INTERIM REPORT for the six months ending 30 SEPTEMBER 2014

Transcription

1 INTERIM REPORT for the six months ending 30 SEPTEMBER

2 Group overview Gavin Dalgleish, Managing Director 2

3 Group overview Illovo s vision is to BE A WORLD-CLASS, LOW-COST AND HIGHLY EFFICIENT ORGANISATION, operating on the African continent, adding value to its core products of fibre, sugar and molasses. We seek to ENHANCE SHAREHOLDER WEALTH and optimise growth, achieving a sustainable, balanced and integrated economic, social and environmental performance, whilst taking cognisance of the interests of our stakeholders. Africa s leading and largest sugar producer Strong domestic, regional and preferential sugar markets Significant manufacturer of high-value, niche-market downstream products Sustainability focus both social and environmental Extensive agricultural and manufacturing operations across 6 African countries permanent and seasonal employees Illovo s operating footprint Regional African countries where Illovo markets sugar 3

4 Salient features six months to September Financial Revenue & operating profit decrease by 5% & 14% respectively due to challenging market conditions coupled with lower production & sales Headline earnings per share down 10% to 171 cents Robust balance sheet and strong cash generation Continuous improvement strategy delivers revenue enhancements & meaningful cost savings Downstream operating profit up R68m to R130m Interim distribution remains unchanged at 37 cents Physicals Record sugar production expected in Zambia & Mozambique Newly commissioned distillery in Tanzania operating consistently above design capacity Higher power exports to the Swaziland national grid Overall, sugar production decreases 9% to 1 284kt Industrial strike action in South Africa and Swaziland South African production impacted by drought & frost Domestic sales volumes grow in Malawi & Zambia Higher tariff in South Africa reduces low-cost imports Build on continuous improvement strategy to enhance returns from existing operations Markets Strong demand for potable alcohol in East Africa Improved furfural prices achieved in export markets Sugar sales volumes decrease 12% to 798kt Pricing in EU, world & regional markets declines with difficult trading conditions expected to continue Low-cost sugar imports continue to impact domestic market pricing in Tanzania Growth Review supply chain structures across the group to unlock further value Invest in downstream assets to diversify revenue evaluation of furfural & Zambia distillery projects Opportunities for footprint expansion Increase domestic market penetration & grow new regional markets with logistics & duty benefits 4

5 Governance and advocacy Governance Illovo is committed to achieving the highest standards of corporate governance and corporate citizenship by adhering to the codes of best practice and the principles of fairness, accountability, responsibility, transparency and integrity. Illovo has achieved the following in respect of governance: Awarded the highest Sustainability Data Transparency Index (SDTI) score in the Food & Beverage Industry sector, and ranked fifth overall across all sectors Among the six companies who met JSE s Socially Responsible Investment (SRI) Index Best Performer threshold in the High Environmental Impact category Ranked in the Excellent category in the EY Excellence in Integrated Reporting Awards A rating for governance from GES Invest (an international firm of investment advisors) Allocated Prime status by Oekom Research (an international rating agency) Advocacy Illovo seeks to convey key messages proactively to appropriate audiences with quality information; and encourage balanced tariff structures that legitimise sugar markets and support long-term investment and domestic growth. An update on the Group s advocacy agenda is as follows: The increase in South Africa s dollar-based reference price has been effective in reducing volumes of imported sugar The Tanzanian business is part of an industry-wide Government supported initiative to curb the influx of lowpriced sugar imports South Africa was recently awarded a quota ensuring preferential access into the EU market Ensure duties and import controls remain effective and continue to protect domestic markets against dumped world sugars Work towards establishing a preferential market for African sugar within Africa Collaborate with all stakeholders to address the complex issue of sugar consumption, nutrition & obesity 5

6 Health, safety and environment Environment Illovo is committed to improving environmental management processes with the objective of minimising, and ideally eliminating, the negative impacts of our business on the environment. The group s environmental reporting is guided by the Global Reporting Initiatives and UN Global Compact requirements. The following environmental initiatives are underway: Energy efficiency projects in South Africa and Swaziland with the potential to reduce greenhouse gas emissions Implementation of a water management strategy focusing on water quality monitoring, effluent treatment, infrastructure improvement and improving water re-use Health & Safety Integral to Illovo s strategy is to provide a safe working environment for employees, contractors & stakeholders. Regrettably, 2 fatalities occurred in the past six months Disabling Injury Frequency Rate reduces by 18% while Total Injury Frequency Rate steadily declines Target Zero campaign to be rolled out across the Group after successful implementation in South Africa Developing a fully integrated SHERQ management system The following operations achieved zero disabling injuries for more than 12 months: Kilombero (Agriculture) Partnering with international researchers to better understand water catchment risks in Zambia and Mozambique Nchalo (Agriculture) Maragra (Factory) Participation in international disclosure programmes (e.g. CDP Climate Change & Water Disclosure) to improve consistency & transparency of environmental reporting Eston (Agriculture & Factory) Eston (Syrup Plant) Sezela (Agriculture) Umzimkulu (Agriculture & Factory) Merebank & Glendale 6

