0,96

CAPITAL ExCELLENCEDebt equity ratio (%) 30 40 56 22 76 75The debt equity ratio is defined as net borrowings to total shareholders’ equityOur target is to achieve a gearing of between 30% and 40%

Return on invested capital (%) 15 17 19 18 * *Return to exceed required rates of return as determined by our weighted average cost of capital (WACC). For new investments we target returns of 1,5 x WACC

PEOPLEOur target is to develop a creative, safe and sustainable environment for our people

Employee turnover 12 12 11,7 12,5 14,5 18,5

Safety (recorded injuries) 5 to 10 5 to 10 0 7 7 2

Logistics incidents (per million kilometres) 4 4 3,95 5,2 2,4 0,9

COMMUNITIES AND ENVIRONMENTOur target is to be a fully integrated South African company with a strong focus on our communities and environment

B-BBEE score 4 4 5 6 8 8

Socio-economic development spend (R’000) 1 1 1 754 1 299 593 809

Carbon footprint (tons CO2 equivalent per ton production) 0,5 0,5 0,3 0,51 * *

Total waste disposal * * * * * *

Emissions survey results * * * * * *

SHAREHOLDERSReturn on equity (%) 10 to 15 5 to 10 – – – –By improving financial performance and position improve the return on equity to a long-term average of between 10% and 15%

* not yet implemented

Our KPIs are derived from our strategy and serve as lead and lag indicators of our performance in meeting our strategic goals and objectives. We regularly monitor our performance against these key targets and revise them from time to time as strategic priorities and/or circumstances change. Our KPIs are arranged across the four strategic pillars and our key capital resources or value drivers and measure actual performance as well as indicate the targets we have set over the medium (one to four years) and long term (five to eight years). Not all KPIs reflected in our integrated business strategy are set out below as they do not meet the selection principles as set out in the annexure to this Integrated Annual Report.

50

25

0

(25)

(50) Long Medium 2013 2012 2011 2010

revenue growth (%)

50

40

30

20

10

0Long Medium 2013 2012 2011 2010

Margin (%)

40

30

20

10

0Long Medium 2013 2012 2011 2010

net working capital to turnover

100

75

50

25

0Long Medium 2013 2012 2011 2010

gearing

Key performance indicators continued

42

While we had hoped to return to profit earlier, we remain confident of rewarding patient medium- to long-term investors and we would hope that shareholders see this loss as a base-setter for a prosperous future rather than as a negative.

In looking forward to the challenges and uncertainties that lie ahead we hold the view that, despite difficult economic conditions, ChemSpec is well-positioned and is growing off a low sales base with lots of upside potential.

The coatings market is due for realignment. Major world coatings players are attempting to enter the SA market, as can be seen from the recent acquisition of Freeworld Coatings Limited by Kansai Paints from Japan. We believe this will continue. These disruptions and changes in the market present opportunities for well-run, entrepreneurial and financially sound South African owned coating companies.

We have set out below the future key uncertainties that we face, which are therefore the key focus areas in our business. Throughout this report, we have endeavoured to describe the actions we have taken to address them.

Future outlook

Sufficient sales

Across the board competitive products

Maintain margin

De-complicate the business

Sufficient cash

Retain key management team and employees

43Value propositionChemSpec integrated annual report 2013

45

03gOvernanCe

Directorship 46Sustainability overview 50Corporate governance 51Risks 60Audit, Risk and Compliance (ARC) Committee report 62

GovernanceChemSpec integrated annual report 201344


Baro

n Ch

risto

pher

Sch

reud

er

Shan

e va

n Ni

eker

k

Jona

than

Gra

nt M

aehl

er

Bruce Robert MacKinnon

Darryn John Coyle-Dowling

Gerard Vincent Metzer

Chief executive officerBSc HonsAppointed to the board 1 January 2013Age 45Baron has worked in the coatings industry for over 25 years in various capacities ranging from R&D to manufacturing, sales and general management. This included a four year secondment from Plascon to the AkzoNobel powder coatings in the United Kingdom and the United States between 1998 and 2002. Baron returned to South Africa in 2002 as sales director for Plascon in the decorative and industrial segment. In 2006 he was appointed managing director of Plascon and held this position until the end of 2012.

International sales directorAppointed to the board 1 April 2011Age 55Shane retired from the Mr Price group in August 2010 after 27 years with that company. During his tenure he was instrumental in developing the Mr Price Home and Mr Price Sport brands, as well as steering the group to its phenomenal success.

Financial directorMAcc (Tax), CA (SA)Appointed to the board 1 June 2011Age 41After completing his studies, Jonathan finished his articles at BDO. He took up a senior management position at BDO and was subsequently appointed as a director in 2000. He specialised in management and tax consulting and is well-versed in corporate governance and corporate finance, having served clients listed on the JSE and been lead partner in a number of high-profile international mergers and acquisitions. Jonathan was previously financial director of ChemSpec in 2008 and was re-appointed in July 2011.

Chief operations officerACIsAppointed to the board 31 March 2007Age 41After completing his articles, Bruce joined Robertsons (Pty) Ltd as a project accountant. In May 1997 he accepted an appointment at ChemSpec as divisional accountant. In February 2000 Bruce was promoted to group financial manager, a position he held until the management buy-out in January 2006 when he was appointed as the group financial director. In May 2010 he was appointed as managing director and moved to the position of Chief Executive Officer (CEO) in November 2010. He was appointed Chief Operations Officer (COO) with effect from 1 January 2013.

Commercial directorCA (SA)Appointed to the board 1 April 2011Age 37Darryn is a qualified chartered accountant and is the current chief executive officer (CEO) of Clark Investments. He manages a portfolio of investments around the globe and has extensive experience in financial structures and corporate governance.

Sales and marketing directorAppointed to the board 1 January 2013Age 54Gerard served as head of marketing for Bosch in the automotive aftermarket in South Africa. In 1993 he established a strategic planning agency, working in the advertising and home improvement industry with Mica Servistar and Jack’s Paint. In 2006 he headed up the sales and marketing functions for the building materials manufacturer Dyson in the Republic of Ireland. In 2011 Gerard was appointed to the board of Plascon SA and in the following year was appointed to the board of the Marketing Association of South Africa (MASA).

executive directorsDirectorship

46


Ivan

Art

hur C

lark

John

Giff

ord

Jone

s

Iain

Bru

ce B

rere

ton

Buch

an

Neil Anthony Page

Sipho Eric Sono

Zack Maxwell Buchan

Chairman of the boardCA (SA)Appointed to the board 1 April 2011Age 69Ivan joined the Grindrod Group in 1977 and rose through the ranks. He served as group Chief Executive Officer (CEO) from 1999 to 2006, after which he was appointed chairman of Grindrod and Grindrod Bank Limited. He is a past winner of the British Airways/Natal Mercury KwaZulu-Natal Businessman of the Year award. He lists as some of his professional achievements the fact that Grindrod was voted top listed company in South Africa for 2005 and 2006, the Financial Mail’s top company for 2005, 2006 and 2007, the top KZN company in 2005 and the Marine Money international top listed shipping company in the world for 2005 and 2006.

Independent non-executive directorAppointed to the board 15 August 2011Age 63John is a past director of Grindrod Limited and spent 42 years with the group. He served as chairman of the Association of Shipping Lines and on the National Council of the Association of South African Shipbrokers and Ships Agents.

Non-executive directorAppointed to the board 9 January 2012Age 64Iain is presently chairman of The Unlimited (a successful business in the financial services sector) which he founded in 1994. His earlier work experience consists of brand and marketing management at large multinational corporates before he started his own businesses.

Non-executive directorBCom, CAIB (SA), Dip SAIMAppointed to the board 31 March 2007Age 58Neil is currently the managing director of RMB Corvest and has gained extensive experience in commercial banking including retail, corporate and international banking. He has specialised in private equity since 1985.

Independent non-executive directorCA (SA)Appointed to the board 12 March 2012Age 46With more than 20 years’ experience in accounting, audit and business advisory, Sipho was previously a partner at the audit firm Sizwe Ntsaluba VSP (now Sizwe Ntsaluba Gobodo) where he was instrumental in developing and growing the firm to become the fifth largest firm in South Africa. He is presently Chief Executive Officer of OPIS Advisory, which he founded in 2009.

Alternate non-executive directorAppointed to the board 9 January 2012Age 37Zack is presently responsible for strategy at The Unlimited and was appointed as alternate non-executive director to Iain on the board.

Nam

hla

Thin

a Yv

onne

Siw

endu

Independent non-executive directorBSocSc (Hons), LLBAppointed to the board 16 January 2013Age 46Thina currently serves as director in the corporate and commercial practice of DLA Cliffe Dekker Hofmeyr, focusing on corporate governance, and is a non-executive director on the board of Woolworths Holdings Limited. She is also a senior research fellow at the Centre for Corporate Governance in Africa at the University of Stellenbosch. Her previous board experience includes positions as non-executive director on the boards of Grindrod Limited and Grindrod Bank where she served as a member of the bank’s Credit and Risk Committee and Airports Company South Africa where she served as chairman of the Risk Committee.

Audit, Risk and Compliance CommitteeSE Sono (Chairman)JG JonesNTY Siwendu

Remuneration and Nominations CommitteeIBB Buchan (Chairman)IAJ ClarkDJ Coyle-Dowling

Social and Ethics CommitteeDJ Coyle-DowlingBR MackinnonJG JonesNTY Siwendu

Directorship continued

non-executive directors

48

GovernanceChemSpec integrated annual report 201350 51

IntroductionSustainability is at the heart of our business and the way we operate. Our strategy is designed to ensure the long-term sustainability of our business.

We believe that our operations can only provide fair returns to shareholders on a sustainable basis if our people and systems can satisfy the needs of our customers within an environment of appropriate corporate governance, where risks are adequately identified and managed, and where we consider our impact on our stakeholders and environment.

The sections that follow address these issues and form the building blocks of our sustainability.

Our approachOur approach to driving our sustainable development is founded on a commitment to being a good corporate citizen, operating in a commercially sensible and socially responsible manner, mindful that we are custodians of the earth’s resources.

We continue to inculcate the tenets of our philosophy in our businesses and generate fair value for all our stakeholders – shareholders, employees, customers, suppliers and the communities and governments in the countries in which we operate.

We recognise the need to identify and respond to concerns that may be raised by our various stakeholder groups about our business or our performance, as we map our future risks and opportunities, striving to ensure our long-term sustainability. Stakeholder engagement is a means to build trust and nurture relationships.

Acknowledging our responsibility to operate innovatively and responsibly in our sector, we capitalise on opportunities as a coatings provider, to produce quality products and solutions that minimise the impact on our environment.

Sustainability overview

Management structures and systemsThe group continues to develop and implement appropriate management structures to improve sustainability issues. These issues focus broadly on ensuring economic growth, health, safety, environment, quality and innovation, as well as promoting black economic empowerment, employment equity and skills development within the organisation.

Our centralised management structure ensures that we are able to implement a uniform administrative sustainability process throughout our operation, and implement systems for measuring and collating our performance data and managing the business.

Best practices for risk management continue to be enhanced as a fundamental part of the process of managing our sustainability. We conduct an annual risk assessment to consider the incidence and magnitude of risk across a spectrum of risk areas: reputational, credit, IT, strategic, product, political, regulatory, commercial, security, human resources, operational, technical, crisis and change management control.

Environmental sustainability issues are overseen by our technical department that continuously manages our environmental performance and control of volatile organic compounds (VOCs).

To ensure high global standards of product quality, safety and environmental performance, our business has maintained its International Standards Organisation (ISO) 9001 certification. We take pride in sustaining these international standards.

Reporting on material issuesIn reporting back to our stakeholders on our sustainability performance, strategy and prospects, we aim to disclose material information transparently, comparatively and understandably.

We have based our report on the criteria of G3 Sustainability Reporting Guidelines of the Global Reporting Initiative (GRI).

We have utilised the most applicable baseline performance indicators in our business and will set targets for monitoring and improving our performance in the future. These indicators are set out on pages 38 to 41 and encompass the following performance areas:

• Economic

• Social

• Environmental

We have set medium and long-term targets (KPIs) across three sustainability pillars and our key capital resources. We have developed performance measurement and monitoring systems to enhance the reliability and hence comparability of the year-on-year data on which we report with the aim of being compliant to a GRI application Level C.

IntroductionThe board of directors endorses the Code of Corporate Practices and Conduct as contained and recommended in the King Report on Corporate Governance (King III) and the JSE Listings Requirements as these apply to AltX listed companies.

The board will always strive to ensure that the interests of all our stakeholders are properly protected and that adherence to the principles of good corporate governance espoused by King III remains a commitment of the group. It is the intention of all directors that the principles of integrity and the highest ethical standards are upheld by all who serve the group and its stakeholders.

The board is satisfied that the proper governance structures exist and are operational within the group, and in the 2013 financial year our focus was to implement, on a prioritised basis, the procedural recommendations that have emerged from the King III Report as well as legislative changes.

In establishing an effective corporate governance framework, ChemSpec has a comprehensive set of policies, regularly updated in line with changes in legislation and business governance requirements, with which all group companies and employees are obliged to comply.

For the 2013 financial year, with the exception of those items outlined below, the board confirms that the group has complied with King III. In addition, a King III reference table is included on pages 58 to 59 of this annual report.

