FINANCIAL RESULTS. for the twelve months ending 31 March 2015

Transcription

1 FINANCIAL RESULTS for the twelve months ending 31 March 2015

2 AGENDA 1. Introduction 2. Financial Overview 3. Market overview 4. Strategic Response 5. Prospects 2

3 GROUP OVERVIEW Gavin Dalgleish, Managing Director

4 SALIENT FEATURES TWELVE MONTHS TO MARCH 2015 Financial Operating profit decreases by 12% due to tough market conditions combined with lower production and adverse exchange rate moves Headline earnings per share down 7.7% to 179 cents Robust balance sheet and strong cash generation Continuous improvement initiative delivers revenue enhancements & meaningful cost savings of R351m Downstream operating profit up by 51% to R268m Physicals Newly commissioned distillery in Tanzania operating consistently above design capacity Power exports to the Swaziland national grid up by 6% Overall, sugar production decreases 4% to 1 760kt, driven by drought & frost impact in South Africa Record sugar production in Zambia Markets Domestic sales volumes grow in Tanzania & Zambia Effective tariff reduces imports into South Africa 29% growth of sugar sales into regional markets Strong demand for potable alcohol in East Africa Downstream Pricing in EU, operating world & regional profit up markets R68m to decline R130m with difficult trading conditions expected to continue Growth Evaluation of further downstream investment opportunities to diversify revenue (Zambia distillery; furfural) Build on continuous improvement strategy to enhance returns from existing operations Review supply chain structures across the group to unlock further value Low-cost sugar imports continue to impact domestic market pricing in Tanzania and Mozambique Long-term African sugar prospects remain strong 4

5 SUGAR PRODUCTION Group sugar production decreased by tons Excellent agricultural conditions and improved factory performance Drought and frost damage affect yields and cane quality tons , /14 Tanzania Malawi Zambia Mozambique Swaziland South Africa 2014/15 Variance Cane Sucrose Recoveries

6 FINANCIAL OVERVIEW Mohammed Abdool-Samad, Group Finance Director

7 GROUP KEY FINANCIAL METRICS Operating Profit (R m) -12.3% 2,000 1,887 1,500 1, , / /15 R million Revenue Operating profit Net financing costs Profit before tax Headline Earnings Per Share (cents) -7.7% Headline earnings Analysis 2013/ /15 Operating margin (%) Interest cover (times) Effective tax rate (%) EPS (cents) HEPS (cents) EBITDA (R m) Debt : Equity Gearing (%)

8 GROUP EXCHANGE RATE PARAMETERS Weaker Zambia Kwacha was the main driver of the overall R36 million loss on translation Translation rates* (Average) 2013/ /15 Change (%) Translation Profit Impact Zambia Kwacha / Rand % Malawi Kwacha / Rand % Tanzania Shilling / Rand % Mozambique Metical / Rand % Rand / US Dollar % * used to translate the Group s results 8

9 OPERATING PROFIT BY SEGMENT 2014 Business segment 9% 21% 70% Business segment 2013/14 R m 2014/15 R m Var R m Operating Profit Sugar Cane Downstream & Co-gen Business segment 16% 13% 71% 2014 Geographic segment 30% 1% 14% 2% 14% 39% Geographic segment 2013/14 R m 2014/15 R m Var R m Operating Profit Malawi Mozambique South Africa Swaziland Tanzania Zambia Geographic segment 35% 9% 4% 13% 1% 38% 9

10 GROUP OPERATING PROFIT BRIDGE - Inflationary increases - Above inflation wage and electricity increases + Cost savings generated via Continuous Improvement initiative + Inflationary increases in domestic markets + Diversion of volumes from EU to the region - Low world & EU sugar prices - Weaker Euro - Production decrease of tons + High underlying inflation (22%) - Domestic price increase below inflation due to weak consumer demand - Lower export realisations with declining EU price, weak Euro and the strong Kwacha - High underlying inflation (22%) - Increased off-crop maintenance March 2014 Volume Price (excl. Malawi) Costs (excl Malawi) Malawi Price Malawi Costs Fair Value Movements Downstream & Co-generation Translation March 2015 R millions + Full season of Tanzanian Distillery operation + Rand weakness (export proceeds) + Additional power exports from Swaziland 10

