Commentary by Peter Staude, CEO of Tongaat Hulett:
Tongaat Hulett’s total sugar production for the 2011/12 year grew by 14% to 1,150 million tons. This included increases of 42% in Mozambique, 12% in Zimbabwe and 7% in South Africa. The cane supplied to all the sugar mills grew to 9,6 million tons, with significant momentum building in the various on-going cane supply initiatives. The starch operations benefitted from world competitive maize costs and improved co-product recoveries. An increasing number of hectares of land are moving towards becoming active developments, with the first sales of industrial land in Cornubia having been concluded in March 2012.
Revenue for the year of R12,081 billion was 24,8% above the prior year, mainly as a result of increased sugar production together with improved realisations in the regional and European Union sugar markets. The total profit from the various operating areas grew by 53% and exceeded R2 billion for the first time. Headline earnings grew to R891 million (2011: R806 million).
Good progress is being made across all the sugar operations to drive growth in future cane supply (including hectares under cane, cane yields and cane quality) in order to fully utilise the existing sugar milling capacity and reduce unit costs as volumes increase. New plantings in the past year increased the area under cane by some 13 520 hectares and the replanting of existing roots is being accelerated for the benefit of future milling seasons. The many initiatives underway to improve root age, farming practices and crop positioning are aimed at improving cane yields and sucrose content.
Profit from the Mozambique sugar operations grew by 198% to R402 million (2011: R135 million), with sugar production having grown by 42% to 233 000 tons (2011: 164 000 tons). Following the previous expenditure on establishing the cane, it is now being harvested and the sugar produced and sold, with the operating cash flow in Mozambique having increased by more than R400 million over the previous year. Both the Mozambique and Zimbabwe operations benefitted from higher export realisations and domestic prices in line with regional pricing levels. The Zimbabwe sugar operations generated profit of R621 million (US$84 million) compared to the previous year of R454 million (US$63 million). Sugar production in Zimbabwe increased by 12% to 372 000 tons (2011: 333 000 tons), with the majority of the increase coming from Hippo Valley.
Operating profit from the South African sugar operations including the downstream sugar value added activities increased by 51% to R354 million (2011: R234 million). Raw sugar production increased by 7% to 486 000 tons (2011: 455 000 tons). The gap between the hectares under cane and the hectares milled was unusually large as a result of the substantial cane root planting following the drought in the previous two years and the approximate 15 month lead time required from planting to first harvesting. New cane planting driven by Tongaat Hulett in the last year totalled 8 687 hectares, following the 9 696 hectares planted in the previous two years. Sales by Tongaat Hulett into the local market increased by 10%. Tongaat Hulett’s share of industry production increased from 23% to 26%. Operating profit in the South African agriculture, sugar milling and refining operations started recovering and improved to R93 million (2011: loss of R7 million). The various downstream sugar value added activities recorded profit of R261 million (2011: R241 million). The Voermol animal feeds operation experienced pressure on sales volumes and margins.
In Swaziland, the Tambankulu sugar estate’s operating profit recovered to R51 million (2011: R17 million), returning to 2009/10 levels. The raw sugar equivalent production increased to 59 000 tons (2011: 54 000 tons), with higher cane yields and sucrose content being achieved. Export pricing levels improved, as did exchange rates.
In the land conversion and development activities, various sales strategies (bulk sale, partnership or own development) are constantly reviewed for each land holding and implemented as appropriate. Offers for bulk and semi-bulk land sales received over the past two years that did not represent optimal value were turned down. Revenue was generated from 22 developable hectares sold in Cornubia and a further 20 developable hectares that were sold primarily in the Umhlanga Ridge, Zimbali, Bridge City and Izinga areas. Operating profit grew by 30% to R215 million (2011: R166 million) with a further R3 million in capital profits (2011: R23 million) being realised.
Profit from the starch operations increased by 20% to R363 million, compared to R303 million last year. Improved co-product revenues and local maize costs that were previously contracted below Chicago (CBOT) prices resulted in an improvement in starch and glucose processing margins. Manufacturing plant performance has continued to improve and sales volumes in the local market were 1,4% above last year.
The “centrally accounted and consolidation items” component of the income statement reflects the effect of the pension fund employer surplus account allocation of 2010/11 not being repeated in 2011/12. Profit from operations, after centrally accounted items, grew by 43,6% to R1,921 billion.
Finance costs increased to R507 million from R472 million in the 2011/12 year and are commensurate with the level of borrowings.
Operating cash flow, before working capital, improved by R863 million to R1,757 billion for the year. This follows the previous absorption of cash in the various expansion and on-going sugar cane establishment programs. The net cash outflow, after dividends, of R293 million reflected an improvement of R534 million over the prior year. Tongaat Hulett’s net debt at 31 March 2012 was R4,404 billion. A first long-term bond issuance of R750 million was successfully concluded.
