Integrated Report. for the year ended 31 March 2013

Transcription

1 Integrated Report for the year ended 31 March 2013

2 A leading low-cost sugar and downstream products producer on the African continent with strong domestic markets and exports to 78 countries.

3 Contents Business overview Scope of report Inside front cover Vision 1 Group profile 2 Strategic Intent 2 Forward-looking statement 2 Investment case 3 Illovo s cane sugar integrated business sustainability model 4 Production and market statistics 6 Group key performance indicators 7 Value-added statement 8 Five-year review 9 Notes to the five-year review 11 Group structure and locations 12 Stakeholder engagement 14 Managing our integrated risks 15 Strategic overview 16 Strategic and operational accountability 18 Directorate 20 Executive Committee 22 Governance structure 23 Commentaries Chairman s statement 26 Managing director s review 28 Financial director s review 32 Operations director s review 38 Commercial director s review 44 World of sugar 50 Sustainability Introduction 58 Corporate governance 61 Social and Ethics Committee report 69 Remuneration report 71 Risk management report 76 Stakeholder engagement 80 Economic impact 82 Social impact 84 Environmental impact 94 Condensed consolidated financial statements Independent auditor s report 107 Directors report 108 Audit Committee report 112 Shareholder information Analysis of shareholders 124 Notice of annual general meeting 125 Directors curricula vitae 128 Glossary of terms 130 Form of proxy Shareholders diary Corporate information attached inside back cover inside back cover

4 Scope of report This Integrated Report to stakeholders covers the Illovo group s financial and non-financial performance for the year ended 31 March It incorporates the ongoing business activities of the cane, sugar and downstream operations of all the company s subsidiaries which are located in six African countries: Malawi, Zambia, South Africa, Swaziland, Mozambique and Tanzania. There has been no change to the structure of the business during the past 12 months and accordingly this report builds on and is comparable to the 2012 Illovo Integrated Annual Report for the year ended 31 March Information describing our agricultural, manufacturing and marketing activities has been provided on the basis of promoting understanding of the group s primary processes and providing an informed assessment of the group s ability to create and sustain value among our key stakeholders, including shareholders, investors, employees, trade unions, regulators (including the JSE), customers, raw material suppliers (most notably providers of sugar cane), other suppliers and service providers, governments, and communities and civil society. This report is also available on our website at In compiling the report, and in line with the group s aim to strengthen its integrated business approach, we have considered the following: the Companies Act, 2008 and the Companies Regulations 2011; the Listings Requirements of the JSE; King III; the Global Reporting Initiative s (GRI) G3 Guidelines, the Integrated Reporting Committee s Draft Paper on the framework for integrated reporting, the Consultation Draft of the International Integrated Reporting Framework, the awards criteria of the Institute of Chartered Secretaries of Southern Africa s Annual Report Awards, ISS Proxy Advisory Services and the JSE s Socially Responsible Investment (SRI) Index 2012; and the best practice frameworks, developed from auditing topranked corporate reports in South Africa, and trends in the market place. An index of the GRI sustainability performance indicators and the full annual financial statements are located on our website at In respect of the annual financial statements, assurance has been provided by the independent external auditors, Deloitte & Touche. The sustainability section of the report has been externally assured by IRAS, while individual components of other sections of the report, such as Illovo s B-BBEE rating, have been audited by relevant accredited external verification agencies. Approval of integrated report The board acknowledges its responsibility to ensure the integrity of this report. The directors have collectively assessed the content and believe the report addresses all material issues and presents fairly the integrated performance of our group. The board has authorised the release of this report for Don MacLeod Chairman Graham Clark Managing director 24 May 2013

5 Business overview The vision of the group is to be a world-class, low-cost and highly efficient organisation, operating on the African continent, adding value to its core products of fibre, sugar and molasses. We seek to enhance shareholder wealth and optimise growth, achieving a sustainable, balanced and integrated economic, social and environmental performance, whilst taking cognisance of the interests of our stakeholders. 01

6 Group profile Illovo is Africa s leading sugar producer and a significant manufacturer of downstream products, with extensive agricultural and manufacturing operations in six African countries. We produce raw and refined sugar for local, regional, EU, USA and world markets from sugar cane supplied by its own agricultural operations and from independent outgrowers who supply cane to Illovo s factories. High-value products manufactured downstream of the sugar production process are sold internationally into niche markets. Installed electricity generating capacity, fuelled by renewable resources, provides 91% of the group s energy requirements. Illovo is listed on the JSE and is a subsidiary of Associated British Foods plc which holds 51% of the issued share capital. Strategic Intent Illovo s Strategic Intent is: to be the leading sugar and downstream products operation in Africa, an increasing global supplier and a world-class organisation; to be the lowest-cost producer in every country in which it operates and among the lowest-cost producers in the world; to 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; to be the market leader, meeting and proactively anticipating customer needs; to 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; to 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; to 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; and Forward-looking statement We have made further good progress during the past 2012/13 sugar milling season towards our medium-term objective of increasing annual sugar production to more than two million tons by Our Vision and Strategic Intent remain valid supported by our overall strategy to maximise opportunities from our current operations while considering further expansion in Africa. At near-stable state, following a period of major agricultural and sugar production capacity expansion across the group, our base business is now benefiting from these initiatives which ultimately serve to strengthen Illovo s long-term economic sustainability. The imminent full delivery of three strategic projects commenced in 2011/12, namely the construction of an ethanol plant in Tanzania together with the establishment of a customdesigned sugar warehouse and a new project to increase significantly our cane supplies in South Africa, are further evidence of our growth strategy to support greater asset utilisation and improved opportunities for our diverse downstream operations. Our model to become self-sufficient in our own electricity requirements from renewable energy sources together with the greater objective of supplying surplus power to national grids, such as we do in Swaziland, remains a priority against the background of our group s sustainability objective to reduce GHG emissions. The strength of our business model is underpinned by our ability to supply efficiently our range of domestic and preferential markets in the EU and USA, together with our growing exports to regional African markets which remain fundamentally attractive. We have also made good progress to strengthen our integrated business approach across governance, economic, environmental and social sustainability indicators. In particular, from an environmental perspective, this has included work to better measure and quantify the group s GHG emissions and the commencement of a group-wide water footprint project which will guide us in developing an effective and efficient water management strategy for our business. These and other initiatives stand Illovo in good stead as it formulates new strategies to support the group s long-term sustainability. to be cognisant of the rural rural locations of the group s operations and the impact that it has on job creation and poverty alleviation in such areas. 02

7 Investment case Illovo is Africa s leading and largest sugar producer, comprising agricultural estates and 14 manufacturing sites across six Southern African countries, with the first origins of the group s history dating back to Driving our investment case today is our primary objective to enhance the wealth of shareholders by optimising long-term returns and growth of the business, against the background of achieving a sustainable, balanced and integrated economic, social and environmental performance. People are our strength 14 top-level independent and non-independent directors with combined Illovo board experience of 108 years and direct sugar experience of 139 years permanent employees seasonal employees at peak periods Products and markets the key Quality production of raw and refined sugar, speciality sugars and syrups together with high-value, niche-market downstream furfural and ethanol products Strong domestic, preferential, regional markets with proven expertise for outbound logistics Sustainability protecting our future and that of our stakeholders High community impact, core values aligned to social and environmental responsibility Continued development of Illovo s cane sugar sustainability model, making maximum use of all input material with minimum waste products 91% of group s energy requirements produced from own generating capacity from renewable resources GRI Application Level B+ Company Economic value Quality of earnings, strong cash generation, high interest cover Strong balance sheet with low gearing positioned for growth Attractive dividend yield Significant economic, operational and market scale inherent leverage Illovo s presence in African sugar production widely recognised and is the company of choice among governments wishing to develop/expand their own sugar industries Comparative share price index: Illovo, JSE Food Producers Index, JSE All Share Index (1 September 2006 to 24 May 2013) Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Apr 13 May 13 Base Illovo JSE Food Producers Index JSE All Share Index 03

8 Illovo s cane sugar integrated business sustainability model PIVOT IRRIGATION CMS LIQUID Fertiliser Harvest Boigas to energy recycle Molasses Sugar Mill STEAM BAGASSE Distillery WATER Sugar Natural solvents Evaporate AND Anaerobic Digestion Freeze Crystalisation Treated Condensate Ethanol to Market Sugar to Market Food Flavours, Margarine * For a full explanation of Illovo s cane sugar integrated business sustainability model see page 59 of the sustainability report. 04

9 Power AND WATER TO IRRIGATION Power IRRIGATION PUMP Boilers Steam Power to Mill Power Generation Residue water Electrolytic cell Hydrogen Generation power Furfural Plant hydrogen furfuryl alcohol Plant Agriguard Furfural furfuryl alcohol to Market Power Export to National Grid 05

10 Production and market statistics for the year ended 31 March 2013 Revenue of R1.696 billion earned by small and medium-sized outgrowers in 2012/13 Record ethanol production of 57million litres 35% increase in South African sugar to almost tons Group sugar sales 11% higher than last year Social benefits to employees and our neighbouring communities R197 million Kilombero new ethanol distillery to commence commercial production August 2013 Launch of major water footprint project to guide water management strategy across group Total sugar production million tons 14.9 million tons cane milled by 11 factories Rolling DIFR down 250% over 34-month period Own cane production ( 000 tons) Sugar production ( 000 tons) Total t Total t Malawi Zambia South Africa Swaziland Mozambique Tanzania Downstream revenues increase by 10% 87% of sugar sales to stable domestic and preferential markets Group sugar markets (%) Downstream production (SA only) Domestic EU and USA preferential Regional 22 World Group social investment spend (Rm) 22 Total R197 million Accommodation Health care Education Community Environmental initiatives Share of industry sugar production (%) Record 14.5 million accident-free man-hours achieved by Kilombero Agriculture Furfural tons Furfuryl alcohol tons Diacetyl kg Lactulose ton Ethanol kl Syrup tons Agriguard kl Malawi Zambia South Africa Swaziland Mozambique Tanzania Record tons sugar in Zambia Of R4.244 billion wealth created, R1.990 million was distributed to our own employees and R339 million to governments as taxation Coal usage amounts to only 5% of total group energy requirements Record cane production of : million tons Introduction of group ERM strategy New sugar warehouse and distribution centre commissioned in South Africa Opening of newlyconstructed Nyandeo Hospital, jointly financed by Kilombero Sugar Company Limited 06

11 Group key performance indicators for the year ended 31 March 2013 Financial highlights Revenue (Rm) Operating profit (Rm) Average exchange rate (R/US Dollar) Revenue increases by 21% to R billion ?? Operating margin rises from 15% to 17% Total distribution of 95 cents per share Weighted average shares in issue (millions) Headline earnings per share (cents) Year-end market price (cents per share) % growth in operating profit to R1.901 billion Headline earnings per share of cents improves by 43% Return on net assets increasing to19.7% Non-financial highlights Cane production (million tons) Sugar cane production (million tons) employees attend group Business Understanding Programme Total number of permanent employees Training and employee development spend (Rm) % of our group procurement needs are sourced from local country suppliers, amounting to R6.022 billion 89% the average level of permanent and seasonal employee unionisation Training and development spend increases by 26% to R57million Joint partnership with government to extend reach of malaria indoor spray programme to surrounding communities in Mozambique In South Africa, we retain our status as a Level 5 contributor relative to Codes of Good Practice on B-BBEE Inclusion in 2012 JSE s Socially Responsible Investment Index for sixth consecutive year, together with continued participation in Carbon Disclosure Project Adoption of UNAIDS HIV and AIDS Triple-Zero programme and UN acclaim for our awareness and prevention programme 70% of all external recruitments and internal promotions in South Africa from designated groups Vitamin A fortification of sugar introduced in Malawi, together with long-standing fortification in Zambia 07

12 Value-added statement The value-added statement shows the wealth the group has been able to create through manufacturing, trading and investment and its subsequent distribution and reinvestment in the business. During the 2013 financial year, R4 244 million was created, which is 35% more than in Of this amount, R3 067 million was distributed to employees, providers of capital and to governments. Of the wealth created, 47% 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 Rm Wealth created Revenue Dividend income 2 4 Paid to growers for cane purchases (3 386) (2 662) Manufacturing costs (3 501) (3 361) 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 Rates and taxes paid to local authorities 5 12 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 Withholding taxation Wealth reinvested 15% 6% 6% Retained profits Deferred taxation Depreciation 8% 11% 7% 47% Wealth distributed Employee costs Finance costs Distributions Taxation 08

13 Five-year review Ten-year compound annual growth % Rm 2003 to Consolidated income statement Revenue Operating profit Net financing costs Profit before taxation and non-trading items Profit attributable to ordinary shareholders Headline earnings Reconciliation of headline earnings Profit attributable to ordinary shareholders Adjusted for: (Profit)/loss on disposal of property, plant and equipment (0.9) (6.8) (10.3) (1.7) 2.7 (Profit)/loss on disposal of business (19.8) 27.9 Impairment of investments Profit on disposal of previously impaired assets (3.1) Headline earnings Consolidated statement of financial position Property, plant and equipment Intangibles assets Cane roots Investments and loans Current assets Cash and cash equivalents Total assets Equity attributable to shareholders of Illovo Sugar Non-controlling interest Total equity Deferred taxation Borrowings Interest-free liabilities Total equity and liabilities Consolidated statement of cash flows Operating profit before working capital movements Working capital movements (506.4) (291.6) (183.2) Cash generated from operations Net financing costs (279.6) (244.6) (95.5) (139.0) (185.4) Taxation paid (196.1) (209.0) (186.4) (304.2) (230.3) Dividend and deferred income Distributions/dividends paid (458.0) (370.3) (455.9) (490.2) (449.2) Net cash inflows from operating activities Investment in future operations (679.7) (210.6) ( ) (897.6) ( ) Replacement of property, plant and equipment (291.4) (239.2) (199.8) (181.1) (169.5) Acquisition of business (249.9) Proceeds on disposal of businesses Other movements 23.4 (58.9) (78.6) (82.6) (38.4) Net cash outflows from investing activities (947.7) (508.7) ( ) ( ) ( ) Net cash outflows before financing activities (817.6) (162.3) (838.5) (985.3) ( ) Long-term borrowings (repaid)/raised (245.7) (366.9) (200.0) Short-term borrowings raised/(repaid) (541.5) ( ) Issue/(repurchase) of share capital net of associated costs (26.7) Other financing activities Net cash inflows/(outflows) from financing activities (27.0) Net (decrease)/increase in cash and cash equivalents (844.6) (602.2) (468.1) Earnings and distribution per share Notes Earnings cents Headline earnings cents Distribution (interim paid; final declared) cents Distribution cover on headline earnings times

14 Five-year review continued Notes Profitability and asset management Operating margin % Return on average shareholders equity % Return on net assets % Return on total assets % Working capital per rand of revenue cents Liquidity and borrowings Net debt:equity ratio (3.4) 70.0 Gearing % (3.5) 41.2 Total liabilities to total equity % Current ratio times Interest cover times Employee statistics Total number of employees at year-end Average number of employees Revenue per average number of industrial employees R Net assets per average number of employees R Headline earnings per average number of employees R Note: Agricultural employees are excluded from the calculation of revenue per average number of employees. JSE Limited statistics Ordinary shares in issue Weighted average number of shares Net asset value per share cents Total volume of shares traded Total value of shares traded Rm Ratio of shares traded to issued shares times Headline earnings yield at year-end % Distribution yield at year-end % Price : Headline earnings ratio at year-end times Market price per share year-end cents highest cents lowest cents

