Strategic intent. Contents. To:

Transcription

1 Company Registration No. 1906/000622/06 Strategic intent To: be the leading sugar and downstream products operation in Africa, an increasing global player and a world-class organisation. be the lowest-cost producer in every country in which it operates and among the lowest-cost producers in the world. Contents Features 1 Group profile 2 Group history 2 Goals and objectives 3 Group locations 4 Group structure 5 Operations 5 Directorate 6 Senior management 8 Chairman s statement 10 Review of operations 14 Corporate Governance 31 Remuneration report 34 Sustainability report 38 Five year review 52 The world of sugar 56 Annual financial statements 63 Independent auditor s report 64 Audit Commitee report 65 Analysis of shareholders 114 Notice of meeting 115 Form of proxy 123 Corporate information IBC Shareholders diary IBC optimise the return on every stick of cane by adding value to its core commodity products - fibre, sugar and molasses. It will focus on its core business and develop material niche operations which add value. be the market leader, meeting and proactively anticipating customer needs. increase profits in real terms on a sustainable basis and maximise the return on capital employed through cost leadership, the use of innovative technology and the participation of all of its employees. be a moral performance focused organisation that people are proud to work for, where they are challenged to go the extra mile, feel they can make a difference and know that good performance is recognised. be welcomed in the communities in which it operates because of what it does, how well it does it and be accepted as a progressive company by all communities; aligning strategies to meet changing circumstances in the various countries in which the group operates. be cognisant of the rural locations of the group s operations and the impact that it has on job creation and poverty alleviation in such areas.

2 Features ILLOVO SUGAR Year ended 31 March % change Results () Revenue (2 ) Operating profit Net financing costs (25 ) Headline earnings (5 ) OPERATING PROFIT Share performance (cents per share) Headline earnings (19 ) Distribution/dividend (interim - paid; final - declared) (19 ) Year-end market price Statement of financial position and cash flow () Total assets Ordinary shareholders funds Net cash/(borrowings) ( ) Cash operating profit cents YEAR-END SHARE PRICE Financial ratios Operating margin (%) Interest cover (times) Effective tax rate (%) Net debt : equity ratio (3.4) 70.0 Return on net assets (%) Net asset value per share (cents) Dividend cover (times) Price : headline earnings ratio Operating profit increased by 8% Good domestic market sales growth Strong operational cash generation Rand strength negatively impacts earnings Ongoing major capacity expansions Successful rights issues 1

3 Group profile Illovo Sugar is a leading, global, low-cost sugar producer and a significant manufacturer of high-value downstream products. The group is Africa s biggest sugar producer and has extensive agricultural and manufacturing operations in six African countries. Downstream products include furfural (used mainly in lube oil refineries for the purification of oils), furfuryl alcohol (used mainly to produce a resin in the foundry industry as a binder for foundry sands), diacetyl and 2.3-pentanedione (both used as highquality natural flavourants), Agriguard (an agricultural nematicide), BioMass Sugar (a sugar cane-based fertiliser), ethyl alcohol and lactulose (a natural laxative). Illovo is listed on the JSE Limited. It is a subsidiary of Associated British Foods plc which holds 51% of the issued share capital. Excellent climatic and soil conditions in the group s countries of operation, accompanied by irrigation from secure water sources, are ideal for the cultivation of high-yielding and good quality sugar cane. The group manages agricultural estates in each of the countries in which it operates and in the past season these estates produced an aggregate of 6.1 million tons of cane. In addition, independent growers supplied an aggregate of approximately eight million tons of cane to Illovo s sugar factories, mainly to those in South Africa. Sugar production in /10 amounted to million tons, comprising tons produced in South Africa, Malawi tons, Zambia tons, Swaziland tons, Tanzania tons and Mozambique tons. The group also has a 30% equity investment in Gledhow Sugar Company (Pty) Limited which produced tons of sugar in /10. The most recent independent survey of international sugar production costs covering in excess of 100 sugar producing countries, for the period to 2006/07 to /10 indicated that, of the six countries in which Illovo operates, three are in the top ten lowestcost cane sugar producers in the world and all six are within the top 30. The group is a major supplier of sugar to African consumer and industrial markets, particularly in its own countries of operation. In Malawi, Illovo is that country s sole sugar producer and in Zambia, it manufactures 94% of all local production. The group s share of industry production in South Africa is 30%, Swaziland 35%, Tanzania 46% and Mozambique 32%. Illovo has significant and increasing access to preferential markets in the European Union (EU) and the United States of America (US), whilst the operations outside South Africa also have access to the South African Customs Union (SACU) market in terms of the Southern African Development Community (SADC) Sugar Protocol on Trade. Pre-packed and bagged sugar is supplied into other regional markets within Africa. The group, through the South African sugar industry exports sugar into the world free market. Syrup and speciality sugars are produced in South Africa and Zambia mainly for domestic consumption, whilst speciality sugars made in Malawi and Zambia are produced for preferential markets in the EU and in the case of Malawi also in the US. The majority of downstream production is sold internationally into high-value, niche markets. Furfural and its derivatives are produced at the Sezela mill complex on the south coast of KwaZulu-Natal. High quality ethyl alcohol, from which various grades of alcohol are made, is produced at the Merebank plant in Durban and at the Glendale distillery on the north coast. Lactulose is also manufactured at Merebank. In recognition of the group s interdependence with the communities in which it operates, across six African countries, Illovo co-ordinates a wide range of social investment-related programmes focusing on basic needs such as the provision of water and sanitation, access to health care, education delivery and involvement in community outreach programmes. Illovo also provides considerable training and other support to local indigenous growers in order to promote sustainable agriculture and economic development activities. Total cane supplies from these growers, including community-based co-operative schemes, amount to 2.0 million tons annually, generating revenue of approximately R645 million. Particular attention is given to preferential procurement with the aim of promoting and supporting the development of small and medium-sized businesses which supply goods and services to both cane growers and neighbouring communities, and to the group. Group history 1891 Reynolds Brothers Limited is listed as a public company and Charles George Smith appointed as its agent in Durban; 1893 CG Smith, entrepreneur and sugar agent, becomes a shareholder in Reynolds Brothers; 1904 CG Smith and associates buy the Umzimkulu mill and estates; 1915 Reynolds Brothers opens the Sezela mill; and The Natal Cane By-Products Limited (now Illovo Merebank) is listed as a public company; 1952 Reynolds Brothers moves the Esperanza mill to Pongola; 1975 The sugar-related assets of CG Smith & Company, together with the Gledhow Sugar Company, are amalgamated with Reynolds Brothers into a single new entity under the name of CG Smith Sugar Limited; 1977 CG Smith Sugar acquires the Illovo and Noodsberg sugar mills and estates from Tate & Lyle; 1991 The company celebrates its Centenary year; 1992 CG Smith Sugar is listed on The Johannesburg Stock Exchange, and the company acquires the Umfolozi sugar mill; 1994 The company name is changed to Illovo Sugar Limited to identify with the Illovo brand of sugars and syrups; 1995 As a purely South African sugar company with five agricultural estates and seven factories, Illovo cultivates around one million tons of sugar cane and produces an equal amount of sugar. Turnover amounts to R1.6 billion and the share price trades at R6.70 (year-end); 1996 Illovo acquires a 50% stake in Maragra Açúcar SA in Mozambique; 1997 Illovo acquires Lonrho Sugar Corporation Limited, with sugar assets in Malawi, Swaziland, Mauritius and South Africa; 1998 Illovo acquires a 55% stake in Kilombero Sugar Company in Tanzania; 2

4 PRIMARY OBJECTIVE Goals and objectives To enhance the wealth of shareholders by optimising the long-term returns and growth of the business. To be a world-class organisation and amongst the most efficient and lowest-cost producers in the world. To achieve a sustainable, balanced and integrated economic, social and environmental performance. To provide all employees with a working environment that is safe and without risk to their health. ILLOVO SUGAR GROWTH To expand the group s sugar and cane production. To consolidate and improve the profitability of downstream products and further develop new applications where appropriate. To maximise usage of bagasse and biomass to generate electricity for own operations and to supply power into national grids. To seek new opportunities for sugar and downstream products nationally and internationally. PROFITABILITY To achieve a competitive rate of return on shareholders funds and increase profits on an ongoing basis in real terms. To maintain a dividend cover of at least two-times. ASSET MANAGEMENT To manage investments in fixed assets and working capital so as to achieve the most efficient usage of funds employed, with the objective of not exceeding gearing of 40% over the long term and achieving an interest cover of not less than five times. PRODUCT DEVELOPMENT To be proactive in identifying the needs of customers. To consistently deliver quality products and services to customers. To undertake research and development to improve returns, and develop new products and applications, from its core commodity products using every stick of cane. HUMAN RESOURCES To promote the ongoing development of all employees in order that they reach their maximum level of competence and participate fully in achieving the group s primary objective. To offer equal opportunity to all employees. CORPORATE GOVERNANCE To ensure that the company is managed in an efficient, accountable, responsible, transparent and moral manner. To be socially responsible, and maintain and develop appropriate ethical, environmental and risk management standards as an integral part of the business. To take cognisance of all stakeholders interests in the group s business The company acquires Monitor Sugar Company in the United States; 2001 Illovo sells its Mauritian interests and acquires a controlling interest in Zambia Sugar Plc; 2004 The Gledhow sugar mill and estates are sold to a Black economic empowerment company, and the company sells its interests in Monitor Sugar Company; 2006 Associated British Foods plc, a company listed on the London Stock Exchange, acquires a 51% controlling stake in Illovo; A major expansion of the Zambia Sugar operation is completed, as planned, on 1 April, increasing annual cane production by 50%, and sugar production capacity to tons; and Illovo sells its Umfolozi and Pongola sugar mills and acquires a 30% shareholding in and provides technical services to Gledhow Sugar, previously wholly-owned by Ushukela Milling (Pty) Limited; and Illovo undertakes a successful rights issue to raise (cont) R3 billion in support of the group s drive to increase significantly its cane and sugar production capacity. US$50 million is raised in a rights issue undertaken by Zambia Sugar to fund the acquisition of a large cane growing company, Nanga Farms, and its own capacity expansion project. The South African business is re-structured and its relevant assets transferred into a wholly-owned subsidiary, Illovo Sugar (South Africa) Limited; Today, Illovo is Africa s largest sugar producer and has extensive agricultural and manufacturing assets in six Southern African countries, producing more than six million tons of cane and two million tons of sugar per annum. Revenue amounts to R8.5 billion and the share price trades at R29.70 (year-end). 3

5 Directorate NON-EXECUTIVE, INDEPENDENT CHAIRMAN NON-EXECUTIVE, DEPUTY CHAIRMAN Robbie Williams (69) * # BA, LLB Chairman of Nomination Committee Director of companies Appointed to the Board 1985 EXECUTIVE DIRECTORS MANAGING DIRECTOR Don MacLeod (63) # ^ BCom, AMP Previous Managing Director of Illovo Sugar Joined the sugar industry 1971 Appointed to the Board 1983 Graham Clark (Australian) (54) ^ + ø BAcct(Hons), FCA(Aust) Joined the sugar industry 1980 Appointed to the Board 1997 David Haworth (British) (61) + ø BSc(Hons) Business Development Director Joined the sugar industry 1999 Appointed to the Board To retire on 31 May Larry Riddle (50) + ø BCom, CA(SA) Commercial Director Joined the sugar industry 1986 Appointed to the Board Barry Stuart (62) ^ + ø BCom, DipSugarTech, SEP Operations Director Joined the sugar industry 1968 Appointed to the Board 1994 * Member of Audit Committee # Member of Remuneration / Nomination Committee ^ Member of Risk Management Committee + Member of Executive Committee ø Member of Group Executive Committee Member of Executive Committee Karin Zarnack (37) ^ + ø BCom, CA(SA) Financial Director Joined the sugar industry 2005 Appointed to the Board

6 NON-EXECUTIVE, INDEPENDENT DIRECTORS ILLOVO SUGAR Brian Connellan (69) CA(SA) Director of companies Appointed to the Board 1993 Len Konar (Dr) (56) * CA(SA), MAS, DCom Chairman of Audit Committee Director of companies Appointed to the Board 1995 Mike Hankinson (61) * # ^ BCom, CA(SA) Director of companies Appointed to the Board 2008 Phinda Madi (46) # BProc, EDP Director of companies Appointed to the Board 2002 Ami Mpungwe (Tanzanian) (59) ^ BA(Hons) Director of companies Appointed to the Board Nosipho Molope (45) * BSc, BCompt(Hons), CA(SA) Director of companies Appointed to the Board 2008 Trevor Munday (60) ^ BCom Director of companies Appointed to the Board NON-EXECUTIVE DIRECTORS Martin Shaw (71) * # ^ CA(SA), SEP Chairman of Remuneration and Risk Management Committees Director of companies Appointed to the Board 2001 Mark Carr (Dr) (British) (47) # ø BSc, PhD, MBA, CEng, MIMechE Chief Executive Officer - British Sugar Appointed to the Board 2006 Paul Lister (British) (46) LLB Director of Legal Services and Company Secretary - Associated British Foods Appointed to the Board 2006 Richard Pike (British) (40) ^ LLB, ACA, ATII, AMCT Financial Director - British Sugar Appointed to the Board 7