• The chairman of the board is not an independent non-executive director. Mr IAJ Clark was appointed non-executive chairman in 2011 and due to his shareholding in the group is not considered to be independent. The board is of the view that his experience and business skills far outweigh any perceived lack of independence. Mr JG Jones is the appointed lead independent director.

• The chairman of the remuneration and nominations committee is not an independent non-executive director. Mr IBB Buchan is not considered independent due to his shareholding in the group. The board is of the view that the experience and commercial acumen that he brings to the committee outweigh any perceived lack of independence.

• At present the group does not have a majority of non-executive directors. There are, however, six executive directors and six non-executive directors on the board to ensure a good balance of power. The board structure suits the current needs of the group as it continues on its growth path.

• At present the majority of the non-executive directors are not independent. There are, however, three non-executive directors and three independent non-executive directors on the board, with a good balance of power. The board structure suits the size and dynamics of the company at present.

• Directors do not earn attendance fees in addition to a base fee. Directors add value to the group outside of the formal board and committee meetings, often greater value than within the confines of formal meetings. In addition, the directors have a record of high attendance at board and committee meetings.

Corporate governance

• An independent assurance on sustainability reporting and disclosure and ethics performance has not yet been formally implemented. A process will be established to address this matter.

The following King III recommendations that were not implemented in the 2012 financial year have been addressed during the 2013 financial year:

• An internal auditor has been appointed and he will report functionally to the audit, risk and compliance committee as required by King III.

• The board completed a full evaluation of its performance, constitution, leadership and supporting structures.

The boardThe board is the group’s highest decision-making body and is ultimately responsible for governance.

The board charter governs and defines the responsibilities of directors and the board. In terms thereof and in assigning responsibility for control of the group, the board determines key risk areas, ensures compliance with the law, gives direction to matters of strategy, monitors management to ensure compliance with the business plan, defines levels of materiality, reviews committee performance, considers the sustainability of the business and its impact on the environment and determines policy.

The group has a unitary board comprising twelve directors, six of whom serve in a non-executive capacity.

The board of directors of domestic and offshore operating subsidiaries comprise executive directors and senior management.

The directors met four times in the past financial year, while the executive directors meet more regularly to ensure there is effective and meaningful control exercised over the affairs of the company. Directors’ details and remuneration are disclosed elsewhere in this annual report.

Appointment of directorsBoard members are appointed through a formal process and the remuneration and nominations committee assists in identifying suitable candidates to be proposed to shareholders for approval.

Non-executive directors are chosen in accordance with the principles contained within the King III Report and with regard to their business skills pertinent to the group. All board members are required to have the requisite strategic, analytical, communication and knowledge competencies.


One third of the directors and also those who were co-opted during the year must retire by rotation and stand for re-election at each annual general meeting, after the first annual general meeting. Election of directors will be dealt with via individual resolutions. Executive directors must retire at age 62 and non-executive directors at age 70.

Independence of board of directorsThe remuneration and nominations committee reviewed the independence of ChemSpec’s non-executive directors and concluded that Messrs JG Jones, NTY Siwendu and SE Sono are independent non-executive directors. Messrs IAJ Clark, NA Page and IBB Buchan were not considered independent as they have material direct or indirect shareholdings in the company.

Board evaluationThe board recognises the importance of conducting an annual evaluation of its performance, constitution, leadership and supporting structures, as recommended in the King III Report. Accordingly the board completed its first comprehensive board evaluation in the current financial year.

A board evaluation will take place again in the 2014 financial year.

Chairman and chief executive officerThe functions of chairman and chief executive officer are separate and independent. The chairman, Mr IAJ Clark, is a non-executive director and is responsible for the working of the board. He provides overall leadership of the board without limiting the principle of collective responsibility, and ensures that the directors receive accurate, timely and clear information from the executive management in order to reach optimum decisions.

The task of the chief executive officer, Mr BC Schreuder, is to provide leadership to the executive team, run the business and steer management to realise the policies and strategies of the board.

Directors’ induction and trainingA JSE AltX induction programme is in place and is mandatory for all new directors to attend. The cost of attending appropriate external training courses is paid by the company. As the JSE AltX induction training is comprehensive, a domestic programme relevant to the group will be implemented during the course of the 2014 financial year to cater for further continuing education and training.

Directors’ meetingsThe agenda and supporting papers are distributed to all directors ahead of each board meeting. Explanations and motivations for items of business requiring decisions are provided in the meeting by the appropriate executive director. Discussions at board meetings are open and constructive, free of domination, and consensus is sought on items requiring decisions. No one director has unfettered powers of decision-making. When necessary, decisions are also made by directors between meetings by written resolution as provided for in the company’s Memorandum of Incorporation and the Companies Act. When using written resolutions outside of meetings, directors receive complete background information and evaluations as would normally have been made available at a board meeting. Directors are entitled to have access to all relevant company information and records, and to executive officers and senior management.

Directors are appraised whenever relevant, and kept abreast of any new legislation and changing commercial risks that may affect the business interests of the company. In fulfilling their responsibilities, directors may seek professional advice from the company secretary or external professional advisers at the company’s expense. The designated adviser attends board meetings.

Board committeesIn discharging its duties the board delegates authority to relevant board sub-committees and individuals with clearly defined mandates and delegated authorities, although the board retains its responsibilities.

Governance frameworkThe governance framework shown on the previous page enables the board to balance its role of providing risk oversight and strategic counsel while ensuring adherence to regulatory requirements and risk tolerance. The group has a corporate governance framework for its operating subsidiaries in place to ensure consistency. The group has an audit, risk and compliance committee, remuneration and nominations committee and a social and ethics committee which report to the board.

These three committees assist the board in fulfilling its stated objectives. The role and responsibilities of each committee are set out in formal terms of reference, which are reviewed annually to ensure that they remain relevant in a rapidly changing legislative and regulatory environment. Board committees may take independent professional advice at the company’s expense when necessary. The committees are subject to regular evaluation by the board with regard to performance and effectiveness.

The chairman of each committee and the external auditors of the company are required to attend annual general meetings to answer questions raised by shareholders. The external auditors are represented by the individual registered auditor who undertakes the audit for the company. In accordance with the board’s requirements, ad hoc committees may be set up to review specific matters for the board. Depending on the task allocated to such a committee, verbal or written terms of reference are given.

Control frameworkA formal delegation of authority sets out categories of business decisions that require approval by the board. This authority framework is revised from time to time.

Combined assuranceChemSpec follows a combined assurance model, which we believe optimises the assurance obtained from management and internal and external assurance providers.

Management provides the ChemSpec board with assurance that it has implemented and monitored the group’s risk management plan and that this is integrated into day-to-day activities.

Management monitors and implements internal controls.

Internal audit, which is overseen by the audit, risk and compliance (ARC) committee, provides an assessment of the effectiveness of ChemSpec’s system of internal control.

The external auditors, KPMG Inc., express an opinion on the fair presentation of the group’s annual financial statements.

The ARC committee is responsible for ensuring that the combined assurance model introduced by King III is applied to provide a co-ordinated approach to all assurance activities. The ARC committee is also responsible for ensuring that the combined assurance received is appropriate to address all significant risks facing the company and for monitoring the relationship between the external service providers and the company.

Audit, Risk and Compliance (ARC) CommitteeThe ARC committee comprises Messrs SE Sono (chairman), JG Jones (lead independent director) and NTY Siwendu, all of whom are independent non-executive directors. The chief executive officer, financial director and representatives from the external and internal auditors attend all meetings by invitation.

Mr Sono reports to the board on the activities and recommendations made by the committee.

The ARC committee performs the role of reviewing internal controls and financial results, approving the internal audit plan, recommending the appointment of the external auditor and overseeing the external and internal audit processes. The committee is responsible for overseeing the implementation of the integrated annual report and verification procedures.

The responsibility for managing risk and information technology (IT) governance has been delegated to the ARC committee and is managed by sub-committees that report to the ARC committee.

The ARC committee fulfils its responsibility in line with specific terms of reference and in terms of section 94(7) of the Companies Act.

The ARC committee met four times during the year and meet with internal and external auditors without management present. Committee attendance is set out on page 54.

The report of the ARC committee is set out on pages 62 to 63.

Corporate governance continued

audit, risk and compliance committee

social and ethics committee

risk sub-committee

Board

remuneration and nominations committee

it steering sub-committee

Management

External auditInternal audit


Remuneration and Nominations CommitteeThe remuneration and nominations committee comprises Messrs IBB Buchan (chairman), IAJ Clark and DJ Coyle-Dowling who, with the exception of Mr Coyle-Dowling, are non-executive directors.

The committee is responsible for, inter alia, the assessment and approval of a broad remuneration philosophy and strategy for the group, the review of the structure, size and composition of the board and its committees, evaluation of the leadership requirements of the group and succession planning and approval of the terms of any scheme providing performance-based incentives.

The committee has developed and will periodically review performance measurements in order to monitor the effectiveness of management in these areas as well as the achievement of budgets.

In addition to the above, the committee is responsible for making recommendations to the board on all fees payable to non-executive directors and considers the performance and independence of all non-executive directors.

The group’s remuneration policy was put to shareholders for the first time for a non-binding advisory vote at the 2012 annual general meeting (refer pages 76 to 78 for the remuneration policy).

Board

Audit,risk and

complianceRemuneration

and nominations Social and ethics

Number of meetings held 4 4 3 1

IAJ Clark 4/4 3/3

BC Schreuder* 1/1

BR Mackinnon 4/4 1/1

JG Maehler 4/4

GV Metzer* 1/1

S van Niekerk 3/4

DJ Coyle-Dowling 4/4 3/3 1/1

JG Jones 4/4 4/4 1/1

SE Sono 4/4 4/4

IBB Buchan 2/4# 3/3

NA Page 4/4

NTY Siwendu* 1/1 1/1

ZM Buchan^ 3/4# 2/3

* Directors were appointed or resigned during the year and were therefore not eligible to attend all meetings. ^ Mr ZM Buchan is an alternate director to Mr IBB Buchan# Mr IBB Buchan was represented at one meeting he did not attend by his alternate director Mr ZM Buchan

The committee met three times during the year. Committee attendance is set out in the table above.

Social and Ethics CommitteeThe committee comprises Messrs DJ Coyle-Dowling (chairman), BR Mackinnon, JG Jones and NTY Siwendu.

The role of the committee is to assist the group with overseeing sustainability matters and is responsible for monitoring the group’s activities with regard to social and economic development, good corporate citizenship, environment, health and public safety, consumer relations and labour and employment practices, as prescribed by the Companies Act.

The committee met once during the year. Committee attendance is set out in the table above.

Company secretaryStatucor (Pty) Limited fills the role of company secretary in accordance with applicable legislation.

All directors have access to the advice and services of the company secretary.

The board is supplied with all relevant information and has unrestricted access to all group information, records, documents and property that enable directors to adequately discharge their responsibilities. Information requirements are well-defined and non-executive directors have full access to management and the company secretary.

The board has, through its interactions with the company secretary and by enquiry, satisfied itself that the company secretary is independent,

The following board and committee meetings were held during the year and attendance was as follows: competent and has the necessary qualifications and experience required to perform the duties of company secretary to the company.

External auditorThe external auditor of the group is KPMG Inc, who performs an independent audit on the annual financial statements. These are audited in accordance with international standards on auditing.

Interim reports are not audited. The re-appointment of KPMG is recommended by the audit, risk and compliance committee and their recommendation is fully supported by the board.

Designated adviserGrindrod Bank Limited acts as the company’s designated adviser in compliance with the JSE Listings Requirements.

Risk ManagementA risk management review, identification and assessment process has been completed by management, and the board continues to monitor plans to ensure that unacceptable risk is either avoided altogether or mitigated to tolerable levels. A further comprehensive review will be undertaken in the 2014 financial year.

Internal controlThe group’s system of internal control is designed to identify, evaluate and manage material misstatement and loss and provide a reasonable assurance to this effect. The group’s system of internal financial control is designed to provide assurance of proper accounting records and reliable financial information within the business for publication.

The board concluded that the system of internal control is effective and the internal financial controls form a sound basis for the preparation of reliable financial statements.

Internal auditThe group has an internal audit function that covers all its operations. The ARC committee approves its audit plan. The internal audit plan is based on an assessment of risk areas identified by the internal audit and management. Systematic and thorough annual internal audit coverage plans are prepared, in consultation with management.

A report is presented to the ARC committee quarterly where any internal control weaknesses are discussed and appropriate action taken is assessed.

Information technology (IT) managementThe group’s IT governance system is systematic and based on CoBIT (control objectives for business information and related technologies) principles. Management is responsible for IT governance. An IT charter has been developed that is managed by the IT steering sub-committee. The IT strategy which is being developed by the IT steering sub-committee is aligned to the group’s business needs.

IT is implemented as follows:

• the group operates on a single business application

• an IT steering sub-committee, represented by executive management and the group chief information officer (CIO), oversees IT strategy and its implementation.

• the IT steering sub-committee reports quarterly to the ARC committee.

IT management responsibilities include:

• developing IT governance, policies and standards

• strategic IT development integrated with business development

• maintaining IT registers

• measuring IT performance

• maintaining IT security

• implementing disaster recovery and business continuity plans.

A comprehensive new Enterprise Resource Planning (ERP) system is currently being implemented to replace the existing system and will be completed in the first half of the 2014 financial year.

Compliance with laws and regulationsAn internal review of legal compliance with laws and regulations was completed during the year. The board, with assistance from the ARC committee, will continue to monitor the changing legal landscape and monitor the group’s compliance.