15 Notes to the five-year review 1. Earnings per share Profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue. 2. Headline earnings per share Headline earnings divided by the weighted average number of ordinary shares in issue. 3. Distribution/dividend per share The distribution per share includes capital distributions out of share premium. 4. Distribution cover on headline earnings Headline earnings per share divided by distribution per share (interim paid; final declared). 5. Return on average shareholders equity Profit attributable to ordinary shareholders expressed as a percentage of average shareholders equity. 6. Return on net assets Operating profit expressed as a percentage of average net operating assets. 7. Return on total assets Operating profit expressed as a percentage of total average assets excluding cash and cash equivalents. 8. Working capital per rand of revenue Average of inventories and trade and other receivables less trade and other payables, divided by revenue. 9. Net debt:equity ratio Interest-bearing liabilities (net of cash and cash equivalents) divided by total equity. A negative net debt:equity ratio indicates that the group is in a net cash position. 10. Gearing Interest-bearing liabilities (net of cash and cash equivalents) expressed as a percentage of total equity and interest-bearing liabilities (net of cash and cash equivalents). A negative gearing ratio indicates that the group is in a net cash position. 11. Total liabilities to total equity Interest-bearing liabilities and other liabilities expressed as a percentage of total equity. 12. Current ratio Current assets divided by current liabilities. 13. Interest cover Operating profit divided by net financing costs. 14. Total number of employees at year-end The total number of employees excludes those employed by associate companies. 15. Net asset value per share Total assets less total liabilities divided by the number of shares in issue. 16. Headline earnings yield at year-end Headline earnings per share as a percentage of year-end market price. 17. Distribution yield at year-end Distribution per share (interim paid; final declared) as a percentage of year-end market price. 18. Price:headline earnings ratio at year-end Year-end market price divided by headline earnings per share. 19. Change in accounting policy Where a change of accounting policy is implemented with retrospective application, the previous year is restated but all other years are not restated in the five-year review. 11

16 Group structure and locations Zambia Sugar ownership 82 % Tanzania 55 % Kilombero Sugar ownership 5 % Contribution to operating profit Production of Sugar cane Direct consumption raw sugar Ethanol Speciality sugar Key elements Irrigated sugar cane estates Two sugar factories Commissioning of new ethanol distillery in 2013 Internal electricity generation Mozambique Malawi 76 % Illovo Sugar (Malawi) ownership 60 % Ubombo Sugar ownership 8 % Contribution to operating profit Key elements Irrigated sugar cane estates One sugar factory and refinery Internal electricity generation Electricity exports Production of Sugar cane Raw and refined sugar Speciality sugar Swaziland 12

17 Zambia 25 % Contribution to operating profit Production of Sugar cane Raw and refined sugar Speciality sugar Syrup Associated British Foods plc 51.4% AB Sugar, as a division of Associated British Foods plc (ABF), represents ABF in respect of all its sugar interests, including Illovo Key elements Irrigated sugar cane estates One sugar factory and refinery Internal electricity generation 6 % Contribution to operating profit Production of Sugar cane Direct consumption raw sugar Maragra Açúcar ownership Key elements Irrigated sugar cane estates One sugar factory Internal electricity generation 90 % 47 % Key elements Irrigated sugar cane estates Two sugar factories and refineries Speciality sugar production Internal electricity generation Production of Sugar cane Raw and refined sugar Speciality sugar Contribution to operating profit Key elements Three rain-fed sugar cane estates Four sugar factories, one including a refinery and 30% share in managed operation (including a refinery) Three downstream plants and 50% share in ethanol distillery Internal electricity generation Central warehouse and distribution facility 9 % Contribution to operating profit Production of Sugar cane Raw and refined sugar Speciality sugar Downstream: Furfural, furfuryl alcohol, diacetyl 2,3-Pentanedione, Agriguard products, ethanol, lactulose, syrup and treacle Illovo Sugar SA ownership 100 % South africa 13

18 Stakeholder engagement Illovo recognises that its long-term sustainability objectives are supported through engaging with our stakeholders to address matters of mutual interest. We are aware that our corporate reputation is based on how well it functions against the legitimate interests and expectations of stakeholders. Illovo appreciates the benefits derived from stakeholder dialogue and endeavours to maintain active and productive relationships, identifying and addressing relevant issues on an ongoing basis. Stakeholder support or lack thereof, may influence the group s performance. 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. However, the group s stakeholder engagement is underscored by management s responsibility to maintain its visibility to and accessibility by our stakeholders, with clear commitment not to profit at the expense of the environments and communities in which we operate. Further explanation of our stakeholder policies and management are featured on pages 80 and 81, together with a brief description of stakeholder interactions. COMMUNITIES, CIVIL SOCIETY TRADITIONAL AND EMPLOYEES TRADE UNIONS SHAREHOLDERS, INVESTORS, ANALYSTS GOVERNMENTS MEDIA PROVIDERS SUPPLIERS AND SERVICE REGULATORS PROVIDERS OF CAPITAL RAW MATERIAL SUPPLIERS: PROVIDERS OF SUGAR CANE CUSTOMERS 14

19 Managing our integrated risks Linked to our efforts to achieve a high level of corporate governance, as well as compliance with the risk management requirements of the King III Code, a comprehensive ERM process to assess, mitigate, manage and monitor the group s risk factors has been fully embedded across the business. This process focuses the risk management practices to deal effectively with uncertainty, to capitalise on opportunities, to meet objectives and stakeholder expectations, and enhance strategic and tactical decisionmaking. Our identification of salient risks arising out of the ERM process, together with the implementation and monitoring of risk improvement plans, have resulted in the overall risk profile of the group improving significantly. The following tables identify Illovo s major category areas together with the 10 top strategic and operational risks which are considered to have potentially the most material impact upon the group. A full account of their inherent and residual risk, before and after mitigating controls, is explained on pages 76 to 79. Risk categories Strategic Market Financial and treasury Operational Human capital Health and safety Product safety and quality Legal Environment Water Description of risks Projects Political risks Stakeholder relations World sugar price Local market revenue Regional market revenue Access to preferential markets Foreign currency exposure Access to funding Factory utilisation and performance Exceptional input cost increases Contractor performance Logistics delays Fraud/corruption Cane supply Recruitment and skills retention Risk or insufficient attraction of key skills Occupational health Employee safety Inadequate product quality Product liability exposure Legislative and regulatory compliance Direct and indirect tax exposure Exposure to complex tax legislation Failure to comply with local tax law Legal and commercial exposure due to prejudicial contractual environments Climate Sustainability imperatives Power/electricity supply Risk of continuity of water supply Potential climate change impacts on future water security Risk process Identify risks Develop assessment criteria Assess risks Assess risk interactions Prioritise risks Respond to risks 15

20 Strategic overview Strategic Intent Be the leading sugar and downstream products operation in Africa, an increasing global supplier and world-class organisation Be the lowest-cost producer in every country in which it operates and among the lowest cost producer in the world Key Performance Area 2012/13 KPIs include: Pictures Operational Performance 14% increase in group sugar production Operating margin improved 2.4 percentage points to 17% 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 Human Resource Development Employee development spend (Rm) Be the market leader, meeting and proactively anticipating customer needs Safety, Health, Environment and Quality Five entities achieved IS and/or FSSC food safety accreditation in 2012/13, with a further entity to be accredited by December 2013 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 challenging 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 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 its employees Optimise the return of 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 Sustainability and Governance Cost Reduction and Revenue Growth 91% of energy requirements from renewable resources using own installed capacity Social benefits to employees and our neighbouring communities amounted to R197 million Headline earnings growth of 43% to cents per share 10% increase in downstream revenue 16

21 Group Strategy Future Objectives include: Objectives and Ambitions Optimise current operational Reach production level of performance Leverage our existing expertise and scale in African operations to identify further opportunities to enhance shareholder wealth Evaluate opportunities to invest further in downstream operations, and consider footprint expansion as attractive opportunities arise Sugar production (million tons) millions tons of sugar by 2017 Improve overall time efficiency and yields Establish a Sugar Centre of Excellence and Training Academy Ethanol distillery in Tanzania to be brought into full operation Extend ethanol and furfural operations outside South Africa Promote the ongoing development of all employees so that they reach their maximum level of competence and participate fully to achieve the group s objectives Offer equal opportunity to all employees Continuously improve human resource productivity metrics, including number of employees per thousand tons of sugar produced Integrated talent management programme including succession planning at operational and management level Provide support and training to encourage development of local employees at all operations Proactively realise opportunities for improved people productivity Provide a safe working environment for all employees, contractors and stakeholders Be proactive in identifying the needs of customers Drive to further decrease workplace injuries by focusing on behavioural performance and entrenching further rigid health and safety standards Consistently deliver quality products and services to customers Continuous improvement in group safety and environmental performance Achieve a sustainable, balanced and integrated economic, social and environmental performance Ensure the company is managed in an efficient, accountable, responsible, transparent and moral manner Take cognisance of all stakeholders interests in the group s business Ambition that we will be self-sufficient in power supplies with 100% coming from renewable resources Implement Sustainability Policy and Framework Compliance with all JSE and King III requirements Improve water efficiency in both agriculture and factories Embed a culture of continuous improvement across the business Undertake research and development to maximise value added from core products 4% increase in downstream revenue 2013/14 Continuous improvements programme to lead to improved working practices, increased plant optimisation and enhanced operating profit Achieve self-sufficiency in electricity requirements Realise logistical savings from introduction of the new South African warehouse and distribution centre 17

22 Strategic and operational accountability MALAWI Business profile Illovo Sugar (Malawi) Limited, listed on Malawi Stock Exchange Two agricultural estates, two factories with refineries Produces raw and refined sugar, speciality sugars permanent employees seasonal agricultural workers at peak DIFR: 0.14 (2012: 0.18/group target: <0.5) Areas of operation Corporate office Limbe Dwangwa Mid-central region Nchalo Southern region Objectives 2012/13 Optimise milling performances Increase sugar production to over tons Potential packaging improvements evaluation Capitalise on growing markets Implementation of group continuous improvement initiative Review of procurement cost base Contribution to operating profit 47% Performance Economic climate in Malawi impacted by devaluing currency Sugar production tons (2012: tons) Increased sugar exports offsets lower domestic offtake Average cane yield 104 tons per hectare (2012: 105 tons) Average factory capacity utilisation 96% (2012: 95%) Risk areas Slow economic growth and high inflation may impact negatively on domestic demand Impact of lower world sugar price on regional export prices Forex shortages and/or further Kwacha devaluation Objectives 2013/14 Optimise cane growing performance through irrigation upgrades and improved husbandry Secure additional estate land to enable future expansion Increase sugar production to above tons Evaluate milling optimisation for further growth Deliver value from continuous improvement initiatives Business profile ZAMBIA Zambia Sugar plc, listed on Lusaka Stock Exchange One agricultural estate; largest capacity factory in Illovo group; one refinery Produces raw and refined sugar, speciality sugars, syrup permanent employees seasonal agricultural workers at peak DIFR: 0.18 (2012: 0.47) Areas of operation Corporate office Lusaka Nakambala South-western region Objectives 2012/13 Improvement in cane volumes Increase sugar production to over tons Molasses beneficiation project under evaluation Implementation of group continuous improvement initiative Contribution to operating profit 25% Performance Excellent year with a new production record established Sugar production tons (2012: tons) Power-house failure negatively impacted our power generation reducing irrigation availability insurance claim initiated Average cane yield 122 tons per hectare (2012: 113 tons) Domestic and export sales strong and ahead of plan Average factory capacity utilisation 96% (2012: 97%) Risk areas Impact of low world sugar price on regional export prices Currency rate volatility Regional sales reliant on required permits and customs clearance from neighbouring countries Objectives 2013/14 Outgrower programme expansion resulting in increased hectares under cane Increase sugar production to over tons Improvement in milling yields Complete evaluation of molasses beneficiation potential Cost reduction through continuous improvement initiative SOUTH AFRICA Business profile Three agricultural estates; four sugar factories; one refinery; three wholly-owned downstream plants/50% share in distillery; 30% investment in a further sugar factory and refinery Produces raw and refined sugar; syrup; and downstream products permanent employees; seasonal agricultural workers at peak DIFR: 0.54 (2012: 0.52) Areas of operation KwaZulu-Natal Group head office Objectives 2012/13 Realisation of sustainable production strategy Increase cane supplies Increase sugar production above tons Expansion of downstream business opportunities Contribution to operating profit 9% Performance Sugar production tons (2012: tons) Increased net area under cane following increased planting and outgrower extension services Average cane yield 72 tons per hectare (2012: 58 tons) Average factory capacity utilisation 86% (2012: 89% excluding Umzimkulu which did not open) Successful commissioning of new warehouse and distribution centre in Pietermaritzburg Record alcohol production High level of duty-free imports impacts sugar industry revenue Risk areas Weather and ongoing growth in cane supply Sugar industry review and tariff protection Resolution of land claims Lower world market prices Volatility in markets for downstream products Objectives 2013/14 Continue to secure increased cane supply Initiatives to support commercial and small-scale growers Increase sugar production to above tons Logistics savings from the new central warehouse and distribution centre Evaluate energy-efficiencies to continue reducing coal usage 18

23 SWAZILAND Business profile One agricultural estate, factory and refinery Produces raw and refined sugar, direct consumption sugars marketed by Swaziland Sugar Association Commissioning in April 2011 of major factory expansion and power cogeneration project permanent employees seasonal agricultural workers at peak DIFR: 0.18 (2012: 0.29) Areas of operation South-eastern region Objectives 2012/13 Increase area under cane mostly through LUSIP development Optimise expanded factory milling capacity Increase sugar production to over tons Increased electricity exports Implementation of new procurement arrangements Contribution to operating profit 8% Performance Record cane crop crushed million tons Sugar production tons (2012: tons) Average cane yield 104 tons per hectare (2012: 105 tons) Average factory capacity utilisation 87% (2012: 86%) Increased power cogeneration and exports into the national grid Risk areas Sugar industry review and restructuring Delays in agricultural initiatives supporting outgrower development Lower EU and world sugar prices Objectives 2013/14 Support the development of increased outgrower cane supply Continue to improve factory performance Increase sugar production to above tons Explore opportunities for increasing biomass availability for power cogeneration MOZAMBIQUE Business profile Produces raw sugar, marketed domestically by industry marketing association permanent employees seasonal agricultural workers at peak DIFR: 0.09 (2012: 0.17) Areas of operation Manhica district, north of Maputo Objectives 2012/13 Continued growth in cane supply Optimise season length to improve sugar productions levels Increase sugar production to over tons Contribution to operating profit 6% Performance Lower estate cane yields due to adverse weather conditions Sugar production tons (2012: tons) Average cane yield 91 tons per hectare (2012: 99 tons) Average factory capacity utilisation 84% (2012: 95%) Fairtrade certification achieved for small grower suppliers Risk areas Weather and flooding Greater industry production increasing export exposure Adverse currency impacts Objectives 2013/14 Support expansion of outgrowers area under cane Increase sugar production to above tons Implement further factory initiatives to reduce costs and increase efficiencies Introduction of syrup storage to mitigate rain delays and steady factory throughput TANZANIA Business profile Two agricultural estates; two sugar factories, treated as one enterprise Production of raw sugar Commissioning of new ethanol distillery mid permanent employees seasonal agricultural workers at peak DIFR: 0.03 (2012: 0.07) Areas of operation Centre-south region Objectives 2012/13 Increase sugar production to over tons Evaluation of marginal mill expansion Continued safe construction of distillery Support EU-funded outgrower irrigation trial Contribution to operating profit 5% Performance Record estate cane production tons Sugar production tons (2012: tons) Low-priced sugar imports limit domestic sales volumes Adverse working capital impact and exports required to generate cash Average cane yield 78 tons per hectare (2012: 82 tons) Brand entrenched as pre-pack sales increase Average factory capacity utilisation 99% (2012: 97%) Construction of new ethanol distillery nearing completion; mid-2013 commissioning Risk areas Long-term cane supply from outgrowers Uncontrolled sugar imports Wet weather negatively impacting cane recently replanted Objectives 2013/14 Increase sugar production to above tons Ongoing improvement in cane yields Increased pre-pack volumes counter bulk sugar imports Commission the potable distillery project as planned 19

