Managing director’s review
“Our continuing focus has been to drive the performance improvement in areas within our control”
Overview
Market conditions have not been easy over the last year. Despite strong domestic markets our exposure to low world sugar prices and currency challenges, in particular the sharp weakening of the Euro, have negatively impacted earnings. Adverse weather conditions in South Africa also resulted in considerable cane yield losses. Notwithstanding these factors, we continue to move forward on a number of fronts to reposition the business. Our recently-announced plans for expansion of the refinery in Zambia and the increased contribution to operating profit from our downstream activities are testament to these initiatives.
External factors
The business continued to lean into headwinds of declining world and EU market pricing, currency volatility and the impact of poor weather on the South African cane crop. The depreciation in the Brazilian Real against the US Dollar has provided an export incentive to Brazil’s sugar producers which will impact an already over-supplied world market. The recent fall in world prices to a six year low will indirectly impact regional market pricing.
Our response
Our continuing focus has been to drive the performance improvement in areas within our control.
The group’s commercial and trade advocacy teams continue to make sound progress in growing domestic, regional and niche markets ahead of the EU market reform in 2017.
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Domestic markets continue to be important for the group with strong demand growth particularly in Zambia. The introduction of an effective dollar-based reference price import duty in South Africa significantly reduced sugar imports relative to the previous year, impacting positively on local industry sales. In Tanzania the political recognition of the long-term damage to the domestic economy of illegal sugar imports and the emerging measures to control these trade flows, resulted in a dramatic recovery in domestic sales volumes. Our Tanzanian business recorded record sales volumes and some exciting new prepack branding is being launched in the 2015/16 season. |
Conversely, the strong Malawian Kwacha, high interest rates and little or no economic growth in that country saw domestic demand soften. New route-to-market initiatives are underway to improve the affordability and drive domestic demand growth.
Bulk raw sugar exports to the EU by the operations in Malawi and Zambia continued to decline compared to those of the previous year, while the demand for speciality sugar exports to the EU continued to grow at a price premium to regional market alternatives.
Notwithstanding these poor market conditions and the drought impact on production in South Africa, the Illovo group was able to offset partly the downside with strong growth in the downstream business and strong sugar production in a number of our countries of operation.
Record sugar production in Zambia, Mozambique and at the Dwangwa mill in Malawi, as well as record cane crushed in Tanzania, again underscore the value of the geographic spread of our largely irrigated cane growing areas and sugar milling assets to mitigate climate risks. Record yields achieved by our outgrowers in Mozambique were a particularly pleasing result. Developing thriving economies that surround our operations is a key pillar in our long-term business sustainability and to this end, we continue to engage multiple funding and community agencies in developing and delivering successful outgrower schemes that enjoy increasing international recognition.
Consistent milling operations in Tanzania supported strong output of potable alcohol at our Kilombero distillery, comfortably exceeding the first full-year investment case assumptions. Increased proceeds from electrical co-generation in Swaziland and record ethanol production at the Merebank distillery in South Africa supported the excellent downstream performance, negatively impacted only by the lower drought-affected furfural production at Sezela.
Investment, innovation and shareholder value
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One of the key threads running through our strategy is to diversify our product mix to offset the cyclicality in our business brought about by abnormal weather conditions, sugar pricing and currency fluctuation, among others. Initiatives, including the Zambian refinery expansion project announced during the year and to shift the group sugar export sales mix away from the EU to growing domestic and regional markets are progressing well. Building on the success of our Tanzanian distillery investment, two further downstream investment projects are under review. |
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We will continue to innovate within our supply-chains to create logistic supply advantages in a likely future scenario of the EU switching from being an attractive preferential export customer to that of a competitor in our existing regional markets. |
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As part of our drive for greater operational efficiencies, structural cost reduction programmes will continue to build on the good results achieved by the group-wide continuous improvement programme during the year. |
Supply-chain integrity
The multinational food company trend towards local sourcing from ethical supply-chains presents an important supplier point of difference for the Illovo group. We continue to create greater awareness within the business and with external stakeholders of our impact on the environment and on the communities within which we operate.
Not only do sustainable practices make business sense, they also reflect our responsibility for and accountability to the environment and our surrounding communities. We continue to improve on the exemplary safety records of our factories and agricultural operations, our employee well-being programmes, our partnerships with local and international non-governmental organisations and the reduction of water usage and carbon emissions. Our strategic ambition is to ensure reliable cost-efficient energy supply to our operations, strive toward 100% renewable energy use and where attractive, to export power to national grids. Currently, we are meeting 89% of our own energy requirements from renewable bagasse fibre combustion and we sell surplus power into the Swaziland national grid in excess of the contractual obligations entered into with that country’s power utility.
More recently, as part of the global “Zero Tolerance for Land Grabbing” campaign, we have developed our own customised Group Guidelines on Land and Land Rights, formulated in consultation with local and international experts on land matters. The guidelines complement our Strategic Intent and our Group Code of Conduct and Business Ethics which embodies our commitment to respecting internationally recognised human rights and to adopt policies and practices to protect against human rights abuses, including land rights. We are committed to the implementation of the principles contained in these Guidelines using the benefit of our long-term experience as a major land user on the African continent, and with the assistance of other key stakeholders, including representatives of the local communities in which we operate, local government and non-governmental organisations.
The growing sugar and health debate is of concern to us, particularly the linkage between sugar consumption and increasing obesity rates. Illovo advocates the promotion of a balanced and healthy lifestyle. AB Sugar’s "Making Sense of Sugar" campaign, which was launched last year, aims to educate people about sugar and the role it can play in a healthy balanced diet. We aim to provide factual information, based on robust science, so that everyone is able to make informed choices about what to consume. Further information can be found at www.makingsenseofsugar.com.
We also support and understand the concerns of governments of the countries in which we operate regarding the increasing incidence of non-communicable diseases (NCD’s) such as hypertension, chronic respiratory diseases and diabetes; these health issues are serious and represent complex problems that require a collective effort to solve. We have invested, and continue to invest, in extensive medical facilities and health programmes that provide treatment and counselling for employees, their families and members of local communities, often where no such alternative facilities currently exist. Our facilities and programmes focus on treating NCDs, as well as helping to educate our communities that preventative measures are the preferred long-term approach, as treating the symptom is not treating the cause in all cases.
Illovo is also proud of its continuing inclusion on the JSE’s Socially Responsible Investment (SRI) Index and in 2014, was among the nine companies which met the JSE’s SRI Index “Best Performer” threshold. Also in 2014, our Integrated Annual Report was awarded the highest Sustainability Data Transparency Index (SDTI) score in the Food & Beverage Industry sector and ranked fifth overall across all sectors, and was ranked in the “Excellent” category of the 2014 EY Excellence in Integrated Reporting Awards.
Gavin Dalgleish
Managing Director