7 Sugar production Group sugar production decreased by tons Tons Sugar Drought, frost damage & strike September (Actual) Disappointing performance at Nchalo mill Strike & unfavourable climatic conditions Normalised crush rate in, resulting in production phasing year-on-year Rainfall delayed season start-up South Africa Malawi Zambia Swaziland Tanzania Mozambique September (Actual) Season start-up delayed to maximise cane growth Variance Cane Sucrose Recovery

8 Financial overview Mohammed Abdool-Samad, Financial Director 8

9 Group exchange rate parameters A weaker Zambia Kwacha and Malawi Kwacha contributed to a R35 million loss on translation. The following exchange rates were used to translate the Group s interim results: Translation Rates (Average) Sept 6 months Sept 6 months Change (%) Profit Impact Rand / US Dollar % Rand / Euro % Zambia Kwacha / Rand (6%) Malawi Kwacha / Rand (4%) Tanzania Shilling / Rand % Mozambique Metical / Rand % 9

10 Group key financial metrics (5) (10) (15) Headline Earnings Per Share (cents) (5) Revenue vs (% change) (14) Operating profit -10% (7) Finance costs (15) Profit before tax R million Sept 6 months Sept 6 months Revenue Operating profit Net financing costs Profit before tax Headline earnings Analysis Sept 6 months Sept 6 months Operating margin (%) 26.1% 23.5% Interest cover (times) Effective tax rate (%) 25.5% 25.6% EPS (cents) HEPS (cents) EBITDA (R m) Debt : Equity Gearing (%) 28.6% 29.2% 10

11 Operating profit by segment 44% 52% Business Segment Sept 6 months R m Sept 6 months R m Variance R m Operating Profit Sugar % % % 50% 4% Cane Downstream & Co-gen % % % 130 9% 68 9% Geographic Segment Sept 6 months R m Sept 6 months R m Variance R m Operating Profit % 33% Malawi Mozambique % % % 110 8% 43 31% 41% 1% 17% 10% 9% South Africa Swaziland Tanzania % % % 124 9% % -9 (1%) 20-1% 9% 12% 8% Zambia % % 46 11

12 Country operating profit bridges Malawi (50) 544 Disappointing mill performance offset 560 by higher domestic sales Sept South Africa (50) Volume Price Cost Fair Value Trans. Sept Sept Tanzania (50) Volume Price Cost Fair Value D/stream Sept (9) Sept Industry strike, drought & frost offset by better sales mix & furfural prices Impact of low-cost world sugar imports offset by distillery profits Volume Price Cost Fair Value D/stream Trans. Sept Mozambique (50) (50) Zambia (50) Sept Swaziland 274 Sept Normalised crush rate, lower export 438 prices offset by higher domestic sales Sept Delayed mill start-up, lower export prices offset by cost saving initiatives Volume Price Cost Fair Value 92 Industry strike, lower export prices offset by higher power exports 62 Volume Price Cost Fair Value 45 Volume Price Cost Fair Value 6 10 Co-Gen Trans. Sept D/stream 27 Trans. 124 Sept Sept 12

13 Group operating profit bridge Domestic market growth in Malawi and Zambia, weaker exchange rates benefit export proceeds and initiatives to redirect EU-designated sugar into higher margin regional markets; offsets pressure on Tanzania s domestic prices, the impact of a low world sugar price and a substantial decline in EU market pricing. Tanzania s distillery operates for its first full six month period. South Africa increases furfural exports and benefits from weaker exchange rates. Alcohol production efficiencies at Merebank realise cost savings. Swaziland exports additional power into the national grid. R millions September Volume Production decreased by tons due to: strikes, drought conditions and frost damage in South Africa ( tons), strikes in Swaziland ( tons); and disappointing factory performance at Malawi s Nchalo mill ( tons). Consequently, sales volumes reduced 12%. Price Costs (Malawi) Costs (Rest of Group) High inflation in Malawi and above inflation wage increases in South Africa and Swaziland. Continuous improvement programme delivers significant cost savings to offset pressure on margins from lower export prices. Fair Value Movements Downstream & Co-generation Translation Expectation of a weaker exchange rate and higher inflation in Malawi. Domestic and regional market growth improves sales mix. Anticipation of higher molasses prices. September 13