24 Directorate Non-executive, independent chairman Don MacLeod (66) # ^ + BCom, AMP (Oxford) Chairman of Nomination Committee Joined the sugar industry in 1971 Appointed to the board in 1983 Position: Previous managing director of Illovo Non-executive, independent directors Mike Hankinson (64)*#^ BCom, CA(SA) Chairman of Remuneration Committee Appointed to the board in 2008 Position: Director of companies Dr Len Konar (59)* CA(SA), MAS (Illinois), DCom Chairman of Audit Committee Appointed to the board in 1995 Position: Director of companies Phinda Madi (49)#+ BProc, EDP Chairman of Social and Ethics Committee Appointed to the board in 2002 Position: Director of companies Nosipho Molope (48)*+ BSc (Medical Sciences), BCompt (Hons), CA(SA) Appointed to the board in 2008 Position: Director of companies Ami Mpungwe (Tanzanian) (62)^ BA (Hons) Appointed to the board in 2009 Position: Director of companies Trevor Munday (63)*#^+ BCom Appointed to the board in 2010 Position: Director of companies 20

25 Executive directors Graham Clark (Australian) (57)^+ª BAcct (Hons), FCA (Australia) Joined the sugar industry in 1980 Appointed to the board in 1997 Position: Managing director Mohammed Abdool-Samad (42)^+ª BCom, CA(SA) Joined the sugar industry in 2011 Appointed to the board in 2011 Position: Financial director * Member of Audit Committee # Member of Remuneration/ Nomination Committee ^ Member of Risk Management Committee + Member of Social and Ethics Committee ª Member of Executive Committee Directors condensed curricula vitae appear on pages 128 and 129. The diversity status of the board is 6 white South African males, 4 non-south African males, 3 black males and 1 black female. Gavin Dalgleish (47)^+ª BScEng(Chem), MScEng(Chem) Joined the sugar industry in 1988 Appointed to the board in 2011 Position: Operations director Larry Riddle (53)+ª BCom, CA(SA) Joined the sugar industry in 1986 Appointed to the board in 2009 Position: Commercial director Non-executive directors Dr Mark Carr (British) (50)# BSc, PhD, MBA, CEng, FIMechE Appointed to the board in 2006 Position: Chief executive officer, AB Sugar Paul Lister (British) (49) LLB Appointed to the board in 2006 Position: Director of Legal Services and company secretary: Associated British Foods Richard Pike (British) (43)^ LLB, ACA, ATII, AMCT Chairman of Risk Management Committee Appointed to the board in 2010 Position: Managing director, British Sugar 21

26 Executive Committee ^ Member of Risk Management Committee + Member of Social and Ethics Committee * Includes periods of broken service The diversity status of the executive directors who comprise the Executive Committee is two white South African males, one white non-south African male and one black male. Graham Clark (Australian) (57)^+ BAcct (Hons), FCA (Australia) Joined the sugar industry in 1980 Joined the group in 1997 Position: Managing director Responsible to the Illovo board and shareholders for the delivery of the group s strategic goals and objectives, providing leadership across operations. Mohammed Abdool-Samad (42)^+ BCom, CA(SA) Joined the sugar industry in 2011 Joined the group in 2011 Position: Financial director Responsible for group financial, treasury and corporate finance functions, internal audit, information technology, performance analysis (operational and financial), risk management and insurance. Gavin Dalgleish (47)^+ BScEng(Chem), MScEng(Chem) Joined the sugar industry in 1988 Joined the group in 1988* Position: Operations director Responsible for group operational performance relating to all agricultural and manufacturing operations, group operations support, technical services, risk and safety management, continuous improvement. Larry Riddle (53)+ BCom, CA(SA) Joined the sugar industry in 1986 Joined the group in 1986 Position: Commercial director Responsible for group commercial operations relating to sugar and downstream operations, new business opportunities, export marketing, group procurement and industrial affairs and advocacy. Jennifer Kunst (59)^+ BA, LLB, DipMarLaw Joined the sugar industry in 2011 Joined the group in 2011 Position: Company secretary Responsible for all statutory and regulatory company secretarial functions, governance, and overseeing the legal, secretarial, compliance, sustainability and corporate citizenship functions. Nigel Hawley (56)+ BCom (Hons) Joined the sugar industry in 1978 Joined the group in 1978 Position: Human resources executive Responsible for group and corporate human resources policies, staffing and talent management, human resource development and training, industrial relations, retirement funding, compensation and benefits, human resource administration and payrolls, employee welfare and medical services. 22

27 Governance structure Board Audit Committee Social and Ethics Committee Remuneration/ Nomination Committee Risk Management Committee Executive Committee 23

28 Commentaries Chairman s statement 26 Managing director s review 28 Financial director s review 32 Operations director s review 38 Commercial director s review 44 World of sugar 50 24

29 Commentaries We produced a record million tons of cane which, combined with deliveries from our outgrowers, resulted in the production of million tons of sugar in the 2012/13 season. At the same time, making use of our own installed power generating capacity, we produced GWh of electricity providing 91% of our own energy requirements from renewable resources, thereby reducing our dependence on fossil fuels, such as coal, and resulting in a further decrease of GHG emissions. 25

30 Chairman s statement Don MacLeod (66) BCom, AMP (Oxford) Joined the sugar industry in 1971 Appointed to the board in 1983 Committees served Chairman of Nomination Committee Member of Remuneration Committee Member of Risk Management Committee Member of Social and Ethics Committee Safety remains a significant item on every board agenda and it is most pleasing to report that the group s safety record in respect of both disabling injury and total injury frequency has shown a major improvement over the last couple of years with the past year reflecting a 23% improvement over the previous year. The past year was a pleasing one for Illovo and I am glad to be able to report good financial results and much improved operational performance from the business due to ongoing initiatives to build production capacity and enhance operational efficiency. The progress made in respect of a number of strategic projects is most pleasing as they ensure that the group will continue to grow in line with its vision to be a world-class, low-cost and highly efficient organisation operating on the African continent, adding value to its core products of fibre, sugar and molasses. The company is in good shape with a strong balance sheet, healthy cash generation and robust cane sugar assets across Africa. Illovo s objective is to be a major player in every country in which it operates and to be the majority shareholder and manage the business for which it is responsible with local investors having an interest through a minority shareholding. However, we operate in a world that is constantly changing and uncertain, and Illovo is not alone in needing to overcome significant economic, market, labour and socio-economic challenges within the African continent and the world at large. Although the Southern African region has seen improved economic growth compared to many other parts of the world, the region suffers from high levels of unemployment, lack of infrastructure and extreme poverty. Rising costs are a concern particularly as they also affect the purchasing power in the local economies, thereby potentially restricting the ability to pass on increased costs without impacting on offtake. The continuing devaluation of the Kwacha in Malawi and its impact on the local people is especially a worry for the group. The level of sugar imports into South Africa and Tanzania has negatively impacted on market offtake in these countries. Discussions with these governments to obtain better import protection are ongoing. An application to address the level of tariff in South Africa has been lodged with the authorities in which it is stressed that the industry is a low-cost producer in world terms and is suffering from dumping of surplus sugar from the world market. The Swaziland industry, as part of the SACU, is also negatively impacted by these imports. The importation of significant quantities of sugar could have a material impact on employment in the rural areas in both countries. The recent wave of industrial unrest in the mining industry and the Western Cape fruit farms in South Africa is of concern particularly as it has often been violent. The company experienced unprocedural industrial action in Zambia during the past year which, although of limited duration, was most unfortunate as the business has the framework to address labour and related issues in an appropriate manner without resorting to unbecoming conduct which impacts negatively on all concerned. Safety remains a significant item on every board agenda and it is most pleasing to report that the group s safety record in respect of both disabling injury and total injury frequency has shown a major improvement over the last couple of years with the past year reflecting a 23% improvement over the previous year. I regret that we had one fatality in the past year and the objective is to eliminate any such occurrence by focusing on behavioural performance and entrenching rigid health and safety standards, and thereby nurturing a safe operating culture across the organisation. Our people are key to achieving our strategy. Attracting and developing our people is central to our business strategy and we apply a consistent people management approach across all our operations. Regrettably, we have not made the progress we aspire to in 26

31 transforming our senior management levels, both in South Africa and in our other areas of operation. We do, however, have a pool of talent in junior management and training, development and mentorship programmes are in place to promote advancement to meet our goals through our targeted succession plans. Generally, a strength of the Illovo business lies in the diversity of our market opportunities. A strong presence is maintained in the domestic markets in all the countries in which we operate. In addition, we have preferential access to markets in the EU and USA while in Africa, regional markets in close proximity to our operations remain a strong focus. Lobbying for continued favourable access to the EU markets beyond 2015 has been a major area of focus and involvement during the past year and it is hoped that an extension to the current regime will be achieved. The world sugar market reflects a surplus of production over consumption and the world price has declined and is trading in a range of US17 to US19 cents/lb currently. The world price impacts directly only on a small proportion of total group sales but indirectly regional sales prices are affected. Generally relations with the various governments in the countries in which we operate remain positive and constructive. Structural reform to the sugar industries is anticipated in two of the countries in which Illovo operates. In South Africa discussions continue regarding a new Sugar Act with implementation by government anticipated in The Swaziland industry is also involved in a review to the structure of that industry whereby increased responsibility for marketing would devolve on the milling section of the industry. The group has an extensive social investment role across the vast areas in which we operate, this is particularly relevant as most of our operations are situated in rural areas. In addition to the employment of permanent employees and another seasonal employees, the group s businesses form the economic and social backbone of the local communities in the areas in which we operate providing infrastructure, health care facilities, schools and many other community benefits amounting to expenditure of R197 million in the 2012/13 season. As a buyer of goods and services we also play an important role in supporting local businesses which provides further employment and drives socio-economic development in local communities. This, combined with significant agricultural and manufacturing investments, has resulted in Illovo having a material impact on job creation and poverty alleviation in the regions in which it operates. Access to health care is provided to all our employees and their dependants either through a network of group-run primary health care clinics and four hospitals or through the provision of medical insurance schemes. We operate 24 primary health care clinics and four hospitals. We continue to take a proactive stance against life-threatening epidemics such as HIV and Aids, malaria and tuberculosis. These diseases are being managed largely on a preventative and integrated basis. Strategies controlling the spread of HIV and Aids include preventative programmes together with an established in-house wellness programme. Matters of corporate governance have become critical issues for shareholders around the world. Good governance practices are fundamental to creating, protecting and sustaining shareholder value. Illovo s directors and employees strive to ensure that the company is managed in an efficient, accountable, responsible and ethical manner and its governance structures are in line with King III and the new Companies Act. Our board s approach to governance is to stay abreast of, and implement relevant local and international best practice. We monitor developments in the various countries in which we operate to ensure local requirements are met. The past year saw the formation of the Social and Ethics Committee of the board. The Risk Management Committee has in the past year implemented an Enterprise Risk Management Policy and a combined assurance framework to ensure that the key risks that may impact on the business are managed in such a way as to provide reasonable assurance regarding the achievement of Illovo s objectives. In South Africa, the company has a Level 5 contributor status in terms of the Codes of Good Practice on B-BBEE. The group continues to evaluate opportunities for further footprint expansion in Africa but careful assessment of the risk will remain crucial to any new opportunity being progressed. Ethanol and molasses beneficiation opportunities in Malawi and Zambia continue to be evaluated along with power cogeneration and increased furfural production options across the group. Illovo continues to make steady progress towards its objective to increase its sugar production to more than two million tons per annum and optimise the return on every stick of cane. Plans to achieve the strategic intent, vision, goals and objectives have been put in place in an environment of continuous improvement and best practice. The group is among the lowest cost and most efficient sugar producers in the world, is an efficient supplier into the domestic markets in which it operates and through its marketing and distribution expertise is able to deliver sugar to Europe, the United States and the region. The next few years will see focus on capacity utilisation and productivity improvements across the group. Weather and volatile exchange rates will continue to be factors impacting on the business. The business is sound and many opportunities are available to grow the existing base business while a further footprint expansion is possible, but will be subject to rigorous risk assessment. I would like to thank each of my fellow board members for their continued commitment, contribution, valuable guidance and wise counsel throughout the past year. My thanks go to Graham and the executive management team for the focused manner in which they implemented our strategies during 2012/13 and for delivering a strong set of results. We are fortunate to have committed employees across the group and I thank them on behalf of the board for their efforts this past year. Don MacLeod Chairman 27