EthicsChemSpec aims to establish a climate of high ethical standards in the workplace. The group’s code of ethics is enforced with appropriate discipline on a consistent basis and action is taken to prevent the recurrence of an offence. There are codes of conduct agreed upon between management and employees at each operation to govern conduct between employees, suppliers and customers.

A KPMG Ethics hotline is in place and provides an independent and confidential method for employees or other parties to report unethical behaviour. Such reporting can be submitted to the ChemSpec ethics toll free number: 0800 212 155

During 2012 there were:

• no transgressions of ChemSpec’s ethics policy reported



• no incidents of corruption at management level. When incidents of corruption are identified, these are investigated internally and, where relevant, referred to disciplinary procedures or, in more serious cases, to law enforcement authorities

• no legal actions against ChemSpec for anti-competitive behaviour, anti-trust and monopoly practices

• no fines or non-monetary sanctions for non-compliance with laws and regulations.

No incidents were reported on the Ethics hotline.

Interests of directorsThe company secretary keeps a register of directors’ interests in contracts in terms of the Companies Act. The register is available for inspection upon request by those who are entitled to access. The directors have declared their interest in contracts or arrangements entered into by the company or its subsidiaries. Directors are required to inform the board timeously of conflicts of interest that they may have in relation to the business and are consequently excluded from voting on such items.

Insider tradingNo director, officer, employee, nominee or member of his/her immediate family may deal either directly or indirectly, at any time, in the securities of the company based on unpublished price-sensitive information about the company’s business or affairs. With regard to dealing in the company’s shares, a share dealing policy for its directors, officers and employees has been put in place that sets out the manner in which the shares of the company may be traded and provides for clearance to trade by the chief executive officer or the financial director. The policy adheres to the JSE Listings Requirements and the Securities Services Act. A list of persons who are restricted in trading in ChemSpec shares in terms of this policy has been approved by the board and is revised from time to time. The company secretary provides all communications in this regard.

Closed periodClosed periods are enforced and directors and the company secretary are prohibited from dealing in the company’s securities during these periods. The directors are required at all times to obtain clearance from the chief executive officer or the financial director before any trade can be undertaken. All directors are aware of the laws regulating insider trading. The company keeps a record of all dealings by directors, and in terms of


the JSE requirements for listed companies informs the market timeously of any dealings by directors.

Management reportingThe group has developed a comprehensive management reporting system which includes the development of a budget by each operating division as well as a five-year strategic plan. The results of each division are reviewed in detail on a monthly basis and compared to both budget and prior year information. Working capital and cash requirements are monitored on an ongoing basis to ensure that the capital base of the company is adequate to meet its current and future needs.

Integrated annual reportThe directors of the company are responsible for the preparation and integrity of the integrated annual report and interim report of the company. These reports are prepared in accordance with International Financial Reporting Standards (IFRS) and the South African Companies Act, 71 of 2008, as amended, the South African Institute of Chartered Accountants (SAICA), Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council and in compliance with the Listings Requirements of the JSE Limited (JSE). The integrated annual report is prepared on the historical cost basis, excluding financial instruments and property, plant and equipment which are fairly valued.

The accounting policies, methods of measurement, recognition, computation and presentation adopted in the preparation of the integrated annual report are consistent with those applied in the full annual financial statements for the year ended 31 March 2012 and for the year ended 31 March 2013.

The board appreciates that strategy, risk, performance and sustainability are inseparable. Readers are referred to the sustainability overview on page 50 or a review of the nature and extent of the company’s social transformation, safety, health and environmental management policies and practices.

The board has reviewed and approved the integrated annual report.

Stakeholder relationshipsChemSpec subscribes to King III stakeholder management principles. The board takes account of the legitimate interests and expectations of all stakeholders in its decision-making. Stakeholders are encouraged to attend the annual general meeting (AGM) where they will have an opportunity to put questions to the board (for more information, refer to page 20).

Access to informationChemSpec has complied with the requirements of the Promotion of Access to Information Act (PAIA) of 2000. ChemSpec’s PAIA manual was updated in November 2011 and is available on the group’s website. There were no specific requests made in terms of this legislation during the year.

Governance57


King iii reference table

✔ Compliant ● Partially compliant ▲ Under review ✗ Non-compliant

The governance of risk

The board is responsible for the governance of risk and setting levels of risk tolerance ✔

The audit, risk and compliance committee assists the board in carrying out its risk responsibilities ✔

The board delegates the risk management plan to management ✔

The board ensures that risk assessments and monitoring are performed on a continual basis ✔

Frameworks and methodologies are implemented to increase the probability of anticipating unpredictable risks ✔

Management implements appropriate risk responses ✔

The board receives assurance on the effectiveness of the risk management process ✔

Sufficient risk disclosure to stakeholders ✔

The governance of information technology

The board is responsible for IT governance ✔

IT is aligned with the performance and sustainability objectives of the company ✔

Management is responsible for the implementation of an IT governance framework ✔

The board monitors and evaluates significant IT investments and expenditure ✔

IT is an integral part of the company’s risk management ✔

IT assets are managed effectively ✔

The audit, risk and compliance committee should assist the board in carrying out its IT responsibilities ✔

Compliance with laws, codes, rules and standards

The board ensures that the company complies with applicable laws ✔

The board and directors have a working understanding of the relevance and implications of non-compliance ✔

Compliance risk forms an integral part of the company’s risk management process ✔

The board has delegated to management the implementation of an effective compliance framework and processes ✔

Internal audit

Effective risk-based internal audit ✔

The internal audit function is independent of management ✔

Written assessment of the effectiveness of the company’s system of internal control and risk management ✔

Internal audit is strategically positioned to achieve its objectives ✔

Remuneration and nominations committee

The chairman of the committee is not an independent non-executive director ✗

Governing stakeholder relationships

Appreciate that stakeholders’ perceptions affect a company’s reputation ✔

Management proactively deals with stakeholder relationships ✔

There is an appropriate balance between its various stakeholder groupings ✔

Equitable treatment of shareholders ✔

Transparent and effective communication with stakeholders ✔

Disputes are resolved effectively and timeously ✔

Integrated reporting and disclosure

The board ensures the integrity of the company’s integrated report ✔

Sustainability reporting and disclosure are integrated with the company’s financial reporting ✔

Sustainability reporting and disclosure are independently assured ✗

King iii reference table

✔ Compliant ● Partially compliant ▲ Under review ✗ Non-compliant

Ethical leadership and corporate citizenship

Effective leadership based on an ethical foundation ✔

Responsible corporate citizen ✔

Effective management on company’s ethics ✔

Assurance statement on ethics in integrated report ▲

Board and directors

The board is the focal point for the custodian of corporate governance ✔

Strategy, risk, performance and sustainability are inseparable ✔

Directors act in the best interest of the company ✔

The chairman of the board is not an independent non-executive director ✗

Framework for the delegation of authority has been established ✔

The board comprises a balance of power, with a majority of non-executive independent directors ●

Directors are appointed through a formal process ✔

Formal induction and ongoing training of directors are conducted ✔

The board is assisted by a competent, suitably qualified and experienced company secretary ✔

Regular performance evaluation of the board, its committees and the individual directors ✔

Appointment of well-structured committees and an oversight of key functions ✔

An agreed governance framework between the group and its subsidiary boards ✔

Directors and executives are remunerated fairly and responsibly ✔

Remuneration of directors and certain senior executives is disclosed ✔

The company’s remuneration policy is approved by its shareholders ✔

Audit committee

Effective and independent ✔

Suitably skilled and experienced independent, non-executive directors ✔

Chaired by an independent non-executive director ✔

Oversees integrated reporting ✔

A combined assurance model to optimise assurance activities ✔

Satisfies itself of the expertise, resources and experience of the company’s finance function ✔

Oversees internal audit ✔

Integral to the risk management process ✔

Oversees the external audit process ✔

Reports to the board and shareholders on how it has discharged its duties ✔



Risk Category Impact Mitigation

Critical fire on our premises

Operational Interrupt production, harm to employees, contractors and the public and incur capital and financial losses

Regular fire protection system reviews are performed and recommendations are actioned

Advanced fire protection systems are in place in high risk areas

Standard operating procedures are checked regularly to ensure that fire risk is properly managed

Insurance cover is taken to mitigate the capital and financial losses

Supply interruption by a key supplier

Market Interrupt production and incur financial losses

We are in regular communication with our suppliers and an alternative supplier base is maintained

We are insured against business interruptions

Industrial action

Organisational Interrupt production and incur financial losses

Good human resource and industrial relations procedures are practised and an environment of open communication exists with all relevant stakeholders and is maintained

Serious fraud Financial Financial loss and damage to reputation and goodwill

Internal audit and internal controls are focused on risk areas susceptible to fraud and fraud factors and controls are regularly assessed and updated if necessary

ChemSpec subscribes to KPMG Ethics hot line, the confidential whistle-blowing service

The reduction in our retail footprint serves to mitigate this risk

IT systems failure

Organisational Inability to operate and financial loss due to reliance on IT systems

The IT steering committee monitors IT governance and strategy

A new ERP system will be implemented on 1 July 2013

Centralised IT systems are backed up with a disaster recovery plan

The group regularly invests in appropriate computer technology, spares and parts

Environmental and climate change and health and safety

Operational Environmental remediation costs, reputation loss, fines, penalties, statutory liability, harm to employees, contractors and the public from accidents

There is a regular independent review and update of the manufacturing processes and the implementation of environmentally friendly recommendations

ChemSpec’s development focus is on lead-free and low VOC products and we avoid the use of harmful raw materials where there are safer alternatives

The reduction of our carbon footprint

Occupational health and safety policies and procedures are strictly enforced, updated and monitored

Legal compliance

Legal Reputational loss and penalties, statutory liabilities and financial losses

Regular review of changes in applicable laws and regulations is managed by the ARC committee

Interaction with service providers such as our auditors, lawyers and trade associations keeps the group abreast of developments

Taxation updates are regularly reviewed and an independent tax compliance review is carried out on a regular basis

Major product failure

Organisational Reputational loss and penalties and financial losses

Stringent quality control procedures in all stages of the supply chain and manufacturing process

Products recall procedures in the event that a defect occurs

Product failure insurance is in place

Risks

ChemSpec continually assesses its business risk in line with its key strategic objective of maintaining a sustainable, growing business to create wealth for all its stakeholders. This process is formally driven by the risk sub-committee which meets regularly to evaluate the impact that identified risks have on the business, as well as the likelihood of them occurring and ensures due care is taken to mitigate them.

ChemSpec’s risk philosophy recognises that effective risk management is central to maintaining and improving a competitive advantage while adapting to changes in the business environment. ChemSpec adopts a holistic approach to managing uncertainty, which it regards as offering both risk and opportunity.

The ARC committee, through the risk sub-committee, is entrusted with responsibility to ensure the development of policies, procedures and risk management controls for the group. ChemSpec has a comprehensive enterprise risk management (ERM) programme.

The objectives of the ERM are to:

• Ensure the group’s significant business risks are systematically identified, assessed and managed to acceptable levels based on risk tolerance and appetite levels acceptable to the board

• Achieve an optimal risk-reward balance

• Ensure that risk management is embedded into all decision-making processes.

The ERM programme is supported by a risk management policy that affirms ChemSpec’s commitment to effective risk management. The policy provides guidance to management through the communication of certain broad risk management principles. Executive management is ultimately accountable to the board for designing, implementing and monitoring the process of risk management and integrating it into the day-to-day activities of the group.

The risk sub-committee reports its progress on risk management to the ARC committee on a quarterly basis, while ChemSpec’s board retains ultimate responsibility for the governance of risk and ensuring that risks are adequately identified, calculated, monitored and managed.

Overview of top risksThere were no unexpected or undue risks taken during the period under review and there are no current exposures that could jeopardise the going concern status of the group.

The risks considered to be significant to the group are set out in the table below. The evaluation takes into account all controls in place to mitigate the risks. The rating is an aggregation of the individual ranking by each member of the risk sub-committee that has been approved by the board.

The board is of the opinion that no further mitigating actions are required to manage these residual risks other than the mitigating actions that are set out below.

Risk Evaluation Ranking

Major fire on our premises

8 1

Supply interruption by a key supplier (including

utilities) 6 2

Industrial action 4 3

Major fraud 2 4

IT systems failure 2 5

Environmental and climate change and

health and safety 2 6

Legal compliance 1 7

Major product failure 1 8

All risks are rated in terms of impact and likelihood, taking into account the existing controls, on a scale of 1 to 5. The likelihood and impact scores are then multiplied to give each residual risk a rating (IxL=R) which determines whether the residual risk is a low risk, medium to high risk or a critical risk.

Evaluation range Matrix evaluation

1 to 6 Low

7 to 22 Medium – high

23 to 25 Critical

7/8

4/5/6

2

1

3

Likelihood

risk heat map

Impa

ct

5

5

4

4

3

3

2

2

1

1


External auditThe ARC committee has considered the independence of KPMG Inc. and is satisfied that they were independent throughout the year. To fulfil this responsibility, we reviewed:

• Changes in key external audit staff in KPMG Inc.’s audit plan

• The arrangements for day-to-day management of the audit relationship

• A record from KPMG describing their policy to identify, report and manage conflicts of interest

• The overall extent of non-audit services provided by KPMG Inc.