7 Senior management Joined the Operational Name Qualifications group responsibility GROUP R Botha (Mrs) (41) ^ BCom, BCompt(Hons), CA(SA) 2003 Internal audit G R Brown (45) BScAgricEcon 2008 Procurement P H Canter (Dr) (63) ^ MBChB, DTM&H 1990 Medical services D G Coates (59) ø HNDipMechEng, GCOC 1983 Operations S J M Collet-Serret (55) HNDipElecEng 1978 Project management M S Edwards (58) GCOC, ABP 2007 Export sugar marketing N M Hawley (53) + ø BCom(Hons) 1978 Human resources W L Jackson (Ms) (36) BCom, DipAcc, CA(SA) 2005 Corporate finance G D Knox (61) ^ + ø BCom 1984 Administration X Magojo (47) BJourn, MBL 2008 Sustainability & corporate citizenship N T Moor (Ms) (38) BCompt(Hons), BCom(Hons) 1998 Financial management N C Morris (49) ø BAMaths&CompSc, DipCorpFin Project evaluation J M Moult (61) ^ BScEng, NatDipTech 1995 Technical services D A Schaller (46) BCom, ACMA 1999 Information technology G S Trott (42) BScAgricEng 2007 Agriculture G W van Schoor (42) PrEng, BScMechEng, GCOC 1997 Technical services (projects) G H Williams (42) ø BCom, CA(SA) 1996 Operational finance N Zwane (50) ø MScAgricSc, BScChem&Bot Agricultural development SOUTH AFRICA OPERATIONS D E Howells (46) ø BCom, CA(SA) 1997 Managing director H R Hackmann (51) BCom 2000 Marketing S B Hlela (51) BA 1995 Human resources J J R Lyall (35) BCom, DipAcc, CA(SA) 2006 Finance G F Mann (56) DipSugarTech 1979 Refined sugar production S Rau (58) BScAgric 1981 Raw sugar production L Bachan (56) BSc, MBL, DipSugarTech 1978 Sezela B R Cornish (56) BCom, HNDipMechEng 1983 Merebank/Glendale J P M de Robillard (64) DipSugarTech 1974 Gledhow (managed operation) B V Holmes (55) GCOC, MDP 1999 Umzimkulu E W Lucht (44) GCOCMechEng, MBA 1985 Noodsberg V Pillay (55) BSc, BCom, DipSugarTech 1978 Eston MALAWI OPERATIONS I G Parrott (43) ø BCom, CIA 1997 Managing director D W H Cousens (61) MScEng, MBL 1988 Expansion project W A Cowden (31) BAcct(Hons), CA(SA) 2006 Finance D P R Davies (55) DipMktMgt(IMM) 2003 Marketing C H Kyle (60) BCom, HDPM 1998 Human resources G M Mkandawire (63) BScEcon, MComMkt 2003 Commercial K M J Tembo (47) DipIndustrialEng 1992 Dwangwa E I Williams (63) CertEng, SMSAIEE 1984 Nchalo 8

8 Joined the Operational Name Qualifications group responsibility ZAMBIA OPERATIONS S D Langton (49) ø PrEng, BScEng 1996 Managing director D Kabunda (Mrs) (47) BAPubAdmin, MBA 1986 Human resources R M L Katowa (Mrs) (49) BA, MBA, MCIM 1997 Marketing J Mukukwa (45) MScChemEng 1990 Factory S S Munsamy (55) BTechMgt, MDP 1982 Operations director L M Sievu (47) BAcc, ACMA, ACIS 2004 Corporate affairs/administration H Veenstra (53) MAgricMgt 1990 Agriculture M D Wellington (54) BAcc, CA(Zim) 2008 Finance ILLOVO SUGAR SWAZILAND OPERATIONS S J M Cleasby (51) ø BScEng(Chem), MBA Managing director J A Blumberg (50) BCompt, MBL 1996 Finance C R Crebo (56) BCom, DipSugarTech 1984 Factory A H Domleo (50) BCom 1983 Agriculture J P Hulley (50) DipMechEng, MDP 2007 Operations J Mashwama (47) MScSoilSc, DipIR 1993 Human resources D S Watson (48) BScElecEng, DipBusMgt 2006 Expansion project TANZANIA OPERATIONS D H Carter-Brown (60) ø BScAgricEng 1978 Managing director C M Bennie (61) BCom, CA(SA) 2006 Commercial L A Elkington (60) BCompt 1984 Finance Z E Mshechu (58) MSc Agric 1998 Agriculture C J van den Berg (60) BA(Law) 1974 Human resources P J van Greunen (45) HNDipMechEng, GCOC 1983 Factory MOZAMBIQUE OPERATIONS W M A Buchanan (60) ø BTechMkt, SEP 1981 General manager M Cotter (54) RCE, GCOC 1989 Factory R Giblot-Ducray (54) CertLabour, CertSugarCaneAgric 2002 Agriculture D J Main (60) MCom(Mgt&OrgSys), MHRP 1974 Human resources M A Walsh (62) BCom, CA(SA) 1988 Finance ^ Member of Risk Management Committee + Member of Executive Committee ø Member of Group Executive Committee Member of Corporate Executive Committee 9

9 Chairman s statement Robbie Williams Group operating profit for the year ended 31 March of R1 499 million reflected an 8% improvement over the previous year, with the operating margin increasing from 16% to 18%. The results benefited from the positive impact of improved world and regional market sugar prices, increased sugar production in Zambia following the major expansion at Nakambala and good growth in domestic market sugar sales across the group. However, the value of the rand which was significantly stronger compared to the previous year impacted negatively on export revenue in respect of both sugar and downstream products as well as the conversion of foreign subsidiary profits into rands. In addition, adverse weather conditions in Zambia and South Africa reduced anticipated sugar and downstream production, whilst lower prices for sugar exports into the European Union (EU) became effective from 1 October. Net financing costs have reduced to R139 million following the receipt of the rights issue proceeds. The effective rate of tax has normalised at around 30% compared to 20% last year and this has resulted in headline earnings of R703 million showing a decline of 5%. As a result of the dilution impact of the rights issue, headline earnings per share fell in total by 19% to cents. The contributions to operating profit were sugar production 59%, cane growing 34% and downstream 7%. By country, contributions were Malawi 42%, Zambia 18%, South Africa 17%, Tanzania 11%, Swaziland 8% and Mozambique 4%. Strong cash operating profit of R1 443 million was achieved. The rights issue to raise R3 billion in fresh capital was successfully concluded in September, with a take-up of 99.4%. Consequently, the group has moved from a substantial borrowings position to a net positive cash position of R213 million at year-end, despite expansion projects and the acquisition of businesses amounting to in excess of R1.1 billion being undertaken during the year. The rights issue was progressed to enable the group to pursue major investments outside South Africa in areas which meet its investment criteria. These include positive and stable social, political and economic fundamentals, adequate water and land resources, favourable climatic and agronomic conditions, strong local sugar markets and good export potential. The agricultural operations generally performed satisfactorily with cane production in the /10 season amounting to 6.1 million tons, an increase of one million tons compared to the previous year. The season was affected by variable weather conditions. South Africa, Tanzania and Mozambique had a very dry winter which was favourable for harvesting the cane crop. South Africa then had a very wet end to the season, which impacted negatively on anticipated cane deliveries, but since then it has been extremely dry. Adverse weather conditions in Zambia, where heavy and unseasonal rainfall severely disrupted cane deliveries, resulted in hectares of cane being carried-over to be harvested in the coming year. The performance levels of the factories throughout the group were generally good with improved recoveries of sugar from cane and better operational efficiency levels. The Zambian factory, following the completion of the major expansion, reached rated capacity during the season and achieved reasonable performance. Group sugar production of million tons exceeded the previous season s output by in excess of tons, excluding the production of the Umfolozi and Pongola mills which have been sold. The downstream plants operated well. Ethyl alcohol production was similar to last year, but the output of furfural and its derivatives fell by around 10% commensurately with the reduced cane supplies to the Sezela factory. 10

10 The agricultural operations generally performed satisfactorily with cane production in the /10 season amounting to 6.1 million tons, an increase of one million tons compared to the previous year. Domestic market sugar sales and prices were positive, with all operations achieving similar or improved offtake compared to the previous year. In South Africa, imports continued to have a negative impact on sales volumes, although the quantity has reduced as a result of the higher world sugar prices during the year. However, the South African Customs Union market provided a growth in sales largely due to a reduced presence of Zimbabwe sugar in the region. The world sugar price was very strong during the year, rising to a 28-year high. The improved world price had a positive knock-on effect for regional prices. The world price increase was driven by a significant production decline in India and capital constraints within the sugar industry in Brazil together with inclement weather during the harvest in that country. The material global deficit in production created the platform for the significant rise in price. However, the price has come under intense pressure since the beginning of February and is currently more than 50% lower than the high achieved just a few months earlier. Negative macro economic factors generally triggered the decline in the price which was sustained by fund liquidation and speculative selling. Market sentiment is now very fragile, although there is still a global physical supply deficit and prices are now at levels below the cost of production of most major producers. It should be noted that only the South African business is directly exposed to the world sugar market. The group continues with its drive to significantly increase its cane and sugar production capacity outside of South Africa, and to become self-sufficient in respect of power requirements for its operations as well as supplying power into the national electricity grids in the various countries in which it operates. The first step in the major growth phase was the Zambian expansion project which was completed for the beginning of the /10 season. The expansion resulted in factory capacity increasing to a level which enables sugar production to rise to tons per annum. The plant has been settling down and is demonstrating its increased production capability. The Zambian operation also acquired a large cane growing company, Nanga Farms PLC, currently producing tons cane per annum with the potential to further increase output. This resulted in the company s own estates now supplying more than 65% of the total cane delivered to the Nakambala factory. The Zambian business completed a rights issue which raised US$50 million in August, resulting in Illovo s interest in Zambia Sugar Plc reducing from 89.7% to 81.6%, this being supportive of the Government policy to increase local participation in businesses in that country. The proceeds have been utilised to reduce borrowings related to the acquisition of the Nanga operations and the expansion project. The Maragra expansion project in Mozambique, which has increased the factory capacity to around tons of sugar per annum was completed for the start of the forthcoming season. Linked to this, the company is currently involved in projects to increase cane supplies from both its own estate and local growers. The Ubombo factory expansion and co-generation project in Swaziland has commenced. The project provides for an increase in annual sugar production from tons to over tons, together with an increase in power generation capacity utilising biomass as supplementary fuel for the factory boilers. The power plant will enable the factory and estates to become self-sufficient in electricity consumption. In addition, agreement in principle has been reached with the Swaziland Electricity Company to supply power into the national grid for 48 weeks of the year. The project is linked to the completion of a major new dam and canal system sponsored by the Swaziland Government which will facilitate the development of some hectares of new cane land in the medium-term. Development of the first 880 hectares of land is nearing completion and this area will be harvested in A further 600 hectares is planned for development during the current calendar year. CHAIRMAN S STATEMENT 11

11 Chairman s statement continued Group sugar production of million tons exceeded the previous season s output by in excess of tons. Sezela mill During the last two years, marginal factory capacity expansions have also been undertaken at Dwangwa and Nchalo in Malawi, and at Kilombero in Tanzania. Additional areas have also been developed to cane by both the company s own estates and outgrowers. New varieties of cane have been introduced and improved irrigation installed in order to improve cane and sucrose yields. Opportunities to further increase the area under cane and improve yields together with related factory expansions are being explored in these countries. The proposed greenfields project in Mali continues to be progressed, and the various pre-project activities are at an advanced stage. Subject to the Government of Mali meeting certain requirements, the necessary approvals for the funding of the project are likely to be progressed and finalised in the second half of the calendar year. This would facilitate the commencement of cane development, with factory commissioning taking place around two years later. The sale of the Pongola sugar factory in South Africa to TSB Sugar RSA Limited was approved by the Competition Commission during the year. The disposal was part of a process to consolidate Illovo s business in South Africa. In addition, the capacity of the refinery at Noodsberg is to be increased in the next offcrop and the lactulose plant at Merebank has been expanded. The transfer of the South African business, which remains the largest sugar producer in South Africa, into a wholly-owned subsidiary was completed with effect from 1 April. Risk management is an integral part of Illovo s business. The safety, security and preservation of our people are essential for the group s sustainable growth. The NOSA Integrated Five Star System covering safety, health and environmental management is implemented at all the cane growing and factory operations. The Disabling Injury Frequency Rate (DIFR) measurement of safety performance is used in all the group s operations, and is included as one of the line-of-sight targets for the performance related bonus scheme. It is pleasing that the DIFR measurements reflect a significant improvement over the past year. The group operates in diverse environments, many of which are predominantly rural, with limited infrastructure and significant development needs. These challenges are most evident in the countries of operation outside South Africa, four of which are classified by the United Nations as Least Developed Countries. In line with the group s strategic intent as a long-term investor and a major player in these communities, an active social investment programme is in place at each of the operations and is structured to address the specific needs of the respective communities. Illovo qualified for the JSE s Socially Responsible Investment Index. In addition, it was identified as one of the 30 best performers of the 67 companies qualifying for the Index, and is one of only 10 companies which has been classified as a best performer for three years running. The group s investment in health care facilities is significant. Access to health care is provided to all employees and their dependants, either through the network of group-run primary health care clinics and hospitals or through the provision of medical insurance schemes. Where no other public medical facilities exist, these services are extended to members of surrounding communities. The group operates 24 primary health care clinics and four hospitals. These facilities are staffed by 16 doctors, 150 nurses and other qualified medical staff, and 135 auxiliary personnel, and provide a service to approximately employees and dependants. In South Africa, the health facilities are clinic-based, and focus on occupational health, primary health care and HIV/AIDS, whilst in the operations in the rest of Africa, the facilities are hospital-based, and focus on primary and secondary health care, occupational health, HIV/AIDS, malaria and other tropical diseases. A pro-active stance is taken against life-threatening epidemics such as HIV/AIDS, malaria and 12

12 1 1 Domestic market sugar sales and prices were positive, with all operations achieving similar or improved offtake compared to the previous year. 2 The Ubombo factory expansion and co-generation project in Swaziland has commenced, providing for an increase in annual sugar production from tons to over tons, together with an increase in power generation capacity. tuberculosis. These diseases are being managed, largely on a preventative basis, to negate their impact on the business and the employees themselves. Outlook In the current /11 year, own cane, sugar and downstream production are all anticipated to exceed the levels achieved in the last season, with output in Zambia expected to increase by more than 25%. World sugar prices are extremely volatile and futures prices are currently below last year s average prices. Although the world sugar market is forecast to remain in deficit, if prices remain at present levels this would be negative for sugar revenues. Domestic market offtake is expected to remain positive. The results for the current year will again be affected by the level of the rand compared to other currencies. In addition, the value of the euro impacts on downstream sales and sugar export earnings from sales to the EU. Sugar exports into the EU are anticipated to grow following increased market access. Whilst this will be of long term benefit to the group, the current financial crisis in the Euro zone and its impact on currency values is likely to have a negative impact on results in the current financial year. Financing costs are expected to be similar to last year. The effective tax rate is expected to remain at around 30%. Overall, the current year is expected to be a difficult one for the company. Directorate I am pleased to welcome Ami Mpungwe back to the Board as an independent, non-executive director. Mr Mpungwe served on the Board from 2001 to 2006 and was previously the Tanzanian High Commissioner to South Africa. He has a wealth of commercial experience on the African continent. I also welcome Trevor Munday as an independent, non-executive director. Mr Munday has considerable experience in the corporate sector and is a director of other listed companies. Richard Pike has joined the Board as a non-executive director and replaces David Langlands. Richard joined the British Sugar Group as finance director following the resignation of David from that position. I welcome Richard to our Board and thank David for his contribution during his tenure as a director. Tony Norton retired at the last annual general meeting in July, and Brian Connellan and Martin Shaw will both retire at the annual general meeting in July. I would like to record our thanks and appreciation to all of them for their valuable contribution and wise counsel over the long period they have been members of the Board. David Haworth will be retiring at the end of May. Appreciation On behalf of the Board, I would like to thank the people of Illovo for their efforts and contributions during the past year. The group has clear strategies for future growth and the year ahead has many opportunities and challenges for the people of the group. 2 CHAIRMAN S STATEMENT R A Williams Mount Edgecombe Chairman 28 May 13