32 Managing director s review Graham Clark (57) BAcct (Hons) FCA (Australia) Joined the sugar industry in 1980 Appointed to the board in 1997 Committees served Member of Risk Management Committee Member of Social and Ethics Committee Chairman of Executive Committee Improved sugar availability helped to increase sales volumes by 11% compared to the previous year and better sales prices were realised in all market segments, yielding an increase of R1.9 billion in sugar revenue. The 2012/13 season has demonstrated the positive benefits from ongoing initiatives around the group to build our production capacity and enhance operational efficiency. Weather conditions were generally favourable during the past year and a record cane crop of nearly 6.5 million tons was produced from our own agricultural operations. Total cane production from independent farmers also increased, 8.4 million tons having been delivered to our factories during the course of the season. Recovery from the previous year s drought in South Africa and the benefit of recent factory expansions around the group, notably in Swaziland and Zambia, as well as improved plant efficiency and better process recoveries, resulted in group sugar production increasing over that of the previous season by 14% to 1.75 million tons. Improved sugar availability helped to increase sales volumes by 11% compared to the previous year and better sales prices were realised in all market segments, yielding an increase of R1.9 billion in sugar revenue. Despite lower furfural sales, combined revenue from downstream products also improved year-on-year, resulting in group revenue totalling R billion, representing an increase of 21%. Cost control remained effective during the year resulting in the group operating margin increasing from 14.7% to 17.1% for the period. Group operating profit increased accordingly by 41% to R1.9 billion. Although net financing costs increased to R280 million, reflecting the ongoing cost of servicing the group s expansion-related debt, interest cover improved compared to the previous year from 5.5 to 6.8 times. The effective tax rate for the group increased to 31.6% being negatively impacted by deferred tax adjustments driven by expansion-related capital allowances not expected to be fully utilised in Zambia. Headline earnings per share for the year improved by 43% to cents and the return on group net assets increased from 15.9% to 19.7%. Cane supply Growing conditions during the 2012/13 season were generally much improved compared to 2011/12. Adequate early season rainfall in South Africa broke the drought conditions of the prior two seasons and supported the significant and ongoing re-planting programme across all cane growing areas. Seasonal cane yields were well above the 2011/12 drought-affected results. The total volume of cane supplied to our South African factories increased by tons compared to that of the previous season, as a result of increased cane yields and a larger area harvested. Elsewhere in the group, an additional hectares of land under cane harvested by ourselves and our growers, together with higher cane yields in Zambia which offset slight reductions elsewhere, resulted in group cane supply increasing by a further tons compared to the previous season. Cane quality was generally better than the season before and levels of sucrose content in cane in particular, were higher in all operations other than in Swaziland where wet conditions depressed sucrose production. The latter half of the season was unseasonably wet in South Africa, which slowed operations and resulted in a premature end to harvesting and the carrying over of nearly tons of cane to be crushed at the commencement of the 2013/14 season. Around tons of cane was also carried over in Zambia, following the onset of summer rains at the end of last year. In Swaziland, the harvesting season was extended in order to ensure that all available cane was harvested. As a result the crop in Swaziland in 2013/14 will be harvested at a younger age which is likely to reduce cane yields in that country in the year ahead. Sugar production Group sugar production of million tons increased by tons compared to the 28

33 Cane harvested by ourselves and our growers across the group increased by more than million tons compared to the previous season, resulting in a record output of 6.5 million tons of cane. 29

34 Managing director s review continued A notable milestone was achieved in Zambia where over tons of sugar were produced for the first time, with final sugar production in Zambia being tons. previous season, largely driven by the recovery in South Africa where sugar production rose by 35% year-on-year. The South African factories performed very well in the first half of the 2012/13 season, but early rains which began in August 2012 disrupted the back-end of the crushing period and adversely impacted factory throughput and sugar recoveries. In Mozambique, sugar production fell short of the previous year due to a generally poorer factory performance, caused by erratic steam supply arising from disappointing boiler performance which has since been rectified. All other operations recorded increases in sugar production. Credible factory performance was achieved in all operations other than Mozambique, with highlights being good mechanical efficiency in Malawi, and the expanded factories in Zambia and Swaziland running at their new throughput rates. A notable milestone was achieved in Zambia where over tons of sugar were produced for the first time, with final sugar production in Zambia being tons. In Tanzania, modest expansions to both factories took some time to settle down but reasonable performance was maintained in the second half of the season. The late arrival of the summer rains enabled the season to be extended and all available cane was crushed resulting in final sugar production being slightly higher than anticipated. Sugar marketing In excess of 60% of the group s sales volume continues to be sold into domestic markets in the countries in which the group produces sugar. In 2012/13, this represented 1.07 million tons, sold via a range of pre-packed and bulk industrial and direct consumption sugars in brown and refined sugar offerings. Sugar sold for direct consumption in Malawi and Zambia is fortified with Vitamin A in an attempt to counter medical problems arising from Vitamin A deficiency. Higher sugar production in South Africa has driven volume growth in the country, while in Zambia, improved economic fundamentals are translating to increased consumer spending power which continues to drive growth in that market. Low-cost imports are negatively impacting market conditions in Tanzania and South Africa and without effective tariff protection and/or market management, prospects in these markets remain constrained. Applications to address the level of tariff in South Africa and to better regulate imports into Tanzania have been lodged with the relevant authorities. In Malawi, difficult economic conditions and a depreciating local currency have impacted on local market pricing in that country. Regular price adjustments to match inflation have been implemented throughout the past year and although local demand has contracted moderately, the market has been fully supplied and limited tonnages have been released for export by the group. Meaningful storage and logistics benefits are anticipated in South Africa in the coming year following the successful completion of a new custom-designed central warehouse and distribution facility in Pietermaritzburg, which will streamline supply to all segments of the South African market at a lower cost. Malawi and Zambia continue to supply sugar into large deficit markets in East and Central Africa where these two countries enjoy a geographical advantage over other potential suppliers. Pricing in these markets was buoyant during 2012/13, reflecting a general shortage in sugar supply and high inland transport costs. Preferential exports into the EU and the USA grew further during the past year. Prices held steady in Euro terms for bulk raw sugar and niche speciality sugars, including Fairtrade sugar, which continued to provide premium prices in these two markets. Group exposure to the world bulk raw sugar market is limited to South Africa from where sugar is sold via the single-desk export marketing function of the South African Sugar Association. Increased South African sugar production during 2012/13 resulted in a modest increase in world market sugar exposure, with the Illovo group share amounting to tons (2011/12: tons), priced at US22.9 cents/lb. The world sugar market is currently trading lower, below US18 cents/lb, on expectations of a growing world sugar surplus. Downstream products The rain-affected latter half of the crushing season in South Africa disrupted cane supplies to the Sezela mill which supports a downstream plant producing furfural and its derivatives. As a result of this disruption, 2012/13 furfural production was well below expectation, although diacetyl output was higher than the previous year. Pricing for furfural products softened during the year as a consequence of strong Chinese supply to the world market. While our product still commands a premium for quality, prices were lower than in 2011/12 and are only expected to recover in the second half of 2013/14 as Chinese inventories run down. The production of potable and denatured alcohol at our Merebank and Glendale distilleries reached record levels for the season, on the back of an adequate supply of molasses feedstock which followed the cane crop recovery in South Africa. Alcohol sales at the start of the new year have generally been as expected and alcohol pricing has remained firm in the local and export markets. 30

35 Construction of the group s new potable alcohol distillery in Tanzania is nearing completion, with commissioning due in mid This plant will utilise the entire molasses production of our two Tanzanian factories and supply high quality potable alcohol into the lucrative and expanding East African market. Alcohol production is expected to contribute to the Tanzanian earnings base during 2013/14 and will provide useful diversity to our operations in that country going forward. Cogeneration of electricity remains a priority across the group, the objective being to become fully self-sufficient in power for our own requirements and, where attractive, to export electricity into the national grid. The large commercial cogeneration plant recently commissioned in Swaziland is operating well and commercial exports to the national grid in Swaziland are presently exceeding contractual commitments. Limited supply into the national grid has also been achieved in Zambia. Sustainability During the season under review, we made considerable progress to develop our sustainability framework, focusing on the social, economic and environmental sustainability of our primary activities of cane growing, sugar manufacturing and downstream production, in operations in which we have management control or influence. These included: together with our risk management function to govern risks that may impact upon the sustainable development of the business, the strengthening of accountability for sustainability through the introduction of a group ERM and combined assurance process; notable progress in the group s continuous improvement initiative which underscores the concept of doing more with less and mirrors effectively the operational imperatives of Illovo s unique cane sugar sustainability model to maximise the use of every input material, with very little waste; further development of internal processes to better measure and quantify the group s GHG emissions and the commencement of a group-wide water footprint project which will guide us in developing an effective and efficient water management strategy for our business; and from a social impact perspective, ongoing high levels of expenditure and the personal involvement of our people in meaningful community-based social investment programmes and activities which characterise our core objectives to be welcomed in the communities in which we operate. Prospects The 2013/14 season is expected to reflect further focus on capacity utilisation and productivity across the group. In addition, prevailing weather conditions have been good, notably in South Africa. The result should see a further increase in cane production from our own operations and from our growers which should underpin a moderate increase in sugar production for 2013/14. Declining market fundamentals in the world of sugar, including a continued world sugar surplus and low ocean freight rates, will likely put negative pressure on pricing in the group s exports markets during the coming year. Currency exchange rates across the group are generally depreciating against the US Dollar and Euro, the major currency denominations of group exports, which could provide some relief through the conversion of export proceeds into reporting currency. Local market pricing is expected to generally follow inflation except in Tanzania where pricing will be governed by the level of imports in the year. Further enhancement of the group s cost base is anticipated in the coming year as continuous improvement initiatives deliver results in the operations. The group s operating margin will likely come under pressure during the coming year as global sugar prices ease further, and consequently cost control will remain vital to maintaining these margins. Finance costs are expected to reduce as strong group cash flow is applied to the reduction of debt and the group s effective tax rate should normalise at around 30% as deferred tax adjustments are not expected to recur. Exchange-rate volatility will, however, continue to be a major influence on the conversion of foreign subsidiary profits into Rand. Capital expenditure in the coming year will be modest and focused on supporting performance improvement and normal plant and machinery replacements. No major new capital expansion projects are planned for the year, although ethanol and molasses beneficiation opportunities continue to present themselves in Zambia and Malawi and will be fully evaluated, along with power cogeneration options during the 2013/14 season. The group continues to evaluate opportunities for further footprint expansion in Africa, but careful assessment of the risk will remain crucial to any new opportunity being progressed. Overall, we are confident of another year of progress across the group. Graham Clark Managing Director The group continues to evaluate opportunities for further footprint expansion in Africa, but careful assessment of the risk will remain crucial to any new opportunity being progressed. 31

36 Financial director s review Mohammed Abdool-Samad (42) BCom, CA(SA) Joined the sugar industry in 2011 Appointed to the board in 2011 Committees served Member of Risk Management Committee Member of Social and Ethics Committee Member of Executive Committee Revenue (Rm) Operating profit (Rm) Total net borrowings/ (cash) (Rm) Highlights Revenue increased by 21% Operating profit increased by 41% Operating margin increased from 15% to 17% Headline earnings growth of 43% Total distribution of 95 cents per share Return on net assets increased to 19.7% Purpose The purpose of this review is to provide further insight into the financial performance and financial position of the group and should be read in conjunction with the condensed annual financial statements presented on pages 115 to 121, together with the notes to the financial statements on the Illovo website at Key financial risks Exchange rates The group enters into purchase and sale transactions denominated in foreign currencies and as a result, is subject to transactional exposure from fluctuating foreign currency exchange rates. In order to protect the business from the effects of transactional exchange rate volatility, forward exchange contracts are utilised, enabling more effective management of our export realisations, cash flows and debt. All forward exchange contracts are entered into in line with the Group Treasury Policy and individual contracts are approved by the Treasury Committee. The group is also exposed to currency fluctuation in respect of the translation of profits into Rand, with 91% of the group s operating profit being derived from non-rand-based countries. During May 2012, the Malawi Kwacha was floated, causing the currency to devalue immediately against the Rand by 52% and in total for the financial year by an estimated 64%, reducing the group s operating profit on translation for the year by R354 million. The impact of the weaker Malawi Kwacha translation exchange rate has, however, been marginally offset by the stronger year-on-year Zambian Kwacha, Tanzanian Shilling and Mozambique Metical translation exchange rates. The table below summarises the average exchange rates achieved for the relevant currencies: Exchange rate (average) Rand/Euro Rand/US Dollar Rand/Malawi Kwacha Rand/Zambian Kwacha* Rand/Shilling Rand/Metical * The Zambian kwacha was rebased on 1 January World sugar prices The South African business is the only operation that exports sugar into the world market. These sales, together with the related hedging activities, are undertaken on behalf of the sugar milling companies by SASA. The company participates in all decisions made by SASA relative to its pricing and hedging activities. Following the recovery from the drought, sugar production in South Africa increased by 35%, resulting in increased exposure to the world market, with tons sold into the world market during the current financial year (2011/12: tons) at an average price of US22.9 cents/lb. The world sugar price is currently trading below US18 cents/lb. 32

37 Capital expenditure during the year amounted to R971 million, including R680 million spent on strategic expansion projects such as the South African sugar warehouse and the Tanzanian ethanol distillery. 33

38 Financial director s review continued Headline earnings/ distribution per share (cents) HEPS Distribution/ dividend per share Gearing and return on shareholders equity (%) Gearing Return on average shareholders equity The world sugar market is expected to realise a significant surplus during the 2013/14 season resulting in increased downward pressure on the world market price which, in turn, could have a negative impact on Illovo s South African export earnings in the coming season. Prices in the regional markets remained strong throughout the current financial year, as the region remained a deficit market and high in-land transport costs continued to protect these markets from low-cost world market sugar imports. Tanzania has been impacted by lowcost, duty-free imports in that market, resulting in pricing pressure and a significant increase in the sugar stock on-hand at year-end. This is not expected to improve significantly in the coming season. South Africa is also impacted by low-cost imports in the market, but to a lesser extent. The impact of inflation and cost containment Inflation in most countries in which we operate has been relatively stable in the past year, except in Malawi where, following the floating of the currency and subsequent devaluation thereof, the inflation rate has increased to 38% year-onyear, having a significant impact on input costs. This has been largely mitigated by five separate domestic price increases to protect operating margins, as well as the US Dollar price equivalent of sugar in Malawi. In Tanzania, inflation rates have decreased year-on-year to 10% (2011/12: 19%) to reflect a slowdown in the rise of food prices and more normalised input costs. Illovo maintains strict cost disciplines through a combination of efficiency and productivity improvements as well as economies of scale. To the extent possible, purchasing contracts are negotiated for bulk commodities. Interest rate risk management The group is exposed to interest rate risk in respect of variable rate loans and short-term cash investments. During the year, the external debt in Swaziland and Mozambique was refinanced using internal funding, which has resulted in significant finance cost savings at a group level and thereby maximising the group s arbitrage opportunity of funding from low interest rate jurisdictions to higher interest rate environments. If interest rates applicable to existing borrowings increase by 50 basis points, the group s profit before tax would reduce by R11.7 million. Changes in accounting principles During the current financial year, no new accounting principles were adopted. Financial performance The financial performance of the group is measured in terms of various key financial ratios which include the operating margin, headline earnings growth, gearing and cash flow generation, as set out in the graphs on pages 34 and 35. Acquisitions, disposals and investments On 25 February 2013, the group took ownership of the new centralised sugar warehouse facility and distribution centre located in Pietermaritzburg, South Africa. The facility will be utilised by the South African operation resulting in significant savings both on warehouse space and transport costs. The first sugar transfers into the new warehouse took place during March The project cost R367 million and has been completed on-time and within budget. The construction of the new potable alcohol distillery in Tanzania is commencing well with the project 85% complete. Capital spend to-date is R245 million. Commercial production is expected to commence in August During the year, the company redeemed US$130 million worth of B preference shares in Illovo Group Holdings to re-finance the Swaziland external loan facilities and to substantially fund the new warehouse in South Africa. Material items and impairments Following the impairment of the Mali investment in 2012, various movable assets located on site in Mali have subsequently been sold, resulting in a recovery of R3.1 million. Operating performance Revenue has increased by 21% as a result of increased sales volumes, improved sales prices realised in most market segments and good forward cover achieved on export sales proceeds. In Malawi, the average domestic market price has increased by 63% in response to the increase in the domestic inflation rate, whereas in Tanzania, the presence of low-cost imports has resulted in the domestic sales prices decreasing year-on-year by 6%. Downstream revenue increased year-on-year with improved lactulose prices and the weaker Rand/US Dollar exchange rate improving export realisations for all downstream products, offsetting lower furfural sales volumes and prices. Operating profit has increased by 41% with the operating margin increasing to 17%. Strict cost disciplines, together with the introduction of various continuous improvement initiatives across the group have resulted in inflationrelated cost increases being largely negated and the group achieving real-term cost savings. 34