To assess the effectiveness of the external auditors, we reviewed:

• KPMG Inc.’s fulfilment of the agreed audit plan and variations from the plan

• The robustness and perceptiveness of KPMG Inc. in their handling of the key accounting and audit judgements.

With regard to the oversight of the external audit process, we reviewed:

• The areas of responsibility, associated duties and scope of the audit

• KPMG Inc.’s overall work plan for the year

• Major issues that arose during the audit and their resolution

• Key accounting and audit judgements

• The level of errors identified during the audit

• Recommendations made by KPMG Inc. and management’s responses to issues raised and the adequacy of management’s response.

Based on our satisfaction with the results of the activities outlined above, we have nominated, for approval at the annual general meeting, KPMG Inc. as the external auditors, with Mr J Datadin as the designated partner.

With reference to the rotation requirements of the Companies Act, the reporting year 2013 will be Mr Datadin’s fifth year as designated auditor of the company. The ARC committee confirms that the auditor and designated auditor are accredited by the JSE.

Finance functionWe believe that Mr JG Maehler, the financial director, possesses the appropriate expertise and experience to meet his responsibilities in his position as required by the JSE.

We are satisfied with the:

• Expertise and adequacy of resources within the finance function

• Experience of the divisional financial managers.

Based on the processes and assurance obtained, we believe that the group’s accounting practices are effective.

Financial statementsThe ARC committee has reviewed and recommended for adoption by the board such financial information that is publicly disclosed, which for the year included:

• The interim results for the six months ended 30 September 2012

• The audited annual results for the year ended 31 March 2013

• Reviewing the working capital packs prepared by management to support the board’s going concern statement at reporting dates as well as the solvency and liquidity tests required in terms of the Companies Act.

Integrated annual reportThe ARC committee considered the integrated annual report, incorporating the abridged annual financial statements, for the year ended 31 March 2013. The ARC committee has also considered the sustainability information as disclosed in the integrated annual report and has assessed its consistency with operational and other information known to ARC committee members. The annual financial statements have been prepared using appropriate accounting policies, which conform to International Financial Reporting Standards.

The ARC committee recommended the integrated annual report for approval to the board.

The ARC committee recommended the adoption of the annual financial statements by the board.

Enterprise risk managementThe ARC committee has discharged its responsibility to the board for the development of policies, procedures and risk management controls to ensure that all business risks are properly managed and to promote effective and efficient risk management at reasonable cost.

The risk management report is set out on pages 60 to 61.

IT managementAn information technology (IT) charter was adopted by the board in 2012 and the IT steering sub-committee under the ARC committee is responsible for monitoring the application of IT policies for effectiveness and alignment with the group’s strategic and business processes.

On behalf of the ARC committee

SE SonoChairman

7 June 2013

Audit, Risk and Compliance (ARC) Committee report

BackgroundThe ARC committee is pleased to present this report on its activities during the financial year ended 31 March 2013.

Objective and scopeThe ARC committee has a formally adopted charter and terms of reference that have been approved by the board of directors.

The charter is reviewed annually and the ARC committee has executed its duties during the past financial year in accordance with this charter and more specifically its terms of reference.

The ARC committee reports the results of all meetings, key issues and major recommendations to the board.

The ARC committee has reviewed its corporate governance practices in terms of the Companies Act and King III. The ARC committee is pleased to present their report in terms of the Companies Act and the JSE Listings Requirements for the financial year ended 31 March 2013.

MembershipThe ARC committee consists of three independent non-executive directors and is thus fully compliant with the requirements of the Companies Act and the recommendations of King III.

The chief executive, financial director and representatives of the external and internal auditors now also attend the ARC committee meetings. Representatives of the internal and external auditors have unrestricted access to the ARC committee. The risk sub-committee, the IT steering committee and internal audit manager report directly to the ARC committee and have unrestricted access to the ARC committee chairman. The company secretary serves as secretary to the ARC committee.

The ARC committee strives to operate in an atmosphere of openness and trust where members and other invitees are made to feel free to speak their minds and pursue issues to conclusion.

MeetingsThe ARC committee held four meetings during the year. Attendance at these meetings is reflected on page 54.

Statutory duties of the ARC committeeIn the execution of its statutory duties during the past financial year, the ARC committee:

• Nominated for appointment as auditor, KPMG Inc. which, in our opinion, is independent of the company and Mr J Datadin as the responsible partner

• Determined the fees paid to KPMG Inc. as disclosed in the notes to this integrated annual report

• Determined KPMG Inc.’s terms of engagement

• Believes that the appointment of KPMG Inc. complies with the relevant provisions of the Companies Act and King III

• Approved all non-audit service contracts with KPMG Inc.

• Received no complaints relating to the accounting practices and internal audit of the company, the content or auditing of its financial statements, the internal financial controls of the company and any other related matters

• Made submissions to the board on matters concerning the company’s accounting policies, financial controls, records and reporting

• Concurred with the adoption of the going concern premise in the preparation of the financial statements.

Internal audit and internal controlsThe ARC committee has:

• Evaluated the effectiveness and performance of the internal audit function and compliance with its mandate

• Reviewed the effectiveness of the company’s system of internal financial control, including receiving assurance from management, the internal auditor and external auditor

• Reviewed significant issues raised by the internal audit process

• Reviewed policies and procedures for preventing and detecting fraud.

Based on the results of the review of the group’s system of internal control and risk management and considering information and explanations provided by management and discussions with the external auditor on the results of the audit, nothing has come to the attention of the ARC committee that caused it to believe that the company’s system of internal control and management are not effective and that the internal financial controls do not form a sound basis for the preparation of reliable financial statements.

Regulatory complianceThe ARC committee has complied with all applicable legal, regulatory and other responsibilities.

At 31 March 2013, the ARC committee comprised:

Name Qualifications Appointed

SE Sono CA (SA) 12 March 2012

JG Jones 15 August 2011

NTY Siwendu BSocSc (Hons) LLB 16 January 2013

Mr TJT McClure resigned from the ARC committee on 14 January 2013.

Ms NTY Siwendu was appointed to the ARC committee on 16 January 2013.

65

04PerFOrManCe

Economic performance

– Financial director’s report 66

Social performance 72

Environmental performance 75

Remuneration 76

PerformanceChemSpec integrated annual report 201364

PerformanceChemSpec integrated annual report 201366 67

Turnaround continues – a year of trade-offs for sustained value creation

ChemSpec has posted results which, at a first glance, are disappointing and reflect deterioration in performance. On closer inspection, however, the group’s performance indicates continued progress to sustainable profitability as the business proceeds with the implementation of its turnaround strategy.

The board has taken the view that we cannot take a short-term outlook in the turnaround process. As much as we would all like the business to be profitable as quickly as possible and are actively working towards this, there will always be “bumps in the road” and leads and lags between revenue and costs as we adjust to meet the need of increasing our revenue substantially.

The key point is that this business has, can and should again reach volumes that are 1,5 times higher than are currently being achieved, with overhead growth that will not increase at the same rate. The business has been structured or set up for that level of volume and that is where we are headed.

Our strategic focus and the most important initiative in our turnaround strategy continues to be a significant increase in revenue. To assist in understanding the background to this approach, we have illustrated the effect that the drop in revenue had on the business since revenue peaked in 2009. Volumes sold in that year totalled 18 million litres and decreased to a low of 8 million litres in 2011. Since the turnaround strategy began in the latter half of the 2011 financial year, volumes have steadily increased to 12 million litres.

Had we maintained our volumes at the 2009 levels, we estimate that our revenue would have been more than R800 million in the 2013 financial year on an inflation-weighted basis.

As a result of the drop in revenue the business had to focus on being more efficient and reducing overheads. Although it may not appear to be the case in the short term, fixed overheads have dropped over the longer

Economic performance

term on an inflation-weighted basis. We continue to focus on being more efficient, especially in the current financial circumstances, and we plan to drive through further cost savings in the year ahead.

The illustrative example shows that overheads have decreased in line with diminished revenue but not to the same extent. In like fashion, as the business returns to pre-2010 revenue volumes we do not foresee that fixed overhead costs will increase to the same extent. The step up of fixed costs will lag growth in revenue and as a result of this, total overhead growth will be lower than revenue growth.

Strategically, the other obvious alternative could be to rationalise the business by downsizing and turn it to profit more quickly before growing it again from there. Our view has been that this will limit our ability to return easily to previous revenue levels. We have taken the decision that revenue will return faster and have therefore elected not to go down that path. It is a delicate and difficult decision and a balance that is regularly debated at executive and board levels and is all dependent on how fast our revenue will return. Hence our intense focus on this area of our business.

Either way, building a sustainably profitable business will take time and we ask our shareholders to be patient.

There were important investments made in the “key capitals” in our business during the year and the necessary trade-off against our financial capital was carefully considered by our board and executive team to maximise sustainable value creation going forward.

In tandem with an intense focus on revenue growth, the business focused on implementing sustainable improvements in efficiencies in production processes and supply chain and most importantly, the business invested in capability and capacity in the executive and sales areas in building the platform for sustainable revenue growth into the future.

Key highlights in this regard are as follows:

• We boosted our sales force, which increased payroll as we added “feet on the ground”.

• We added key executives to our “C-Suite” to boost leadership.

1 000

800

600

400

200

0

(200)

Revenue (normalised)RevenueOverheads (normalised)

OverheadsEBITDA (normalised)EBITDA

2009 2010 2011 2012 2013

illustrative example

Financial director’s report

• We invested in our automotive business in deploying colour systems for future revenue.

• We invested in further efficiency in our plant as follows:

– An upgrade to our resin plant to bring this manufacturing process in-house

– Construction of a new solvent blending facility to bring this process in-house

– Improvements to our solvent distribution network to improve production efficiencies

– Added a solvent recycling plant

– Added warehouse capacity

• We are implementing a new ERP system to improve management information and supply chain management.

Other financial highlights of the year can be summarised as follows:

• The IDC introduced R51 million of additional funding to support capital expenditure at very competitive rates.

• We benefited from grants in excess of R6 million paid by the Department of Trade and Industry (dti) Manufacturing Competitiveness Incentive Scheme (MCEP) and Manufacturing Incentive Programme (MIP).

• We settled the last of our outstanding insurance claims on our fire at the old Jaco Place plant.

• Our significant shareholders continued to support the company throughout the year.

FINANCIAL PERFORMANCEThe table below illustrates the financial performance of the group over the last two halves and against the comparative financial year. Further analysis of these results is set out in the commentary that follows.

RevenueGroup revenue of R471 million showed good positive growth of 24% when compared with the prior year. This is despite an unanticipated slowdown in revenue experienced by our offshore businesses in the USA (down 15%) and Australia (down 9%) in the second half of the year. A depreciating Rand assisted in offsetting these decreases to some extent, but overall the drop in second half revenue was 1,5% when compared with first half revenue.

MarginOur margin reduced by 4% for the year. Margin pressure was reflected in the first and second half of the year where we experienced a 4% drop in margin in the first half and 5% in the second half of the current year when compared with the prior year. This was due to raw material cost-push from the Rand’s weakness as well as fuel and electricity price increases. We were not able to pass all of these costs upwards immediately. However, the executive team has taken steps to bring our margins back into line in the new financial year. Tough market conditions and aggressive revenue growth have an impact on margin and maintaining the correct margin is a key strategic initiative of the group.

OverheadsThe group invested in its sales team during the latter half of the financial year and bolstered its executive capacity with the introduction of key personnel at the most senior levels. Variable costs, such as freight and distribution costs, increased in line with the growth of revenue. Furthermore, additional investment in marketing and sales, particularly in the automotive division, which includes our new Sikkens business, impacted on overheads. Legal fees incurred to settle the insurance claim, a once-off rental adjustment in the prior year and other once-off matters of R13 million were incurred. These increases of over 30% had an overall impact on overheads which grew by 34% when compared with the previous period.

First Second March Marchsix months six months 2013 2012 Variance

Rm Rm Rm Rm %

Revenue 237 234 471 381 24Cost of sales (150) (149) (299) (225)

Gross profit 87 85 172 156 10Group profit margin (%) 37 36 37 41Other income 19 9 28 27Operating expenses (101) (136) (237) (176) 34

Operating profit/(loss) 5 (42) (37) 7Net finance costs (3) (4) (7) (19)

Loss before taxation 2 (46) (44) (12) 267Taxation – 14 14 4

Loss for the period 2 (32) (30) (8) 275

Discontinued operations (1) – (1) (6)

Loss for the period 1 (32) (31) (14) 121


The increases from our investment in people were necessary to build the required capacity and we do not believe that the same cost growth ratio will be repeated as we continue to build the revenue line.

Other incomeThe group received a final settlement of R15 million in respect of its insurance claim on the old Jaco Place plant fire. This was realised as “other income” in the first half of the financial year and has therefore added to the drop in performance when comparing the first half with the second half of the current financial year.

Finance chargesThe proceeds from the specific issue and rights issue in the 2012 financial year continue to have a favourable impact on our cost of finance, which reduced by 63% to a net R7 million when compared with the prior year.

TaxationThe group continues to benefit from a favourable tax rate due to global research and development tax incentives.

Net lossThe 24% growth in revenue was diluted to 10% at the gross margin level. The lag effect of building our sales team to further bolster our revenue growth prospects resulted in a cost push of 34%, which exceeded our growth in revenue and margin and ultimately resulted in a negative performance for the year.

The loss for the period increased from R14 million to R31 million as a result.

Headline loss for the periodThe headline loss increased to R30 million from R8 million in the prior year, which represents a 285% increase.