13 Review of operations Graham Clark OVERVIEW The initiative to increase the group s production capacity continues and meaningful progress was made in the period under review. Group cane production increased by more than one million tons to 6.1 million tons and sugar output reached million tons compared to million tons produced in 2008/09, excluding Umfolozi and Pongola, which have since been sold. These increases were driven primarily from the expansion of the Zambian operations where the existing cane supply was supplemented by nearly hectares of newly developed estate cane fields. This, together with additional cane supplied from grower expansions, enabled the factory to produce tons more sugar than in the previous season. The acquisition of Nanga Farms PLC during the year further consolidated group cane production in Zambia and has strategically resulted in nearly 65% of the total Nakambala cane supply being placed in the hands of the company. The acquisition also provides further future cane expansion potential to the group. Following completion of the major factory expansion in Zambia in April, the plant reached rated capacity during the season and achieved reasonable performance. Growth in the Zambian cane supply and consolidation of factory operations will continue in the coming year and a further 25% increase in sugar production is expected in Zambia in /11. Increased cane production was also achieved in Malawi, Mozambique, Swaziland and Tanzania following smaller expansions and irrigation upgrades in those countries. In addition, in Tanzania the introduction of new cane varieties has resulted in improved cane yields. The expansion of the Maragra factory in Mozambique has been completed, doubling capacity to tons of sugar per annum. Maragra remains actively involved in projects to increase and sustain cane supply from its own estate operations and from surrounding local growers. Marginal capacity expansions have also been completed at the Dwangwa and Nchalo factories in Malawi and at Kilombero in Tanzania. A further significant group expansion is underway in Swaziland where the Ubombo factory expansion and co-generation project is in progress, due for commissioning at the start of the 2011/12 season. Annual sugar production at Ubombo is to increase by more than 40% to over tons per annum. Increased power generation using cane biomass to supplement boiler fuel will enable the Swaziland operation to become selfsufficient in electricity. In addition, following the conclusion of a power purchase agreement with the Swaziland Electricity Company, surplus power will in future be supplied into the national grid for 48 weeks of the year. Increased volumes of cane will be supplied from the agricultural development linked to the completion of a new dam and canal system, promoted by the Swaziland Government. This is expected to result in hectares being developed to sugar cane in the medium-term. Approximately hectares of this area is expected to be planted to cane by the end of the current year, with the balance over the next two seasons. The existing operations generally performed well during the past year. Cane yields were good other than in South Africa where adverse weather impacted negatively on the crop and resulted in lower output. Excellent agricultural results continue to be produced in Zambia and Malawi and it was pleasing to note ongoing improvements in cane yields in Mozambique, Swaziland and Tanzania. These result from an ongoing programme of continuous improvement and focus on operational efficiency. 14 Factory performance was significantly improved compared to the previous year. Mechanical efficiency was better and the sugar recovery from cane was good. Improved throughput was achieved at all factories in the group other than Eston and Sezela in South Africa, where slower crush rates were aligned to lower cane availability. The expanded Noodsberg factory and refinery in South Africa performed better than in the previous year.

14 1 1 Cane production in /10 increased by more than one million tons compared to last year primarily due to the recent expansion of Zambia Sugar s area under cane, together with the acquisition of Nanga Farms. 2 Factory performance across the group was significantly improved compared to the previous year. Record sugar production of nearly tons was achieved at Maragra which has recently been the subject of a factory expansion project, doubling capacity to tons per annum. Downstream production at Sezela in South Africa was affected by reduced cane supply in /10. As a result both furfural and furfuryl alcohol production was lower than last year. The production of ethyl alcohol at Merebank increased year-on-year following plant modifications undertaken at the beginning of the season. Increased lactulose production was achieved at Merebank following completion of Stage 1 of a two-phased expansion programme which will be completed next year. The production of diacetyl was also increased in response to higher market demand. Downstream revenue was impacted by lower export prices compared to the record high levels experienced in the previous year. Furfural and furfuryl alcohol prices in particular were negatively affected by the global economic downturn, and the strength of the rand further depressed downstream earnings. However, alcohol sales benefited from strong local demand at good prices. 2 Performance in the various sugar markets supplied by the group during /10 was strong. Illovo s domestic markets continue to be a primary focus and all were the subject of strong demand. In South Africa, Illovo continues to be the major supplier to the industrial market, whilst a more focused approach to the retail market proved beneficial. In South Africa, imports continued to have a negative impact on local sales volumes although imported sugar tonnages were lower year-on-year as a result of higher world sugar prices. In Malawi, local sugar demand remained strong and growth was only constrained by production. Domestic markets in Mozambique, Swaziland, Tanzania and Zambia all performed strongly with Tanzania enjoying firmer prices as sugar was imported at high world prices to supply local production deficits. Reform of the current European Sugar Regime was completed during the year with the previous system of quota access coming to an end on 30 September. Advantage was taken of available quota prior to 30 September and the transition to quota free, duty free access for qualifying origins went well thereafter. The final reduction in the European raw sugar price became effective from 1 October and will impact on export revenue from the European Union (EU) going forward. Contracts have been negotiated to supply European refineries via Mitra Sugar, the marketing joint venture between Illovo and British Sugar. Land and marine logistics continue to be consolidated as tonnages being routed to the EU increase. The world sugar price, which directly affects only South African exports, rose strongly during the year, peaking at a 28-year high of US30 cents/lb in February. The increase was driven by production declines in India and Brazil, the world s two largest producers, leading to a growing global sugar deficit. Year-on-year, the average world sugar price achieved by the South African Sugar Association (SASA) increased by 29% from an average of US12.77 cents/lb in 2008/09 to an average of US16.53 cents/lb in /10. This benefit was however largely undermined by the very strong rand. The world sugar price has fallen dramatically since February/March, losing half of its value and leaving the market very fragile. Resistance appears to have been established between US14 and 15 cents/lb and although still volatile, this range places the world price structurally below the cost of production for many of the world s largest sugar producers, notably in Brazil. Regional export prices rose on the back of higher world prices and benefited further from lower availability from Zimbabwe. Good advantage was taken of these opportunities by Malawi, Swaziland and Zambia. The global economic downturn resulted in a number of base commodity prices decreasing during the year compared to the rapid escalation experienced in 2008/09. The opportunity to procure major inputs such as fertiliser, coal, packaging and steel at lower base prices assisted in containing costs of production. Strong local currency exchange rates also restrained further cost escalation. The group remains focused on lowering costs of production where possible and it was encouraging that the group s operating margin increased from 16% to 18% for the year, despite a fall in revenue. A formal benchmarking and cost optimisation process has been introduced within the group to assist in lowering the costs of production. REVIEW OF OPERATIONS 15

15 Review of operations continued The production of ethyl alcohol at Merebank increased year-on-year following plant modifications undertaken at the beginning of the previous season. STRATEGIC REVIEW The group goals and objectives continue unchanged, with primary objectives being to remain a world class, low-cost and highly efficient organisation seeking to enhance shareholder wealth and optimise growth, whilst at the same time achieving a sustainable, balanced and integrated economic, social and environmental performance. High standards of corporate governance are demanded from all group operations and compliance is regularly reviewed. The group strives to achieve and surpass its goals and objectives on an ongoing basis, guided by the principles incorporated within the group strategic intent. All entities within the group are aligned to Illovo s common goals and objectives. Annual strategic plans and budgets are prepared with these aspects in mind. Growth philosophy The group continues to consolidate its South African operations in order to maintain a profitable, stand-alone South African entity with the capacity to maintain acceptable group returns. In the rest of Africa, where there is potential for superior returns, investments will be undertaken in areas that display positive and stable social, political and economic fundamentals, have adequate water and land resources, favourable climatic and agronomic conditions, strong local sugar markets and good export potential. Strategic up-date In accordance with the above philosophy, the following projects have either been completed or are underway:- South Africa The rationalisation of the South African business has progressed, with finalisation during the year of the sale of the Pongola sugar mill to TSB Sugar RSA Limited. This followed the sale in the previous year of the Umfolozi mill and the acquisition of a 30% shareholding in the Gledhow sugar mill and refinery. The South African operations now comprise three agricultural estates, four sugar factories, one incorporating a refinery, five downstream plants and the 30% share in the Gledhow mill and refinery where management and technical support is also provided by Illovo. The South African business, comprising the above operations, has been incorporated into a wholly-owned subsidiary Illovo Sugar (South Africa) Limited, which began operating on 1 April. Mozambique A two-phased project to double factory capacity at Maragra to tons of sugar per annum was completed on schedule in April. Maragra remains actively involved in projects to increase and maintain cane supply from its own estate operations and from surrounding local growers. Longer-term opportunities to increase total sugar production in Mozambique to at least tons continue to be evaluated. The company has chosen not to exercise its option to participate in the Búzi project and instead is looking to leverage from the operational and management base at Maragra by investigating alternative expansion areas. 16

16 Illovo s domestic markets continue to be a primary focus and all were the subject of strong demand in /10. Zambia The expansion of the Nakambala operation was completed in April and has been fully commissioned, becoming operational during /10. This provides the base to produce up to tons of sugar annually in Zambia. The acquisition of Nanga Farms PLC, adjacent to the Nakambala estate was completed during the year. In addition to increasing the extent of the company s cane operations, the acquisition has resulted in the company s own estates now supplying 65% of the total cane delivered to the Nakambala factory. Swaziland The first phase of the expansion of the Ubombo factory was completed on schedule in time for the start of the /11 season. The second phase of the project, which incorporates the power co-generation component of the project is well advanced, set for commissioning in April Factory capacity will increase from tons to in excess of tons of sugar per annum. Following completion of a major dam and canal system, promoted by the Swaziland Government, development has commenced on the first hectares of cane development as part of the initial development area of hectares. Malawi Mali Marginal factory capacity expansions have been completed at both factories in Malawi over the past two seasons. Combined, the two Malawian factories now have the capacity to produce approximately tons of sugar per annum. New areas of cane have been planted on both estates and in addition, support for small-scale growers will result in an increase in outgrower cane in the next two years. Options for further significant expansion in Malawi are being evaluated. Considerable potential exists for further development of the estate and outgrower cane operations in Malawi. Opportunities for power co-generation are also being assessed. The proposed greenfields project in Mali continues to be progressed and pre-project activity is at an advanced stage. Funding for the project is currently being evaluated and subjected to final due diligence from a consortium of concessional funders. Support from the Government of Mali is strong and necessary formalities for the debt funding of the project are likely to be concluded in the second half of. This would facilitate the phased commencement of cane development, with factory commissioning requiring about two years thereafter to complete. The Malian operation will ultimately produce tons of sugar, kilolitres of ethanol for fuel blending and generate sufficient electricity for the agricultural factory and operations, with additional capacity to export power into the national grid. REVIEW OF OPERATIONS 17

17 Review of operations continued SEGMENTAL ANALYSIS Country key South Africa Malawi Zambia Swaziland Tanzania Mozambique Karin Zarnack Activity key Sugar Cane growing Downstream FINANCIAL REVIEW Group performance Group revenue decreased by 2% from R8 602 million to R8 468 million in the current year mainly due to the disposal of the Pongola and Umfolozi mills, at the beginning of the year. Operating profit has however, improved by 8% to R1 499 million. A focused cost reduction programmme, increased sugar production in Zambia, continued growth in domestic market sales as well as higher world and regional sugar prices have contributed to the improvement in profits. However, the stronger rand against all currencies has negatively impacted export revenues together with the conversion of foreign subsidiary profits into rands. At a constant conversion exchange rate ignoring the impact of rand strength, revenue and operating profit would have increased year on year by 9% and 23% respectively. Operating margins were higher at 18% (: 16%). Net financing costs of R139 million were lower than last year s R185 million. Included in net financing costs in the current year is a foreign exchange gain of R124 million mainly related to a US dollar-denominated loan to Zambia Sugar. In September, the company completed a R3 billion rights issue and the benefits of the additional cash has contributed to the reduction in net financing costs. Interest of R14 million (: R258 million) was capitalised to expansion projects in the current year. Included in material items is the net loss on the sale of the Pongola mill, together with the impairment of an investment in an agricultural joint venture in Mozambique. Both these items, together with the profit on the sale of property, plant and equipment have been added back for headline earnings purposes. The tax charge of R412 million included current tax of R273 million, deferred tax of R102 million and secondary tax on companies of R37 million, resulting in a normalised effective tax rate of 30% for the year (: 20%). This is higher than last year s effective tax rate due to expansion-related tax allowances granted to the Zambian operations being fully utilised on the completion of the expansion. Earnings and distributions Headline earnings have declined by 5% to R703 million (: R742 million). The weighted average number of shares in issue has however increased by 59.8 million shares to million due to the rights issue. The reduced profits after taxation and the dilutive effect of the rights issue shares, has resulted in headline earnings per share decreasing by 19% from cents to cents. An interim dividend of 32.0 cents was paid and a final capital distribution in lieu of dividend of 54.0 cents has been proposed. The strength of the balance sheet and results achieved have made it possible to maintain a dividend twice covered by earnings. In accordance with International Financial Reporting Standards, no liability has been raised for this final distribution. The source of the distribution will be a capital reduction out of share premium and therefore the cost of the proposed distribution of R249 million has been transferred from share premium to a separate distribution reserve. Statement of financial position Non-current assets increased by R327 million to R5 751 million. Property, plant and equipment of R4 263 million increased by R237 million mainly driven by expansion capital, in particular the factory 18