39 Illovo Sugar group operating profit (Rm) (933) 384 (46) 350 (264) Operating margins (%) Actual 2012 Volume Price Costs Downstream and cogeneration The positive increase in the standing cane fair value movement is primarily as a result of the higher sucrose price in Malawi which has been impacted by the higher domestic market price and improved export earnings driven by the weaker Malawi Kwacha exchange rate. The higher domestic inflation rate in Malawi has resulted in a favourable increase in the cane roots fair value movement. Downstream profits are lower year-on-year as a result of lower furfural alcohol prices and volumes as demand in China and Europe slowed. Higher input costs, in particular higher electricity costs at the Merebank distillery have also contributed to the lower downstream profits. of low-cost imports has significantly slowed sales volumes resulting in large volumes held in stock at year-end. In Malawi, treasury bill rates increased by 20% during the season in line with a depreciating currency and higher domestic inflation rate. In Mozambique, the weaker Metical/US Dollar exchange rate resulted in exchange rate losses on the US Dollar denominated facilities which was offset by a hedge at the group level. The benefit of this hedge, together with the restructuring of the Swaziland loan has led to a significant finance cost saving at a group level. Taxation Fair value movements Translation rates and group operation costs Actual 2013 Headline earnings (Rm) Cash generated from operations (Rm) The increase in operating profit over the previous year is graphically depicted in the chart above. Finance costs Rm Variance Malawi (44) (19) (25) Zambia (233) (232) (1) Illovo South Africa (74) (58) (16) Ubombo (97) (102) 5 Maragra (17) (3) (14) Kilombero (31) (9) (22) Group operations Total (280) (245) (35) Finance costs Finance costs increased from the prior year due to the increase in working capital requirements, particularly in South Africa where production increased by tons year-on-year, increasing the average monthly sugar stock volumes, and in Tanzania where the presence Illovo Sugar group cash flow (Rm) (507) The effective tax rate increased from 30.3% to 31.6% in the current year due to the derecognition of a portion of the deferred tax asset relating to accumulated tax losses in Zambia which are considered irrecoverable due to the expiry of the capital allowance incentive period. Effective Tax rates (PERCENTAGE) Normal tax Deferred tax Withholding tax Effective tax rate Headline earnings Headline earnings increased by 43% to R873 million (2012: R610 million). The weighted average number of shares in issue increased by shares to million as a result of the issuance of shares in terms of the Illovo Sugar 1992 Share Option Scheme Net debt (Rm) (277) (196) (948) (458) 818 Cash operating profit Working capital movements Net financing costs and dividend income Taxation paid Cash outflow from investing activities Distributions paid Cash outflow before financing activities 35

40 Distribution per share (cents) Revenue 2013 (Rm) 12% 5% 6% 38% Revenue 2012 (Rm) 11% 16% Malawi Zambia South Africa Swaziland Mozambique Tanzania 23% Operating profit 2013 (Rm) 9% 8% 8% 5% 34% 6% 5% 25% 18% 24% 47% Operating profit 2012 (Rm) 6% 7% 33% % 4% 2013 Borrowings Rm to EBITDA (%) % Financial director s review continued Cash flow During the year under review, we continued to focus on cash flows generated from operations. The increase in fair value movements has resulted in a decrease in the cash operating profit from 100% to 82% in the current financial year. The increased fair value movement is primarily due to the significant devaluation of the Malawi Kwacha exchange rate and is expected to normalise in the coming season as the exchange rate stabilises and trades within a narrower band. Management continues to focus on revenue enhancements, cost reductions and continuous improvement initiatives across the group to maximise cash flow generation, optimise working capital requirements and minimising financing costs. Each of the operations generated cash from its operations with the group s cash operating profit increasing from R1 348 million to R1 568 million. We invested R641 million in expansion capital projects which primarily relates to the purchase of the central distribution warehouse in South Africa and the construction of the distillery in Tanzania. In addition, R291 million was spent on replacement capital and minor capital projects. Distributions to shareholders totalled R458 million. Preference shares of R1 093 million were redeemed and net additional borrowings of R1 143 million were raised. Borrowings Net borrowings/(cash) Rm Long-term borrowings Short-term borrowings Bank overdraft Total borrowings Less: Cash and cash equivalents (474) (1 390) Net borrowings Increase in funding Net borrowings increased from the prior year as a result of the purchase of the centralised warehouse in South Africa, the construction of the distillery in Tanzania and the increased working capital requirements across the operations as production volumes increased year-on-year. The increased sugar stock holding in Tanzania at year-end, the delay in the loading of an EU shipment and the timing of domestic market sales in Zambia, have also contributed to the increased net borrowings position. The borrowings profile is split evenly between long-term and short-term/bank overdraft borrowings which reflects both the capital investment programme and working capital requirements of the business. Most capital projects are funded by each of the businesses, primarily in the same currency as the underlying project costs. Any residual funding is financed through group treasury which in turn is financed by the local debt markets. Capital expansion projects are financed by floating rate long-term debt and are repaid from project cash flows. Gearing increased to 21.1% which is within the group s objective limit of 40%. The low level of gearing is expected to be maintained in the short term, however, over the medium to long term, in anticipation of large capital expansion projects, this gearing level is expected to reach the objective limit. At year-end, the group had total committed bank facilities amounting to R4 144 million of which R2 303 million was drawn-down. The group also has access to uncommitted facilities of R1 198 million. Cash-on-hand at year-end totalled R474 million, resulting in a net debt position of R1 867 million. Shareholding and return Trading activity by volume of shares traded on the JSE increased by 18.2% year-on-year. The share price increased by 26% from cents to cents at year-end. The borrowings exposure at 31 March is analysed by currency Rm 2013 % 2012 % Rand US Dollar Euro Zambian Kwacha Tanzanian Shillings Malawian Kwacha Mozambique Metical Swaziland Emalangeni Total borrowings

41 SUMMARY OF GROUP S CAPITAL EXPENDITURE AND APPROVED CAPITAL COMMITMENTS Rm Capital expenditure Capital commitments Expansion Ongoing Expansion Ongoing Total capital commitments South Africa Malawi Zambia Swaziland Tanzania Mozambique Group Total We have maintained our policy to pay a distribution to shareholders twice a year (interim and final), in aggregate twice-covered by headline earnings. The board believes that this distribution cover ratio is appropriate given our current and forecast cash generation, planned capital expenditure and gearing levels. An interim capital distribution in lieu of dividend of 34.0 cents was paid and a final capital distribution in lieu of dividend of 61.0 cents has been approved. The distributions for the year increased by 44% to 95.0 cents per share, compared to 66.0 cents in In accordance with International Financial Reporting Standards, no liability has been raised for the final distribution. The source of the distribution is the capital reduction out of share premium and therefore the cost of the final distribution of R281 million has been transferred from share premium to a separate distribution reserve. Return on net assets The return on net assets for the group has increased from 15.9% to 19.7% year-on-year, reflecting the investments in good cane growing practises and in factory maintenance and improvement projects as well as the initial benefits of the group s continuous improvement programme. A currency loss of R167 million arose on the translation of the group s foreign currency denominated net assets into Rand, predominately as a result of the weaker Malawi Kwacha exchange rate. not always possible to demonstrate economic viability. Equity injections into the operating subsidiaries are considered from time to time as may be appropriate, in order to maximise shareholders returns. Financial controls The internal control systems are designed to provide reasonable assurance against material losses and misstatement of financial results, and are intended to manage all significant risks. The safeguarding and prevention of misuse of assets is an important aspect of internal control. During the year under review in line with King III, the internal financial control framework was further developed to improve the identification of financial reporting risks and to provide additional assurance that controls are adequate to address the risk of material misstatements of financial results. Going-concern assertion The board has formally considered the goingconcern assertion for the Illovo group and is of the opinion that it is appropriate for the forthcoming year. Mohammed Abdool-Samad Financial director Capital expenditure and commitments The group continued to apply the following hurdle rates to new capital projects: Internal rate of return >20% EBIT/capital at steady state >20 % Payback <7 years These hurdles ensure that capital is applied to projects that give the best return on investment, but do not apply to ongoing capital expenditure on existing operations and in particular environmental capital in respect of which it is 37

42 Operations director s review Gavin Dalgleish (47) BScEng (Chem) MScEng (Chem) Joined the sugar industry in 1988 Appointed to the board in 2011 Committees served Member of Risk Management Committee Member of Social and Ethics Committee Member of Executive Committee The 2012/13 operating season was characterised by a strong production improvement across the business to post the highest sugar make in the group since 2009/10. Total group production of million tons was underpinned by increased production in every country of operation, with the exception of Mozambique. Sugar production Reduction in disabling injury frequency rate DIFR May 2010 Health and safety Jan 2011 Jan 2012 Jan 2013 The past three years has seen a significant improvement in Illovo s safety record with the group 12-month rolling DIFR falling by almost 250% from 0.61 in May 2010 to 0.16 in March Most notably the sugar crop in South Africa showed a pleasing recovery after two consecutive years of drought although milling operations were impacted by the late season heavy rains that bode well for the 2013/14 crop. The Malawian mills showed a good improvement in time efficiencies and the The past three years has seen a significant improvement in Illovo s safety record with the group 12-month rolling DIFR falling by almost 250% from 0.61 in May 2010 to 0.16 in March This improvement follows the implementation of a group-wide safety initiative which has improved the lives of all our employees, as well as our contractors, service efforts of the Zambian and Swaziland teams in providers and visitors to our sites. recovering from their poor early-season positions is worthy of particular mention. The DIFR graph above shows the positive benefit of the multi-faceted nature of the our Our team in Swaziland posted a strong finish to the season, milling through the whole of December to crush their entire crop and run at performance levels equal to the design capacity ratings of the recent expansion. The Zambian team overcame major operating challenges and unprocedural industrial action to break through the ton level of sugar production for the first time. safety programme which, commencing with base-level safety awareness promotion and the implementation of standard safety procedures across the group, has resulted in an acrossthe-board shift in employee behaviour towards personal and workplace safety issues. This exceptional record is further demonstration by the following safety milestones achieved by the group over the past 12 months. Sugar production (tons sugar 000 s) (6) Actual 2012 Tanzania Malawi Zambia Mozambique Swaziland South Africa Actual

43 The 2012/13 operating season was characterised by a strong production improvement across the business to post the highest sugar make of million tons, since 2009/10. 39

44 Operations director s review continued This exceptional record is further demonstration by the following safety milestones achieved by the group over the past 12 months. Disabling injury-free milestones Million man-hours without a lost time Operation injury incident Kilombero Agriculture 14.5 Maragra Agriculture 8.0 Nakambala Agriculture 5.3 Maragra Factory 3.0 Nakambala Factory 2.5 Ubombo Factory 2.2 Beaumont Farm 2.0 Nchalo Factory 1.9 Nchalo Agriculture 1.9 Merebank 1.7 Further to these achievements, Eston s Beaumont Farm in South Africa recently won both the NOSA international safety competition for Sector A (agriculture, hunting, forestry and fishing) and the NOSCAR award, an international award which remains the ultimate symbol of excellence in occupational risk management. Continuous improvement Illovo s continuous improvement (CI) initiative has made significant ground over the past 18 months, taking lessons from the first two pilot site assessments and applying the knowledge to the implementation of the initiative across a further four sites during the 2013/14 season. From the outset it was clearly evident that we would have the capacity to succeed, given the considerable support of senior leadership teams who rallied together to encourage and help facilitate the implementation of a CI culture. The Illovo CI process is driven through the application of the TRACC system, which is a continuous improvement management method that delivers operational improvement and builds internal capability, and which is facilitated with the support of consultants whose key role is to ensure the sustainability of CI at each site over a period of 18 months. Thereafter, Illovo staff members will be sufficiently skilled to facilitate the process and continue on the CI journey. The initial savings are potentially of significant benefit but the challenge will be achieving the speed at which we are able to develop the CI skills in order to deliver on these opportunities. In this regard, lost opportunity systems are being tested and developed so that we can continuously measure and respond to a range of potential outcomes, across both milling and agricultural disciplines. The first two pilot areas were at Nakambala in Zambia, which commenced its CI journey in February 2012, followed by Nchalo in Malawi a few months later. In summary, the CI journey within our business has been a process of go slow, to go fast, and shortly we are to expand our CI implementation at our Ubombo, Maragra, Dwangwa and Kilombero operations. Illovo Distillers (Tanzania) Limited Construction on the potable alcohol distillery at the Kilombero sugar mill is nearing mechanical completion and on track to produce extra neutral potable alcohol during the upcoming crushing season. The plant boasts the best and most robust fermentation and distillation design across all of the our ethanol operations. The local Tanzanian plant operators and supervisors completed their operations training at our Glendale and Merebank distilleries in South Africa, together with that of the distillery management team who completed plantspecific training at two distilleries in India. Our local team, together with the central support functions, are well prepared for and anticipating the plant start-up and commissioning. As one of many safety initiatives implemented across the business, members of the Group Risk Management Forum meet at regular times during the year to discuss past progress and future safety/ health targets. 40