11 NET DEBT RECONCILIATION R million Opening net debt (1 873) (2 086) Operating cash flows Cash operating profit Working capital 105 (314) Inventory (41) (47) Receivables 119 (311) Payables Net financing costs & dividend income (331) (353) Taxation paid (299) (253) Shareholder distributions (557) (576) Investment cash flows (705) (668) Expansion/opportunity capital (379) (333) Replacement capital (343) (366) Other movements Other financing activities Translation loss (349) (329) Closing net debt (2 086) (2 731) High sales in Zambia and Malawi in the last two weeks of the year Net Debt Balances (R million) (2 086) Gearing: 21.8% +31% (2 731) March 2014 March 2015 Packed sugar warehouse (Malawi) Nakambala refinery (Zambia) Sezela coal & energy (South Africa) Gearing: 26.2% Disposal of 5.1% interest in Zambia Sugar Plc 11

12 MARKET OVERVIEW & STRATEGIC RESPONSE Gavin Dalgleish Sources: The following market information has been compiled using data from the following sources: AB Sugar; Czarnikow; World Bank; LMC; FO Licht; 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.

13 WORLD SUGAR MARKET World sugar prices have exhibited a significant decline over recent months Prices have been depressed by weak Brazilian Real, Indian subsidies, and low oil price High levels of global stocks will take some time to clear Economic fundamentals support an increase in the world price in the medium term Continued demand growth of 2% p.a. Various mill closures occurring and expected due to high debt levels Construction of new capacity is not viable at current price levels without significant subsidies World sugar price (#11 c/b) Change in global sugar stocks (m tons) End Stocks (LHS) Production (RHS) Consumption (RHS) Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan

14 EUROPEAN SUGAR MARKET EU prices have reached import parity, and in medium-term are expected to remain there European producers repositioning ahead of quota reform in September 2017 This will reduce the benefits that arise from the concessions made to least development countries in supplying the EU market 1.40 US$:Euro exchange rate /ton European reported prices

15 STRATEGIC RESPONSE Development of key markets Reduce bulk exports to EU Wider region provides valuable alternatives Target higher margin segments Quality of product, packaging and supply differentiates us Cost reduction Continue to ensure global cost competitiveness Continuous Improvement programme a key enabler Increased downstream activities dilute fixed cost base Diversification through downstream expansion Introduction of non-crystal revenue improves robustness of returns and additional profit opportunities Meeting more of our customers needs via a wider product range Preparation for long-term expansion of sugar production Regional growth will continue ahead of global averages Experience as Africa s largest sugar producer, supported by strong balance sheet, makes us well positioned for brownfield and greenfield opportunities 15

16 REGIONAL MARKETS HAVE STRONG FUNDAMENTALS Historic and forecast sugar consumption in Africa GDP per capita growth (1.0% p.a.) Population growth (2.2% p.a.) 3.2% up to % Market development Downstream expansion Cost reduction Long-term expansion Sugar surpluses and deficits across Africa Expenditure per Capita $100 $80 $60 $40 $20 Household expenditure in developing countries Sub-Saharan Africa 2013 average $1,150 Sub-Saharan Africa forecast for 2021 average $1,380 High-sugar processed foods * Sugar (direct consumption) $0 $0 $2 000 $4 000 $6 000 $8 000 $ GDP per Capita * Combination of the following food categories: Confectionery, Chocolate & Ice Cream; Soft Drinks, Mineral Waters & Juices; and Other Bakery Products. 16

17 REGIONAL MARKETS ARE VALUABLE ALTERNATIVE TO EU Prices within regional markets expected to remain above world levels despite increasing levels of competition amongst regional producers High logistics costs across Africa provide ongoing advantage to local producers versus world supply Preferential access within Customs Areas and Trade Blocs of operation provide benefit where trade protection is effective Market development Downstream expansion Cost reduction Long-term expansion Regional Markets with Preferential Access Country with Illovo production Countries which share at least one Customs Area or Trade Bloc with Illovo s production countries Customs Area & Trade Blocs included: COMESA (Common Market for Eastern and Southern Africa) EAC (East African Community) SADC (Southern African Development Community) SACU (Southern African Customs Union) $800 $600 $400 $200 $0 Proportional Pricing of Markets Regional & Domestic EU bulk-ex mill March 2014 March