18 Revenue by country Revenue by activity Operating profit by country Operating profit by activity 4% 10% 20% 7% 8% 4% 7% 8% 23% 11% 17% 17% 42% 34% 59% 41% 70% 18% 4% 9% 8% 46% 20% 13% 20% 7% 73% 6% 9% 9% 19% 12% 45% 36% 12% 52% REVIEW OF OPERATIONS expansions in Zambia and Mozambique, of R846 million, the acquisition of Nanga Farms PLC of R167 million and replacement capital expenditure of R181 million. Assets of R183 million were disposed of during the year and depreciation was R250 million. The impact of the stronger closing rand exchange rate reduced the closing value of property, plant and equipment on conversion by R524 million. The Zambian business completed a rights issue which raised US$50 million in August, and resulted in Illovo s interest in Zambia Sugar reducing from 89.7% to 81.6%. The proceeds have been utilised to reduce borrowings related to the acquisition of Nanga Farms as well as expansion related debt. On the consolidation of Nanga Farms, an intangible asset of R106 million was raised which represents the strategic value of the cane supply that was secured by this transaction. The R3 billion rights issue proceeds were utilised to settle the ABF inter-company loan of US$120 million as well as various external rand and dollar loans. The remaining cash on hand at year-end of R1 345 million together with group facilities will be utilised to invest in future expansion projects. Return on average shareholders equity was 15% (: 29%). This decline is largely as a consequence of the level of investment made this year in long-term capital projects which have yet to yield a return. A currency loss of R618 million arose on the translation of the group s foreign currency denominated net assets into rands. This resulted from the fact that the rand was stronger against all major currencies at the end of this year than at the end of the previous year. The group s net asset value increased by R2 870 million to R6 315 million. Capital expenditure and future capital commitments A summary of the group s capital expenditure and future capital commitments is set out below Capital expenditure Capital commitments Total capital commitments Expansion Ongoing Expansion Ongoing Expansion South Africa Malawi Zambia Swaziland Tanzania Mozambique Mali Group Total With the exception of the projects in Mali and Swaziland which will be project financed, the group has sufficient cash reserves, cash generated from operations and committed bank financing facilities to fund this approved capital expenditure. 19

19 Review of operations continued With the recent changes in the financial markets together with an increase in the average cost of debt, target hurdles rates for potential new projects have been determined as follows Internal rate of return above 20% EBIT/capital at steady state above 20% Payback less than 7 years These hurdles ensure that capital is applied to projects that give the best returns on investment. Management also continues to monitor the performance of entities and will also consider injecting equity in order to maximise shareholders returns. Cash flow The group continued to achieve strong cash operating profit of R1 443 million, compared to R1 207 million last year. The group continued to invest in the future growth of the group with R1 352 million spent on factory and agricultural expansion projects, replacing existing property, plant and equipment, research including product registrations and acquisitions, principally Nanga Farms. R119 million was received for the disposal of businesses. Other cash outflows included taxation of R304 million, dividends of R490 million and net financing costs of R139 million. This resulted in a cash outflow before financing activities of R985 million. This cash outflow together with the repayment of debt of R1 427 million, was funded by the Illovo and Zambia Sugar rights issues proceeds of R3 213 million, resulting in an increase in cash of R801 million. Financing At the year-end, the group had total committed bank facilities amounting to R2 194 million of which R1 014 million was drawn-down. R1 225 million of these facilities are short-term in nature with the remainder maturing between 2012 and The group also had access at year-end to uncommitted facilities of R1 618 million of which R118 million was drawn-down. Cash on hand at year-end totalled R1 345 million, resulting in a net cash position of R213 million. A treasury risk management committee, consisting of senior executives in the group, meets regularly to analyse currency and interest rate exposure and formulates treasury management strategies in the light of prevailing market conditions and current economic forecasts. The committee operates within group policies approved by the board and is responsible for arranging term debt facilities for expansions and acquisitions as well as short-term working capital facilities. Forecasts have been prepared which take into account the group s capital commitments, available facilities and cash resources, and this still indicates a strong liquidity position for the group over the medium-term after expansion. Foreign currency exposure In the normal course of business, the group enters into transactions denominated in foreign currencies and hence is exposed to fluctuating exchange contracts. Exchange rate exposures are managed within approved policy parameters utilising forward exchange rates. The group is also exposed to fluctuations of the rand against the currencies of the countries in which it operates, in particular on the conversion of local profits into rands. These profits are converted at the actual average exchange rate for the year and cannot be hedged. Accounting policies The annual financial statements comply with International Financial Reporting Standards, Schedule 4 of the Companies Act, 1973, as amended, and the disclosure requirements of the JSE Limited s Listings Requirements. The accounting policies are consistent with those applied in the prior year, except for the revised IAS 1 Presentation of Financial Statements and IFRS 8 Operating Segments which were adopted during the current year. The adoption of these new and revised standards has resulted in certain disclosure reclassifications and therefore had no impact on the group s accounting policies. Subsequent events No material changes have taken place in the affairs of the group subsequent to year-end. 20

20 1 Cane production in South Africa in /10 amounted to tons which, together with deliveries from private growers, resulted in the production of tons of sugar. 2 The raw sugar mills enjoyed successful seasons with good recoveries of sugar from cane and high levels of mechanical and operational efficiencies achieved at Eston, Sezela and Umzimkulu. 1 2 Umzimkulu mill REVIEW OF OPERATIONS OPERATIONS South Africa Illovo remains South Africa s largest sugar producer, with its operations strategically located across the eastern and southern section of KwaZulu-Natal. The operations consist of three agricultural estates, four sugar factories, one of which incorporates a refinery, and five downstream plants, three of which are wholly-owned and two are 50% owned with joint venture partners. Approximately tons of sugar are produced annually from around 5.6 million tons of cane, tons of which is supplied by the company s own agricultural operations and the balance by private growers. Furfural, furfuryl alcohol, Agriguard, diacetyl, 2.3-pentanedione, ethyl alcohol and lactulose are produced at the various downstream plants. In addition, the group has a 30% investment in the Gledhow sugar factory and refinery which it manages and to which it provides technical support. The South African operations currently employ approximately permanent employees and seasonal workers at peak periods, and in /10 contributed 17% of total group operating profit. Agriculture Cane production in /10 amounted to tons. Cane yields and sucrose content at Umzimkulu benefited from above average rainfall in the growing months of January and February. Extensive hail damage early in the growing season at Eston impacted negatively on both cane yields and sucrose content which were both well below those experienced in the previous season. Above average rainfall for the month of December made cane harvesting at the closure of the season difficult, resulting in cane being carried over to the current season at Sezela and Umzimkulu. Cane deliveries from small-scale growers, excluding Pongola and Umfolozi, amounted to tons representing 4% of total deliveries to Illovo s mills, whilst cane supplied by medium-scale growers decreased marginally to tons compared to the previous season. The company provides ongoing support to the small-scale grower sector, and cane re-development initiatives continued at Sezela and Umzimkulu, co-ordinated by Illovo and local cane growing associations. Currently, 43% of the total land area supplying cane to Illovo mills is the subject of land claims in terms of the Restitution of Land Rights Act, Thus far, of the areas claimed, just over 10% has been transferred to claimants. The company is working with the affected growers, the claimants and the relevant government authorities to ensure that farms transferred in terms of the restitution process continue to be cultivated productively. Land reform committees are very active in all mill areas and Illovo is playing a leading role in sugar industry land reform initiatives. Sugar production The raw sugar mills enjoyed successful seasons with good recoveries of sugar from cane and high levels of mechanical and operational efficiencies achieved at Eston, Sezela and Umzimkulu. The factory and refinery 21

21 Review of operations continued 1 Record lactulose production was again achieved at Merebank, with the plant having benefited from a further expansion of its capacity during the season. 2 Illovo s domestic market sales performance was pleasing, particularly in the brown sugar sector. 1 2 performance at Noodsberg showed considerable improvement, with the refinery in particular operating consistently well and producing record refined sugar production. Energy conservation initiatives at Noodsberg and Sezela proved highly successful and realised significant coal savings. Total sugar production amounted to tons, with the corresponding share of industry production decreasing from 41% in 2008/09 to 30% in /10 following the sales of the Umfolozi and Pongola mills. The Gledhow sugar factory and refinery performed well, producing tons of sugar. Downstream The furfural plant at Sezela operated consistently throughout the year although production was affected by irregular cane supplies in the latter part of the season resulting in a slight decrease in production compared to last year. Both the Merebank and Glendale distilleries continued to perform well, and maintained consistent quality and good throughput levels throughout the year. Record lactulose production was again achieved at Merebank, with the plant having benefited from a further expansion of its capacity during the season. 22 Marketing Illovo sells raw, brown and refined sugar, speciality sugars, syrup, furfural and its derivatives, potable and denatured alcohols, and lactulose into local and international markets. Despite reduced refined sugar availability arising out of the sale of the Pongola factory and refinery, Illovo s domestic market sugar sales performance was pleasing, particularly in the brown sugar sector. The group remains the major supplier of sugar to the South African industrial market. Regional market sales into the South African Customs Union (SACU), which has traditionally been supplied from Zimbabwe, were again boosted this year due to that country s current sugar production difficulties. Illovo s share of raw sugar exports to the world market, undertaken by the SASA, amounted to tons for the year. The average price realised by the industry, including hedging activities undertaken by SASA, was US16.53 cents/lb, representing an increase of US3.76 cents/lb compared to the previous year, due to the higher average world market price experienced during /10. In respect of the /11 season, around tons of sugar, representing approximately 30% of world market export availability, have been priced to date on behalf of the industry by SASA, at an increased average price of US20.66 cents/lb. Futures prices are currently around US15 cents/lb. The downstream operations had a challenging year, following a very successful performance in the previous season when international furfural prices were at record highs. Initially, furfural and furfuryl alcohol prices decreased significantly in line with the world economic downturn, although in recent months these prices have recovered as an exceptionally severe winter in China resulted in the temporary closure of almost all furfural plants in that country. Export alcohol prices were strong, whilst the lactulose business capitalised on record production. The Agriguard business continued to expand gradually as further regulatory access was gained during the season and growing sales into new markets and for new crops commenced. In South Africa, Crop Guard achieved registration for use on vines and stone fruit, and a refocused marketing initiative resulting in sales volumes more than doubling. MultiGuard Protect remained under review at the United States Environmental Protection Agency in respect of its use on turf. BioMass Sugar, a liquid organic fertiliser derived from sugar cane, showed good international growth during the year with expansion and sales into new geographic locations.

22 1 1 Total cane production of 2.1 million tons from the agricultural operations at Dwangwa and Nchalo was marginally above that produced last year. 2 Combined sugar production in /10 amounted to tons, marginally below last year s record output of tons. Malawi Illovo Sugar (Malawi) Limited is listed on the Malawi Stock Exchange with the Illovo group holding 76% of the issued share capital and the balance being held by institutional investors and the public. The company is Malawi s only sugar producer with significant agricultural, milling and refining assets at the Dwangwa sugar estate situated in the mid-central region and at the Nchalo sugar estate in the south of the country. In a normal season, combined with supplies of cane from Malawian small-holder growers, around 2.5 million tons of cane can be produced in Malawi enabling the production of approximately tons of sugar. The Malawi operations currently employ approximately permanent employees and more than seasonal workers at peak periods, and in /10 contributed 42% of total group operating profit. Agriculture Cane growing operations at both estates benefit from access to secure water sources for irrigation, resulting in excellent yields and high sucrose content in cane. Cane grown at Dwangwa is irrigated from the Rupashe River, supplemented by water from Lake Malawi, whilst Nchalo sources water from the Shire River. Total cane production of 2.1 million tons from the agricultural operations at Dwangwa and Nchalo was marginally above that produced last year, although impacted by unfavourable weather conditions during the season. Outgrowers were similarly affected, bringing combined cane production for the season to 2.36 million tons. An expansion programme, to increase land under irrigated cane by hectares, was completed and is expected to further enhance cane production in the forthcoming season. Sugar production Combined sugar production in /10 amounted to tons, representing a 3% decline compared to last year s record production of tons. Lower than forecast sucrose content in cane, particularly at Nchalo, impacted negatively on final sugar output. Operating efficiencies at the factories were generally satisfactory, however both were at times negatively affected by mechanical performance. An enhanced focus on plant maintenance and operations management during the current offcrop maintenance period has addressed the problems encountered. Both factory operations produce molasses as a by-product of the sugar manufacturing process, which is currently sold as fermentation raw material to the Ethanol Company Limited and Presscane Limited, both fuel alcohol distilleries in Malawi. Marketing 2 Nchalo mill Approximately 66% of sugar produced by Illovo Malawi is currently sold to local industrial and consumer markets, whilst 21% is exported to markets in the EU and US. The remainder is sold into regional and other selected markets. Domestic sugar sales volumes for the year were constrained by the reduced sugar production and amounted to tons. Regional sales, particularly into Zimbabwe, were supported by strong demand and good prices. The balance was sold into the EU market in respect of which, effective from 1 October, Malawi now is entitled to full duty-free, quota-free access, albeit at the reduced EU price. REVIEW OF OPERATIONS 23

23 Review of operations continued 1 In Zambia, the agricultural operations incorporating Nanga Farms produced a record cane crop of 1.7 million tons in /10, compared with tons in the previous year. 2 In its first year of operation following the expansion of the Nakambala factory, record sugar production of tons was achieved. 1 2 Zambia Zambia Sugar Plc, which is listed on the Lusaka Stock Exchange, is the country s leading sugar producer, with a 94% share of industry production. In August, the company completed a successful rights issue which raised US$50 million. During the process, the Illovo group partially renounced its rights and consequently reduced its shareholding in Zambia Sugar from 89.7% to 81.6%, thereby enabling increased public ownership in the company. This reduction is supportive of government policy to increase local participation in business. The proceeds were used to reduce borrowings related to the recent major expansion project and the acquisition of Nanga Farms. Zambia Sugar is based at Nakambala, adjacent to Mazabuka in the south of the country. It is the single largest private agricultural and milling company, and employer in the region. The Zambian operations currently employ slightly less than permanent employees and just over seasonal workers at peak periods, and in /10 contributed 18% of total group operating profit. In December, Zambia Sugar s recent major expansion project was officially commissioned by President Jacob Zuma of the Republic of South Africa and President Rupiah Banda of the Republic of Zambia. The R1.7 billion project, which resulted in the development of an additional hectares of irrigated cane fields by the company and its supplying growers, along with the expansion of the factory s milling capacity, will enable the increase in annual sugar production from around tons to tons. The acquisition of the neighbouring Nanga Farms has further increased annual company cane production by around tons. Agriculture The agricultural operations incorporating Nanga Farms produced a record cane crop of 1.7 million tons in /10, compared with produced in the previous season. Heavy and unseasonal rainfall during the season, however, impacted negatively upon cane deliveries, resulting in an area of hectares of cane land being carried-over for processing in /11. Outgrower deliveries amounted to approximately tons of cane, bringing total cane production to 2.6 million tons. Sugar production In its first year of operation following the expansion of the factory, record sugar production of tons was achieved, representing a 62% increase in tonnage compared to the previous season. Overall, factory performance and efficiencies showed considerable improvement over the previous season, with the plant reaching its new rated capacity. Marketing Continued improvement in the company s domestic distribution and depot system, together with the promotion of specific pack sizes, resulted in record local sales of tons of sugar representing a 10% increase compared to last year. The prevailing strong macro-economic fundamentals and stable domestic currency assisted in curtailing illegal sugar importation activities. With increased sugar availability, exports into the region increased from tons in 2008/09 to tons during the year under review. Zambia Sugar exported a record tons of sugar to the EU in respect of which, effective from 1 October, Zambia is entitled to full duty-free, quota-free access, albeit at the reduced EU price. 24