45 OPERATIONS REVIEW Malawi Sugar cane production for the year amounted to 2.5 million tons which included tons produced by Malawian outgrowers. Both our own and outgrower cane yields at Nchalo improved compared to 2011/12 while at Dwangwa, cane yields were lower than last year but offset by increased sucrose content in cane and resulting in higher sugar production. An additional 400 hectares of land was developed to cane by Nchalo outgrowers during the year. Both factories commenced operations during the first two weeks of April 2012 and generally operated at acceptable levels of performance efficiencies during the year. Overall recovery of sugar improved compared to the previous season, and together with the higher cane throughput, resulted in total sugar production increasing by 5% to almost tons. Zambia Zambia s agricultural operations in 2012/13 produced million tons of cane, which was higher than the previous year s harvest of million tons. The onset of the summer rains brought an end to milling operations and resulted in the carryover of around tons of cane for processing in the 2013/14 season. Zambia Sugar s outgrowers delivered another record crop of million tons of cane which included tons of cane delivered by small scale farmers representing around 10% of total cane supply. This resulted in the Nakambala factory processing a record 3.2 million tons of cane to produce tons of sugar, representing the most sugar produced in a single season since the recent major expansion of the factory and agricultural operations. Despite generally good mechanical and operational performance, the season s milling operations were impacted negatively by electricity supply problems which were corrected at the end of the season. South Africa Cane production in Illovo s cane supply regions in 2012/13 was characterised by a recovery from the prolonged drought of the previous two seasons. As a result, our miller-cum-planter cane yields, which are generally higher than the industry average, improved above those of the previous season resulting in an increase in cane production from tons in 2011/12 to tons in the 2012/13 season. In addition, sucrose content in cane returned to more normal pre-drought levels. The recovery from the drought also impacted positively on outgrower production with total deliveries from small, medium and large-scale growers improving from the drought-affected production of 4.0 million tons to 4.8 million tons in the year under review. Excellent rainfall continued throughout the summer period of the 2012/13 season and a further growth in cane supply is anticipated for the 2013/14 season. Cane supply remains a significant concern in the South African sugar industry, with 38% of the total land area supplying cane to Illovo mills being the subject of long-standing land claims in terms of the Restitution of Land Rights Act, Thus far, of the areas claimed, just over 7% has been transferred to claimants. While the protracted process of settling land claims continues, independent cane growers affected by the process are reluctant to re-invest in their crops, and this further impacted on cane yields. However, the company is working with these 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 active in all mill areas and Illovo is playing a leading role in sugar industry land reform initiatives. In the year under review, cane supply restoration initiatives resulted in the development of an additional hectares of new land to cane. Interaction between the sugar industry leadership and both national and provincial government has seen renewed awareness of the importance of the sugar industry to the rural economies of KwaZulu-Natal and Mpumalanga. The various government departments have responded with assistance in the form of grants and loan funding to rejuvenate in particular the small-scale, new freehold and land claim grower sectors who supply cane to our factories. Some R150 million has been allocated to these sectors by government for the rehabilitation and maintenance of cane production over a threeyear period. These initiatives are planned to assist in the development of more than hectares of land to cane by 2017/18, providing at least an additional tons of cane per annum and significantly improving our factory capacity utilisations particularly at the Umzimkulu and Sezela mills on the south coast. With the significant improvement in the crop, the Umzimkulu mill once again opened for crushing in the 2012/13 season. Together with Illovo s three other sugar factories, sugar production recovered from the previous year s droughtaffected production of tons to tons. The performance of all our mills was generally good, although higher than normal rainfall in KwaZulu-Natal in the second half of the season resulted in poor cane quality and difficult milling conditions. The Nakambala factory processed a record 3.2 million tons of cane to produce tons of sugar, representing the most sugar produced in a single season since the recent major expansion of the factory and agricultural operations. 41

46 Operations director s review continued Meaningful storage and logistics benefits are anticipated in South Africa following the successful completion of the new sugar warehouse and distribution centre in Pietermaritzburg. Logistics Optimisation of supply-chain opportunities is a focal point of the business. In March 2013, the company took occupation of a purpose-built finished goods warehouse in Pietermaritzburg in the extent of m 2 with the ability to store tons of sugar in a variety of pack configurations. Downstream The furfural plant at Sezela operated well during the first six months of the 2012/13 season, regularly setting new monthly production targets. Unfortunately wet weather during the remainder of the season resulted in a reduction in cane supplies and a commensurate decrease in furfural production. Our Merebank and Glendale distilleries continued to perform well, maintaining excellent product quality and good throughput levels to achieve a new production record of kl. Swaziland Cane production of tons represented a 6% increase compared to that of the previous year. Although the latter part of the season was impacted negatively by very wet conditions, the existing productive cane base benefited from the recent completion of two developments, those being a 476-hectare cane expansion programme and the fourth phase of a longer-term pivot irrigation conversion project. Outgrowers supplied around 1.3 million tons of cane, which included cane harvested by small holder farmers under LUSIP. During the past year, the size of their combined cane holdings almost doubled to hectares of land under cane with a further hectares of land still to be developed under this first phase of this project. Already, the benefits of the project to an average of 30 households within each of the 34 schemes has been considerable, with at least two of the schemes reaching debt-free positions after only two seasons of production. The expectation is that by the end of the 2013/14 season, the majority of the initial schemes should be in a similar situation. The performance of the expanded factory and cogeneration operations continued to improve with at least ten new performance records set during the season. This performance, together with a record cane throughput of million tons of cane, resulted in a 4% increase in sugar production to tons. The factory s processing, warehousing and dispatching of bulk refined sugar received Food Safety System Certification during the year. Electrical power exports into the Swaziland national grid increased to by more than 11% to 36.9 GWh, exceeding commitments under the 42

47 Cane production in Malawi, including tons produced by Malawian outgrowers, amounted to 2.5 million tons representing almost 20% of total cane delivered to our factories in 2012/13. power purchase agreement concluded with the Swaziland Electricity Company. In addition to satisfying all factory electricity requirements, 31.2 GWh was exported to our own irrigated estates and other third parties. Mozambique Cane production on our Maragra estate amounted to tons which was marginally below that of the previous season. During the year, the company acquired a 430-hectare sugar cane operation and this was successfully integrated into our estate operations, increasing total area under cane to hectares. Outgrower deliveries of tons of cane decreased by 20% compared to that of the previous year, impacted by flood damage early in 2012 and compounded by lower than average rainfall for the remainder of the season. Total cane throughput amounted to tons which was tons less than in 2011/12. Factory performance during the season was hampered by a number of mechanical and process problems, resulting in inconsistent throughput and recoveries of sugar from cane. Compared to the 2011/12 season, sugar production fell by around tons to tons of sugar. Several projects have been undertaken to improve mill throughput in the coming season. The company continued to record improved ratings in respect of both the ISO quality management system and the NOSA safety management system with special recognition received for exceeding five million accident-free man-hours. Tanzania Total cane production at Kilombero in 2012/13 was million tons, comprising record estate cultivation of tons, together with tons delivered by outgrowers. Rainfall during the milling season was less than normal resulting in good harvesting conditions with all of our own cane fields and most of our outgrower cane harvested by the end of February, importantly before the onset of the summer rains in March. Sugar production amounted to tons representing a 15% increase over that produced in the previous season. The benefits of capacity expansion programmes carried out at both mills assisted operations in the current season, with expectations of further gains being realised in the coming season. As reported elsewhere in this report, construction of the new 12 million litre per annum potable alcohol distillery at Kilombero is nearing mechanical completion with commercial production commencement expected in August. Gavin Dalgleish Operations director 43

48 Commercial director s review Larry Riddle (53) BCom, CA(SA) Joined the sugar industry in 1986 Appointed to the board in 2009 Committees served Member of Social and Ethics Committee Member of Executive Committee Our increase in sales revenues were aided by a 14% rise in sugar production compared to last year and better pricing being achieved in both export and domestic markets. Products Illovo produces and sells a range of sugar, syrup and downstream products into domestic, preferential, regional and world markets. Sugar We sell a wide range of brown and refined sugar products to serve both our domestic and export customers. Our offerings include: Industrial sugar: Mainly in refined bulk form, sold primarily to soft drink, confectionery, canning and re-packing customers. Most of this sugar is sold into markets in the countries in which we operate. Pre-pack sugar: Refined and brown sugar which is prepacked in paper or plastic of various pack sizes for direct consumption in domestic markets. It is sold to retail and wholesale customers and directly to consumers through our wide network of warehouses and distribution channels. In South Africa and Malawi, prepack sugar is marketed under the Illovo brand name, and in Zambia and Tanzania, under the Whitespoon and Bwana Sukari brand names respectively. In Swaziland and Mozambique, local market sugar is marketed on behalf of producers by their respective sugar associations. Bulk raw sugar for refining: Raw sugar which is primarily exported to sugar refineries via preferential access to EU and USA markets, or through world market sales out of South Africa. Speciality sugars: Sugar which undergoes additional or special processing to meet our customers unique requirements pertaining to flavour, grain size and colour, which is exported into high-premium niche markets in the EU and USA. An increasing volume of these exports is marketed under the EU-based Fairtrade label with price premiums returning directly to promote agricultural development among emergent cane farmers in our own countries of operation. Relatively smaller quantities are sold into Illovo s domestic markets. Syrup: In South Africa and Zambia, Illovo produces a wide range of quality invert syrup products ranging from golden syrup through to the rich-dessert topping range. Illovo s market leading syrups can be found nationally in retail, wholesale and industrial markets while customer-specific inverts are also supplied to many industrial customers and to growing export markets. Downstream As part of Illovo s Strategic Intent to optimise the return on every stick of cane, a wide variety of niche, high-value downstream products are produced and marketed from the core commodity products of sugar cane-fibre, sugar and molasses. Downstream products include syrups, ethanol, furfural and furfuryl alcohol, diacetyl, 2,3-Pentanedione, BioMass Sugar, agricultural nematicides and an increasing supply of electricity. Lactulose is also produced at the Merebank site in South Africa. Commercial review Favourable market conditions impacted positively on sales resulting in the group achieving revenues of R11.1 billion, representing a 21.3% increase in sales compared to that of the previous year. This improved position was aided by an increase in sugar production of 14% compared to last year and better pricing being achieved in both domestic and export markets. An area of growing concern is the increased volumes of low-cost sugar imports that have been flowing into both the Tanzanian and South 44

49 Favourable market conditions supported by local marketing initiatives, such as the new sugar pack campaign in Malawi, impacted positively on sugar sales resulting in the group achieving revenues of R11.1 billion, representing a 21.3% increase in sales compared to that of the previous year. 45

50 Commercial director s review continued Sugar revenues continued to be underpinned by strong market shares in each of the domestic markets in which we operate, and in the year under review, domestic market sales represented 63% of total sugar sales volumes. African markets. In South Africa, duty-free sugar imports amounted to in excess of tons while in Tanzania, world sugar imports attracted minimal duties. The high level of imports is having a direct impact on the sustainability of sugar producers and sugar cane farmers alike and these industries are engaging with their respective governments to motivate for an equitable increase in the import tariff. The downstream operation, which is based primarily in South Africa, has once again grown its combined revenue by 9.9% year-on-year, despite a deterioration in furfural products pricing and production volumes. The group produced a new ethanol production record and combined with improved pricing, is the main reason for the growth in current-year downstream sales. Domestic sugar sales provide the foundation of Illovo s marketing strategy and represented 63% of total sales. Sugar surplus to local markets is sold into preferential markets in the EU and the USA, and regional markets in Africa, while in South Africa, bulk raw exports to the world market are sold on behalf of Illovo through SASA. Export revenues from the downstream business represent more than 60% of total downstream revenue. Sugar Domestic markets Sugar revenues continued to be underpinned by strong market shares in each of the domestic markets in which we operate, and in the year under review, domestic market sales represented 63% of total sugar sales volumes. Improved domestic sales volumes were achieved by Illovo in South Africa due to an improved share of industry sales following the strong sugar production performance of the South African operations. Despite the improvement in sugar availability, local market sales did not meet expectations due to competition from low-cost duty-free imports that continue to enter the country on a monthly basis. Zambia s per capita consumption of sugar continues to improve in line with buoyant growth of the economy and this positively impacted domestic sales which grew year-on-year. A challenging economic environment in Malawi, with constrained consumer spending, resulted in industry domestic sales volumes declining marginally compared to the previous year. In Tanzania, low cost imports in excess of the normal deficit tonnage resulted in local producers experiencing difficulties in getting volumes away at remunerative prices, with larger than normal volumes held in closing stock over the financial year-end. Export markets Increased sugar availability due primarily to the recovery from the drought in South Africa, together with improved weather conditions in a number of the group s other countries of operation resulted in the sales availability of sugar increasing and enabled Illovo to take full advantage of higher regional and preferential market prices. Illovo currently exports sugar to 28 countries. Regional markets World prices declined in the current year with a further global sugar surplus expected in the international sugar season which ends 30 September. However, tight sugar supply conditions in Europe supported firmer African regional market prices with both Zambia and Malawi benefiting from improved market premiums. Illovo is engaging with key regulatory bodies in this region to ensure that reforms which are being contemplated on the African continent are not divergent to the sustainability of the sugar industries in which Illovo operates. Preferential markets EU prices remained firm and relatively stable in the current year despite the additional supply measures adopted by the EU Commission to improve stock levels which had reached uncomfortably low levels. The EU sugar supply position for next season is expected to improve significantly, putting pressure on prices as additional sources of supply become available to EU refiners with the recently-announced market access arrangements for the Central Americans, improved supply prospects from existing ACP/LDC countries and the likelihood that the EU Commission will continue to provide supply support measures if deemed appropriate. Illovo has been active in lobbying the EU Commission in regard to the pending further reforms to the EU Sugar regime. The EU Commission has recommended that beet sugar quotas that are currently in place and which limit access for beet sugar into the EU market be abolished in In its advocacy messages, Illovo is highlighting the potential negative impact that early termination of beet quotas may have on the levels of price preferences currently available to ACP and least developed sugar producing countries. Illovo has submitted a motivated position calling for an extension of beet sugar quotas until 2020, as this will assist ACP and least developed sugar producing countries to fully adjust to the EU sugar market reforms. The European Council has proposed a two-year extension to sugar quotas until 2017, 46

51 with no provision for additional imports of raw sugar for refining. An extension until 2018 may result in being the agreed compromise. Demand for our premium speciality sugars was strong and record sales were again achieved. During the year, group preferential exports to the EU and the USA reached record levels. Downstream operations continue to play an important and vital role in our business, with revenues increasing by 9.9% compared to that of 2011/12. This position is on the back of higher production levels of ethanol at our Merebank and Glendale distilleries and improved market prices for lactulose. Furfural and furfuryl alcohol revenue declined due to lower production at the Sezela mill as a result of abnormal weather conditions and depressed prices arising from subdued demand in China and the EU. While the group s range of downstream products is primarily aimed at export markets, the Merebank and Glendale distilleries remain important suppliers of ethanol to the South African beverage, pharmaceutical, personal care, flavour, printing and packaging market segments. 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, a natural laxative, are sold in the local South African market. Illovo syrup, a well-known brand in the South African domestic market, retained its status as the market leader. The group exports furfural and its derivatives to more than 70 countries. MultiGuard Protect, a furfural-based agricultural nematicide derived from sugar cane, continues to explore new markets and is in the process of registration for access into the USA pre-plant food market and if successful will provide a further opportunity to commercialise this product. The group continues to explore projects to expand its downstream operations and in addition to the investment in the potable alcohol distillery in Tanzania the group is evaluating further potential investment in distilleries in Zambia to maximise the value of molasses produced by the operations. Sugar market segmental analysis (% by volume) 2012/13 24% 9% 2011/12 27% 8% 4% 1% 63% 64% Domestic markets Preferential markets Regional markets World markets Demand for our premium speciality sugars exported primarily to the EU was strong and record sales were again achieved. 47