Total net profit was R1,021 billion (2011: R871 million). The gain in respect of the pension fund accounting of R288 million and the R129 million employer surplus account allocation in the prior year did not arise again in the current year. The minority shareholders’ interests increased to R132 million (2011: R38 million) as a result of higher profits at the sugar milling operations in Mozambique and at Hippo Valley in Zimbabwe. Headline earnings were R891 million, compared to the R806 million earned in the prior year.
The Board has declared a final dividend of 170 cents per share, bringing the annual dividend to 290 cents per share (2011: 250 cents per share).
Tongaat Hulett’s drive to increase the cane available for its mills is continuing to build momentum (including hectares under cane, yields and cane quality), towards fully utilising its existing milling capacity of more than 2 million tons of sugar. At full capacity utilisation, sugar production would increase by more than 75% over the 1,150 million tons of the 2011/12 season. Unit costs will benefit substantially from increasing volumes and yields, as milling costs are mostly fixed and many of the agricultural costs are fixed per hectare, countering the effect of current cost pressures including wage increases.
The strategy to increase cane supply in South Africa is focused on commercial farmers, small scale farmers and increasing Tongaat Hulett’s influence in cane development through leasing additional land and collaborating with Government to rehabilitate cane supply on land reform farms that have gone out of cane. The gap between hectares under cane and hectares milled will remain a feature of the next three years as a result of accelerated root replanting to improve cane age, generate better yields and increase the crop’s ability to withstand variable weather conditions. Hectares available for milling in 2012/13 will increase as a result of the 9 696 hectares which were planted in the 2009/10 and 2010/11 years. The additional 8 687 hectares that were planted in the 2011/12 season in the catchment areas of Tongaat Hulett’s South African mills will largely be harvested for the first time in the 2013/14 season.
Co-operation between the Zimbabwe Government, the eastern lowveld communities and Tongaat Hulett is focused on the “Successful Rural Sugar Cane Farming Community” project. Some 15 900 hectares have been allocated to approximately 870 indigenous farmers. In this past season, these farmers delivered 532 000 tons of cane (equivalent to 65 000 tons of sugar) from some 9 000 hectares. The target is to uplift this to over 1,4 million tons of cane (equivalent to 180 000 tons of sugar) from the available hectares, with the pace of planting new roots being targeted to average some 4 000 hectares per annum. It is thus pleasing that some 6 000 hectares were planted in the 2011/12 year. This, together with Tongaat Hulett’s improvement of its own agricultural yields, is key to achieving the target of increasing sugar production in Zimbabwe to full milling capacity of some 640 000 tons per annum.
Sugar production in Mozambique is expected to grow by a further 30% over the next three years to above 310 000 tons per annum together with a reduction in unit costs.
High levels of South African maize exports in the past season and dry weather conditions during the current maize season have resulted in local maize prices rising to levels slightly above international maize prices and this is expected to place some pressure on starch margins. Exposure to future movements of the maize price in the forthcoming year has been reduced with 59% of maize requirements having been priced with customers or hedged below the international maize price.
Tongaat Hulett has targeted some 8 600 developable hectares (13 607 gross hectares) for development in South Africa. There are on-going processes on most of the developable land to enhance its usage and value to all stakeholders. The extent and pace of planning, in collaboration with Government, has increased substantially. Cornubia industrial (80 hectares still to be sold) and Sibaya node 1 (49 hectares) have recently become available for sale. Tongaat Hulett continues to explore bulk land sale opportunities within its land holdings. The exact timing of land sales, including bulk sales, remains variable in the current economic climate.
Overall, as one of the main drivers of revenue and earnings, sugar production is expected to increase by between 12% and 25% in the 2012/13 season. It is anticipated that regional sugar prices will be stable and export realisations into the European Union should remain attractive, with the business’s direct exposure to the more volatile world sugar market being of the order of 10%. Tongaat Hulett’s financial results remain sensitive to movements in exchange rates, which impact particularly on export realisations and the conversion of profits from Zimbabwe and Mozambique into Rands.
The future revenue stream would benefit significantly from electricity and ethanol developments. Tongaat Hulett continues to interface with Government towards establishing an appropriate regulatory framework for both electricity generation and ethanol production from sugar cane.
Chief Executive Officer
About Tongaat Hulett
Tongaat Hulett is an agricultural and agri-processing business which includes integrated components of land management and property development. Through its sugar and starch operations, Tongaat Hulett produces a range of refined carbohydrate products from sugarcane and maize. Renewable energy, in the form of biofuel production and electricity generation, is of increasing importance to the business. The energy-food-water nexus is an evolving dynamic. Tongaat Hulett balances the operational requirement for sugarcane supplies to its cane processing operations with the transition of agricultural land to other uses at the appropriate times. The business is well placed to capitalise on emerging opportunities for expansion and growth in Africa, with unconstrained access to sugar markets, its independent position, established business platform and size.
28 May 2012