14 Continuous improvement programme Continuous improvement strategy continues to deliver meaningful cost savings and revenue enhancements across the Group Focus on low-capital initiatives, encouraging grass-roots development and rolling out best practice to other operations Case Study: Zambia Farm 6 Yields Improvement Project Yields on Farm 6 were consistently below the estate s average. An initiative was launched to understand the challenges (e.g. soil, drainage, water supply), implement improved farming practices and monitor performance. Yields increased by 21%, exceeding the 5 year objective in a single season. Yields (tons cane per hectare) Zambia Farm 6 Yield Improvement 21% improvement in a single season R1.4 million profit with no capital Farm 6 Zambia Estate (Average) 5 Year yield objective Before After 14

15 Cash generation and profitability Sustaining the strong conversion of operating profit into cash remains a key focus of the group Sept 6 months R m Sept 6 months R m Operating profit Material items 3 1 Operating income Add back: Depreciation & amortisation Change in fair value of cane roots (102) (111) Change in fair value of growing cane Other (1) - Cash operating profit Cash conversion ratio 114% 110% 15

16 Fair value movements Benefit of domestic & regional market growth, higher molasses prices & weaker Malawi Kwacha Growing Cane Sept 6 months R m Sept 6 months R m Change R m Malawi (23) Mozambique (5) (18) (13) South Africa (6) 7 13 Swaziland (14) (23) (9) Tanzania (41) (66) (25) Zambia (30) Total (119) (38) 81 Growing cane represents the estimated sucrose content valued at the estimated sucrose price for the 2015/16 season, adjusted for the cost of harvesting & transporting the cane to the mill. Cane Roots Sept 6 months R m Sept 6 months R m Change R m Malawi Mozambique 10 9 (1) South Africa Swaziland Tanzania 14 9 (5) Zambia 6 (2) (8) Total Cane roots represents the cost of replanting the area under cane in each year, escalated for the impact of inflation & adjusted for the expected remaining life of the roots. 16

17 Net debt reconciliation R million Opening net debt April (2 086) Operating cash flows (1 270) Cash operating profit Working capital (2 137) Inventory (2 426) Receivables (316) Payables 605 Interest paid (142) Taxation paid (160) Shareholder distributions (360) Investment cash flows (280) Expansion capital (120) Replacement capital (137) Other movements (23) Disposal of 5.2% of Zambia Sugar Plc 196 Issue of shares 1 Translation loss (89) Closing net debt September (3 528) (3 272) Gearing: 28.6% Sept Net Debt Balances (R million) +8% (2 086) Gearing: 21.8% March (3 528) Gearing: 29.2% Sept Working capital levels at September represent the peak of the season requirement. Sugar stocks in Tanzania begin to normalise, however tough trading conditions in South Africa and a slower sales profile in Malawi & Zambia increases sugar stocks year-on-year. 17

18 Finance cost analysis R millions September Malawi Mozambique South Africa Swaziland Tanzania Zambia Group Translation September 1. Tanzania Finance costs on distillery funding are no longer capitalised following the completion of the project Competition from low cost imported sugar reduces domestic prices and operating cash flows 2. Zambia Significant interest rate increases implemented to stabilise the currency, combined with the impact of slower export sales 3. Group Interest savings result from the refinance of Zambia s external borrowings with internal funding 18

19 Capital cash flows Capital expenditure on fixed assets, intangible assets & cane developments totals R257 million Nchalo sugar warehouse Eston packing station & Noodsberg syrup clarifier Nakambala expansion (pre-spend) Furfural development (pre-spend) R million Malawi Mozambique South Africa Swaziland Tanzania Zambia Group Expansion Replacement 19

20 Market update Sources The following market information has been compiled using data from the following sources: AB Sugar; Czarnikow; World Bank; LMC; Business Monitor International; GapMinder; World Bank; Index of African Governance; Food and Agricultural Organization of the United Nations; International Sugar Organisation; EU Commission; as well as internally generated information. 20

