ILLOVO SUGAR LIMITED - Annual General Meeting 16 July 2014 - Chairmans Address

Annual General Meeting 16 July 2014 - Chairman’s Address

ILLOVO SUGAR LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1906/000622/06)
Share Code: ILV
ISIN: ZAE000083846
(“the company”)

ANNUAL GENERAL MEETING 16 JULY 2014

CHAIRMAN’S ADDRESS

As already reported in respect of the year ended 31 March
2014, group turnover increased by 20% to R13.2 billion.
However, despite the increased sugar and downstream
production, group operating profit remained flat year-on-
year at R1.887 billion.     The operating margin declined
from 17.2% to 14.3% largely due to competition from low-
priced imported sugar, which affected earnings in the
group’s export markets and certain domestic markets,
together   with  the   significant  adverse  year-on-year
growing cane fair value adjustments and higher-than
inflation cost increases. Headline earnings were up 4.4%
at R893.6 million and headline earnings per share of
194.0 cents reflected growth of 4.3%.
A strong balance sheet, healthy cash generation, sound
cane sugar and downstream assets and strong domestic and
regional markets across Africa position the group to
continue with its growth plans. Illovo continues to
evaluate opportunities for further footprint expansion in
Africa and to grow its downstream business in line with
its business objectives. Careful assessment of the risks
will remain crucial to any new opportunity being
progressed, but the group continues to make steady
progress   towards  its   objective  to   increase  sugar
production to more than 2 million tons per annum and to
optimise the return on every stick of cane. The next few
years will see the group also focus on existing capacity
utilisation and productivity improvements. Strategic
downstream investments will be pursued to enhance and
diversify future revenue streams.    The focus on energy
efficiency projects and the achievement of electricity
self-sufficiency and power co-generation, where viable,
will be important areas of cost reduction and revenue
growth.

The annual general meeting provides the opportunity to
update you on the current state of the group’s
operations.
Growing conditions across the group have been variable
with early season rainfall impacting negatively on the
start-up of mills and thereafter, a reduction in long-
term mean rainfall.     The strikes in South Africa and
Swaziland have had an adverse impact on sugar production
for the year to date but it is anticipated that the
production deficit from the strikes will be recovered by
extending the season in both these countries. Generally
factory performance to date has been positive.    Overall
group sugar production is expected to increase marginally
from last year to around 1.85 million tons.
Market conditions continue to be difficult.      In South
Africa, domestic sugar revenues have been eroded by
prior-year world market imports, however since the
implementation of the tariff, imports into SACU have been
minimal and the negative impact of these imports is
expected to decline as residual stock levels deplete. In
Tanzania, despite assurances from Government, imports
continue to flow into the country thereby negatively
affecting both volumes and price. Elsewhere in the group
annual domestic market sales are anticipated to meet
forecast.

EU market prices have continued to trend downward in the
run up to the deregulation of the EU sugar industry in
September 2017, but prices have decreased earlier than
anticipated and continue to trend downward creating
uncertainty as to where the prices will bottom out.
The world sugar price continues to be negatively impacted
by the global surplus of production over consumption for
the current year.   Futures prices are between US17.0 to
US20.0 cents/lb with the later-dated prices reflecting
the possibility of a return to production/consumption
equilibrium in future years.
The weakness in the world price is negatively impacting
upon regional prices although the group enjoys a
geographic logistics advantage in the markets supplied
from Zambia and Malawi.
The group is taking steps to achieve a better market mix
in order to maximise revenues in the current season.
Exchange rate volatility will continue to be a major
influence on export earnings and the conversion of
foreign subsidiary profits into Rands.
Rising costs, particularly wage increases at levels above
inflation, are a concern in a market place which is under
pressure, and productivity improvements together with
production cost reduction initiatives will be areas of
continuing focus.
Overall, despite a marginal increase in the group sugar
production estimate, it is anticipated that the 2014/15
financial year will be a tough one for the group due to
difficult market conditions, and the achievement of good
earnings growth will be a challenge.



D G MacLeod
Chairman

Mount Edgecombe
16 July 2014

Sponsor
J.P. Morgan Equities South Africa Proprietary Limited

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