18 DEVELOPMENT OF ACCESS TO REGIONAL MARKETS Illovo in strong position to supply the region Reliable quality and supply of sugar Effective distribution networks and relationships with major regional customers Actions taken to increase regional sales Restructured to reallocate resources in line with imperatives Brand and distribution network development Working with major customers in region to solidify position as strategic partner Advocacy to maintain preferential access Segment Mix Outlook Tons Market development Downstream expansion Mar-14 30% 58% 4% 8% Domestic sales Regional sales EU & USA specials and bagged EU/World Bulk raws bulk raws Mar-15 23% Cost reduction Long-term expansion 4% 2015 Sales Domestic Regional Specials EU/World Bulk 2021 Sales 10% 63% 18

19 FURTHER REDUCTIONS IN COST BASE ARE PLANNED Strong cost focus continues to ensure acceptable margins even during troughs of the sugar price cycle Our operations remain competitive on a global basis, although Brazil s competitiveness has improved due to weak Brazilian Real Our Continuous Improvement programme has been implemented across all operations, supporting specific projects such as Cost Deep Dive and Supply Chain Realignment Overall cost structure is regularly reviewed (e.g. decision to temporarily close Umzimkulu mill due to low cane volumes in South Africa) Market development Downstream expansion Cost reduction Long-term expansion Continuous Improvement Savings by Type % 14% Commercial and logistics 42% 23% 13% Sugar volumes Cane growing Operating costs Downstream Continuous Improvement Savings by Location 33% 6% 5% 10% 8% 3% 35% Malawi Mozambique South Africa Swaziland Tanzania Zambia Group Services 19

20 DOWNSTREAM OPERATIONS EXPECTED TO INCREASE Diversification of revenue stream continues across the group During the past year increases in downstream revenue achieved, in particular at Tanzanian distillery and Swaziland s co-generation Further opportunities being actively explored, including: Potable distillery in Zambia Furfural plant in Swaziland Market development Downstream expansion Cost reduction Long-term expansion Growth in Operating Profit from Downstream Downstream Operating Profit % of Total Operating Profit R m 16% % % 9% 9% % % 8% % 0 0% Performance of Tanzanian Distillery First full year of operation successfully completed Operating above original design capacity Business Case 20

21 RATIONALE FOR LONG-TERM EXPANSION REMAINS SOUND Long lead-time of expansion projects requires looking past short-term sugar market weakness Build on existing valuable operations to capture benefit from Africa s solid long-term fundamentals 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 West Africa Attractive region for footprint expansion Market development Downstream expansion Sudan & Ethiopia Large production & project pipeline Cost reduction Long-term expansion East Africa Key deficit market battlegrounds 21

22 PROSPECTS Already challenging market conditions are expected to become more difficult in the year ahead Full year impact of Euro and Brazilian Real weakness on export proceeds still to be felt Lower production expected in South Africa from the continuing effect of drought and frost Progress on underlying strategic imperatives is expected to continue Further progress in shifting export sales away from the EU is expected Structural cost reduction programmes will continue to build on the good results achieved Zambian refinery expansion and product alignment project being implemented There is a reasonable degree of certainty that Headline Earnings per Share in 2016 will be between 25% to 45% below

23 APPENDICES

24 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. Best Performer in High Environmental Impact category 2014 Sustainability Data Transparency Index 24

25 ADVOCACY Active advocacy efforts across the region: Convey key messages proactively to appropriate audiences with quality information Address the complex issue of sugar consumption, nutrition & obesity Encourage balanced tariff structures that legitimise sugar markets and support long-term investment and domestic growth. Ensure duties and import controls remain effective and continue to protect domestic markets against dumping of world sugars 25

26 COUNTRY OPERATING PROFIT BRIDGES March Malawi # Mozambique # Weak domestic demand, poor factory performance, low EU prices, weak Euro Volume Price Cost Fair Value Trans. 596 March March Higher yields, low-cost imported sugar in the domestic market, low EU prices Volume Price Cost Fair Value Co-gen Trans. March March # # South Africa Swaziland Drought and frost affect yields, effective import tariff Volume Price Cost Fair Value D/strm March March 2014 Volume Price Cost Fair Value Lower EU prices, weaker Euro Co-gen 74 March 2015 Tanzania # Zambia # Record production volumes, Improved factory performance, increased regional sales, lower export domestic market recovery, 200 prices, weaker Kwacha 0 21 full-year impact of distillery 0 March Volume Price Cost Fair D/strm Trans. March March Volume Price Cost Fair Trans. March 2014 Value Value 2015 # Excludes the allocation of Group operations 26