21 World sugar market A wide range of uncertainties could materially impact world sugar volumes and prices: High debt at Brazilian & Indian mills has caused many to delay opening, or not open at all, for the /15 season Very little expansion is taking place in Brazil due to low prices and high existing debt World prices very are sensitive to Brazilian macroeconomics, in particular the Real exchange rate and ethanol prices Prices remain well below the level required to encourage material investment in expansions, in Brazil in particular Brazil s flexibility to switch production from ethanol to sugar of up to 10 million tons Major variables in world sugar Capital Expansion Rate Estimated that US 23c/lb price required to make major expansions viable in Brazil (Source: AB Sugar) Economic Growth Growth in sugar consumption stalled during the recent global recession. Over last decade growth averaged 3.2 million tons per annum 8% 6% 4% 2% 0% (2%) EU Reform Reforms predicted to switch EU from a net importer of 2 million tons to a net exporter of 1 million tons Real World GDP Growth Consumption m ton Brazilian Real Exchange Rate A weak BRL:USD rate lowers the effective cost of production of Brazilian exports (particularly if disconnected from inflation) Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Brazil Ethanol Brazilian mills can switch ethanol mix between 40%- 60% of output. Poor ethanol prices increases sugar output Weather Major shifts in weather patterns can cause major supply changes with a high likelihood of an El Nino in /15 Indian Debt Distressed mills delayed crushing and owed $2 billion to cane-growers at the start of /15 season 21

22 World sugar market Forecast of higher world prices is supported by underlying growth in global consumption After 3 years with a production surplus, the world sugar balance is moving back towards deficit as reduced prices both stimulate demand and limit investments in existing and new sugar assets Global sugar consumption has grown at a compound growth rate of 2.0% per annum since 2003/4 with similar growth rates expected to continue into the foreseeable future Requirement for additional global production should push prices above reinvestment levels (US 23c/lb in Brazil) over the medium- to long-term Price increases will, however, incentivise sugar production versus ethanol, creating an upper cap on price growth World sugar balance: net surplus/(deficit) World sugar prices million tons 10 Actual Forecast range 30 US cents/lb No Raw Sugar No Raw Sugar (Futures) 5 0 (5) (10) (15) 16 million ton excess stock build 04/05 06/07 08/09 10/11 12/13 14/

23 African sugar markets Forecast growth in sugar consumption driven by high levels of population and economic growth: Sub-Saharan Africa expected to continue recent trends with high levels of population growth, urbanisation and improvements in life expectancy GDP per capita growth forecast to accelerate Middle class expected to grow rapidly, albeit from a low base Sugar consumption per capita Country / region Congo (DRC) Egypt Ethiopia Kenya Malawi Mozambique Nigeria South Africa Sudan Swaziland Tanzania Uganda Zambia Zimbabwe Sub-Saharan Africa Total Africa Europe Sugar per capita (kg) Additional Demand of +2.8m tons average 13kg per capita Key demographic data for Sub-Saharan Africa Half of all the persons born in the world from now until 2050 will be Africans. Population 2012 Growth m +2.6% pa 1 134m +209m Urbanisation +0.4% p.a. increase in % of population living in urban areas 43% of population is below 15 years Life expectancy improved over last decade +5.7 years Economic development in Sub-Saharan Africa 2,000 1,500 1,000 Household consumption expenditure: 64% of GDP 2012 US$ Real GDP per capita Excluding South Africa: +3.2% +2.3% +3.4% +2.6%

24 African sugar markets Sustained strong growth in African sugar consumption: Population growth drives over two thirds of growth in sugar consumption (2.2% p.a.) it is the youngest continent Remainder of the growth (1.0% p.a.) driven by increasing consumption per capita as income levels rise total calories consumed increase and an increasing proportion of calories come from sugar This total growth of 3.2% is split c.3.0% for direct consumption sugar, and c.4.0% for industrial sugar Total African growth between and 2021 of 4.7 million tons (+25%). Of this, 2.8 million tons is within the SADC and COMESA trade blocs (Illovo s traditional areas of operation) Historic & forecast sugar consumption in Africa million tons GDP per capita growth (1.0% p.a.) Population growth (2.2% p.a.) Actual up to % % Calorie consumption vs GDP per capita Kcal Total KCal per day Sugar % of KCal intake % % % % 10.0% % 1000 Sub-Saharan Africa forecast 5.0% for 2021 average $1, Sub-Saharan Africa 2.5% 0 average $1, % $0 $2 000 $4 000 $6 000 $8 000 $10 000$12 000$ GDP per Capita 24