Basic and headline loss per shareThe group’s basic loss per share increased by 35% to 2,89 cents per share from 2,13 cents per share in the prior year.

The group’s headline loss per share increased by 41% to 2,90 cents per share from 2,06 cents per share in the prior year.

TRADING PERFORMANCEAutomotiveThe automotive segment achieved growth of 17% when compared with last year, which came predominantly from 34% growth in the South African market as we regain traction here. Volume increases in South Africa were offset by decreased volumes in the USA and Australia. However, the effect of the weakening Rand offset any drop in volume in our offshore markets.

Our automotive segment continues to lead in delivering margin, which was slightly improved in the 2013 year when compared with the last year. Our margin is further improved when goods are sold through our global businesses where we continue to remain highly competitive. This remains a key focus for the group and, with our new local partnership with AkzoNobel (Sikkens brand) together with our comprehensive product range, we will continue to target growth both locally and internationally.

DecorativeDecorative performance was encouraging with growth of 34% compared with the prior year. Volume growth was even higher at 37% as we invested in our partnerships with the roll-out of lower-priced house brands. Growth in our African division was particularly high as we begin to enter that market in the decorative market where we are coming off a low base.

Margins, although lower than our automotive segment, also improved slightly in this segment, which is encouraging. Our decorative segment is becoming a significant contributor to our success and there will be further improvement in this sector’s performance with the current strategic focus. We are looking forward to improved revenue growth through our new partnership with Jack’s Paint and our continuing good partnership with MICA Holdings as we grow our business with them and enhance our product offering.

Segment revenue split Segmental revenue growth Geographic revenue split Geographic revenue growth

Auto

mot

ive

Buy

-ins

Dec

orat

ive

Indu

stri

al/

Woo

dfini

sh

Solv

ents

17%

28%

34%

21%

29%

Sout

h Af

rica

Inte

rnat

iona

l

31%

14%

South Africa 61%International 39%

Automotive 51%Buy-ins 4%Decorative 11%Industrial/Woodfinish 28%Solvents 6%

Economic performance continued

Financial director’s report continued

Industrial and WoodfinishGrowth in these segments was much improved from the prior year at 21% and, as expected, continue to generate solid consistent results in both revenue and margin. We restored our reputation and continue to reclaim our position as a leading supplier to the South African woodfinish industry. Our international partnership with Hesse Lignal is beginning to bear fruit as we utilise their credibility, technology and products in our market. Our partnership with Transocean Coatings needs more work in the new financial year as we attack that market segment. The investment in the resin plant and solvent blending facilities at Canelands will give us further cost efficiencies in the manufacture of products in the industrial and woodfinish market. We are confident this will allow us to be even more aggressive in our drive to improve our revenue growth in this segment.

SolventsThe solvent market is a commodity market and pricing is always important. Growth in this segment was good at 29%, with volumes up by 18% and margins well-controlled considering the market price fluctuations that were experienced in the segment.

Cash flowOperating cash flows before working capital were negative as a result of the performance of the group during the year. Working capital grew at 24% in line with revenue growth as the group stabilised working capital levels. Working capital, however, continues to receive attention as the executive team strives to meet the medium- and long-term KPI targets set. The net cash outflow from operating activities was R45 million.

The investments in assets (R61 million) and intellectual property (R19 million) referred to above were funded from the IDC Gro-E loan of R51 million and asset-based finance.

The negative cash from operating activities and investment activities was funded from net financing activities of R69 million and R54 million of general banking overdraft facilities.

The group ended the year with a net cash position of R41 million and had available facilities of a further R55 million.

FINANCIAL POSITIONPlant and equipmentThe group grew its assets by R61 million during the year. This capital expenditure can be summarised as follows:

Rm

Colour systems 25

Efficiency project 10

ERP system and IT upgrades 5

General/replacements 21

61

The capital expenditure on efficiency projects was once-off and related to initiatives to reduce input costs to improve margins and boost competitiveness, particularly in the woodfinish and industrial segments. We invested in our partnership with AkzoNobel in the launch of the Sikkens brand as well our own Metalux brands through the introduction

of colour systems into the market. Our investment in 2013 was larger than normal as a result, and we expect this level of expenditure to moderate. We upgraded our ERP system and hardware to improve our management information. This will be completed at the end of June 2013.

Management will endeavour to limit the growth in expenditure on plant and equipment in the year ahead.

We expect our fixed asset turnover ratio of 1,7 (2011: 1,6) to increase in the medium to long term as we grow our revenue and further improve our plant utilisation.

Intangible assetsProduct development and innovation are keystones of the success of our business model as we strive to develop our products to compete against the competition and win in terms of innovation, technology, quality and delivery. This year saw us increase our intangible assets by a net R15 million on product development, which is just over 3,6% (2012: 2,6%) of our turnover.

Deferred taxDeferred tax represents “near cash” and reflects the large assessed loss that the group enjoys. This will convert to cash as we realise profits and utilise the assessed loss.

Working capitalWorking capital increased in the current year as the business grew revenue. Net working capital to turnover remained steady at 35%. Management continues to monitor this position closely and to balance tight working capital control with revenue growth.

Equity and long-term liabilitiesThe group increased its long-term liabilities by a net R68 million for the year. The group secured preferential funding from the IDC under the Gro-E scheme for R51 million. This facility offers favourable interest rates (5,5%) and was utilised to fund the capital expenditure efficiency projects referred to above.

The group utilised the R15 million received from the insurance claim pay-out to settle further long-term borrowings and converted the debt to a 365-day revolving term loan in order to reduce finance costs.

The group remains in a solvent and liquid position with gearing of 56% (2012: 22%).

ECONOMIC CONTRIBUTIONIt is our philosophy to create value for our stakeholders through nurturing our relationships with them. Furthermore, we seek to maximise profitability through increased revenue, increased output, operational efficiencies and margin and cost control to deliver optimum value for our stakeholders. It is through this approach that


we have grown and are able to make a positive economic contribution to the communities near our factories, depots and distribution outlets in South Africa, the Americas, Australasia and Africa.

Our contribution to the local economy includes providing direct and indirect employment, generating business for local suppliers and service providers, paying corporate and local taxes, and promoting the upliftment of communities through the supply of an affordable as well as quality environmentally friendly product, reinforced by our corporate social investment activities. From a quantitative financial perspective, a measure of the benefits associated with our activities includes the levels of payment to employees and suppliers, and the distribution of value added (the difference between revenues and expenses) to our employees, providers of capital and to the public sector.

We measure our progress towards achieving our strategic goals using KPIs as set out earlier in this report.

We will continue to invest in our product, our people and our facilities, and pursue growth opportunities.

Financial implications of climate changeChemSpec recognises that the potential impact associated with climate change through changing rain patterns, differing temperature patterns and an excess or shortage of water in areas throughout South Africa, presents a number of risks and opportunities, which may impact on our operations financially.

Promoting local procurementChemSpec strives to source the majority of our supplies and services locally. However, this is not always achievable, as certain chemicals and other raw materials can only be sourced directly from abroad. Our level of local procurement was 92,33% (2012: 96,35%) of our procurement spend (R265 million of a total R287 million (2012: R235 million of a total R244 million)).

Wherever possible we will seek to limit the level of imports. We do not, however, expect to increase our levels of local procurement significantly given the nature and external sources of many inputs.

Employing local communitiesOur operations are located in close proximity to residential areas and draw their labour directly from those areas.

Prospects and appreciationThe group has a clearly defined strategy and plan to deliver on its medium- and long-term objectives.

ChemSpec is still strongly positioned financially to grow revenue both locally and internationally with a highly successful range of products.

Our financial team continues to display great diligence and professionalism in delivering quality financial information for all our stakeholders. The quality of our financial information will continue to improve in the year ahead as we leverage off our new ERP system and strive to assist the business to meet its key strategic imperatives and thereby create value. I would like to take this opportunity to thank our financial team for their ongoing enthusiastic support.

JG MaehlerFinancial Director

VALUE ADDED STATEMENT

Figures in R’000 2013 % 2012 % 2011 % 2010

Total operationsRevenue 471 569 390 022 318 522 394 286 Purchases and expenses (387 129) (301 758) (344 989) (333 631)

Value added 84 440 88 264 (26 467) 60 655Finance and other income 28 564 31 362 27 950 12 944

Wealth created 113 004 119 626 1 483 73 599

Employee compensation (126 908) 80 (94 343) 67 (100 836) 67 (85 363)Donations (89) – (39) – (37) – (31)Providers of debt (7 802) 5 (22 796) 16 (26 896) 18 (24 172)Taxes (23 733 ) 15 (24 121) 17 (23 726) 16 (20 940)

Income tax (343) (1 120) (714) (507)Assessment rates (2 202) (3 174) (1 959) (3 048)Payroll tax (21 188) (19 827) (21 053) (17 385)

Dividends – – – – – – –Wealth distributed (158 532) 100 (141 299) 100 (151 495) 100 (130 506)

Residual loss (45 528) (21 673) (150 012) (56 907)

Economic performance continued

Financial director’s report continued

Performance71


IntroductionIn dealings with customers, business partners and members of broader society each staff member represents the interests of ChemSpec. The commitment of each employee will ensure that we achieve our vision to be respected as a global, best of breed South African owned coatings company. A comprehensive strategy for the company’s human resources has been created to ensure that our people are skilled, motivated, engaged and healthy.

The culture of ChemSpec has always been to challenge and succeed; representing a positive and innovative spirit which we believe is present in all our staff – sales, technical, supply chain, admin and manufacturing. This culture has been instrumental in ChemSpec becoming a leading coatings company in the country. The vision for our human resources function is the continued promotion of an environment in which staff are engaged and motivated to succeed. In so doing, the company will continue to attract and retain the best talent that the industry has to offer. ChemSpec acknowledges the contributions of its entire staff and seeks to create a mutually rewarding environment in which career success and business success go hand in hand.

We continue to focus on developing skills from within, with an active programme of providing promotional opportunities to staff at all levels in the organisation. The mapping of skills internally is a key process to ensure that an adequate pipeline of skills is available to continue to grow the business from a stable human resource platform. Whilst investing in all its people is a key strategy, with key role succession planning, this investment can also be focused on specific talent within specific divisions. Succession planning has yielded significant success within the technical and sales divisions, where retention of key talent and sound bench strength has and will continue to build a significant competitive advantage for ChemSpec.

The impact of the external legislative environment remains an important focus to ensure that at a governance level where human capital is concerned, the group complies with applicable legislation. This governs and guides the employment relationship and ChemSpec believes in the importance of complying with the provisions of various relevant acts. Complying with these acts, i.e. the Labour Relations Act, Employment Equity Act, the Skills Development Act and the Broad-based Black Economic Empowerment

Act and Codes will contribute to foster a healthy relationship with all stakeholders. As our business continues to grow within the SADEC region and further into Africa, the challenge will be to maintain compliance with applicable social and labour legislation in these territories.

The company is implementing a new HR system, which will enhance the organisation’s ability to implement, track and maintain employee information in the areas of safety and health, training and development, career progression and performance management. Aspects of the system will be delivered through an employee self-service platform, which will empower staff to maintain and update personal information with the company on their own.

Staff complementChemSpec employs a total of 683 employees (2012: 624), of which 82% work in South Africa. A further 7% work in the company’s businesses in the SADEC region and the balance in the USA and Australia Pacific Rim. Growth in employee numbers has mostly been in the South African business, with 561 employees (2012: 522), whilst the USA has also seen an increase to 60 staff (2012: 51). Growth of staff numbers is largely attributable to the requirements for sales growth in the respective sales divisions.

Turnover of permanent employees in the South African business was 11,7% for the period (2012: 12,5%). Not included in this figure is 14 staff transferred out of the business as a result of the franchising of existing branches.

ChemSpec staff complement by country of operation

Country 2013 2012

South Africa 561 522

USA 60 51

Australia 11 7

Botswana 35 32

Namibia 16 12

Total 683 624

Learning and developmentIn pursuing our mission to become a global, best of breed South African owned coatings company, employee retention, succession planning and training programmes all play a key role in the talent management process. A further initiative will be the launch of the ChemSpec Training Academy in 2014, an initiative that will enhance the company’s ability to meet its future skills needs and also provide a channel to develop industry qualifications. The company currently meets its obligations regarding skills development legislation with annual submissions of a Workplace Skills Plan (WSP) and Annual Training Report (ATR) to the CHIETA (Chemical Industry Education and Training Authority). A specific focus during this reporting period has been on first-line supervisory skills development in the manufacturing environment, with all first-line supervisors attending an interactive programme designed to increase leadership competence and so improve the effectiveness of factory floor work-teams.

ChemSpec has a long relationship with SAPITI (South African Paint Industry Training Institute) and continues to utilise the programmes and courses offered by this institution. At present ChemSpec has nine technicians on SAPMA (South African Paint Manufacturers’ Association) programmes, ranging from SAPMA 1 through to SAPMA 5. Several of ChemSpec’s staff earned distinctions and two staff members achieved the highest marks in the country in their modules. A significant milestone was reached recently when eight factory operators were enrolled on SAPITI’s recently developed NQF aligned Raw Materials Preparation Skills Programme (NQF 2). The programme is being presented in-house by an accredited SAPITI training facilitator.

ChemSpec continues to invest in people who wish to study towards a degree or diploma in their chosen field. Currently eight staff members are studying in fields ranging from supply chain management to accounting. They are supported through financial assistance and study and exam leave. This programme forms a key part of our employment equity strategy of developing staff from the designated groups and 85% of staff enrolled in this scheme are representatives from these groups.