27 CASH GENERATION AND PROFITABILITY Sustaining the strong conversion of operating profit into cash remains a key focus of the group 2013/14 R m 2014/15 R m Operating profit Material items 24 3 Operating income Add back: Depreciation & amortisation Change in fair value of cane roots (198) (209) Change in fair value of growing cane (68) (111) Gain on disposal of assets & investments (8) (7) Insurance claim (19) - Amortisation of deferred income (10) (10) Cash operating profit Cash conversion ratio 102% 101% 27

28 FINANCE COST ANALYSIS - Interest rate increases - Slower domestic and regional sales - Lower realisations from EU exports + Full year benefit of refinancing Zambia s external borrowings with internal funding - Higher utilisation of short term facilities due to lower export realisations and below inflationary domestic pricing - High interest rate environment - Decreased production and sales - Increased interest rates + Weaker Zambian kwacha + Stronger US dollar R millions March 2014 South Africa Malawi Zambia Swaziland Tanzania Mozambique Group Translation March

29 FAIR VALUE MOVEMENTS Benefit of domestic & regional market growth, weaker Zambian Kwacha & higher molasses prices Growing cane 2013/14 R m 2014/15 R m Change R m Malawi Mozambique (15) (4) 11 South Africa Swaziland (6) (45) (39) Tanzania (16) (11) 5 Zambia Total Growing cane represents the estimated sucrose content valued at the estimated sucrose price for the 2015/16 season, adjusted for the cost of harvesting and transporting the cane to the mill Cane roots 2013/14 R m 2014/15 R m Change R m Malawi Mozambique South Africa (1) Swaziland Tanzania 12 (3) (15) Zambia 1 (2) (3) 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 29

30 CAPITAL CASH FLOWS Capital expenditure on fixed assets, intangible assets & cane developments totals R699 million Nchalo sugar warehouse & irrigation upgrades 187 Sezela coal & energy, Eston packing station, Illovo academy & Noodsberg syrup clarifier Product alignment, refinery expansion & distillery (pre-spend) Furfural development R million Irrigation conversion to pivots Malawi Mozambique South Africa Swaziland Tanzania Zambia Group Expansion/opportunity Replacement 30

31 GROUP PROJECT PIPELINE Appraise Select Define Execute Operate Joint Venture Nchalo irrigation upgrade Furfural development Nakambala product alignment & refinery Asset realignment (Eston) Nakambala outbound logistics Nakambala distillery Sezela coal & energy Eston packing station Asset realignment (Noodsberg) Ubombo energy efficiency Ubombo cane development (St Philips) Nchalo warehouse project Maragra speciality sugar (phase 1) Illovo academy Nchalo packed sugar Asset realignment (Sezela) Maragra speciality sugar (phase 2) Dwangwa regional refined sugar Ubombo cane development (St Phillips) 31

32 MALAWI Record sugar production at Dwangwa offset by poor factory performance at Nchalo 2012/ / /15 Own Cane (tons) Yield Own Cane (tons/hectare) Sucrose Content Own Cane (%) Crush Rate (tons cane per hour) Capacity Utilisation (%) Sugar Production (tons)

33 MALAWI Sugar Production ( 000 tons) Sugar Sales ( 000 tons) (1) By market 2014 By market 2015 (5) % 1% 10% 58% 32% 1% 5% 62% 13/14 Cane Sucrose Recovery 14/15 Local EU Regional USA Operating Profit # (MWK billions) Margin 51% 33% 25% 33 Cane 29 Sugar # Excludes the allocation of Group costs Overview Demand for sugar in the domestic market declined as the low economic growth, strong Kwacha and high interest rates impacted affordability High levels of cost inflation and price increases below inflation erode margin Export price realisations were negatively impacted by the low EU price, the weak Euro and the strong Kwacha Regional sales volumes impacted by lower production and difficulties in customers obtaining import permits 33

34 MOZAMBIQUE Record production as yields recover from flood damage in prior season 2012/ / /15 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

