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Annual General Meeting 15 July 2015 - Chairman’s Address
ILLOVO SUGAR LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1906/000622/06)
Share Code: ILV
ISIN: ZAE000083846
(“Illovo”)
Annual General Meeting 15 July 2015 - Chairman’s Address
As already reported, the past year was a disappointing one for the group,
characterised by abnormal weather conditions, which hampered production, and
challenging market conditions, which adversely affected the financial results. Group
sugar production was below that of last year mainly due to the impact of drought
and frost in South Africa, whilst continuing low world sugar prices and a significant
declining trend in EU sugar prices and currency impacted negatively on revenue
realisations from the export market. Revenue was marginally higher than the prior
year at R13.3 billion, but with the operating margin decreasing from 14.3% to 12.5%,
operating profit was 12.3% lower at R1.655 billion. Rising interest rates across most
emerging economies and the impact of sluggish sales resulted in finance costs
increasing by R20 million compared to 2014. Overall, financial results reflect a 7.7%
decline in headline earnings per share to 179 cents per share, with the total
distribution for the year being 90 cents per share. It is pleasing that the performance
of the downstream business, which now contributes 16% of our operating profit, was
strong. The new potable alcohol distillery in Tanzania performed extremely well in
its second year of operation and the co-generation operations at the Ubombo
factory in Swaziland established a new record for electricity sales into the National
grid. In addition, in South Africa, the Merebank and Glendale distilleries achieved
new production records.
A sound balance sheet, healthy cash-generation and good cane, sugar and
downstream assets across Africa, together with investments in strategic projects,
such as the new refinery in Zambia, energy saving projects across the group and
marginal cane and sugar production expansions, should have a positive impact on
the business in the future.
The group will be focusing on its domestic markets, both consumer and industrial,
and the opportunities available in the growing African regional markets. In addition,
Illovo will continue to pursue downstream investments to enhance and diversify
future revenue streams. We will continue to evaluate opportunities for future
footprint expansions in Africa, but careful assessment of the risk will remain crucial
to any new opportunity evaluation.
The annual general meeting provides an opportunity to update you on the current
state of the group’s operations. Lower than long-term mean rainfall has continued
to be experienced across the Southern African region. This has affected cane yields
in the rain-fed growing areas in South Africa and has also impacted on river and dam
levels in Zambia and Swaziland. In South Africa, the Umzimkulu mill has not opened
this season with the cane from this area being crushed at Sezela. Generally, factory
performance to-date has been positive, with Nchalo’s performance reflecting a
pleasing positive improvement. Overall group sugar production is anticipated to be
around 5% below that of last year.
Export markets continue to be very challenging with the indirect impact of soft world
sugar prices, that recently touched six-year lows, on regional realisations being of
particular concern. Efforts to change the market mix to reduce the impact of the
lower world and EU prices have realised some positive results. Domestic markets
remain the backbone of the business and it is pleasing that demand growth in
Zambia remains positive and that the market conditions in Tanzania continue to
improve. The new tariff structure implemented in South Africa last year has largely
had the desired effect on sales into the SACU region, which is encouraging.
Unfortunately, the effective implementation of a new import tariff structure in
Mozambique remains elusive, whilst in Malawi the strong kwacha, high interest rates
and little or no economic growth continues to weigh on demand.
The downstream business overall continues to remain strong and its contribution to
operating profit is anticipated to be in excess of 20% in the current year.
Exchange rate volatility in general, and the weaker Euro in particular, will continue to
be a major influence on export earnings and the conversion of foreign subsidiary
profits into Rand.
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. The
embedding of the Continuous Improvement culture within the organisation
continues to gather momentum and the contribution from the new targets set in this
area will be vitally important in achieving improved production performance,
innovation and reduced costs of production.
As advised previously, as a result of the challenging production and marketing
conditions, it is expected that HEPS for the year ending 31 March 2016 will be
between 25% and 45% below those of last year.
I will be retiring from the Board at the end of this AGM and I would like to thank the
shareholders, business partners, my fellow directors and the employees of Illovo for
their support over the many years of my involvement at Illovo. It has been a
privilege to serve as both Chairman and Managing Director of the Group. Phinda
Madi is also retiring from the Illovo board at this AGM. I thank him for his
contribution to the Board over the past 12 years and particularly for his efforts as
Chairman of the Social & Ethics Committee. Phinda I wish you well in your future
endeavours and thank you.
Best wishes to Trevor Munday as the new Chairman of Illovo. I wish him, the Board,
Gavin Dalgleish and the executive team every success in meeting Illovo’s vision and
Strategic Intent and will follow their achievements with great interest.
D G MacLeod
Chairman
Mount Edgecombe
15 July 2015
Sponsor
J.P. Morgan Equities South Africa Proprietary Limited
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