We continue to apply a strong training focus in all areas and particularly in the area of safety, where machine operator and driver safety programmes are continually undertaken for both new staff and staff requiring re-certification.

Employment equityWe believe that employment equity is a priority to further entrench inclusivity in the workplace culture. ChemSpec recognises that transformation must be implemented on a sustainable basis and that can only be achieved through the implementation of integrated employment equity and broad-based black economic empowerment (B-BBEE) initiatives. This is a focus of our business and integral to sound employee relations and our talent management initiatives.

South African staff by occupational level

Level

Employment equity

Male Female

TotalA C I W A C I W

Top Management 0 0 0 6 0 0 0 0 6

Senior Management 0 0 0 5 0 0 0 1 6

Middle Management 2 2 3 14 0 0 2 2 25

Junior Management 48 17 39 47 5 2 8 25 191

Semi-skilled 88 28 25 8 9 6 10 12 186

Unskilled 109 4 7 3 18 4 1 1 147

Total 247 51 74 83 32 12 21 41 561

Key: A = African; C = Coloured; I = Indian; W = White.

The group is in the third year of its current plan which will end in 2014. Trends from the organisation’s most recent employment equity reporting period showed that 66% of all recruitment was black, while blacks accounted for 81% of internal promotions. At present, black staff comprises 78% of the South African business against a target of 82% by the end of the current plan. Black African female representation has been a key focus area of late. African females now comprise 5.7% of staff employed against a target of 15% by the end of the current employment equity plan.

Employee relationsInternal communication takes place through various internal forums, established to ensure that information is filtered throughout the organisation. The company’s skills and equity forums meet twice a year and representation is drawn from across the company’s divisions and groupings. Various plant communication forums meet on a regular basis to enhance information sharing and to ensure that issues are speedily resolved. A quarterly ChemSpeak publication features inserts on staff achievements and profiles, company involvement in social and sponsorship initiatives as well as company performance.

In the arena of organised industrial relations practices, ChemSpec aims to foster good working relationships with organised labour structures and monitors and resolves employee issues before they lead to industrial action. The company remains

Social performance


a member of the NBCCI (National Bargaining Council for the Chemical Industry) for the parts of the organisation that fall within the definitions of the surface coatings sub-sector of the Industrial Chemicals chamber. At present the levels of unionisation stand at 48%. (2012: 52%). ChemSpec recognises two trade unions, General Industries Workers Union of South Africa (Giwusa) and Chemical Energy Paper Printing Wood and Allied Workers Union (Ceppwawu) across its various manufacturing, distribution and retail facilities.

Health and wellnessChemSpec acknowledges its responsibility for safeguarding the health and safety of its staff in the work environment. The company continues to develop its occupational health programmes, not only at its main manufacturing facility at Canelands, but also in its depots, branches and retail operations.

A full-scale medical surveillance programme, under the direction of the company’s Occupational Health Medical Practitioner and Occupational Health Nurse, ensures that safety prevention programmes for all staff remain at the forefront of our operations. A wellness day was recently held at Canelands for all factory, technical and dispatch

staff, which highlighted some key areas of focus around the prevalence of chronic conditions within the workforce and provided some important information for the proactive intervention and management of these conditions together with the staff concerned.

The company remains committed to its programme around HIV/AIDS and will continue to present programmes to raise awareness and encourage staff to know their status, while educating and counselling affected staff. The company’s peer educator programme was launched in 2012 to spread this message along more informal channels.

B-BBEEThe group continued to make progress in the major aspects of B-BBEE and is committed to an overall improvement of its B-BBEE credentials. ChemSpec currently holds a B-BBEE Level 5 certificate and has initiatives and plans in place to move to a Level 4 in the next period. Particular challenges are being addressed in the areas of preferential procurement, whilst progress is also being made in management control, employment equity and skills development which have been outlined in this report. Success has been achieved in the area of enterprise development with a programme aimed at building capacity among local distributors. The programme provides specific levels of support to ensure sustainability and ultimate success. ChemSpec understands that its business and the communities and markets in which it operates are interdependent. Good relations and contributions to socio-economic upliftment create business opportunities for all. The group therefore focuses its primary corporate social investment (CSI) activities on schools, community-based structures and crèches in projects involving support and maintenance programmes.

Again, ChemSpec has been mindful of its environmental impact and significant improvements and progress have been made this past year.

The following is a summary of the actions and successes this year.

We continue to remove lead and hazardous materials from our paint. The woodfinish industry is slowly becoming more environmentally aware and this has allowed us to begin selling our waterborne woodfinishing products.

The same applies to the industrial market, where more and more waterborne products are being developed and produced.

We are in the final stages of developing waterborne products for all solvent-based products.

We are following the European trend in decorative technology by developing low VOC and low odour products. These will be launched in the near future.

Waste management remains a priority. This is currently outsourced to a specialist company, which removes recyclable material from our waste and disposes of hazardous materials in an appropriate manner. Spillage is an area in which we have improved tremendously, with systems in place to avoid any danger to the environment.

This year we spent considerable time analysing our energy consumption and sources, and have a documented project list to reduce energy consumption over the next 12 months.

These, along with expected savings, include:

• Electrical energy reduction 655 000 kWh/year

• Peak power demand reduction (max) 157 kVA

• Sasol Gas energy reduction 748 GJ/year

• Water 3 015 kl/year

• Cost savings R730 000/year

• Implementation costs R710 000

• Potential greenhouse gas reduction 727 tons CO2e/year

GHS (Globally Harmonised System) is a new system for analysing and declaring hazardous substances. South Africa has legislated this system with an implementation date of 2016.

ChemSpec will begin implementing these changes as a matter of priority, and our plan is to begin changing all product labelling within the next few months. All new Safety Data Sheets will be GHS compliant from the end of 2014.

A comprehensive risk analysis has been conducted with senior staff from all areas of the business. Fire is obviously one of our most significant risks and we have managed the potential and impact of a fire down to comfortable levels. We continue to focus on fire prevention and control on a daily basis.

Social performance continued Environmental performance

ChemSpec carbon footprint: 1 April 2012 – 31 March 2013This year has seen an increase in the actual Carbon Footprint in absolute numbers purely due to a large increase in paint produced. However, footprint per litre paint produced is substantially lower. This indicates lower energy consumption in relation to the increased volume of paint produced. We have started seeing the benefits of recycling, which has resulted in a fairly large allowable reduction in the calculation.

We have considered the effects from incoming raw material and services, through the manufacturing processes at both Canelands and USA factories and the distribution of goods across the oceans to our international depots and distributors.

Source of CO2 contribution

Carbon footprint (tons CO2)

UTILITIES/ENERGy

Electricity used annually 7 134

Natural gas used annually 136

Propane used annually 4

TRANSPORTATION

Petrol used annually 964

Diesel fuel used annually 1 372

Airline travel 297

WATER USE

Water used 15

DIRECT EMISSIONS

VOC emissions 1 370

OFFSET, CREDITS, RECyCLING

Annual material recycling 355

Total kg tons CO2 4 959

Total kg tons paint produced 15 746

Carbon footprint 0,3

Notes:1 VOC emissions are estimated as a percentage

of overall paint loss. A full emissions evaluation is currently underway and will be reported on in future results.


Remuneration philosophyChemSpec values the importance of people in the group’s ability to achieve its strategic, financial and operational goals. ChemSpec strives to create a performance-orientated remuneration philosophy which fairly rewards executives and staff for their contributions to the group in sustainability targets. These targets are based on strategic, financial and operational objectives.

The executive and key managers’ remuneration is being structured in a manner where a significant portion of their package is linked to performance and achievement of the sustainability targets through incentives.

Remuneration

Details of share options granted but not yet exercised:

Date option granted Expiry date Number of options Subscription price (cents)

20/10/2011 20/10/2021 26 000 000 4003/11/2011 03/11/2021 6 000 000 4221/02/2012 21/02/2022 3 500 000 5503/01/2013 03/01/2023 19 000 000 5514/03/2013 14/03/2023 2 000 000 50

Total options granted 56 500 000

The following share options have been issued to directors:

Director

Options at1 April

2012

Options granted during

the year

Price at which options

granted

Options at 31 March

2013 Vesting dates Expiry dates

B Schreuder 0 10 000 000 55 0 03/01/2016 03/01/2023B R Mackinnon 6 500 000 0 40 6 500 000 20/10/2014 20/10/2021JG Maehler 6 500 000 0 40 6 500 000 20/10/2014 20/10/2021S van Niekerk 6 500 000 0 40 6 500 000 20/10/2014 20/10/2021DJ Coyle-Dowling 6 500 000 0 40 6 500 000 20/10/2014 20/10/2021G Metzer 0 6 500 000 55 0 03/01/2016 03/01/2023

Directors’ emoluments

Remuneration governanceThe board has delegated responsibility for the oversight to the group’s remuneration and nominations committee. The committee meets twice a year, is chaired by a non-executive director and currently consists of two non-executive directors and an executive director.

Remuneration practicesRemuneration practices are structured to encourage sustainable, long-term wealth creation through:

• Aligning remuneration practices with the group’s strategy

• Aligning executive rewards with the interests of the stakeholders

• Promoting a performance-based culture across the business

• Offering appropriate short- and long-term performance-related rewards that are fair and achievable

• Managing employment costs while at the same time rewarding, retaining and motivating talented executives and staff.

Basic remuneration

R’000

Medical and pension

R’000Travel R’000

Other R’000

Total 2013

R’000

Total 2012

R’000

Executive directorsB Schreuder** 481 77 30 2 256 2 844 –BR Mackinnon 1 921 155 86 – 2 162 2 104 JG Maehler 1 546 114 180 – 1 840 1 499 S Van Niekerk 1 696 – 102 8 1 806 1 686 DJ Coyle-Dowling 1 580 122 96 – 1 798 1 145 G Metzer** 373 44 27 149 593 –TP Dykins * 1 416 124 – – 1 540 296 RD Simpson*** – – – – – 1 861

Non-executive directors IAJ Clark 200 – – – 200 –IBB Buchan 125 – – – 125 – JG Jones 125 – – – 125 – SE Sono 125 – – – 125 – T Siwendu**** 31 – – – 31 –

* Resigned 28 February 2013** Appointed 1 January 2013*** Resigned 1 January 2012**** Appointed 16 January 2013

Further relocation costs to B Schreuder (R563 196) and G Metzer (R20 000) were paid in the year ended March 2013. These costs have not been included in remuneration paid detailed above.

No fees were paid to non-executives during the year ended 31 March 2012.

Non-executive directors’ remunerationNon-executive directors earn a base fee for their services as directors. This is in line with prevailing practices in the industry. These are market-related fees for their services as officers of the company. The payment of fees was implemented effective 1 April 2012.

The remuneration of non-executive directors is reviewed annually by the remuneration and nominations committee and recommended to shareholders for approval at the annual general meeting.

Non-executives do not participate in the group’s incentive schemes and remuneration is benchmarked via an independent survey.

The remuneration paid to directors of the company whilst in office during the year ended 31 March 2013 is as follows:

At the general meeting of ordinary shareholders held on 6 December 2012, the requisite majority passed an ordinary resolution to increase the aggregate number of unissued ordinary shares so that the reserve for the Employee Share Option Scheme, together with the shares under option, increased from 50 000 000 shares to 100 000 000 shares.


General remunerationRemuneration packages established for each job take into account the position and industry-related remuneration level for the post. Improvements in packages are driven by the individual’s performance and the business performance of the group.

Remuneration continued

Top three earners (non-directors)In accordance with King III, we disclose below the top three earners of the group, excluding executive directors, identified by total remuneration awarded.

Basic remuneration

R’000

Medical and pension

R’000Travel R’000

Other R’000

Total2013

R’000

Total 2012

R’000

Executive 1 2 457 21 314 – 2 792 1 796Executive 2 1 578 194 223 131 2 126 1 293Executive 3 514 97 128 883 1 622 1 233

Director Beneficial 2013 Beneficial 2012 Beneficial 2011

IAJ Clark 177 428 907 176 346 109 38 271 560BR Mackinnon 4 954 634 4 954 634 4 954 634JG Maehler 5 000 000 6 082 798 3 041 399NA Page 5 001 011 5 001 011 5 001 011IBB Buchan 55 949 695 55 949 695 –JG Jones 500 000 500 000 –

Directors’ interest in the companyAs at 31 March 2013, the directors held ordinary shares in the company as follows:

Performance79

81

05

FinanCial resUlts

Directors’ responsibility statement 82Preparer of financial statements 82Certificate by the company secretary 83Independent auditor’s report 83Condensed consolidated statement of financial position 84Condensed consolidated statement of financial performance 85Condensed consolidated statement of comprehensive income 85Condensed consolidated statement of cash flows 86Condensed consolidated statement of changes in equity 87Condensed consolidated segmental analysis 88Notes to the abridged annual financial statements 89Shareholders’ profile 95

Financial resultsChemSpec integrated annual report 201380


These abridged annual financial statements have been prepared under the supervision of Mr JG Maehler, CA (SA).

JG MaehlerFinancial Director19 June 2013

This serves to confirm that in terms of section 88 (2) (e) of the Companies Act 71 of 2008, as amended (the Act), I hereby certify that the company has filed the required returns and notices in terms of the Act for the financial year ended 31 March 2013 and that, to the best of my knowledge and belief, all such returns and notices are true, correct and up to date.