24 1 Phase two of the Ubombo factory expansion and cogeneration project in Swaziland will be completed before the commencement of the 2011/12 season. The required additional cane throughput will be sourced primarily via the Lower Usuthu Smallholder Irrigation Project involving the development of land to irrigated cane by local Swazi growers, supported by the government. 2 The second phase of a four-year project to convert a portion of Ubombo s irrigated fields to centre pivot irrigation was completed in /10. 1 Swaziland The group has a 60% share in Ubombo Sugar Limited, with the balance of shares held on behalf of the Swazi nation by Tibiyo Taka Ngwane (Tibiyo). The operation is situated at Big Bend in the south-east of the country and annually produces about tons of cane and tons of sugar. The Swaziland operations currently employ approximately permanent employees and more than seasonal workers at peak periods, and in /10 contributed 8% of total group operating profit. Phase one of a major R1.5 billion factory expansion and co-generation project at Ubombo has been completed, with phase two scheduled for completion before the commencement of the 2011/12 season. The project, which is the single largest commercial investment in Swaziland in recent years, will increase annual factory milling capacity by more than 40% to in excess of tons of sugar and significantly raise power generation capacity, utilising biomass from cane as supplementary fuel for the factory boilers. The project is linked to the government-sponsored Lower Usuthu Smallholder Irrigation Project (LUSIP) under which a major new dam and canal system has been constructed, and which will facilitate the new development of an initial hectares of land to cane under irrigation in the medium-term. Development of the first phase is underway, with planting expected to be completed during the year for harvest in Subsequent phases of cane development will continue to be undertaken using government and EU funds between 2011 and The co-generation project will enable the factory and agricultural operations to become self-sufficient in electricity consumption and will export surplus power into the national grid. In this regard, agreement in principle has been reached with the Swaziland Electricity Company for the supply of this electricity into the national grid. Ubombo is well advanced towards registration for carbon credits under the Clean Development Mechanism, derived from the replacement of fossil fuels and renewable energy production. Agriculture Cane production at Ubombo in /10 amounted to just over tons, representing a 9% increase compared to the previous season. There was an encouraging increase in cane yields, benefiting from ongoing modernisation of and upgrading of irrigation systems. Cane quality was negatively affected by higher than normal rainfall received in the latter part of the year, which resulted in the delayed closure to the harvesting season. The second phase of a four-year project to convert a portion of Ubombo s irrigated fields to centre pivot irrigation was completed in /10. The primary aim of the upgrade is to improve water usage efficiencies and increase cane yields. Sugar production The /10 harvesting season was extended following rain-related disruptions to cane supply. Lower cane quality towards the end of the season due to the rains affected factory efficiencies which resulted in sugar production of just over tons being marginally higher than production in the previous season. Factory performance was generally satisfactory with various factory records being established. The Ubombo refinery ran well throughout the year. Ubombo experienced further positive benefits of its biomass initiative, which utilises residual cane tops and leaves combined with bagasse to fuel the factory boilers, with the ultimate objective of eliminating coal usage REVIEW OF OPERATIONS

25 Review of operations continued 1 Despite very dry conditions, Kilombero s agricultural operations benefited from improved irrigation efficiencies, the introduction of new, higher-yielding cane varieties and longer sunshine hours during the season. 2 Sugar production in Tanzania amounted to just over tons. 1 2 Marketing All sugar produced in Swaziland is marketed by the Swaziland Sugar Association, with sales to the domestic SACU market, preferential markets in the EU and US, as well as regional markets. Demand for Swaziland sugar in the SACU market remained strong and sales ended the season marginally above the levels achieved in 2008/09. Bulk shipments to the EU via Maputo went smoothly and Swaziland positioned itself to take advantage of additional quota opportunities in the EU prior to the 25% price decline which came into effect on 1 October. Since then, Swaziland has become entitled to duty-free and quota-free access to the EU, subject only to a global safeguard applied to all African, Caribbean and Pacific (ACP) countries. In addition, regional shortages of sugar in east and central Africa resulted in increased sales to these markets at higher premiums, in line with improved world sugar prices. Tanzania Illovo s shareholding in Kilombero Sugar Company Limited represents 55% of the issued share capital, with 20% held by ED&F Man, the London-based commodities group, and 25% by the Government of Tanzania. Kilombero is situated in the Morogoro region in the centre / south of the country and comprises two adjacent agricultural estates and sugar factories, Msolwa and Ruembe, on either side of the Great Ruaha River, linked by a low-level bridge. The estate produces annually in excess of tons of cane, with outgrowers supplying a further tons in a normal year. The combined annual sugar production capacity of both factories is currently approximately tons. The Tanzanian operations currently employ approximately 700 permanent employees and more than seasonal workers at peak periods, and in /10 contributed 11% of total group operating profit. Agriculture Despite very dry conditions, Kilombero s agricultural operations benefited from improved irrigation efficiencies, the introduction of new, higher-yielding cane varieties and longer sunshine hours during the season. Cane production amounted to tons, representing an 11% increase over the previous season. However, outgrower cane production, which is rain-fed, was negatively impacted by the dry conditions and decreased by around 11% to tons. New irrigation systems covering about 450 hectares of land were installed during the past season, including a linear/lateral irrigator, particularly suitable for large tracts of flat agricultural land. In addition, a project to improve the drainage network in order to reduce infield water retention during periods of high rainfall, commenced during the season. In /11, a further hectares of existing cane land will be converted to upgraded irrigation and drainage systems. In a separate initiative to assist Kilombero s outgrowers, funding is being sought from the EU s Accompanying Measures programme in order to investigate the feasibility of irrigating some of their cane lands. Sugar production Sugar production in /10 amounted to just over tons, a marginal increase over the previous year. The Msolwa factory operated satisfactorily with improved extraction and increased efficiency, whilst there was a slight improvement in sugar recovery from cane at Ruembe. However, the performance of both factories was negatively impacted by wet conditions at the end of the year and in January. 26

26 2 1 In Mozambique, a two-phased project to double factory capacity to tons of sugar per annum at Maragra was commissioned as planned at the commencement of the /11 season. 2 Stable weather conditions during the season at Maragra resulted in increased efficiencies in harvesting and haulage operations. 3 The factory operated consistently throughout the year resulting in a third consecutive year of record sugar production. 1 Marketing There are three sugar producers in Tanzania. Aggregate domestic production from all three producers declined from previous levels to just under tons in /10, primarily due to difficult weather conditions. Current domestic requirements of sugar amount to around tons, with the balance provided by duty-paid imports from the world market. Kilombero s share of total industry production was 46% in the past year, all of which was sold domestically. No exports to preferential markets in the EU were made as domestic market conditions and prices remained strong throughout the season, resulting from lower domestic production and higher import prices. Mozambique The Illovo group is the majority shareholder in Maragra Açucar SA, with the balance of shares held by a private investor. During the year, Illovo increased its holding in Maragra from 71.5% to 74.0%. In the same transaction, Maragra also acquired approximately 300 hectares of new cane land. The operation is situated on the coast-line of Mozambique, about 80 kilometres north of Maputo. In the /10 season, sugar production amounted to a record of nearly tons with approximately tons of cane produced by the agricultural operations and tons of cane supplied by local outgrowers. The Mozambique operations currently employ just less than permanent employees and around seasonal workers at peak periods, and in /10 contributed 4% of total group operating profit. In total, the sugar industry in Mozambique produced tons of sugar during the season under review, representing a slight increase over that produced in 2008/09. Maragra increased its share of production from 30.5% in, to just over 32% in /10. A two-phased project to double factory capacity to tons of sugar per annum, was commissioned as planned and within budget at the commencement of the new season. The expansion will take advantage of both company and private grower cane development initiatives currently underway. Agriculture The Maragra agricultural operation performed well during the year, recording an increase in both yield per hectare and sucrose content. Stable weather conditions during the season resulted in increased efficiencies in harvesting and haulage operations. Sugar production The factory operated consistently throughout the year. Good cane quality, combined with significantly reduced stoppages due to adverse weather conditions, resulted in the completion of the season within 29 weeks, including the toll milling of cane for a nearby mill. Efficient factory performance ensured excellent recovery of sugar from cane and an increase in throughput resulting in a third consecutive year of record sugar production which amounted to nearly tons for the season. Marketing The domestic sugar market in Mozambique continues to grow strongly and in the year under review industry sales volumes ended almost 12% above the previous season. Driven by demand for raw sugar amongst consumers, growth in the market was experienced from all of the regions in the country, with demand in 3 REVIEW OF OPERATIONS 27

27 Review of operations continued Maximum sales to higher priced and stable domestic markets form the basis of Illovo s primary marketing strategy. the central region being the most notable. It is likely that sugar from Mozambique has found its way into Zimbabwe as a consequence of the prevailing shortage in that country. Ongoing consumer expansion, particularly in the beverages and food processing sectors, also gave rise to a strong increase in the demand for refined sugar. The industry exported the maximum available tonnage into the EU market in respect of which, effective from 1 October, Mozambique is entitled to full duty-free, quota-free access, albeit at the reduced EU price. MARKETS The group produces and sells a range of sugar, syrup and downstream products into domestic, regional and world markets. Maximum sales to higher-priced and stable domestic markets form the basis of Illovo s primary marketing strategy. Currently, sales to these markets in the countries in which the group operates account for 66% of total revenue. Sales to preferential markets in the EU and US, together with those to regional markets in Africa, comprise Illovo s next most profitable markets, followed by bulk raw exports to the world market, sold on behalf of the company through SASA. Combined, sales to these markets, comprising 29 countries, contribute 34% to total revenue. Downstream products mainly developed from molasses and bagasse are produced and sold into niche markets in 85 countries to complement this strategy. Group revenues were underpinned by strong domestic sugar sales in all countries of operation but export revenues, despite much improved world sugar prices, were negatively affected by the relative strength of the rand and on the translation of foreign subsidiary profits into rands for the season as a whole. Domestic markets Sugar Illovo enjoys a meaningful share of the domestic sugar markets in the countries in which it operates and domestic market sales contributed 63% of total revenue. During the season, the SACU sugar market was essentially flat year-on-year at just under two million tons. The major suppliers into this market are the South African and Swaziland sugar industries. Minimal imports from Southern African Development Community (SADC) sugar producing countries were sold into SACU this season. Duty-paid imports declined from last year s levels and amounted to tons. The rationalisation of Illovo s South African operations has resulted in a more streamlined focused business and domestic sugar sales were ahead of expectations. In South Africa, 65% of total production was sold into the SACU market. Illovo is Malawi s sole sugar producer and in the /10 season, domestic sales comprised approximately 66% of total sales. Zambia Sugar experienced strong demand in its domestic market with sales increasing by 10% during the year. In Swaziland, Ubombo accounted for about 35% of industry sales. Swaziland s domestic sales in /10, undertaken by the Swaziland Sugar Association into the SACU market, represented approximately 54% of total sales. In Tanzania, Kilombero s total production was sold into the domestic market which benefited from improved returns due to higher regional prices. Industry sugar production in Mozambique was higher than in the previous season and Maragra s share of industry production was 32%, with around 67% of its total sales being sold into the domestic market. 28

28 During the year, the group s preferential exports from Malawi, Swaziland, Mozambique and Zambia amounted to tons. REVIEW OF OPERATIONS Syrup is produced in South Africa and Zambia with both products being brand leaders in their respective domestic markets. Speciality sugars made in South Africa are for domestic consumption, whilst in Malawi and Zambia they are produced for preferential markets in the EU and in the case of Malawi also in the US. Downstream Whilst the group s range of downstream products is primarily aimed at export markets, the Merebank and Glendale distilleries remain important suppliers of ethyl alcohol to the South African beverage, pharmaceutical and industrial chemical industries. Relatively small volumes of furfural and its derivatives, including Crop Guard, a furfural-based agricultural nematicide under the Agriguard range of products, as well as lactulose, are sold in the local South African market. Export markets Sugar Preferential markets The new preferential market access arrangements into the EU, albeit with a concomitant reduction in the minimum reference price, provided the market certainty required for Illovo to invest in significant additional sugar production capacity with a view to exporting a large portion of this additional tonnage into the EU. In Malawi, speciality sugars are produced for markets in the EU and the US, whilst Zambia also currently produces speciality sugars for the EU market. During the year, the group s preferential exports from Malawi, Swaziland, Mozambique and Zambia amounted to approximately tons. Regional markets The higher average world market price and the tight supply conditions as a result of lower production in Zimbabwe had a positive impact on regional market prices. Illovo was able to take advantage of this opportunity by selling into the regional markets in Southern Africa. More than 100 countries produce sugar around the world either from sugar beet or sugar cane. Approximately 79% of total production is made from sugar cane grown primarily in the tropical and sub-tropical zones of the southern hemisphere, and the balance from sugar beet which is grown mainly in the temperate zones of the northern hemisphere. Generally, the costs of producing sugar from sugar cane are lower than those in respect of processing sugar beets. Currently, 71% of the world s sugar is consumed in the countries of origin, whilst the balance is traded on world markets. Because of the residual nature of the world market, the world market price has historically been one of the most volatile of all commodity prices. The five largest exporters in /10, Brazil, Thailand, Australia, EU and SADC, are expected to supply approximately 93% of all world free market exports. South Africa is currently ranked as the 8th largest exporter to the world market. None of the other countries in which Illovo operates exports sugar to the world market. The world sugar price lived up to its reputation as being one of the most volatile commodities, trading to record highs of US30 cents/lb early in the first quarter, before correcting to levels below US15 cents/lb towards the end of April. An improving supply position out of Brazil and India, coupled with the EU s 29

29 Review of operations continued WORLD RAW SUGAR PRICES (monthly averages) US cents/lb Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 decision to export an additional tons of out-of-quota exports onto the world market, has resulted in market sentiment turning around very quickly to a more bearish outlook. The SASA export allocation for bulk sugar was around tons, which represents 35% of total industry production for the /10 season. SASA achieved an average price of US16.53 cents/lb compared to US12.77 cents/lb in the previous season, and realised approximately R2.3 billion in export proceeds. Downstream The group is a material player in most of the world markets in which it participates, and exports, furfural, furfuryl alcohol, diacetyl, 2.3-pentanedione, ethyl alcohol and lactulose to 85 countries. In addition, BioMass Sugar, a liquid organic fertilizer derived from sugar cane is being sold to a growing number of international markets. The stronger rand impacted negatively on downstream export revenues, which during the year under review, contributed R595 million to group revenue. The directors and employees of Illovo Sugar strive to ensure that the company is managed in an efficient, accountable, responsible and moral manner. 30