25 African sugar markets Industrial sugar growth expected to outpace growth in direct consumer purchases of sugar: As GDP per capita rises, demand for high-sugar processed foods continues rapid growth long after the demand for direct consumption sugar has levelled off Based on forecast GDP and population growth in Sub-Saharan Africa, this is expected to equate to 5% growth p.a. over the next decade (which aligns with specific forecasts for carbonated soft drinks) Industrial production growth could grow faster than consumption of processed foods if local manufacture displaces imports Expenditure per Capita Household expenditure in developing countries $100 $80 $60 $40 $20 Sub-Saharan Africa average $1,150 Sub-Saharan Africa forecast for 2021 average $1,380 $0 $0 $2 000 $4 000 $6 000 $8 000 $ GDP per Capita High-sugar processed foods * Sugar (direct consumption) Carbonated soft drink consumption Consumption in 10 countries^ comprising 46% of Africa s population: 12,000 m litres 5.7% 10,000 8, % 6,000 4,000 2, * Combination of the following food categories: Confectionery, Chocolate and Ice Cream; Soft Drinks, Mineral Waters & Juices; and Other Bakery Products. ^ Only 10 African countries for which data was available: Algeria, Botswana, Cameroon, Egypt, Ghana, Morocco, Mozambique, Nigeria, South Africa and Tanzania 25

26 African sugar markets Substantial growth in industrial volumes expected across the region we operate in: Based on GDP and population growth forecasts, industrial sugar is forecast to grow at 2% p.a. in South Africa, but 6% p.a. across the rest of the region Growth in specific countries could be higher than this where they play a role as regional suppliers Established expertise to provide a reliable supply of sugar which meets quality and technical requirements is key to securing major industrial customers Coca-Cola invests an additional $5bn for long-term sustainable growth in Africa - Coca Cola press centre, Aug to be made over next 6 years brings total investment to $17bn from 2010 to 2020 launches Source Africa, a local ingredient sourcing initiative for its products Industrial demand current & forecast ( 000 t) South Africa Zambia GLA 46% 14/15 20/21 13% Zimbabwe 46% 14/15 20/21 63% Tanzania 23% 14/15 20/21 14/15 20/21 Malawi 14/15 20/21 Kenya 49% 14/15 20/21 Mozambique 43% 75% 14/15 20/21 14/15 20/21 26

27 European sugar market Removal of EU production quotas in 2017 is expected to bring about material changes to the EU market, with knock-on impacts world wide Current regime Until September 2015 Preferential access varies: LDC unlimited, ACP with signed EPA & no SA quota Supply agreements of value compared to spot EU pricing likely to be better than the world market Increasing competition from new FTAs Regime extension Additional two years ACP/LDC access unchanged, SA awarded EPA quota of tons EU buyers uncertain of demand; no existing supply agreements SSA able to export sugar to EU EU pricing expected to follow world market Competition to increase further Post regime October 2017 onwards EU structural deficit expected to diminish Forecasting large domestic EU sugar stock at change over SSA sugar surplus to continue with exports going to best returning markets EU pricing expected to drop along with volumes Key: ACP African, Caribbean & Pacific EBA Everything But Arms EPA Economic Partnership Agreements EU European Union FTA Free Trade Agreements LDC Least Developed Countries SA South Africa SSA Sub Sahara Africa Forecast supply from SSA to EU (kt) 13/14 14/15 15/16 16/17 17/18 18/19 19/20 27

28 European sugar market High degree of uncertainty exists as to how the next few years will play out in Europe Requirements for imports expected to remain given the relatively short production period and the regional concentration of sugar producers in North Western Europe, but the level of imports remains a key uncertainty Existing imports from CXL (Cuba, Brazil and Australia) and Balkans expected to be displaced before imports from EPA- EBA and free trade agreements EU reform expected impact on sources & uses of sugar m tons Sources of sugar Uses of sugar EU sugar production expected to increase EU sucrose consumption expected to decrease, replaced by increasing isoglucose usage Imports Out of quota production Production [in quota] Isoglucose Exports Consumption Chemical Isoglucose Imports to the EU expected to reduce by 45% Overall the EU will shift from being a net importer of 2 million tons to become a net exporter of 1 million tons Expected stockpiling before change will weigh on external demand and prices

