Chairmans statement
| Don MacLeod Chairman |
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The past year was a challenging one for Illovo with low world sugar prices and significant imports of sugar into South Africa and Tanzania which disrupted domestic markets. I am, however, glad to report a solid set of results due to the increased sugar production and a strong performance from our downstream businesses. The company is in good shape with a strong balance sheet, healthy cash generation and sound cane, sugar and downstream assets across Africa. The completion of a number of strategic projects was most pleasing. In particular, the new warehouse in South Africa and the distillery in Tanzania will have a significant positive impact on the business in the years to come.
Operating challenges
The world continues to be an uncertain place in which to do business and the operating environment in southern Africa is challenging with high levels of unemployment, lack of infrastructure and extreme poverty. The continuing devaluation of the Malawian Kwacha and its impact on the local people is a particular worry to the group. Rising costs in a market place which is under pressure has negatively impacted on margins despite continued focus on cost management. The trend for unions to make demands for wage increases well in excess of inflation is of concern and will need to be met by increased productivity across the board if the business is to be world competitive. However, Illovo has well-articulated values and will continue to grow in line with its vision to be a world-class, highly-efficient organisation operating on the African continent and adding value to its core products of fibre, sugar and molasses.
The level of sugar imports into South Africa and Tanzania had a significantly negative impact on our market off-take in these countries. We are pleased that following discussions with the government in South Africa a new level of tariff was implemented in April 2014. Discussions with the authorities in Tanzania continue with the objective of obtaining better import protection. It must be stressed that while our operations are low-cost in world terms, we have been heavily impacted by the dumping of low-priced surplus sugar from other parts of the world. The world market price of sugar is one of the most volatile of all commodities and it is further distorted by subsidies, whether direct or indirect, granted to major sugar producers around the world.
Focus on domestic markets
Illovo is Africa’s leading sugar and downstream producer with 16 operations across six countries, with strong domestic, regional and preferential markets. African annual sugar consumption growth continues to increase with demand expected to grow by six million tons by 2020. The current world price is low and is below the costs of production of most sugar producers due to a fourth year of a global sugar surplus. The reform of the EU Sugar regime from 2017 is expected to impact negatively on prices in that market and as a result we will be focusing on growth in our domestic markets and on the opportunities available in the growing African regional markets. In addition, 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 will be important areas of cost reduction and revenue growth.
We are very conscious of the need to provide safe and healthy work places for our employees. I am pleased to advise that our safety record in respect of both disabling injury and total injury frequency continues to improve with the past year reflecting a 31% improvement over the previous year. I regret that we had five fatalities in the past year, three Illovo employees and two external contractors. Our objective remains, to eliminate any such occurrence by focusing on behaviours and more rigid health and safety standards and so nurture a safe operating culture across the group.
People development
Our people are key to achieving our Strategic Intent. Illovo employs in excess of 32 000 people, 13 000 on a permanent basis and another 19 000 as seasonal employees. Attracting and developing our people is vital to achieving our objectives. Transformation of top management both in South Africa and in our other areas of operation remains below our aspirations but this is being addressed by training, development and mentorship of the pool of talent in middle management so as to meet our goals through targeted succession plans.
I am very pleased that in South Africa we have achieved a Level-3 contributor status in terms of the Codes of Good Practice in respect of the Agri-B-BBEE rating.
Illovo has a significant impact on the communities and countries in which it operates, particularly as most of our operations are situated in rural areas. The UN classifies Malawi, Mozambique, Zambia and Tanzania as among the world’s least developed countries. The group’s businesses form the economic and social backbone of the local communities in the areas in which we operate providing infrastructure, healthcare facilities, schools and other community benefits amounting to R268 million in 2013/14. A recent independent socio-economic impact assessment conducted across our countries of operation provided a clear picture of Illovo’s contribution to the economies, communities and individual livelihoods in these rural communities. In addition, it confirmed that the group was a material contributor to socioeconomic development of the regions concerned, spanning support of strategic government initiatives to providing the most basic of human needs.
The group adheres to the highest standards of corporate governance as it believes that good governance practices are fundamental to creating, protecting and sustaining shareholder value. Illovo’s directors and employees strive to ensure that the company is managed in an efficient, accountable, responsible and ethical manner and its governance structures are in line with the JSE Listings Requirements, King III and the Companies Act. The Enterprise Risk Management Policy and combined assurance framework are bedding down and this should ensure that the key risks facing the business are managed in such a way so as to provide reasonable assurance that Illovo’s objectives are achieved.
Future growth
The group 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 to increase its sugar production to more than two 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. Illovo is among the lowest cost and most efficient sugar producers in the world, is an efficient supplier into the domestic markets in which it operates and through its marketing and distribution expertise, will maximise value into the export markets available to it.
The group is focused on achieving its Strategic Intent, vision and objectives and although profit growth was below expectations, the base business is sound and the physical performance of its assets continues to improve. The contribution of the downstream businesses was commendable in the past year and reflects the benefits of the group philosophy to progress this area of the business.
Appreciation
I would like to thank my fellow board members for their commitment, guidance, valuable input and wise counsel throughout the past year. Graham Clark resigned as Managing Director during the past year and I thank him for his contribution to Illovo over a long period of time. I congratulate Gavin Dalgleish on his appointment as Managing Director and wish him and his executive team well in leading the group to higher levels of achievement in the years ahead. I also welcome John Hulley to the board as Operations Director and wish him every success in his new role.
My thanks to the executive management team for their hard work and leadership in what has been a challenging year.
On behalf of the board I wish to extend my appreciation and thanks to the employees of Illovo across the operations for the considerable effort and commitment during the past year.
Don MacLeod
Chairman