52 Commercial director s review continued Downstream products Sezela downstream Products produced Furfural Furfuryl alcohol Uses Mainly for the production of furfuryl alcohol and in lube oil refineries as an extractive solvent in the purification of base oils. It is also used for specialist applications such as the manufacture of grinding wheels, friction pellets for brake pads, crucible manufacture, and to a lesser extent as a flavour ingredient Used to produce a resin used in the foundry industry as a polymeric binder for foundry sands. It is also used for wood treatment, to produce acid-resistant coatings and certain pharmaceuticals, and as a flavour ingredient Agriguard business products Crop Guard MultiGuard Protect Protect BioMass Sugar Used as an agricultural contact nematicide, at plant and within the growing season Developed and marketed as an agricultural contact-nematicide under the trade name MultiGuard Protect in the USA Used prior to planting, as a nematicide and fungicide Used as phytofortifiers/soil improvers or as a liquid organic fertiliser Flavourant products Diacetyl 2,3-Pentanedione Natural methanol Used as an ingredient in butter flavourings Used as an ingredient in butter flavourings and as an intermediate in the manufacture of pyrazines Used in the manufacture of natural flavour ingredients Merebank and Glendale ethanol distilleries Products produced Ethanol Potable extra neutral Uses A very high quality potable alcohol used by liquor industries for the production of branded alcoholic drinks (e.g. canes, vodkas, gins, rums, liqueurs and aperitifs) Alcohol (ENA) 96.4% Anhydrous alcohol 99.9% Rectified extra neutral alcohol (REN) 96.4% Industrial alcohol 95% Lactulose Used in the pharmaceutical industry to produce pharmaceutical intermediaries and products (e.g. in cough mixtures, alcohol is used to dissolve ingredients not able to be dissolved by water). Also used in surgical spirits, medical disinfectants, and in the production of solvents for use in the printing ink and flexible packaging industries Also has pharmaceutical applications but mainly used in the personal care industry to produce cosmetics, hair care products, toiletries, fragrances and perfumes. In the food industry, it is used to produce flavours and spirit vinegar which is used in various pickling processes and in the production of condiments (e.g. tomato sauce, chutney, mayonnaise and salad dressings) Used in the production of methylated spirits, solvents and thinners Mild, natural laxative syrup Combined record ethanol production from our distilleries at Merebank and Glendale was a key factor driving up downstream revenues in 2012/13, increasing by 10% above those achieved in the previous year. 48

53 Country operations sugar markets Malawi During the year, Malawi achieved a strong overall sugar sales performance, with approximately half of total sales sold into the domestic market under Illovo-branded pre-packed refined and brown sugar packs through the company s chain of distribution centres situated throughout the country. The balance of the sugar produced was exported to markets within Europe, the USA and regionally into neighbouring African countries. Malawi s speciality sugar remained in strong demand in both the European and USA consumer markets. The Malawi Kwacha devalued materially against the US Dollar and domestic prices were increased to counter inflationary pressures experienced by the business. Local demand has been tempered by the impact on consumer disposable income arising from the devaluation of the local currency. Zambia Domestic sales in Zambia increased in the 2012/13 season, building upon the previous year s strong performance and resulting in a new sales record by our marketing team. The year was characterised by strong domestic economic fundamentals, a stable exchange rate and strong regional demand which supported higher prices, plus increased sales into Europe. South Africa Illovo sells raw, brown and refined sugar, speciality brown sugars, syrup, furfural and its derivatives, potable and denatured ethanol, and lactulose into local and international markets. Illovo s domestic market sugar sales performance in 2012/13 improved following the increase in production which resulted in Illovo s share of the South African market increasing. Illovo s share of raw sugar exports to the world market, undertaken by SASA, amounted to tons which was up on the previous year as the industry showed signs of recovery from the drought although it was curtailed somewhat by a very wet second six months. The average price realised by the industry, including hedging activities undertaken by SASA, was US22.90 cents/lb, representing a slight decrease compared to the previous season average due to prices coming off high levels as the world sugar market remained in a surplus position. The South African sugar industry production in 2013/14 is expected to continue building on this recovery. A total of tons of world export sugar have been priced to date on behalf of the industry by SASA, at an average price of US20.14 cents/lb. Futures prices for the May 2013 contracts are currently trading around US18.00 cents/lb. Good progress has been made in optimising our outbound logistics in South Africa, with the commissioning of the new central sugar warehouse and distribution centre in Pietermaritzburg, on time and within budget. The warehouse, capable of storing tons of sugar, will deliver savings and long-term benefits to the South African operation. Swaziland Demand for Swaziland sugar in the SACU market was depressed due to the effect of low-cost imported world sugar entering SACU. Swaziland continued to supply the EU markets with sugar in 2012/13 under duty-free, quota-free access. Revenues from EU sales during the season were impacted favourably by improved market prices which benefited Swaziland and Ubombo in 2012/13. Mozambique Sugar sales in Mozambique were impacted by lower production attributed to difficulties experienced by the factory. Despite the decrease in production, sales revenue grew year-on-year. Economic growth in Mozambique was boosted by a number of large ongoing infrastructural development projects. This growth in GDP of 7.4% did not, however, translate into higher domestic sales which from an industry perspective remained flat year-on-year. Improved export earnings achieved as a result of higher prices achieved in Europe boosted revenue significantly for the current year and is the main reason for the increase in the current year s revenue. Tanzania Total sales were down on the previous year despite an increase in sugar production. The Tanzanian government awarded import licences at minimal duty in excess of the domestic shortfall and this resulted in an oversupply of sugar in the domestic market, resulting in local pricing coming under pressure. The business was able to secure export licences and sold tons into the EU market. Notwithstanding this initiative the business finished the year-end with higher than normal stock levels. The situation is expected to marginally improve as imports decline and sales volumes are expected to return to normal by June Dialogue with the Sugar Board of Tanzania is ongoing to ensure that domestic producers and small growers are fairly protected against dumping of cheap world market sugar. Domestic sales in Zambia increased in the 2012/13 season, building upon the previous year s strong performance and resulting in a new sales record by our marketing team. 49

54 Commercial director s review continued World of sugar The world of sugar year runs from October to September Sustainability Overview The global sugar industry is one of the world s oldest agriculturally-based industries, which is estimated to produce around million tons of sugar in the 2012/13 international sugar season. Whilst many forces continually impact upon annual global production, a major sustainability feature of this industry is its historic and ongoing sugar consumption growth, which on average, increases by around 2% per annum. Africa, with its favourable agronomic conditions, has significant potential to contribute towards the production needed to meet this growing demand. Illovo, as a world-class, low-cost, highly efficient sugar producer, operating in Africa, is well-placed to participate in this ongoing growth opportunity. The following tables, graphs and data are intended to promote a broader understanding of the dynamic international circumstances in which the Illovo group operates. More than 100 countries produce sugar, about 79.5% of which 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, 70% of the world s sugar is consumed in the countries of origin, whilst the balance is traded on world markets. Source: Czarnikow Sugar World sugar production (million tons) 200 World sugar consumption (million tons) years years World sugar production has recovered strongly over the past two years, following a period of reduced production as a result of poor climatic conditions which affected some of the world s biggest sugar producers, including Brazil. Global sugar consumption growth remains resilient, continuing to increase at around 2% per annum. Global sugar production surplus/deficit balance versus world sugar price Sugar production Raw sugar price million tons (5) (10) US cents per pound (15) World raw sugar prices have declined over the past two years in response to a global sugar production surplus. However, future prices are expected to benefit from a possible reduction in global sugar availability as Brazil, the world s largest sugar producer, looks to diverting a greater proportion of domestically-grown sugar cane into ethanol production. Source: Czarnikow Sugar, Bloomberg World sugar production: 50

55 Top sugar producers 2012/13 estimate (South Africa is a member of SADC) Brazil and India combined account for around 38% of global sugar production. Source: Czarnikow Sugar Approximately 70% of total world sugar production is consumed in the country of origin. Brazil remains the dominant export supplier to the global market. Source: Czarnikow Sugar World raw sugar prices have trended downwards in response to a further year of global production exceeding consumption. Source: Bloomberg Brazil India China EU-15 Thailand USA Mexico SADC Russia Pakistan Top sugar exporters 2012/13 estimate (South Africa is a member of SADC) Brazil Thailand Australia Central America EU-15 India Cuba SADC World raw sugar price Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr OctAprOctAprOct Preferential prices (free on board) (US cents per pound) While EU sugar prices have continued to strengthen against the background of softer global prices, market supply and demand adjustments in the region are likely to see an easing of price-levels in the 2013/14 season. Source: Bloomberg,EU ManComm /05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 EU USA World Per capita consumption 2012/13 (kilograms per annum) As GDP growth across Africa continues to increase at a rate in excess of other developed economies across the globe, the prospect for enhanced levels of consumption growth on the continent remains positive. Source: FO Licht Brazil Thailand Russia Mexico EU-15 South Africa USA Pakistan India Swaziland Malawi China Tanzania Zambia Mozambique Domestic retail sugar prices 2012/13 (US cents per pound) Retail sugar prices in the SADC region remain well below those of some first-world countries. Source: USDA Gain; US Bureau of Statistics; Silver Spoon; INSEE; Australian Statistics; Japan Bureau of Statistics; Consecana, Illovo Australia Japan China Zambia France Pakistan Mozambique UK USA Tanzania Argentina Malawi Brazil Swaziland South Africa Russia Thailand India Mexico

56 Commercial director s review continued Southern African development community statistics Angola Botswana D R Congo Lesotho Madagascar Malawi Mauritius Mozambique Namibia Seychelles South Africa Swaziland Tanzania Zambia Zimbabwe Malawi Tanzania Zimbabwe Mozambique Mauritius Zambia Swaziland South Africa World USA Europe Sugar production by country (000 tons) /07 07/08 08/09 09/10 10/11 11/12 12/13 Export markets (million tons) /07 07/08 08/09 09/10 10/11 11/12 12/13 Sugar production across the SADC region is expected to return to levels experienced in the 2009/10 season when output exceeded 5.3 million tons. Source: Czarnikow Sugar The region continues to take good advantage of firmer EU prices, with a decreasing world market exposure. Source: Czarnikow Sugar Mauritius Zambia Mozambique Malawi Zimbabwe Tanzania Swaziland South Africa Local consumption (million tons) /07 07/08 08/09 09/10 10/11 11/12 12/13 Following a 4% increase in 2011/12, sugar consumption in the region is expected to grow by a further 7% in 2012/13. Source: Czarnikow Sugar 52

57 South African Customs Union statistics Cane production in both South Africa and Swaziland benefited from increased smallholder output, as both prior and current cane expansions gain critical mass. Source: SSA, SASA Cane production (million tons) /07 07/08 08/09 09/10 10/11 11/12 12/13 Swaziland South Africa Despite adverse weather conditions which impacted upon cane deliveries and quality at the end of 2012, sugar production in the SACU increased by around 6% year-on-year. Source: SSA, SASA Sugar production and markets (million tons) /07 07/08 08/09 09/10 10/11 11/12 12/13 Export: Swaziland Export: South Africa Local: Swaziland Local: South Africa South African statistics A return to more normal weather patterns following two years of drought in KwaZulu-Natal, helped lift total South African cane production by tons in 2012/13. Source: SSA, SASA Increased and higher quality cane supplies resulted in total South African production of R1.952 million tons of sugar. The South African sugar industry s domestic market continued to be impacted negatively by increasing imports of sugar entering the country duty-free. Source: SSA, SASA Cane production (million tons) /07 07/08 08/09 09/10 10/11 11/12 12/13 Sugar production and markets (million tons) /07 07/08 08/09 09/10 10/11 11/12 12/13 Milling companies Small-scale growers Large-scale growers Export Local Local consumer markets were down on the previous year due to the influx of duty-free imports, largely from Brazil. Source: SSA, SASA Industrial market sales also felt the negative impact of significant volumes of duty-free imports entering South Africa. Source: SSA, SASA Consumer market sales (million tons) /07 07/08 08/09 09/10 10/11 11/12 12/13 Industrial market sales (000 tons) /07 07/08 08/09 09/10 10/11 11/12 12/13 Other Chain stores Wholesale Other Sweets Bakers/food processors Minerals 53

58 South Africa Mozambique Tanzania Swaziland Zambia Malawi Commercial director s review continued Illovo group statistics Cane production (million tons) 7 A return to normal weather conditions following 6 two years of drought in South Africa, together 5 with increased company cane deliveries in /13, resulted in record cane production of million tons being achieved. 2 1 Source: 0 06/07 07/08 08/09 09/10 10/11 11/12 12/13 Raw material throughout (million tons/including outgrowers) Rain-fed Irrigated Around 60% of cane throughput provided by the group s own agricultural estates and by private growers is cultivated under irrigation. Source: Mozambique Tanzania Swaziland Malawi Zambia South Africa 0 06/07 07/08 08/09 09/10 10/11 11/12 12/13 Sugar production (000 tons) /07 07/08 08/09 09/10 10/11 11/12 12/13 Boosted by a 35% increase in South African sugar production to almost tons, together with increased sugar output in all operating countries except Mozambique, total sugar production grew from million tons last year to million tons in 2012/13. Source: 54

59 Around 63% of total sugar sales was sold into domestic markets in 2012/13, comprising a range of bulk and pre-packed industrial and direct consumption sugars in both refined and brown sugar offerings. Source: Refined sugar production remained at similar levels to last year and included increased production output in South Africa. Source: Illovo remains a significant producer in each of the countries in which it operates. Source: Group markets (000 tons) /07 07/08 08/09 09/10 10/11 11/12 12/13 Refined sugar production (000 tons) /07 07/08 08/09 09/10 10/11 11/12 12/13 Illovo share of industry production (%) Malawi Zambia Tanzania Swaziland South Africa Mozambique World Regional Preferential Domestic Tanzania Zambia Malawi Swaziland South Africa Illovo Industry 55

60 Sustainability Introduction 58 Awards 58 Scope of sustainability report 58 Accountability for sustainability 59 Illovo s cane sugar integrated business sustainability model 59 Corporate governance 61 Social and Ethics Committee report 69 Remuneration report 71 Risk management report 76 Stakeholder engagement 80 Economic impact 82 Social impact 84 Environmental impact 94 56

61 Sustainability Downstream production of furfural and its derivatives, ethanol manufacture and the cogeneration of electricity for our own energy requirements and that of the national grids of the countries in which we operate, remains a core activity with new projects being completed, such as the construction of the Tanzanian ethanol distillery, and many other potential opportunities being considered. 57