29 European sugar market In the past, lower than anticipated imports from preferential countries resulted in sugar shortages & high prices in the EU Additional measures were adopted by the EU Commission to improve uncomfortably low stock levels Prices are under significant pressure as additional sources of supply are available to refiners Pressure on prices is further compounded by the bumper beet crop being experienced in Europe this season Refined sugar prices, which peaked at 738 / ton in January, fell over the six month period from 604 / ton in March to 508 / ton in September Major industry players position themselves in new markets in advance of the removal of production quotas in 2017 EU prices are expected to follow the world market closely with EU refiners exploring contracts linked to the world price Average ex-works pricing for bulk refined sugar reported in the EU Oct 08 Oct 09 Oct 10 Oct 11 Oct 12 Oct 13 Oct 14 29

30 Sugar sales by market 9% Sept 6 months R m Sept 6 months R m Variance R m Sales Volumes ( 000 tons) % 8% 31% 8% 52% Domestic Regional EU USA % % % 58 7% % % % 4 1% 3 26% 7% 58% World 83 9% 61 8% 22 Domestic - Substantial share of domestic markets in the countries of operation with higher sales in Malawi and Zambia - Stocks of imported sugar in South Africa result in tough trading conditions, but industrial sugar sales increase Regional - Volumes impacted by the production decreases in Malawi and Zambia - Availability of low-cost world sugar in regional markets puts pressure on prices EU - Sales of bulk sugar decrease as EU-designated sugar is redirected to more profitable markets - Demand for premium speciality sugars continues to grow World - Direct exposure to the world market decreases from 9% to 8% - Higher tariff reduces imports into South Africa lowering surplus sugar volumes for export 30

31 Sales market outlook Focus on growing sales volumes into domestic, regional and speciality sugar markets Forecast sugar surpluses/(deficits) in 2021 tons Access into West Africa from existing footprint is not economically feasible 2015 Domestic EU EU USA Region World Sales Bulk Specials 2021 Sales Domestic - Initiatives to increase consumption & market penetration - Target industrial and pre-pack demand (e.g. Tanzania) - Anticipate increasing levels of competition - Advocacy initiatives to ensure effective import tariffs Sugar deficit Sugar surplus Regional - Grow existing markets in Democratic Republic of Congo, Great Lakes Area, Kenya and Zimbabwe - Establish position as preferred supplier to region - Utilisation of preferential access (e.g. COMESA / SADC) - Capitalise on logistics advantages into East Africa EU / USA - Further develop high quality speciality sugar brands to attract premiums 31

32 Future growth 32

33 Group project pipeline Appraise Select Define Execute Operate Capital Hurdle Rates Internal rate of return: > 20% EBIT / Capital: > 20% Furfural Development Nakambala Expansion II Sezela Energy Efficiency Potable Alcohol Distillery Nchalo Warehouse Asset Realignment Ubombo Energy Efficiency Distribution Warehouse Ubombo Cane Development Maragra Speciality Sugar Nchalo Cane Development Eston Packing Station Ubombo Cane Development Speciality Sugar Maragra Cane Development Illovo Training Academy Nchalo Packed Sugar Malawi Mozambique South Africa Swaziland Tanzania Zambia Group / Unallocated Size of the bubble represents the relative scale of capital 33

34 Footprint expansion Long-term profit progression requires footprint extension due to limits on organic growth & downstream expansion around existing sites Build on existing valuable operations to capture benefit from Africa s solid long-term fundamentals Long lead-time of expansion projects requires looking past shortterm sugar market weakness On-going effort to identify, evaluate and execute opportunities for greenfield development or acquisition of existing assets Countries of interest are evaluated on a range of criteria covering the political, legal, business, economic and sugar environments. Regional focus on acquisition opportunities Sudan & Ethiopia Large production & project pipeline West Africa Attractive region for footprint expansion East Africa Key deficit market battlegrounds 34

35 Prospects Production Record sugar production expected in Zambia and Mozambique Overall, sugar production is expected to be below /14 season Downstream earnings benefit from the first full-year of operation for the potable alcohol distillery in Tanzania Markets Challenging sugar market conditions to continue with the world raw sugar price remaining low Repositioning of EU sugar producers and the abundance of world sugar in the region will depress export market prices Growth in domestic sales and initiatives to improve the market mix will assist full-year earnings Global sugar market is moving towards a deficit with Illovo well-positioned to capitalise on growing African demand Financial Group positioned to withstand tough market conditions with significant operating assets, attractive domestic markets, a robust balance sheet and strong cash generation Continuous improvement programme continues to focus on reducing the unit cost of production Review of structures across the business supply chain to unlock further value Financing costs are expected to reduce year-on-year as strong cash flows continue to reduce debt Effective tax rate should normalise at 30% 35