30 Corporate governance The directors and employees of Illovo Sugar strive to ensure that the company is managed in an efficient, accountable, responsible and moral manner. The board of directors (the board) endorses the Code of Corporate Practices and Conduct contained in the King Report on Corporate Governance for South Africa 2002 (the King II Report), and believes that in all material respects the group complied with the principles contained in such Code throughout the year under review. The group s compliance in respect of the King Report on Governance for South Africa and the King Code of Governance for South Africa (the King III Code) will be reported upon in the 2011 Annual Report. The company complies with all the requirements concerning corporate governance contained in the Listings Requirements of the JSE Limited. THE BOARD AND BOARD COMMITTEES The company has a unitary board of directors which comprises a majority of non-executive directors (presently nine non-executive, independent directors, four non-executive directors, three of whom are nominated by the holding company, and five executive directors). Non-executive directors are chosen for their business acumen and skills pertinent to the business of the group and meet the criteria of the King II Report. The board is ultimately responsible for ensuring that the business is a going concern, and to this end effectively controls the group and its management and is involved in all decisions that are material for this purpose. The board functions in terms of a formal Board Charter which requires that there is an appropriate balance of power and authority on the board. The board has defined and monitors levels of materiality and has formally documented matters which it has delegated to the board committees and management. The roles of the chairman and the chief executive are separated and the chairman is a non-executive, independent director. New appointments to the board are subject to the recommendation of the Remuneration / Nomination Committee and formal approval by the board. At each annual general meeting of shareholders, not less than one-third of the directors must retire, being those directors longest in office since their appointment or last re-election, and may, if available, be proposed for re-election. The appointments of new directors are subject to confirmation by shareholders at the next annual general meeting following their appointment. Members of the board have access to the advice of the company secretary and may, in appropriate circumstances, take independent professional advice at the company s expense. The board has six regular meetings a year. In addition, there is provision in the company s Articles of Association for decisions taken between meetings to be confirmed by way of directors resolutions. In the past year, six meetings were held, attendance at which is reflected in a table on page 32 of this report. Audit Committee The responsibilities and activities of the group Audit Committee are covered in the Audit Committee Report on pages 65 and 66 of this report. Audit committees are also established and operational at each of the operating subsidiaries. Remuneration / Nomination Committee The responsibilities and activities of the Remuneration / Nomination Committee are covered in the Remuneration Report on page 34 of this report. Risk Management Committee The company s Risk Management Committee presently comprises six non-executive directors, four of whom are independent and one of whom is the chairman of the Committee, three of the executive directors and five members of senior management. Members of the Committee are indicated on pages 6, 7and 8 of this report. The Committee is chaired by Mr M J Shaw, and upon his retirement in July will be chaired by Mr D G MacLeod. The Committee has formal terms of reference approved by the board. The Committee is responsible for reviewing the Company s risk philosophy, strategy and policies, and ensuring compliance with such policies; reviewing the adequacy and overall effectiveness of the Company s risk management function; ensuring the implementation of an ongoing process for risk identification, mitigation and management; ensuring the establishment of a comprehensive system of controls; pursuing measures for increasing risk awareness throughout the company; reviewing any significant legal matters; and reviewing the adequacy of insurance coverage. The Committee gives particular focus to operational risks, including health and safety. The Committee meets at least twice a year. In respect of the past year, two meetings were held, attendance at which by the director members is reflected in a table on page 32 of this report. For the period under review, the Committee satisfied its responsibilities in compliance with its terms of reference. CORPORATE GOVERNANCE 31

31 Corporate governance continued Attendance at board and committee meetings during the year ended 31 March Audit Remuneration / Risk Annual Board Committee Nomination Management General Committee Committee Meeting A B A B A B A B A B Carr M I Clark G J Connellan B P Hankinson M J Haworth D L Konar D # Langlands D R ** Lister P A MacLeod D G ** Madi P M Molope C W N * Mpungwe A R Munday T S ^ Norton R A ø Pike R N Riddle L W Shaw M J Stuart B M Williams R A Zarnack K Column A indicates the number of meetings held during the period the director was a member of the board / committee. Column B indicates the number of meetings attended during the period the director was a member of the board / committee. # Resigned with effect from 28 January * Appointed with effect from 1 September Appointed with effect from 9 March ^ Retired on 14 July ø Appointed with effect from 28 January ** Participation in his capacity as a non-independent, non-executive director as an attendee + Participation in his capacity as chairman of the board as an attendee Executive Committees The executive directors along with the human resources executive and the company secretary constitute the Executive Committee which meets on a weekly basis to review operational performance, capital programmes and other relevant issues. In addition, consideration is given to major investment and capital expenditure proposals as well as issues of strategic importance to the group, for recommendation to the board. Furthermore, the daily involvement of the executive directors with operational and functional executives ensures the interactive nature of the overall management reporting structure. A Group Executive Committee, comprising the executive directors, one of the non-executive directors, nominated by the holding company and certain senior members of management, meets on a regular basis, particularly to share and discuss the group s key strategies and issues. The members of this Committee are indicated on pages 6 to 9 of this report. The Committee presently meets at least four times a year. A Corporate Executive Committee, comprising the executive directors and certain senior members of corporate management meets on a regular basis to discuss and agree implementation processes in respect of corporate strategies and policies. The members of this Committee are indicated on pages 6 and 8 of this report. The Committee presently meets at least nine times a year. 32

32 MANAGEMENT REPORTING The group has established comprehensive management reporting disciplines which include the preparation of annual strategic plans and budgets by all operating entities. Results and the financial status of operating entities are reported monthly against approved budgets and compared to the prior year. Profit and cash flow projections are reviewed regularly, whilst working capital and borrowing levels are monitored on an on-going basis. FINANCIAL STATEMENTS The company s directors are responsible for overseeing the preparation of the financial statements and other information presented in reports to shareholders in a manner that fairly presents the state of affairs and results of the group s business operations. The independent auditors are responsible for carrying out an independent examination of the financial statements in accordance with International Standards on Auditing and reporting their findings. The annual financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and the Companies Act, 1973, as amended. They are based on appropriate accounting policies which have been consistently applied, except when otherwise stated, in which case full disclosure is made. The directors believe that the business will be a going concern in the year ahead. The auditors concur with the opinion of the directors. INTERNAL CONTROL The group maintains internal controls and systems designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability for its assets. Such controls and systems are based on established policies and procedures and are implemented by trained personnel with an appropriate segregation of duties. The effectiveness of these internal controls and systems is monitored in a number of ways, as set out below, dependent upon the particular circumstances the aid of internal control checklists; the establishment of defalcation reporting procedures; the functions of the internal audit department; and adherence to performance standards. The purpose, authority and responsibility of the internal audit department are defined in a formal Charter approved by the Audit Committee and the board. The department functions as an independent appraisal activity established to conduct reviews of operations and procedures, and to report findings and recommendations to company management, the Audit Committee or the board as may be appropriate. The head of the department reports administratively to the financial director, but has unrestricted access to the chief executive, the Audit Committee and its chairman, and the chairman of the board. The independent auditors, through the audit work they perform, confirm that the abovementioned monitoring procedures have been implemented. Nothing has come to the attention of the directors or the independent auditors to indicate that any material breakdown in the functioning of the abovementioned internal controls and systems has occurred during the year under review. ETHICS It is a fundamental policy of the company, embracing all group operations, to conduct its business with honesty and integrity and in accordance with the highest legal and ethical standards. The company has established a Code of Conduct and Business Practices, determining the minimum standards required of all staff, which is disseminated throughout the group and reviewed annually by the Executive Committee. The Code prescribes, inter alia, that the company shall not make political contributions. All managers are required to give written agreement to this Code. In any instance where ethical standards are called into question, the circumstances are investigated and resolved by the appropriate executive. Crimeline facilities, inviting people from within and outside the company to anonymously report any wrongdoings are operated by independent forensic accountants, and all matters arising are then appropriately investigated and reported upon. INSIDER TRADING The company has a code of conduct for dealing in securities issued by any of the group s listed companies. Directors and officers of the group who have access to unpublished, price-sensitive information in respect of any of these companies are prohibited from dealing in the shares of such companies during defined restricted periods, including those periods immediately prior to the announcement of interim and final financial results and periods during which cautionary announcements are operative. Directors and the company secretaries of both Illovo Sugar Limited and its major subsidiaries are required to obtain clearance from either the chairman or the chief executive before dealing in company shares. CORPORATE GOVERNANCE 33

33 Remuneration report REMUNERATION PHILOSOPHY AND POLICIES The remuneration philosophy and policies of the group are designed to not only attract, retain and motivate employees, but also to reward them for their contribution to the group s operating and financial performance. They take into account market conditions at both industry and country levels. Apart from fixed remuneration, an element of variable remuneration is provided in the form of short and longerterm incentive schemes which are used to reward employees for the achievement and out-performance of specified targets and objectives, and to assist in attracting and retaining key personnel. For the short-term, all employees participate in a performance related bonus scheme designed and implemented on a financial-year basis, with payments made for performance against pre-set criteria at the end of the financial year. The targets set are both of a financial and line-of-sight operational nature, directly relevant to the performance expectations for each operation in the ensuing year. Performance against the targets is readily measured, and progress towards achievement thereof is communicated on an ongoing basis. Longer-term incentives include share purchase schemes and a performance-related phantom share scheme, the latter being extended to key senior staff members, and which are aligned to the company s share performance. These schemes are more fully described under Statutory Information on pages 67 to 69 of this report. REMUNERATION / NOMINATION COMMITTEE For the year under review, the company s Remuneration / Nomination Committee comprised initially seven non-executive directors, five of whom were independent, reducing to six and four respectively upon the retirement of Mr R A Norton with effect from 14 July. The members of the Committee are indicated on page 7 of this report. The Committee was chaired by Mr R A Norton until his retirement and thereafter by Mr M J Shaw, except when it meets to consider nomination matters, it is chaired by Mr R A Williams as chairman of the board. The Committee has formal terms of reference approved by the board. The Committee is responsible for the assessment and approval of a broad remuneration strategy for the group, and for the development and determination of the company s general policy on executive and senior management remuneration. It is also responsible for making recommendations to the board on the fees and remuneration payable to the company s non-executive directors. The Committee plays an integral part in succession planning relative to senior executives, and also gives consideration to the composition of the board and makes appropriate recommendations in this regard to the board. The Committee is apprised of any movements in the beneficial shareholdings of all directors of the company. The Committee meets at least three times a year at which meetings appropriate members of executive management are in attendance. In the past year, five meetings were held, attendance at which is reflected in table on page 32 of this report. For the period under review, the Committee satisfied its responsibilities in compliance with its terms of reference. EXECUTIVE AND SENIOR MANAGEMENT REMUNERATION The group aims to adhere to the broad guidelines of executive remuneration set out in the King II Report, in respect of the remuneration packages of the company s executive directors and senior management, ensuring that - the positioning of the remuneration packages is aligned between the market median and upper quartile of local and international industry benchmarks; there is an appropriate balance between fixed and variable remuneration which is modelled to achieve superior performance; short-term and long-term driven incentives are implemented which contribute to a performance-focused culture and which are aligned to sustainable shareholder value. 34

34 COMPENSATION OF DIRECTORS The remuneration of executive directors for the year ended 31 March was as follows - Salary Bonus Retirement Other Option Total and medical benefits gains contributions R000 R000 R000 R000 R000 R000 Clark G J * # Haworth D L # Riddle L W Stuart B M Zarnack K Total # Appointed with effect from 1 April * To retire on 31 May The remuneration of executive directors for the year ended 31 March was as follows - Salary Bonus Retirement Other Option Total and medical benefits gains contributions R000 R000 R000 R000 R000 R000 REMUNERATION REPORT * * Clark G J MacLeod D G Russell J T Stuart B M Zarnack K Total * Retired on 31 March The fees paid to non-executive directors were as follows - Connellan B P Hankinson M J Konar D # MacLeod D G Madi P M * Mkhize I N Molope C W N Mpungwe A R ^ Munday T S ø Norton R A Shaw M J Williams R A + Carr M I +Ω Langlands D R + Lister P A +~ Pike R N R R # Appointed Deputy Chairman 1 April * Resigned 31 March Appointed 1 September ^ Appointed 9 March ø Retired 14 July Ω Resigned 28 January ~ Appointed 28 January + These directors, nominated by the holding company, have each elected not to receive the payment of the fees due to them as non-executive members of the board and the board committees upon which they serve Total Post-retirement medical aid contributions paid on behalf of past directors amounted to R for the year (: R40 794). In addition, option gains aggregating R were received by Mr D G MacLeod in respect of options granted whilst he was an executive director. 35

35 Remuneration report continued SHARE OPTIONS Illovo Sugar 1992 Share Option Scheme This option scheme is covered under Statutory Information on pages 67 and 68 of this report. The table below reflects options previously granted to directors, any options exercised during the year under review, and options unexpired and unexercised as at 31 March. Options as at Option Options Exercise Options as at Expiry date 31 March price exercised price 31 March (cents ) during (cents ) the year Clark G J * MacLeod D G Riddle L W Stuart B M * Options granted to Mr MacLeod whilst an executive director. Illovo Sugar Phantom Share Scheme This share scheme is covered under Statutory Information on pages 68 and 69 of this report. Given that options in terms of this scheme are cash settled rather than equity settled, the scheme does not fall to be classified as a share incentive scheme in terms of the JSE s Listings Requirements. 36

36 The table below reflects options previously granted to directors, options granted during the year under review, any options exercised during the year under review, and options unexpired and unexercised as at 31 March. Options as at Option Options Options Exercise Options as at Expiry date 31 March price granted exercised price 31 March (cents ) during during (cents ) the year the year Clark G J Haworth D L REMUNERATION REPORT * MacLeod D G Riddle L W Stuart B M Zarnack K * Options granted to Mr MacLeod whilst an executive director. 37