35 MOZAMBIQUE Sugar Production Bridge ( 000 tons) Sugar Sales ( 000 tons) 0 (2) 92 By market 2014 By market % 39% 54% 37% 2% 7% 13/14 Cane Sucrose Recovery 14/15 Local EU Regional USA Operating Profit # (MZN millions) Margin 21% 6% 4% 386 Cane Sugar 208 Co-gen # Excludes the allocation of Group operations Overview Cane yields recover allowing a normalised season length which increased production and sales volumes Pressure from low-cost imported sugar in the domestic market and low EU prices reduced average sugar pricing Sales mix improves as alternate markets to the EU are sought Costs increased in line with higher production and inflation Power exports to the national grid commenced 35

36 SOUTH AFRICA Record alcohol production, but drought conditions and frost reduce sugar and furfural production 2012/ / /15 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 include alcohol produced by Glendale Distilling Company, an associate entity 36

37 SOUTH AFRICA Sugar Production ( 000 tons) Sugar Sales ( 000 tons) 698 By market 2014 By market 2015 (127) 16 (2) % 2% 1% 21% 1% 67% 78% 13/14 Cane Sucrose Recovery 14/15 Local World Regional USA Margin Cane Sugar Downstream Operating Profit # (R millions) 5% 7% 5% # Excludes the allocation of Group costs Overview Drought and frost damage reduced production and sales volumes Effective tariff reduced world market imports, resulting in a recovery of the domestic market Cost saving initiatives by management lessen the impact of the drought Downstream profits supported by improved alcohol pricing and the benefit of weaker Rand on export earnings 37

38 SWAZILAND Adverse climatic conditions reduce both yields and cane quality 2012/ / /15 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)

39 SWAZILAND Sugar Production Bridge ( 000 tons) Sugar Sales ( 000 tons) 0 By market 2014 By market (7) % 52% 38% 53% 5% 4% 13/14 Cane Sucrose Recovery 14/15 Local EU Regional USA Margin Operating Profit # (SZL millions) 13% 17% 5% # Excludes the allocation of Group operations Cane Sugar Co-gen Overview Impact of poor cane quality on factory recoveries as well as lower yields reduced production and sales volumes Lower export price realisations following a decline in EU prices and weaker Euro Industry begins to diversify sales volumes away from EU markets Strong performance from co-generation resulted in record power exports to the national grid and fuel savings 39

40 TANZANIA Distillery operates for its first full season and improved sugar factory performance 2012/ / /15 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 Alcohol (kl) n/a

41 TANZANIA Sugar Production Bridge ( 000 tons) Sugar Sales ( 000 tons) By market 2014 By market (6) % 1% % 100 % 13/14 Cane Sucrose Recovery 14/15 Local EU Regional Margin Operating Profit # (TZS billions) 15% 2% 12% # Excludes the allocation of Group operations Overview Improved factory performance and higher yields (better Cane climatic conditions) increased sugar production Sugar Advocacy initiatives resulted in government improving the Downstream control of illegal imports, increasing domestic sales volumes Increased pre-pack sales contributed to an improved margin Cost reduction initiatives by management offset majority of the inflationary increases Distillery exceeds first full-year investment case assumptions 41

42 ZAMBIA Record production as yields recover from turbo-alternator failure and flood damage in prior seasons 2012/ / /15 Own Cane (tons) Yield Own Cane (tons/hectare) Sucrose Content Own Cane (%) Crush Rate (tons cane per hour) Capacity Utilisation (%) Sugar Production (tons)

43 ZAMBIA Sugar Production ( 000 tons) Sugar Sales ( 000 tons) 1 (3) 424 By market 2014 By market % 41% 22% 41% 25% 37% 13/14 Cane Sucrose Recovery 14/15 Local EU Regional Operating Profit # (ZMW millions) Margin 20% 17% 18% Cane Sugar # Excludes the allocation of Group operations Overview Record sugar production driven by the recovery in cane yields and favourable weather conditions. Favourable economic fundamentals in Zambia continue to drive growth in demand for sugar, increasing domestic market sales The business benefitted from improvements to the sales mix with sugar being redirected from EU into regional markets. The benefit of the weaker Kwacha improved export price realisations and standing cane valuation 43