36 Conclusion the investment case Clear VISION & STRATEGIC FOCUS with profitable GROWTH OPPORTUNITIES World-class, low-cost & highly efficient organisation Diversification of revenue streams Positioning for future growth through expansion of existing operations & acquisition opportunities Driving down costs & repositioning products higher up the value chain PRODUCTS and MARKETS are the KEY Cost effective production of quality refined, raw & speciality sugar & syrups Competitive supply positions High-value, niche-market downstream furfural & ethanol products Strong domestic, preferential & regional markets Trend towards local sourcing in sugar & ethanol SUSTAINABILITY PROTECTING our FUTURE & that of our stakeholders Core values aligned to social & environmental responsibility 90% of energy requirements from renewable resources High community impact Best performer on JSE s Socially Responsible Investment index Development of sustainable sugar cane farming model PEOPLE are our STRENGTH Top-level directors with combined Illovo experience of 112 years & direct sugar experience of 145 years Proven ability to execute strategies & deliver financial performance employees with embedded capabilities Strong FINANCIAL POSITION and PROSPECTS Robust balance sheet positioned for growth Significant economic, operational & market scale Company of choice among African governments wishing to develop or expand their sugar industries Strong cash generation Attractive dividend yield 36

37 Operational review appendices 37

38 MOZAMBIQUE Malawi Delayed start-ups at both mills and disappointing factory performance at Nchalo Months Actual 6 Months Actual 6 Months Actual Own Cane (tons) Yield Own Cane (tons/hectare) Sucrose Content Own Cane (%) Crush Rate (tons cane per hour) Capacity Utilisation (%) Sugar Production (tons) Restated to reflect actual yields achieved rather than a forecast for the season 2. Basis of calculation amended to reflect total operating time available during the season 38

39 MOZAMBIQUE Malawi Sugar Production ( 000 tons) Sugar Sales ( 000 tons) By market By market % 33% % 51% 67% Local EU Regional Operating Profit # (MWK billions) Margin: 77% 54% 48% Cane Sugar Overview Unseasonal rainfall delayed season start-ups at both mills Disappointing factory performance at Nchalo further reduced sugar production Tough economic conditions prevail in the country with high inflation and a volatile currency Initiatives to grow domestic demand deliver increased sales into the domestic market Domestic price increases mitigate inflationary pressure on costs Regional sales volumes impacted by lower production and difficulties in customers obtaining import permits # Excludes the allocation of Group costs 39

40 MOZAMBIQUE Mozambique Improved operational performance with record sugar production expected for the season Months Actual 6 Months Actual 6 Months Actual Own Cane (tons) Yield Own Cane (tons/hectare) Sucrose Content Own Cane (%) Crush Rate (tons cane per hour) Capacity Utilisation (%) Sugar Production (tons) Co-generation production GWHrs generated (external) n/a n/a Restated to reflect actual yields achieved rather than a forecast for the season 2. Basis of calculation amended to reflect total operating time available during the season 40

41 MOZAMBIQUE Mozambique Sugar Production ( 000 tons) Sugar Sales ( 000 tons) By market By market % 37% % 63% Local EU Operating Profit # (MZN millions) Margin: 32% 31% 24% Cane Sugar Co-gen Overview Cane yields recovered after flood damage in the previous year Season start-up delayed to maximise cane growth but reduced sugar production to the half-year Record sugar production expected for the season following improved operational performance Significant exposure to the declining EU prices impacted profits, partially mitigated by an increased focus on cost savings Domestic price increases were restrained as competition from surplus sugar in neighbouring countries increased Export of power to the national grid commenced # Excludes the allocation of Group costs 41

42 MOZAMBIQUE South Africa Industry-wide strike action, drought conditions and frost damage in KZN midlands Months Actual 6 Months Actual 6 Months Actual Own Cane (tons) Yield Own Cane (tons/hectare) Sucrose Content Own Cane (%) Crush Rate (tons cane per hour) Capacity Utilisation (%) Sugar Production (tons) Downstream production Furfural (tons) Furfuryl alcohol (tons) Alcohol (kl) Restated to reflect actual yields achieved rather than a forecast for the season 2. Basis of calculation amended to reflect total operating time available during the season 42