37 Sustainability report Illovo Sugar subscribes to the principles of sustainable development as incorporated in the King II Report and the process for reporting on non-financial matters within the group is the subject of ongoing development. The focus is on the care and development of both employees and the communities in the areas in which the group s operations are based. Illovo qualified for inclusion in the JSE Limited s Socially Responsible Investment (SRI) Index and in addition to being rated as one of the 30 best performers in the high environmental impact category, was acknowledged for having been a consistent best performer for three years running. Best performers are described as those companies that have met the relevant required environmental threshold, as well as all applicable core indicators in the social and governance areas. Other than this assessment, the company s sustainability report has not been externally assured. ECONOMIC IMPACT Wealth distributed Employee costs Finance costs Dividends Taxation Wealth reinvested Retained profit Deferred taxation Depreciation VALUE ADDED STATEMENT 4% 16% 45% 11% 13% 8% 3% The value added statement shows the wealth the company has been able to create through manufacturing, trading and investment and its subsequent distribution and reinvestment in the business. During the current financial period, R3 114 million was created, which is 1% less than in. Of this amount, R2 361 million was distributed to employees, providers of capital and to governments. Of the wealth created, 45% was paid to employees. The balance of the wealth created was retained and reinvested in the company for the replacement of assets and the development of operations. March March Wealth created Revenue Dividend income 4 2 Paid to growers for cane purchases (2 510 ) (2 735 ) Manufacturing costs (2 848 ) (2 737 ) Wealth distributed To employees as salaries, wages and other benefits To lenders of capital as interest To shareholders as distributions To governments as taxation Wealth reinvested Retained profits in holding and subsidiary companies Depreciation Deferred taxation Analysis of taxes paid to and collected on behalf of governments Central and local governments Current taxation (including secondary tax on companies) Rates and taxes paid to local authorities 5 6 Customs duties, import surcharges and excise taxes Net contribution to central and local governments The above amount contributed excludes the following - Employees taxation deducted from remuneration paid Net Vat amount collected on behalf of governments Non-resident shareholders tax

38 The group continues to invest proactively in training and development and spent R31 million of direct costs in this area in the period under review. SOCIAL IMPACT Human resources Human resource management and associated operational strategies are determined by the business needs of the group s operating entities with direction from the corporate office. Although operational responsibility rests with all levels of management, the setting of policies and the specialist determination of strategic direction is driven by the Human Resources Executive. The strategies appropriately embrace the macroenvironment prevailing in each country of operation, and alignment is achieved through the group s strategic intent. Underpinning this, and to ensure that the operational strategies are met, is a work ethic of continuous improvement which encourages focused, skilled employees to realise their full potential and to make a difference in their areas of operation. As a multi-national organisation, employee communication is considered critical to the business and each year a Business Understanding Programme is presented to all employees, promoting an understanding of the prevailing business climate at both the group and operational levels. With diverse and widespread senior management teams in several operating countries, regular communication and executive-led site visits are also undertaken. Key areas of human resource focus include workplace safety; best practice benchmarking; targeted manpower succession planning; talent and performance management; the maintenance of collaborative industrial relations; human resource development and business understanding; Black Economic Empowerment (BEE)-linked employment equity and localisation programmes; and the health and welfare of employees and their dependants. To this end specific attention is given to the staffing of all operations within effective organisational structures, with competent personnel both from an operational and managerial perspective, in order to ensure that goals and objectives are achieved. Manpower benchmarking exercises are undertaken to ensure that structures are efficient; the continued focus on talent management and manpower succession planning, to develop and retain managerial and technical skills, especially within the group s identified key disciplines and positions; being the employer of choice. Remuneration packages which are merit-based and market-competitive in all countries of operation are reviewed regularly. Similarly, incentives such as performance-related bonuses, and share purchase and share schemes are utilised throughout the business and are up-dated to cater for specifically targeted outcomes; complying with internationally recognised labour practices as legislated in the various countries of operation and ensuring that sound employee relations prevail. Trade union involvement is an ongoing component of this process and some 80% of permanent employees are unionised. Collective bargaining forums, which determine the levels of wage rates and other substantive employment conditions via negotiated collective agreements, are established and supported by existing legislation in all countries of operation; training and employee development, which remains an important pillar for harnessing the group s human resource talent and potential. Activities are aimed at satisfying both the current and future business needs in terms of the available skills supply, whilst also supporting employment equity and localisation initiatives. The group invested approximately R31 million of direct costs in this area over the period under review, SUSTAINABILITY REPORT 39

39 Sustainability report continued The group operates 24 primary health care clinics and four hospitals across six countries of operation and during the past year recorded approximately patient visits to these facilities. representing 2.8% of payroll, of which some 6% was used for business alignment workshops, 48% for technical-type training, 33% for management, supervisory and leadership development, 6% for safety and health awareness and training, and the balance on education projects, including adult basic education type programmes. Employee development initiatives include the implementation of internationally accepted safe working practices and health care programmes; the building of employees understanding of the prevailing business context within Illovo. Approximately employees attended the group-facilitated Business Understanding Programme during the year under review; the continued development and implementation of performance management systems, together with ongoing technical competency training which is linked to ISO 9001:2008 standards, along with individual career-pathing and operational excellence; the delivery of group-based management development programmes, aimed at both first-line and upper management. Some 510 managers completed these programmes during the reporting period; the support of 25 students, mainly from the engineering discipline, through their tertiary education by way of Illovo bursaries. Upon successful completion of their studies, these students are bridged into the Management Trainee Programme. At any given time during the year under review, there were some 60 graduates progressing through this programme; the provision of structured formal technical apprenticeships, with 110 employees presently enrolled in varied apprenticeship courses across the group; in South Africa, the opportunity for graduate accountants to continue their Chartered Accountant studies whilst in full-time employment by the company, whilst under the Training Outside Public Practice programme; the leveraging of operational best practice across the group. Employment equity The company promotes equal opportunity and fair treatment in employment through the elimination of unfair discrimination. It encourages inclusiveness with regard to human resource practices, irrespective of race, gender, nationality or religious affiliation. In South Africa, the annual Employment Equity and Income Differential reports, covering progress made with the company s Employment Equity Plan, a key pillar of its BEE programme, have been submitted to the Department of Labour and the Employment Equity Commissioner respectively. Progress continues to be monitored through a group Central Co-ordinating Forum which includes representation from local consultative forums which are in place at the various operations. In respect of income differentials, in line with its policy of equal opportunity and fair treatment, the company does not have any cases of unfair income differentiation which are based on arbitrary grounds such as, but not limited to, race, gender and disability status. Where there are cases of differentiation, they are based on objective grounds such as job level or grade, occupational category, performance and collective bargaining outcomes. 40

40 Relevant statistics in respect of designated employees, as defined in South African legislation, are shown in the table below Representative areas % designated Management level Skilled level Promotions (management / skilled) External recruitments (management / skilled) Promotions (all levels) External recruitments (all levels) Combined recruitments & promotions (all levels) Combined recruitments & promotions (management/skilled) Skills development initiatives (permanent employees) Management trainees Complement The group s overall permanent manpower complement as at 31 March was The focus remains one of right-sizing operations to ensure that the correct organisational structures are in place, staffed by competent people with appropriate skills to meet the group s operational objectives. Employment was in the following categories Sugar manufacture Agriculture Downstream 350 In addition to the permanent complement, approximately seasonal employees were engaged in agricultural operations at the peak periods during the year. Managed health care Particular focus continues to be given to designated appointments in the more senior levels of management. During the year under review, a shortage of technical skills in the market was experienced by the group in sourcing designated manpower in certain areas. Access to health care is provided to all employees and their dependants, either through the network of group-run primary health care clinics and hospitals or through the provision of medical insurance schemes. Where no other public medical facilities exist, these services are extended to members of surrounding communities. The group operates 24 primary health care clinics and four hospitals. These facilities are staffed by 16 doctors, 150 nurses and other qualified medical staff, and 135 auxiliary personnel, and provide a service to approximately employees and dependants. In South Africa, the health facilities are clinicbased, and focus on occupational health, primary health care and HIV/AIDS, whilst in the operations in the rest of Africa, the facilities are hospital-based, and focus on primary and secondary health care, occupational health, HIV/AIDS and malaria and other tropical diseases. During the past year, there were approximately patient visits to the group s health care facilities. A holistic approach to the group s managed health care policy is adopted by providing public health services such as potable water, sanitation and refuse removal, where these are not provided by respective governments. Occupational health is an important facet of the medical services delivered at every operating site. Qualified nursing practitioners perform duties that include regular job-related medical examinations, along with medical surveillance, such as hearing and lung-function testing and biological monitoring of employees, in line with the health and safety regulations of the respective countries of operation. The group continues to take a pro-active stance against life-threatening epidemics such as HIV/AIDS, malaria and tuberculosis. These diseases are being managed, largely on a preventative basis, to negate their impact on the business and the employees themselves. Strategies towards controlling the spread of HIV/AIDS include preventative awareness programmes along with an established in-house Wellness Programme for those afflicted. These programmes continue to be developed in accordance with appropriate best practice aligned to international standards. They involve ongoing high-profile education and awareness campaigns, effective treatment and prevention of sexually transmitted infections, use of peer counsellors in the process of preventative activities and education, voluntary counselling and testing (VCT), use of prophylactic antibiotics, effective screening for tuberculosis, and the promotion of a healthy lifestyle. SUSTAINABILITY REPORT 41

41 Sustainability report continued A holistic approach towards the group s managed health care policy is adopted by providing public health services such as potable water, sanitation and refuse removal, where these are not provided by respective governments. Determining the impact of any HIV/AIDS intervention is difficult, largely due to the confidentiality restrictions with respect to the testing and recording of the disease. However, the group recognises the importance of VCT as it enables individuals to become aware of their HIV status, empowering people to act safely and responsibly, and is therefore key to controlling the spread of the disease. To this end, the group continues to campaign for employees and their dependants to get to know their status and in this regard, has set a target to test 50% of all employees annually. A further target has been set to ensure that at least 50% of HIV positive employees join the Wellness Programme. During the year under review, employees underwent VCT. Excluding those who have been previously tested and identified as HIV positive, this represents 52% of the permanent complement. Of all employees who have tested positive, 61% have joined the group s Wellness Programme. Government interventions relative to the provision of anti-retroviral treatment (ART) are closely monitored in all countries of operation. Where the group is requested to assist in the process, it is particularly important to ascertain the long-term sustainability of intended programmes and the role that the government medical facilities are expected to play in South Africa, formal facilitation partnerships have been developed with those local government hospitals designated as HIV-ART centres, to allow employees and dependants on the Wellness Programme to be bridged into the government ART programme as and when their status for this treatment is medically necessitated; in Malawi, Zambia and Swaziland, the group assists in implementing the government-funded ART programmes at its mill-based medical facilities. Affected employees and dependants in Tanzania and Mozambique are presently being referred to government facilities. In respect of malaria, the group subscribes to the African continent s recognised Roll Back malaria programme, with mosquito control spray programmes and the distribution of insecticide-treated bed nets, being undertaken in the areas affected. This, together with established laboratory testing facilities, enables early detection and prompt commencement of effective treatment. Close liaison is maintained with national malaria control units and in some cases the group s health centres are recognised sentinel sites for the collation of malaria statistics and research. In the case of tuberculosis (TB), the group works closely with national programmes in this regard, and assists with the diagnosis, treatment and follow-up of TB cases where appropriate. Employee benefits and welfare The group offers a diverse range of benefits to its employees, including employee share purchase schemes in certain countries where the operating company is listed, enabling employees to acquire a stake in the business; retirement funding schemes, where elected employee trustees representing the interests of members assist with the prudent management of various funds; educational assistance which is extended to the children of employees in various forms, ranging from the provision of schools to the allocation of bursaries, grants and loan funding; upliftment of life skills of employees through the provision of Adult Basic Education and Training (ABET), retirement planning, HIV/AIDS education and counselling. 42

42 The group operates in diverse environments many of which are predominantly rural with significant development needs. During the year, the group contributed R144 million towards providing community needs, including community outreach programmes and education. Black Economic Empowerment The group is conscious of its responsibility to progress Black Economic Empowerment (BEE) in South Africa and local economic empowerment in the host countries of Illovo s operations outside South Africa. The group has adopted an integrated approach which encompasses meaningful and sustainable participation of Black people at all operations and promotes participation of communities in the value chain of the sugar industry. In South Africa, relative to the Codes of Good Practice on Black Economic Empowerment (the Codes), which were issued in February 2007 in terms of the Broad-Based Black Economic Empowerment (BBBEE) Act, 2003, for the year ended 31 March, the company was audited by an external verification agency and was rated as a Level 5 Contributor, having attained an aggregate score of 59.14% (: 59.20%); comprising the component scores as reflected in the table below - SUSTAINABILITY REPORT Element Score (%) 2008 Ownership Equity Management Control Employment Equity Skills Development Preferential Procurement Enterprise Development Socio-Economic Development In the Financial Mail / Empowerdex Top Empowerment Companies report in South Africa, the company was ranked 67th overall and 6th in the food and beverages sector. In terms of the various BBBEE elements, Illovo was ranked 2nd on socio-economic development. Particular attention is given to preferential procurement from and outsourcing to Black enterprises and service providers, including the development and support of outgrower schemes. During the /10 season, revenue paid to small, medium and large-scale Black farmers for their cane supplies in South Africa delivered to four sugar mills, amounted to R198 million, which compares favourably with the R194 million paid to such growers during the 2008/09 season, when the company operated five mills. Since the initiation of the programme for the sale of the company s farms to Black people in 1996/97, Illovo has sold 58% of its cane lands to BEE companies and commercial farmers. To-date, in terms of the Restitution of Land Rights Act, 1994, land claims covering approximately 50% of the total areas under cane which supply cane to the company s mills in South Africa, have been gazetted. Most of these claims have been made on behalf of local communities which reside in the relevant areas. The process has been particularly protracted and many of the affected growers remain uncertain of their futures. Many of the claims are being contested by the growers. However, where such claims are successful or where growers willingly agree with the Department of Rural Development and Land Reform and / or the Commission on Restitution of Land Rights to make their farms available to the local communities, the company is actively 43