Statucor (Pty) LtdCompany Secretary19 June 2013

Preparer of financial statements

To the Shareholders of Chemical Specialities LimitedThe accompanying abridged annual financial statements of Chemical Specialities Limited, which comprise the condensed consolidated statement of financial position at 31 March 2013, and the related condensed consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended and related notes, are derived from the annual financial statements of Chemical Specialities Limited for the year ended 31 March 2013. We expressed an unmodified opinion on those annual financial statements in our auditor’s report dated 19 June 2013.

The abridged annual financial statements do not contain all the disclosures required by International Financial Reporting Standards applied in the preparation of the annual financial statements of Chemical Specialities Limited. Reading the abridged annual financial statements, therefore, is not a substitute for reading the annual financial statements.

Director’s responsibility for the abridged financial statementsThe directors are responsible for the preparation of the abridged annual financial statements on the basis described in note 1.

Auditor’s responsibilityOur responsibility is to express an opinion on the abridged annual financial statements based on our procedures, which were conducted in accordance with International Standard on Auditing 810, Engagements to Report on Summary Financial Statements.

OpinionIn our opinion, the abridged annual financial statements derived from the annual financial statements of Chemical Specialities for the year ended 31 March 2013, are consistent, in all material respects, with those financial statements, on the basis described in note 1.

KPMGRegistered Auditor

Per Jay DatadinChartered Accountant (SA)Registered AuditorDirector

19 June 2013

5 Arundel CloseKingsmead Office ParkDurban 4000

Independent auditor’s report

Certificate by the company secretary

The directors of the company are responsible for the maintenance of adequate records and preparation and integrity of the annual financial statements and related information. The annual financial statements have been prepared in accordance with International Financial Reporting Standards, and the South African Companies Act, 71 of 2008, as amended, the South African Institute of Chartered Accountants (SAICA), Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council and in compliance with the Listings Requirements of the JSE Limited (JSE). The annual financial statements are prepared on the historical cost basis excluding financial instruments and property, plant and equipment which are fairly valued.

The accounting policies, methods of measurement, recognition, computation and presentation adopted in the preparation of the abridged annual financial statements are consistent with those applied in the annual financial statements for the year ended 31 March 2012 and for the year ended 31 March 2013.

The directors are also responsible for the system of internal control. These are designed to provide reasonable, but not absolute, assurance as to the reliability of the annual financial statements, and to adequately safeguard, verify and maintain accountability for assets, and to prevent and detect material misstatements and losses. The systems are implemented and monitored by suitably trained personnel with an appropriate segregation of authority and duties. Nothing has come to the attention of the directors to indicate that any material breakdown in the functioning of these controls, procedures and systems has occurred during the year under review.

The annual financial statements are prepared on the going concern basis. Nothing has come to the attention of the directors to indicate that the group will not remain a going concern for the foreseeable future.

The abridged annual financial statements, which have been prepared using information required by IAS 34: Interim Financial Reporting, set out on pages 84 to 94, are an extract of the annual financial statements. These annual financial statements are electronically available on the group’s website at www.chemspecpaint.com.

The group’s independent external auditors, KPMG Inc., have confirmed that the abridged annual financial statements are derived from the annual financial statements and their unmodified report appears on page 83.

The abridged annual financial statements were approved by the board of directors on 19 June 2013 and are signed on their behalf by:

IAJ Clark BC SchreuderChairman Chief Executive Officer

Directors’ responsibility statement


Condensed consolidated statement of financial performancefor the year ended 31 March 2013

Condensed consolidated statement of comprehensive incomefor the year ended 31 March 2013

Condensed consolidated statement of financial positionas at 31 March 2013

GROUP Figures in R’000 Note 2013 2012

ASSETSNon-current assetsProperty, plant and equipment 276 625 230 828 Intangible assets 46 065 29 312 Goodwill 22 937 22 926 Deferred tax 65 507 51 291

411 134 334 357

Current assetsInventories 153 196 127 473 Trade and other receivables 102 864 77 426 Cash and cash equivalents 9 772 14 264

265 832 219 163

Assets held for sale 11 – 3 614

Total assets 676 966 557 134

EqUITy AND LIABILITIESEquityStated capital 10 468 055 466 656 Translation reserve 9 615 (1 353 )Revaluation reserve 31 858 31 858 Share option reserve 3 187 1 187 Accumulated loss (145 903 ) (114 996 )

366 812 383 352

Non-current liabilitiesOther financial liabilities 137 891 69 978 Deferred tax 2 828 3 169

140 719 73 147

Current liabilitiesOther financial liabilities 28 106 27 936 Trade and other payables 90 998 71 428 Bank overdraft 50 331 728

169 435 100 092

Liabilities held for sale 11 – 543

Total liabilities 310 154 173 782

Total equity and liabilities 676 966 557 134

GROUP Figures in R’000 Note 2013 2012

Continuing operationsRevenue 5 470 945 380 790 Cost of sales 6 (298 534) (224 511)

Gross profit 172 411 156 279 Other income 7 28 294 27 328 Operating expenses (237 530) (176 717)

Operating (loss)/profit 8 (36 825) 6 890 Finance income 270 4 034 Finance costs (7 802) (22 796)

Loss before taxation (44 357) (11 872)Taxation 14 046 3 991

Loss from continuing operations (30 311) (7 881)

Discontinued operations 11 (596) (6 250)

Loss for the period (30 907) (14 131)

Basic loss per share 9Continuing operations (cents) (2,83) (1,19)Discontinued operations (cents) (0,06) (0,94)

Total basic loss per share (cents) (2,89) (2,13)

Diluted loss per share 9Continuing operations (cents) (2,81) (1,18)Discontinued operations (cents) (0,06) (0,94)

Total diluted loss per share (cents) (2,87) (2,12)

GROUP Figures in R’000 2013 2012

Loss for the period (30 907) (14 131)Other comprehensive income 10 968 4 827

Exchange differences on translating foreign operations 10 968 4 827

Total comprehensive loss for the period (19 939) (9 304)


Condensed consolidated statement of cash flowsfor the year ended 31 March 2013

Condensed consolidated statement of changes in equityfor the year ended 31 March 2013


Cash flows from operating activitiesCash used by operations (37 160) (30 388)Interest income 270 4 034 Interest expense (7 802) (22 796)Taxation paid (650) (1 380)

Net cash used in operating activities (45 342) (50 530)

Cash flows from investing activitiesPurchase of plant and equipment (61 254) (39 258)Proceeds on sale of plant and equipment 815 4 799 Acquisition of intangible assets (18 982) (13 071)Acquisition of business (1 884) –Proceeds of other financial assets – 8 Proceeds on disposal of assets held for sale 3 071 1 050

Net cash used in investing activities (78 234) (46 472)

Cash flows from financing activitiesProceeds on share issue 1 399 259 022 Proceeds/(repayment) of other financial liabilities 68 082 (36 166)Repayment of shareholder loans – (83 536)

Net cash from financing activities 69 481 139 320

Total cash movement for the period (54 095) 42 318 Cash/(overdraft) at the beginning of the period 13 536 (28 782)

Cash and cash equivalents at the end of the period (40 559) 13 536

Reconciled as follows:Cash and cash equivalents 9 772 14 264 Bank overdraft (50 331) (728)

Cash and cash equivalents at the end of the period (40 559) 13 536

Figures in R’000Revaluation

reserveTranslation

reserveShare option

reserve Total

GROUPBalance at 31 March 2011 31 858 (6 180) – 132 447 Transfer to stated capital – – – – Issue of shares – – – 261 095 Share issue expenses – – – (2 073)Loss for the period – – – (14 131)Share options – – 1 187 1 187 Translation reserve – 4 827 – 4 827

Balance at 31 March 2012 31 858 (1 353) 1 187 383 352

Issue of shares – – – 1 404 Share issue expenses – – – (5)Loss for the period – – – (30 907)Share options – – 2 000 2 000 Translation reserve – 10 968 – 10 968

Balance at 31 March 2013 31 858 9 615 3 187 366 812

Figures in R’000Share

capitalShare

premiumStated capital

Accumulatedloss

GROUPBalance at 31 March 2011 2 207 632 – (100 865)Transfer to stated capital (2) (207 632) 207 634 – Issue of shares – – 261 095 – Share issue expenses – – (2 073) – Loss for the period – – – (14 131)Share options – – – – Translation reserve – – – –

Balance at 31 March 2012 – – 466 656 (114 996)

Issue of shares – – 1 404 – Share issue expenses – – (5) – Loss for the period – – – (30 907)Share options – – – – Translation reserve – – – –

Balance at 31 March 2013 – – 468 055 (145 903)


Condensed consolidated segmental analysisfor the year ended 31 March 2013

Notes to the abridged annual financial statementsfor the year ended 31 March 2013


Segment revenuesAutomotive 238 426 203 540 Buy-ins 18 076 14 115 Decorative 52 594 39 200 Industrial/Woodfinish 133 196 110 387 Solvents 29 277 22 780

Total of all segments 471 569 390 022 Discontinued operations (624) (9 232)

Consolidated revenue 470 945 380 790

Segment resultAutomotive (26 994) (7 279) Buy-ins (1 034) (30) Decorative (3 958) (980) Industrial/Woodfinish (10 880) (3 120) Solvents (1 491) (463)

Total of all segments (44 357) (11 872) Income tax 14 046 3 991 Discontinued operations (596) (6 250)

Loss for the year (30 907) (14 131)

Segment assets Automotive 342 276 288 348 Buy-ins 25 949 26 673 Decorative 75 501 57 596 Industrial/Woodfinish 191 211 149 985Solvents 42 029 30 918Discontinued operations – 3 614

Total of all segments 676 966 557 134

Revenue Revenue Assets Assets Figures in R’000 2013 2012 2013 2012

Geographical segmentsSouth Africa 285 011 217 116 546 259 446 061 International 185 934 163 674 130 707 111 073

470 945 380 790 676 966 557 134

1. ACCOUNTING POLICIES AND BASIS OF PREPARATION The abridged annual financial statements for the year ended 31 March 2013 have been prepared in accordance with

International Accounting Standards (IAS) 34 Interim Financial Reporting, the requirements of the South African Companies Act, 71 of 2008, as amended, the South African Institute of Chartered Accountants (SAICA), Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council and in compliance with the Listings Requirements of the JSE Limited (JSE).

The abridged annual financial statements have been prepared on the historical cost basis excluding financial instruments and property, plant and equipment which are fairly valued.

The relevant Standards and Interpretations which are not yet effective and which should be disclosed for March 2013 year-ends are identified in the table below, together with the dates on which these were issued by the IASB:

Standard/InterpretationDate issued by the IASB Effective date

IAS 1 amendment Presentation of Financial Statements: Presentation of items of Other Comprehensive Income

June 2011 1 July 2012

IFRS 10 Consolidated Financial Statements May 2011 1 January 2013

IFRS 12 Disclosure of Interests in Other Entities May 2011 1 January 2013

IFRS 13 Fair Value Measurement May 2011 1 January 2013

IFRS 10, IFRS 11 and IFRS 12 amendment

Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance

June 2012 1 January 2013

IAS 19 amendments Employee Benefits: Defined Benefit Plans June 2011 1 January 2013

IAS 27 Separate Financial Statements (2011) May 2011 1 January 2013

IFRS 7 amendment Disclosures – Offsetting Financial Assets and Financial Liabilities

December 2011 1 January 2013

IAS 32 Offsetting Financial Assets and Financial Liabilities December 2011 1 January 2014

IFRS 9 (2009) Financial Instruments November 2009 1 January 2015

IFRS 9 (2010) Financial Instruments October 2010 1 January 2015

These pronouncements had no material impact on the accounting transactions or the disclosure thereof.

The accounting standards and amendments issued to accounting standards and interpretations which are relevant to the group, but not yet effective at 31 March 2013, have not been adopted. It is expected that where applicable, these standards and amendments will be adopted on each respective effective date, except where specifically identified.

2. RELATED PARTIES There have been no significant changes in related party relationships since the previous year or significant transactions

during the year, other than in the normal course of business.

3. POST-BALANCE SHEET EVENTS The directors are not aware of any material matter or circumstance arising since the financial year-end that is not

disclosed in this report.

4. DIVIDENDS No dividends were declared or paid during the year (2012: nil).




5. REVENUEGross sale of goods 483 071 396 645 Less: Discount allowed (6 875) (4 645) Less: Rebates (4 627) (1 978) Less: Discontinued operations (624) (9 232)

470 945 380 790

6. COST OF SALESGross cost of goods sold 300 993 229 344 Less: Discount received (1 973) (762) Less: Rebates (387) (176) Less: Discontinued operations (99) (3 895)

298 534 224 511

7. OTHER INCOMEProfit on disposal of assets 167 –Foreign exchange gain 1 438 343 Franchise fees – 70 Insurance claim 15 000 15 677 Rental income 7 520 7 610 Other sundry income 4 169 3 628

28 294 27 328

Rental income is received from the sub-leasing of certain portions of property leased by the company.