43 MOZAMBIQUE South Africa Sugar Production ( 000 tons) Sugar Sales ( 000 tons) By market By market % 34% % 66% Local World Operating Profit # (ZAR millions) Margin: 12% 12% 12% Cane Sugar Downstream Overview Dry weather conditions, frost damage in the KwaZulu-Natal midlands and industry-wide strike action (10 days in duration) negatively impacted sugar production Higher import tariff has reduced imports and improved sales mix Tough trading conditions continued in the domestic market but sales to industrial customer increased Lower furfural production resulted from reduced cane supply, while alcohol operations benefitted from production efficiencies Higher furfural export volumes and prices combined with the benefit of a favourable forward exchange contracts Cost savings delivered as management looked to mitigate the reduced production # Excludes the allocation of Group costs 43

44 MOZAMBIQUE Swaziland Industry-wide strike action and unfavourable climatic conditions reduced production Months Actual 6 Months Actual 6 Months Actual Own Cane (tons) Yield Own Cane (tons/hectare) Sucrose Content Own Cane (%) Crush Rate (tons cane per hour) Capacity Utilisation (%) Sugar Production (tons) Co-generation production GWHrs generated (external) Restated to reflect actual yields achieved rather than a forecast for the season 2. Basis of calculation amended to reflect total operating time available during the season 44

45 MOZAMBIQUE Swaziland Sugar Production ( 000 tons) Sugar Sales ( 000 tons) By market By market Operating Profit # (SZL millions) Margin: 20% 26% 15% Cane Sugar Co-gen 45% 50% 50% 50% Overview 3% 2% Industry-wide strike action (21 days in duration) reduced production to the half-year Cane yields affected by unfavourable climatic conditions, combined with a lack of irrigation during the strike Lower Usuthu Smallholder Irrigation Project (LUSIP) continued to expand, increasing cane deliveries from small growers Significant exposure to the declining EU prices impacted profits, partially mitigated by the benefit of a weaker exchange rate Sales into regional and USA markets improved sales mix Local EU USA Regional Co-generation performed well with additional power exported to the national grid # Excludes the allocation of Group costs 45

46 MOZAMBIQUE Tanzania Newly commissioned potable alcohol distillery operated consistently above installed capacity Months Actual 6 Months Actual 6 Months Actual Own Cane (tons) Yield Own Cane (tons/hectare) Sucrose Content Own Cane (%) Crush Rate (tons cane per hour) Capacity Utilisation (%) Sugar Production (tons) Downstream production Potable Alcohol (kl) n/a Restated to reflect actual yields achieved rather than a forecast for the season 2. Basis of calculation amended to reflect total operating time available during the season 46

47 MOZAMBIQUE Tanzania Sugar Production ( 000 tons) Sugar Sales ( 000 tons) By market By market % % 72% 100 % Local EU Regional (3) 2012 Operating Profit # (TZS billions) Margin: 13% 4% (2%) (6) 10 4 (15) (1) Cane Sugar Downstream Overview Heavy rainfall delayed the season start-up reducing production Higher cane yields resulted from the carry-over of /14 season cane, but wet weather lowered sucrose content Low-cost world sugar imports continued to enter the market unrestricted, although advocacy initiatives begin to gain traction Domestic pricing remained under pressure but good progress was made on developing alternate routes to market Cost saving initiatives delivered considerable benefit to profits and cash flows Investment in potable alcohol distillery proved a strong offset for the tough market conditions experienced by the sugar operation # Excludes the allocation of Group costs 47

48 MOZAMBIQUE Zambia Excellent agricultural performance with record sugar production expected Months Actual 6 Months Actual 6 Months Actual Own Cane (tons) Yield Own Cane (tons/hectare) Sucrose Content Own Cane (%) Crush Rate (tons cane per hour) Capacity Utilisation (%) Sugar Production (tons) Restated to reflect actual yields achieved rather than a forecast for the season 2. Basis of calculation amended to reflect total operating time available during the season 48

49 MOZAMBIQUE Zambia Sugar Production ( 000 tons) Sugar Sales ( 000 tons) By market By market % 23% 32% 35% 27% 38% Local EU Regional Operating Profit # (ZMW millions) Margin: 28% 31% 31% Cane Sugar Overview Crop recovered from the low cane yields in the /14 season A normalised factory crush rate in resulted in a different phasing of production year-on-year Favourable economic fundamentals in Zambia continued to drive growth in demand for sugar, increasing local market sales Availability of low-cost world sugar in regional markets put pressure on prices, particularly in the Great Lakes Area (GLA) Decline in EU market pricing offset in part by the benefit of favourable forward exchange contracts on export proceeds Improved sales mix as a EU-designated sugar is redirected into regional markets # Excludes the allocation of Group costs 49