43 Sustainability report continued Illovo engages with its relevant stakeholders on an ongoing basis and for example, provides regular opportunities for members of subsidiary company boards to visit the group s other countries of operation. involved in seeking to ensure that the properties concerned can continue to be farmed on a long-term sustainable basis. Society The group operates in diverse environments many of which are predominantly rural, with limited infrastructure and significant development needs. These challenges are most evident in the countries of operation outside South Africa, four of which are classified by the United Nations as Least Developed Countries. In line with the group s strategic intent as a long-term investor and a major player in these communities, an active social investment programme is in place at each of the operations and is structured to address the specific needs of the respective communities. During the year under review, the group contributed R144 million towards the provision of housing, including water, electricity, road maintenance and sanitation; hospitals and clinics; education; community outreach programmes; and environmental initiatives for the benefit of both employees and local communities. This amount was directed as follows Housing and related infrastructure 72 Hospitals and clinics 40 Education 16 Community 12 Environmental initiatives 4 Total 144 Community projects are considered on the basis that they are motivated by members of the local communities and designated company representatives. To gain company support, projects must be shown to be meaningful and sustainable, with significant community reach and participation. Stakeholder engagement Illovo is cognisant that its long term sustainability objectives are supported by engaging with its relevant stakeholders to address matters of mutual interest, aware that its corporate reputation is based upon how well it performs compared with the legitimate interests and expectations of stakeholders. The type of stakeholders with which the group interacts and the nature of the interaction are products of the operating environment and consequently vary from country-to-country, but underscored by management s responsibility to maintain its visibility to and accessibility by its stakeholders. Generally, across the group, the key stakeholders have been identified as: employees; trade and labour unions; shareholders, investors, analysts and providers of capital; regulators; customers; raw material suppliers; suppliers and service providers; governments; local communities, traditional and civic society; sugar industry representative structures; trade and consumer bodies, amongst many others. 44

44 The forms of interaction are diverse, but specific to each stakeholder. For example - Key Stakeholder Employees Trade unions Shareholders, investors, analysts Regulators: The JSE Limited; Lusaka Stock Exchange and Malawi Stock Exchange Customers Raw material suppliers providers of sugar cane Suppliers and service providers Governments Communities, traditional and civic society Type of interaction Communication forums / management up-dates relating to company business, strategy, general announcements, etc; group-wide business understanding programme; internal bi-annual magazine; skills training and career development; induction programmes; marketing awareness and promotions; workplace forums; safety toolbox sessions Trade union business interaction; labour forums, such as bargaining councils Investor / analyst presentations; one-on-one meetings; site visits; regular operational and financial communications; annual general meeting Ongoing communication and interaction regulation, compliance, company information releases and announcements; annual SRI index (South Africa) Trade market: Ongoing interaction with supermarket chains and wholesalers; promotion of sugar distribution and depot system amongst potential entrepreneurs; direct consumer stakeholder contact; involvement in community-based initiatives; support of annually sponsored sporting events Industrial market: Key customer interaction; focus on specific customer requirements; technical and operational support annual Cane to Sugar course, ongoing liaison Ongoing communication at both industry and local level with grower associations and member groups; operational discussions of mutual concern; contact through industry structures Support of local industry suppliers; development programmes to identify and maintain strategic group suppliers; annual recognition of top performing suppliers via awards programmes; business and operational up-date meetings; negotiation of service level agreements Ongoing discussion at industry and company level with government departments relating to sugar cane growing and milling, together with other departments dealing with land reform, rural development, etc; regular contact to up-date government representatives on state of ongoing business, strategy, capacity expansions Strong identification and communication with communities surrounding operations relating to cane development, community / company projects of mutual concern; support of community-based social investment requirements; provision of community infrastructure and advocacy of community issues SUSTAINABILITY REPORT The company participates in public policy development through sugar industry structures, tripartite business, labour and government public policy development structures, and other business associations. Its involvement in the facilitation of broader national strategic objectives continues through participation in organisations such as the National Business Initiative and the Business Trust (in South Africa), along with its membership across the group of other private and public forums to promote and facilitate the economic business landscape in the various countries of operation. In its employment practices, the group remains committed to human rights and fair treatment of its employees in line with International Labour Organisation Conventions on employment, which in most countries of operation are also enshrined in the employment-related legislation. The group s employment policies are explicit in their commitment to equity ensuring that forced and child labour does not take place at any of its operations. Where potential exists for the contravention of these principles and policies by partner enterprises in the value chain, these enterprises are formally advised that the ongoing business relationship between them and the group is contingent upon them complying with these standards and norms. As a consequence of this commitment to human rights and fair employment practices, for the year under review, the group did not have to pay any fines for non-compliance with relevant legislation in any of the countries in which it operates. 45

45 Sustainability report continued The group has well-established and ongoing interaction with local small, medium and large-scale farming communities. Community and enterprise development In the countries of operation outside South Africa, the group participates in the upgrading of schools and assists in their administration and management in an effort to improve education delivery. There are 27 schools in five countries currently benefiting from this type of support. In South Africa, the company undertakes local community projects to improve facilities at schools in the communities in which Illovo has agricultural and manufacturing operations. It also supports education-related initiatives, such as Rally to Read, a literacy-based development programme co-ordinated by the National READ Educational Trust. Through the South African sugar industry, the company supports the Sugar Industry Trust Fund for Education which provides student bursaries, finances school building projects, works with community-based educational authorities to improve education standards and also provides ongoing financial support for tertiary educational institutions. In addition to providing financial and other support for community-based welfare and fund-raising organisations, Illovo contributes to the South African sugar industry s social investment programme which operates in KwaZulu-Natal and Mpumalanga, and continues to contribute to the National Business Initiative and the Business Trust. Job creation and poverty alleviation initiatives in the communities in which the group operates are actively pursued. This is achieved through the outsourcing of support services and other requirements which can be procured from local entrepreneurs. Cane development programmes are also encouraged by the group as revenue generated by deliveries from private growers, particularly those in rural, impoverished areas, promotes economic development and further enterprise development in the local communities concerned. By way of cane delivered by private growers across the group to Illovo factories for processing, amounting to around 60% of total cane throughput, the group has well-established and ongoing interaction with local small, medium and large-scale farming communities. The group continues to actively promote the development and support of indigenous growers. Dedicated offices have been established across all six countries of operation to provide agronomic expertise and advice on optimal agricultural management practices, together with ongoing training to build technical, financial and administrative competence in order that these growers are able to take charge of their own agricultural businesses. Illovo also assists in facilitating access to grant and other types of funding for both new and existing cane agriculture developments. In the year under review, total cane from indigenous growers, including community-based co-operative schemes, generated revenue of approximately R645 million for such growers. General staff support and development In addition to the community and enterprise development initiatives, and to the employee development activities covered elsewhere in this report, there is a range of other types of support that the group makes available to its staff. Illovo provides assistance to employees who wish to further their studies, where such further study is beneficial to both the employee and the group. Permanent employees of the group are assisted with the costs associated with secondary and tertiary education for their dependants. On the basis of academic ability as future employees, children of employees may also benefit from bursary schemes which the group offers to enable students to study at universities or equivalent institutions. Enhancement of the employees life skills is carried out through the provision of adult basic education and training, retirement planning, and HIV/AIDS education and counselling and wellness programmes. 46

46 Risk management is an integral part of the Illovo business and the safety, security and preservation of its people and property are essential for the group s sustainable growth. The group continues to facilitate home ownership in South Africa and Swaziland in order that employees have a stake in the communities in which they live and work. Initiatives include the provision of home loan subsidies and the ongoing sale of company-owned houses. TECHNOLOGY, RESEARCH AND DEVELOPMENT In order to optimise the return from existing installed capacity, the group continues to benefit from well-established in-house resources which provide technical expertise in agricultural production and sugar and downstream product manufacture to all operations. A centralised core of expertise exists to ensure technical standards are optimized and maintained for both existing equipment and new agricultural and factory installations, and to keep abreast with technical innovations. This in-house function is also involved in investigating opportunities to expand the group s operations, and in the planning and implementation of approved projects. Collaboration with regard to the application of new technology and energy and process performance optimization between the group s technical team and British Sugar plc, a fellow subsidiary of the holding company with responsibility for Illovo, is an ongoing function. This collaboration is expected to benefit the group in the longer-term. Benchmarking to improve productivity and reduce unit costs is a major area of attention in all operations, with additional resources recently having been allocated to enhance operational performance and benchmarking across the group. Illovo is also participating in operational performance benchmarking and best operating practices within the British Sugar group. The group benefits on an ongoing basis from research and development undertaken by the South African Sugar Milling Research Institute and the South African Sugarcane Research Institute. These organisations are funded by the member sugar industries which are represented on the respective boards of the institutes. Illovo also has a dedicated team which pursues opportunities for the development and commercialisation of downstream products and new applications. In addition to its own resources, there is ongoing collaboration with both local and international research organisations, and contract work is outsourced when appropriate. RISK MANAGEMENT Risk management is an integral part of Illovo s business. The safety, security and preservation of its people and property are essential for the group s sustainable growth. The focus of risk management in Illovo is on identifying, assessing, mitigating, managing and monitoring all known forms of risk across the group. Management is involved in a continuous process of developing and enhancing its comprehensive systems for risk identification and management. The risks to the business encompass such areas as the weather, world product prices, exchange rates, political and economic factors, legislation and national regulations, interest rates, people skills, and general operational and financial risks. The major risks and their relevant mitigating and management strategies are the subject of the ongoing attention of the board and are given particular consideration in the annual strategic plan which is approved by the board. Business continuity plans for all sites have been developed through a process of considering and assessing all possible major risks which may impact the business. SUSTAINABILITY REPORT 47

47 Sustainability report continued All the factory operations have been certificated under the ISO 9001:2008 quality management system, whilst the Merebank and Glendale distilleries have also achieved OHSAS 18001:2007 certification for health and safety. The management of financial risk is covered under note 40 to the financial statements on pages 109 to 112. The management of operational risk is a line function, conducted in compliance with a comprehensive set of group policies and standards to cover all aspects of operational risk control. Performance is measured on a regular basis by means of both self assessments and audits by independent consultants. In addition, the group promotes on-going commitment to the management and control of risk by participating in externally organised risk management and safety systems. The NOSA Integrated Five Star System covering safety, health and environmental management is implemented at all the cane growing and factory operations. During the year under review, all operations were graded on the NOSA platinum star system, and were accredited with four star ratings. The Disabling Injury Frequency Rate (DIFR) measurement of safety performance is used at all the group s operations, and is included as one of the line-of-sight targets for the performance related bonus scheme. The target DIFR for the year under review was strengthened from 1.5 to 1.0, and this was achieved by all operations, apart from two, which however met the prior-year target. Regrettably, three employees were fatally injured in work-related incidents during the past year. These unfortunate incidents, all involving vehicle accidents in the cane growing operations, were the subject of thorough executive investigation and appropriate remedial actions were taken so as to prevent a similar recurrence. All the factory operations and the cane growing operations outside South Africa have been certificated under the ISO 9001:2008 quality management system. In addition, the Swaziland factory operation as well as the Merebank distillery have attained the environmental management ISO 14001:2004 accreditation, whilst Merebank and the Glendale distillery have achieved OHSAS 18001:2007 certification for health and safety. In South Africa, the factory at Umzimkulu, the Noodsberg refinery and the Eston syrup plant have been certified under the Hazard Analysis and Critical Control Point (HACCP) food safety system. Certain of the other factory operations in South Africa, Malawi and Zambia are making progress towards this accreditation. During the year under review, there were no significant health, safety or environmental penalties imposed on any of the group s operations. Insurance cover on assets is based upon current replacement values. Consistent with the high standard of risk management, a substantial portion of risk is self-insured, at costs well below market premiums. All risks are adequately covered, except where the premium cost is excessive in relation to the probability and extent of loss. ENVIRONMENT The underlying philosophy of Illovo s environmental policy is to continually look for ways to reduce the environmental impact of its operations by both the efficient use of natural resources and committing the group to continuous improvement. The measurement of and reporting on environmental performance is guided by both the JSE s SRI Index and the Global Reporting Initiative (GRI) Content Index. Environmental performance data is collated from throughout the group and is externally verified and assured. Key performance data reported includes energy usage, both sustainable and non-sustainable, water usage, waste-water, non-hazardous and hazardous waste, and packaging. 48

48 It is significant that almost 90% of the group s power requirements are produced by its own installed electricity generating capacity from renewable energy sources such as bagasse and biomass. During the course of the year under review, Illovo commissioned consultants to undertake a group-wide study of sustainability issues so as to determine key performance areas and establish procedures to more accurately measure the group s environmental footprint. In addition, a carbon workshop was held in order to initiate a more informed and better co-ordinated strategic approach to the management of carbon emissions from the operations. Agriculture In respect of its agricultural operations, the group has adopted farming practices based on field conservation guidelines as advocated by the South African Sugarcane Research Institute, so as to ensure agricultural production on a sustainable basis with minimum impact on the environment. This includes the implementation of land use plans when developing new and re-establishing existing cane fields; the optimal placement of field and access roads; the most suitable method of field establishment so as to conserve soil and water; the protection of existing environmental features such as rivers, wetlands, catchment areas and indigenous forests; and the removal of alien vegetation. In addition, sugar cane, upon harvesting, immediately recommences another growing cycle from its existing roots. This process called ratooning recurs until the sucrose content of the cane plant reduces below a predetermined level, whereafter replanting is undertaken. This generally takes place every eight to twelve years. The environmental benefit of this ratooning and replanting process is the significant reduction in the frequency of soil disturbance and the exposure to soil erosion. Agricultural operations in South Africa are mostly rain-fed, thereby minimising the impact on subterranean water supplies, whilst in the group s other countries of operation, water for irrigation is supplied from secure water resources such as major rivers, lakes and dams. The conventional practice of cane burning immediately prior to harvesting is conducted strictly in terms of industry guidelines. The adoption of green cane harvesting practices, without burning, takes place where feasible. This has the benefit of the leaves and the tops of the cane plant being left behind in the harvesting process, providing for moisture retention and nutrients for the soil, and offering potential as a renewable energy source as a feedstock for the sugar factory boilers. The use of the cane leaves and tops as biomass feedstock for the boilers, as a supplement for bagasse, has been successfully integrated into the sugar factory operations in Swaziland and Malawi. Sugar manufacture The process used for manufacturing sugar from sugar cane provides a unique sustainable advantage with minimal environmental impact. The fibrous residue remaining after the extraction of sucrose from sugar cane, bagasse, may be used as a bio-renewable energy source in sugar factory boilers to generate electricity. This electricity is capable of not only meeting the power requirements of the sugar factory, but may also be used for operating the irrigation systems used for cane growing, and for supplying administrative and domestic users and national grids. Bagasse is used as a boiler fuel at all Illovo s sugar factories, and under normal operating conditions, the factories are self-sufficient in terms of electrical requirements, save that the downstream plant at Sezela relies on power from the national grid. Whilst the factories outside South Africa also supply power for cane irrigation, supplementary electricity supplies are required from external sources, particularly during the factory offcrop maintenance periods. Fortunately, these periods coincide with the rainy seasons, when there is a limited need for irrigation. 49 SUSTAINABILITY REPORT