8. OPERATING (LOSS)/PROFITThe analysis of expenses recognised in profit or loss using the classification based on the function within the entity comprises:Operating expenses 237 530 176 717

Administration 107 178 92 231 Distribution 48 490 35 191 Selling 83 214 63 313 Less: Discontinued operations (1 352) (14 018)

Profit for the year has been arrived at after charging:Operating lease charges:Premises 31 873 22 953 Motor vehicles 302 1 797 Office equipment 981 872

33 156 25 622

Auditors’ remuneration:Fees – current year 1 129 1 158 Tax and secretarial services 1 518 961

2 647 2 119

Depreciation and amortisation:Depreciation of property, plant and equipment 21 831 24 138 Amortisation of intangible assets 4 477 3 092

26 308 27 230

Profit/(loss) on disposal of assets 167 (628)Staff costs 148 096 114 170




9. BASIC AND DILUTED LOSS AND HEADLINE LOSS PER SHAREBasic loss per shareContinuing operations (cents) (2,83) (1,19) Discontinued operations (cents) (0,06) (0,94)

Total basic loss per share (cents) (2,89) (2,13)

Basic headline loss per shareContinuing operations (cents) (2,84) (1,12) Discontinued operations (cents) (0,06) (0,94)

Total basic headline loss per share (cents) (2,90) (2,06)

Diluted loss per shareContinuing operations (cents) (2,81) (1,18) Discontinued operations (cents) (0,06) (0,94)

Total diluted loss per share (cents) (2,87) (2,12)

Diluted headline loss per shareContinuing operations (cents) (2,82) (1,12) Discontinued operations (cents) (0,06) (0,94)

Total diluted headline loss per share (cents) (2,88) (2,06)

Basic loss per shareThe loss used in the calculation of basic loss per share are as follows:Loss for the year (continuing operations) (30 311) (7 881) Loss for the year (discontinued operations) (596) (6 250)

Total loss attributable to equity holders of the parent (30 907) (14 131)

Reconciliation of total loss to headline loss attributable to equity holders of the parentTotal loss attributable to equity holders of the parent (30 311) (7 881) Non-headline adjustmentsLoss/(profit) on disposal of assets (167) 628 Total tax effect of adjustments 47 (176)

Headline loss (continuing operations) (30 431) (7 429) Headline loss (discontinued operations) (596) (6 250)

Total headline loss (31 027) (13 679)

Weighted average sharesThe weighted average number of ordinary shares used in the calculation of loss per share Opening shares 1 071 261 648 418 523 544 Specific issue on 19 October 2011 of 117 107 280 shares – 52 794 266 Rights issue on 21 November 2011 of 535 630 824 shares – 191 714 858 Specific issue on 1 October 2012 of 2 600 000 shares 1 300 000 –

Weighted average number of ordinary shares (basic) 1 072 561 648 663 032 668 Share options 5 810 000 2 194 714

Weighted average number of ordinary shares (diluted) 1 078 371 648 665 227 382

Actual number of ordinary shares 1 073 861 648 1 071 261 648


10. STATED CAPITALAuthorised1 500 000 000 (2012: 1 500 000 000) ordinary shares of no par value – –

– –

IssuedShare capital: 1 073 861 648 (2012: 1 071 261 648) ordinary sharesof no par value 481 621 480 217 Less share issue expenses (13 566) (13 561)

468 055 466 656

Reconciliation between opening balance of issued shares and closing balance:Opening balance of shares issued 1 071 261 648 418 523 544 Specific issue: 2 600 000 shares at R0,54 each 2 600 000 –Specific issue: 117 107 280 shares at R0,40 each – 117 107 280 Rights issue: 535 630 824 shares at R0,40 each – 535 630 824

Total shares in issue 1 073 861 648 1 071 261 648

Results of the specific issue – 2013The results of the specific issue of shares for cash on 1 October 2012 are set out below:

Number of shares

Value at 54 cents

per share

Specific issue 2 600 000 1 404

2 600 000 1 404

Results of the specific issue – 2012The results of the specific issue of shares for cash on 19 October 2011 are set out below:

Number of shares

Value at 40 cents

per share

Industrial Development Corporation (IDC) 75 000 000 30 000 Clark Investments 42 107 280 16 843

117 107 280 46 843

Results of the rights offer – 2012The rights offer closed on 18 November 2011, and the results thereof are set out below:

Total number of rights offer shares available for subscription 535 630 824 214 252 Rights offer shares subscribed for by ChemSpec shareholders 521 134 279 208 454 Excess rights offer shares applied for by and allocated to ChemSpec shareholders 14 496 545 5 798

535 630 824 214 252


11. DISCONTINUED OPERATIONSDuring the 2012 financial year the board resolved to discontinue certain of the group’s retail stores. Of the stores identi-fied to be discontinued, some of these were to be closed and others sold.


Results of the discontinued operationsRevenue 624 9 232 Cost of sales (99) (3 895)Operating expenses (1 352) (14 018)

Operating loss (827) (8 681)Taxation 231 2 431

Net loss from discontinued operation (596) (6 250)

Basic loss per share (cents) (0,06) (0,94) Basic headline loss per share (cents) (0,06) (0,94) Diluted loss per share (cents) (0,06) (0,94) Diluted headline loss per share (cents) (0,06) (0,94)

Cash flows from (used in) discontinued operationsNet cash from (used in) operating activities (827) (8 681)Net cash from (used in) investing activities – –Net cash from (used in) financing activities – –

Net cash outflows for the year (827) (8 681)

Effect on the statement of financial position Plant and equipment – 1 782 Inventory – 1 832 Instalment sale liabilities – (543)

Net assets and liabilities – 3 071


Register date: 28 March 2013Issued share capital: 1 073 861 648 ordinary shares (2012: 1 071 261 648)

2013 2012Number

of share-

holdersNumber

of shares %

Number of

share-holders

Number of shares %

Public/non-public shareholdersDirectors less than 10% 5 71 405 340 6,65 6 74 488 138 6,95Employees less than 10% 5 12 958 580 1,21 6 15 608 580 1,46Shareholding greater than 10% 3 683 103 183 63,61 3 682 020 385 63,67

Public shareholders 1 629 236 487 358 22,02 1 715 229 237 358 21,40Non-public shareholders 21 837 374 290 77,98 23 842 024 290 78,60

1 650 1 073 861 648 100,00 1 738 1 071 261 648 100,00

Shareholding spread1 – 1 000 shares 69 35 367 0,00 67 36 483 0,001 001 – 10 000 shares 365 2 153 403 0,20 361 2 057 707 0,1910 001 – 100 000 shares 849 37 808 307 3,52 910 39 737 095 3,71100 001 – 1 000 000 shares 319 97 696 289 9,10 355 105 154 898 9,821 000 001 shares and above 48 936 168 282 87,18 45 924 275 465 86,28

1 650 1 073 861 648 100,00 1 738 1 071 261 648 100,00

Beneficial shareholders holding of 5% or moreIBB Buchan 55 949 695 5,21 55 949 695 5,22Shalamuka Capital (Pty) Ltd 69 812 187 6,50 69 812 187 6,52Industrial Development Corporation 150 000 000 13,97 150 000 000 14,00IAJ Clark 177 428 907 16,52 176 346 106 16,46Corvest 6 (Pty) Ltd 355 674 276 33,12 355 674 276 33,20

808 865 065 75,32 807 782 264 75,40

Beneficial shareholding of directorsJG Jones 500 000 0,05 500 000 0,05BR Mackinnon 4 954 634 0,46 4 954 634 0,46JG Maehler 5 000 000 0,47 6 082 798 0,57NA Page 5 001 011 0,47 5 001 011 0,47IBB Buchan 55 949 695 5,21 55 949 695 5,22IAJ Clark 177 428 907 16,52 176 346 106 16,46

248 834 247 23,18 248 834 244 23,23

Shareholder profile


PREPARATION OF THIS REPORT

INFORMATION GATHERING PROCESSThe information in the report has been gathered as part of the process to prepare ChemSpec’s Integrated Annual Report for its 2013 financial year. ChemSpec does not yet have a policy which prescribes the process, timeframes and responsibilities for gathering information for the integrated report.

PRINCIPLES ON WHICH REPORT HAS BEEN PREPAREDThe integrated report was prepared on the following principles:

PRINCIPLES INFORMING THE REPORT SCOPE AND BOUNDARyRefer to the scope and boundary of the report on the inside front cover.

PRINCIPLES INFORMING THE SELECTION OF THE REPORT CONTENTThe report includes information which we believe is useful, i.e. relevant and faithfully represented to provide a balanced view of ChemSpec. The content which is included is therefore only that which is material to users of the report.

Relevance and materialityRelevance has to do with providing information that assists stakeholders to evaluate ChemSpec’s performance and to make assessments about the ability of ChemSpec to create and sustain value over the short, medium and long term. It also applies to the impacts, both positive and negative, that ChemSpec has on social, environmental, financial and economic systems. Information that is capable of making a difference in the assessments and decisions of stakeholders is relevant even if some users choose not to take advantage of it or are already aware of it from other sources.

An item is material if it is of such importance and has an impact that could substantively influence the assessments and decisions of the organisation or its stakeholders. Materiality is a measure of threshold against which information can be evaluated. The nature of an integrated report is that of a strategic overview; accordingly, therefore detailed reports will follow other materiality levels.

The financial information, materiality is used in the sense of the magnitude of an omission or misstatement of accounting data that misleads users and is usually measured in monetary terms. Materiality is judged both by the relative amount and by the nature of the item.

In the context of sustainability, materiality is a more difficult measure to define and a great deal of judgement is required. An organisation is faced with a wide range of sustainability issues on which it could report and thus it is important for the organisation’s leadership to apply its mind to what needs to be reported. Relevant issues are those that may reasonably be considered important for reflecting the organisation’s financial, environmental, economic and social impacts, or influencing the decisions of stakeholders.

Content has been considered as material to users from the perspective of ensuring that:

• the right information is being reported

• this information is reported accurately

• ChemSpec is responsive to the legitimate interest and expectations of its key stakeholders. The report explains how key stakeholders’ legitimate interest and expectations have been addressed.

Faithful representationThe information presented is complete, neutral and free from error.

CompleteComplete means that all material information that could affect the assessment or decisions of stakeholders, both positively and negatively, is included in the report. The issues included are those throughout ChemSpec’s sphere of influence.

NeutralNeutral information has no bias in the selection or in the presentation of information. The overall presentation of the report’s content provides an unbiased picture of ChemSpec’s performance, which means that the report avoids selections, omissions or presentation formats that are reasonably likely to unduly or inappropriately influence a decision or judgement by the user. The report includes both favourable and unfavourable results, as well as issues that can influence the decisions of stakeholders, in proportion to their materiality.

Free from errorFree from error implies there are no errors or omissions in the description of the information, and that the process used to produce the reported information has been selected and applied without error. This does not imply that the information will be

Annexure

perfectly accurate in all respects. It does imply that where amounts are estimates, this is clearly communicated, the nature and limitations of the estimating process are explained, and no errors have been made in selecting and applying an appropriate process for developing the estimate. The level of comfort can be enhanced through independent assurance.

PRINCIPLES INFORMING THE qUALITy OF THE REPORTED INFORMATIONThe information presented complies with the following criteria in order to ensure that it meets appropriate standards of quality:

Comparability and consistency• Information is more useful if it can be compared with similar information from other organisations and with similar

information for the same organisation for a different time period. Where reporting policies have been changed, the reasons for the change have been explained and the impact described.

• Comparability is necessary for evaluating performance. Information is presented in a manner that allows users of the report to compare the information reported on financial, social, economic and environmental performance against ChemSpec’s past performance and its strategic objectives and targets.

Verifiability• Users will have more confidence in information that is verifiable. Verifiability means that different knowledgeable and

independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.

• It is not possible to verify all explanations and forward-looking information. To help users decide whether or not they want to use that information, disclosure of the underlying assumptions, the methods of compiling the information and any other relevant information have been included in the report.

Timeliness• Timeliness means having information available to stakeholders in time to be capable of influencing their assessments and

decisions.

Understandability or clarity• The information is presented in a way that is understandable, accessible and usable by the organisation’s key stakeholders.


Country of incorporation and domicile South AfricaRegistration number 2005/039947/06Share code CSPISIN ZAE000109427

Nature of business and principal activities Manufacture, distribution and supply of paint and ancillary products

Directors IAJ Clark (Non-executive chairman) BC Schreuder (Chief executive officer) BR Mackinnon (Chief operations officer) JG Maehler (Financial director) GV Metzer (Marketing and sales director) S van Niekerk (International sales director) DJ Coyle-Dowling (Executive director) JG Jones (Lead independent non-executive director) NTY Siwendu (Independent non-executive director) SE Sono (Independent non-executive director) IBB Buchan (Non-executive director) NA Page (Non-executive director) ZM Buchan (Alternate non-executive director)Registered office 2029 Old Mill Road Canelands Verulam 4339

Business address 2029 Old Mill Road Canelands Verulam 4339

Postal address PO Box 2359 Canelands Verulam 4340

Auditors KPMG Incorporated 20 Kingsmead Boulevard Kingsmead Office Park Durban 4001

Transfer secretaries Computershare Investor Services (Pty) Ltd 70 Marshall Street Johannesburg 2001

Company secretary Statucor (Pty) Ltd BDO House Richefond Circle Ridgeside Office Park Umhlanga 4319

Designated Advisor Grindrod Bank LimitedWebsite www.chemspecpaint.comTelephone +27 32 541 8600Fax +27 32 541 8653

Corporate information

1.57:1 0% · ChemSpec’s decision to enter the decorative coatings market necessitates the...

Documents

Transcript of 1.57:1 0% · ChemSpec’s decision to enter the decorative coatings market necessitates the...