62 Sustainability INTRODUCTION As Africa s largest sugar producer, with agricultural and manufacturing operations in six African countries, Illovo remains conscious of the strong interdependence with, and strives to make a meaningful contribution to, the communities and natural environments in the regions in which it operates. We subscribe to the principles of sustainable development, and through our business strategies, we aim to ensure that sound, sustainable practices are developed and maintained across the group. In line with our integrated business approach, our reporting process is guided by the GRI guidelines on sustainability reporting, the requirements of the SRI Index, local socio-economic and environmental issues, key stakeholders requirements (including those of our majority shareholder, Associated British Foods plc) as well as the governance requirements of the JSE Listings Requirements and King III. In 2012, we qualified for inclusion in the JSE SRI Index for the sixth consecutive year. A full index of the GRI sustainability performance indicators may be found on our website at Integrated Reporting & Assurance Services (IRAS) (previously known as SustainabilityServices.co.za) has provided independent third party assurance over the sustainability information contained within this report, confirming that it meets the GRI s Application Level B requirements (B+ with its assurance). A summary of this assurance statement is provided on page 103, with the full statement appearing on our website. As indicated in the applicable sections of this report, in its operations, Illovo is guided by the principles espoused in the United Nations Global Compact Principles on human rights, labour, environment and anti-corruption, the OECD (Organisation for Economic Co-operation and Development) recommendations regarding corruption and the ILO Protocol relating to working conditions. The United Nations Global Compact Principles are: Universal declaration of human rights Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights. Principle 2: Businesses should make sure that they are not complicit in human rights abuses. The ILO declaration on fundamental principles and rights at work Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining. Principle 4: Businesses should uphold the elimination of all forms of forced and compulsory labour. Principle 5: Businesses should uphold the effective abolition of child labour. Principle 6: Businesses should uphold the elimination of discrimination in respect of employment and occupation. The Rio Declaration on environment and development Principle 7: Businesses should support a precautionary approach to environmental challenges. Principle 8: Businesses should undertake initiatives to promote greater environmental responsibility. Principle 9: Businesses should encourage the development and diffusion of environmentally friendly technologies. The UN Convention against corruption Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery. AWARDS For its 2012 Integrated Annual Report, Illovo received a merit award in the mid-cap category in the JSE Annual Report Awards. In South Africa, during the year under review, our Eston operation s Beaumont farm won the NOSA international safety competition for sector A (agriculture, hunting, forestry and fishing) and the NOSCAR Award, an international award which is the symbol of excellence in occupational risk management. The Eston operation also participated in the KwaZulu-Natal Department of Agriculture and Environmental Affairs sanctioned Institute of Waste Management s awards programme for the first time in 2012 and received a silver award certificate for waste management; our Merebank factory was awarded the waste minimisation certificate by Don t Waste Services for implementation of an on-site waste minimisation programme (as a result of which it recycled 80% of its waste for the 2012 calendar year), and our Noodsberg factory was awarded the NOSA Integrated Five Star System sector D5 award by the NOSA KwaZulu-Natal Midlands Branch. In Swaziland, our Ubombo hospital facility received a certificate of recognition for being one of the top hospital facilities with the best coverage in HIV Care in Swaziland and also received four other prizes from the Swaziland Business Coalition on HIV/AIDS (SWABCHA). It also won an award of excellence from the Swaziland Environment Authority in June 2012 for use of cleaner sources of energy (woodchips, biomass and trash) and reduced use of coal. Our subsidiary in Zambia received the Corporate Governance Sustainability award from the Lusaka Stock Exchange and the Best Performing Listed Stock award from the Zambia Association of Chambers of Commerce and Industry. It also received numerous manufacturing and agricultural accolades during the year. SCOPE OF SUSTAINABILITY REPORT The Sustainability Report provides information on the social, economic and environmental sustainability of our primary activities (ie. cane growing, sugar manufacturing and downstream production), in operations in which we have management control. The report focuses on non-financial sustainability metrics, including: the socio-economic development and empowerment of the local communities in which we operate; producing products in a responsible manner; 58

63 securing continued access to raw materials while optimising the use of scarce natural resources; attracting and retaining employees by being sympathetic to their needs; achieving and maintaining Illovo s licence to operate through responsible management of our operations and their impact on the environment and local communities; and ensuring good corporate governance in line with best practice standards. In areas of process technology and environmental impacts, the group continues to build on the cane sugar integrated business sustainability model depicted on page 4 and 5. At the core of this model is a demonstration of our key sustainability and operational imperatives to maximise our use of input materials, which results in the group s operations generating very few waste products and producing approximately 91% of our energy requirements from renewable energy sources. Making sugar and the downstream diversification of sugar products are technical processes that require significant resources, including labour, land, water, energy and other materials to produce final products. Although the primary energy source for Illovo s production process, bagasse fibre, is renewable and delivered to the sugar factories as the fibre in sugar cane, other resources are constrained and require responsible management to ensure their sustainability and ultimately that of the business. From a corporate social investment perspective, given the rural locations of its operations, the group provides much-needed employment, social benefits and supply opportunities in developing regions of Africa. Over and above the usual costs of production which would typically be found in the more developed sugar-producing countries, Illovo provides much needed social benefits to our employees, valued at approximately R197 million in the year under review. Apart from the employment opportunities it provides, Illovo provides revenue to the local farmers who supply sugar cane to its factories across the group, aggregating approximately R1.7 billion in the year under review, benefiting these growers directly, and indirectly leading to significant multiplier effects within the associated communities. In addition, in the year under review, Illovo procured 87% of its supply requirements from local suppliers in the countries in which it operates, including million tons of cane delivered by our outgrower partners, to the value of approximately R6.022 billion. In accordance with our commitment to the advancement of ethical business practices, we recognise that the scope of influence of our operations goes beyond our own internal policies and procedures, and includes the practices of our suppliers. Accordingly, through our procurement contracts with major suppliers of goods and services, we seek to secure undertakings from those suppliers: to protect their workers rights, to provide safe and hygienic working conditions, freedom of association, the payment of living wages and working hours that are not excessive; not to engage in discriminatory practices, or indulge in harsh or inhumane treatment, or use of child labour; not to engage in corrupt practices, such as the giving or receiving of any improper financial payment or offering, or directly or indirectly making payments or gifts to any public official; and to implement environmental management programmes. ACCOUNTABILITY FOR SUSTAINABILITY Management is assisted in the sustainable development of the business by the group Risk Management Committee, which ensures effective governance of risks that may have a potential impact on the achievement of sustainable development, such as safety and health, environment, regulatory, market and financial performance, as well as reputational issues and community relationships. In addition, as indicated in the Social and Ethics Committee Report, matters relating to the sustainable development of the business are also considered by the Social and Ethics Committee. Risk management is an integral part of Illovo s business management practices, which is fortified by Illovo s combined assurance framework and ERM process, elaborated upon in the Risk Management Report. The management of sustainability at the operational level is coordinated by a sustainability steering committee, which comprises people drawn from various disciplines within the company, including the operations director, human resources executive, the company secretary and technical specialists. The committee s main function is to guide the organisation and provide specialist input on sustainability issues. Operational decisions on sustainability are made by the Executive Committee. The steering committee may establish subordinate committees to address specific sustainability aspects such as water, energy and human rights, as and when necessary. Operationally, the most senior executives are accountable for the different elements of the economic, social and environmental components of sustainability. For instance, our operations director is accountable for environmental issues, whilst our human resources executive is accountable for the social issues. As indicated in the Remuneration Report, incentive schemes are used to reward employees for the achievement of specified targets and objectives, including those pertaining to sustainability. ILLOVO S CANE SUGAR INTEGRATED BUSINESS SUSTAINABILITY MODEL Our sugar milling complexes maximise the use of all input materials with very few waste products. Sugar cane contains between 13% and 15% sucrose, which is used in sugar factories to produce granulated brown and refined sugar. Cane fibre or bagasse, the fibrous residue following the sugar extraction process, is used as a bio-renewable fuel source by the factory boilers to produce steam for processing requirements and to generate electricity. Illovo aims to be power self-sufficient for factory and estate irrigation before exporting to national grids. In 2012/13, 91% of the group s power requirements were produced by the group s own installed electricitygenerating capacity. 59

64 Sustainability continued At Illovo s operations in Swaziland and Malawi, cane trash is blended with bagasse to increase the volume of fuel feedstock for the boilers, thereby providing for increased electricity generation Water contained in sugar cane amounts to between 68% and 72% of total content. During the extraction process, this water is released and recycled for use within the factory, reducing reliance on external water resources. At the Sezela downstream plant in South Africa, plant material in the bagasse is extracted to produce furfural. The resulting furfural reactor residue is returned to the sugar mill boilers as fuel. Electricity from the sugar mill is then used to produce hydrogen by electrolysing water. The hydrogen is then used to catalytically convert furfural to furfuryl alcohol. A furfural process side stream of natural solvents is then further refined through a process of freeze crystallisation to produce food flavour chemicals. Furfural is also used as the active ingredient in our Agriguard, Crop Guard and MultiGuard Protect nematicides products. Organic and non-organic impurities captured in the form of filtercake during the manufacturing process are returned to the cane fields for use as a fertiliser. Molasses is a by-product of the sugar manufacturing process that Illovo ferments and then distils to produce potable alcohol for use as a neutral spirit for beverages and denatured spirits for the pharmaceutical, cosmetic and printing industries. The vinasse by-product from ethanol fermentation is then evaporated to make a CMS (concentrated molasses solids) liquid fertiliser that is applied on sugar cane and a variety of other crops including bananas, pastures and maize. Significantly, the application of CMS recycles important and increasingly expensive minerals back into the soils from which they were extracted. Sugar cane Sugar cane is a large grass variety which grows well in tropical and sub-tropical climates across the globe. Harvesting takes place in the southern hemisphere between April and December when the cane is 12 to 24 months old. Once harvested, the cane commences a new growing cycle from its existing roots; this re-growth is called a ratoon. Replanting takes place only every seven to 10 years, minimising soil disturbance and exposure to wind and water erosion. Rain-fed cane in South Africa, with industry yields of around 65 tons of cane per hectare, minimises the impact on subterranean water supplies. In the rest of Africa, where irrigated cane yields exceed 100 tons of cane per hectare, water for irrigation is sourced from secure water resources such as large rivers, lakes and dams within permitted rights of use. 60

65 CORPORATE GOVERNANCE Corporate governance and accountability Illovo remains committed to achieving high standards of corporate governance and corporate citizenship, by adherence to the relevant codes of best practice, principles of accountability, transparency and integrity and ensuring that the group is managed in an efficient, responsible and ethical manner, having regard to the interests of all its stakeholders. The board, its various sub-committees and management take various measures to ensure that these principles are applied in all our operations, in all the countries in which the group operates through the implementation of a range of policies and monitoring procedures, and that all group companies comply with all recognised codes of good practice as well as all relevant laws, regulations and codes of business practice. Illovo subscribes to the principles embodied in King III and, on an annual basis, the application of these principles is reviewed by the board and its sub-committees, with consideration being given to developments in the field of corporate governance and the implementation thereof across the group, to the extent determined appropriate. As indicated in the Social and Ethics Committee Report at page 69, in accordance with the South African Companies Regulations, we are also guided by the United Nations Global Compact Principles, the OECD (Organisation for Economic Co-operation and Development) recommendations regarding corruption and the ILO Protocol relating to working conditions. King III As recommended by the JSE, a register recording the respects in which the 75 principles of King III are applied has been compiled, and may be viewed on our website ( The table on the next page is a summary of the respects in which Illovo applies these principles: Dry, fibrous bagasse, remaining after the extraction of juice from the crushed stalks of sugar cane, provides us with a substantial renewable energy opportunity for cogeneration replacing fossil fuel sources such as coal and electricity generated from coal, thereby reducing GHG. 61

66 Sustainability continued King Code of Governance for South Africa 2009: Compliance Assessment Summary Key: Applied Partially applied Chapter 1 Ethical leadership and corporate citizenship 1.1 The board should provide effective leadership based on an ethical foundation 1.2 The board should ensure that the company is and is seen to be a responsible corporate citizen 1.3 The board should ensure that the company s ethics are managed effectively Chapter 2 Boards and Directors 2.1 The board should act as the focal point for the custodian of corporate governance 2.2 The board should appreciate that strategy, risk, performance and sustainability are inseparable 2.3 The board should provide effective leadership based on an ethical foundation 2.4 The board should ensure that the company is and is seen to be a responsible corporate citizen 2.5 The board should ensure that the company s ethics are managed effectively 2.6 The board should ensure that the company has an effective and independent audit committee 2.7 The board should be responsible for the governance of risk 2.8 The board should be responsible for information technology (IT) governance 2.9 The board should ensure that the company complies with applicable laws and considers adherence to non-binding rules, codes and standards 2.10 The board should ensure that there is an effective risk-based internal audit 2.11 The board should appreciate that stakeholders perceptions affect the company s reputation 2.12 The board should ensure the integrity of the company s integrated report 2.13 The board should report on the effectiveness of the company s system of internal controls 2.14 The board and its directors should act in the best interests of the company 2.15 The board should consider business rescue proceedings or other turnaround mechanisms as soon as the company is financially distressed as defined in the Act (note 1) 2.16 The board should elect a chairman of the board who is an independent non-executive director. The CEO of the company should not also fulfil the role of chairman of the board 2.17 The board should appoint the chief executive officer and establish a framework for the delegation of authority 2.18 The board should comprise a balance of power, with a majority of non-executive directors. The majority of non-executive directors should be independent 2.19 Directors should be appointed through a formal process 2.20 The induction of, and ongoing training and development of, directors should be conducted through formal processes (note 2) 2.21 The board should be assisted by a competent, suitably qualified and experienced company secretary 2.22 The evaluation of the board, its committees and the individual directors should be performed every year 2.23 The board should delegate certain functions to well-structured committees but without abdicating its own responsibilities 2.24 A governance framework should be agreed between the group and its subsidiary boards (note 3) 2.25 Companies should remunerate directors and executives fairly and responsibly (note 4) 2.26 Companies should disclose the remuneration of each individual director and prescribed officer 2.27 Shareholders should approve the company s remuneration policy Chapter 3 Audit committees 3.1 The board should ensure that the company has an effective and independent audit committee 3.2 Audit committee members should be suitably skilled and experienced independent non-executive directors 3.3 The audit committee should be chaired by an independent non-executive director 3.4 The audit committee should oversee integrated reporting (note 5) 3.5 The audit committee should ensure that a combined assurance model is applied to provide a coordinated approach to all assurance activities (note 5) 3.6 The audit committee should satisfy itself of the expertise, resources and experience of the company s finance function 3.7 The audit committee should be responsible for overseeing of internal audit 3.8 The audit committee should be an integral component of the risk management process 3.9 The audit committee is responsible for recommending the appointment of the external auditor and overseeing the external audit process 3.10 The audit committee should report to the board and shareholders on how it has discharged its duties 62

67 King Code of Governance for South Africa 2009: Compliance Assessment Summary continued Key: Applied Partially applied Chapter 4 The governance of risk 4.1 The board should be responsible for the governance of risk 4.2 The board should determine the levels of risk tolerance 4.3 The risk committee or audit committee should assist the board in carrying out its risk responsibilities 4.4 The board should delegate to management the responsibility to design, implement and monitor the risk management plan 4.5 The board should ensure that risk assessments are performed on a continual basis 4.6 The board should ensure that frameworks and methodologies are implemented to increase the probability of anticipating unpredictable risks 4.7 The board should ensure that management considers and implements appropriate risk responses 4.8 The board should ensure continual risk monitoring by management 4.9 The board should receive assurance regarding the effectiveness of the risk management process 4.10 The board should ensure that there are processes in place enabling complete, timely, relevant, accurate and accessible risk disclosure to stakeholders Chapter 5 The governance of information technology 5.1 The board should be responsible for information technology (IT) governance 5.2 IT should be aligned with the performance and sustainability objectives of the company 5.3 The board should delegate to management the responsibility for the implementation of an IT governance framework 5.4 The board should monitor and evaluate significant IT investments and expenditure 5.5 IT should form an integral part of the company s risk management 5.6 The board should ensure that information assets are managed effectively 5.7 A risk committee and audit committee should assist the board in carrying out its IT responsibilities (note 6) Chapter 6 Compliance with laws, rules, codes and standards 6.1 The board should ensure that the company complies with applicable laws and considers adherence to non-binding rules, codes and standards 6.2 The board and each individual director should have a working understanding of the effect of the applicable laws, rules, codes and standards on the company and its business 6.3 Compliance risk should form an integral part of the company s risk management process 6.4 The board should delegate to management the implementation of an effective compliance framework and processes Chapter 7 Internal audit 7.1 The board should ensure that there is an effective risk-based internal audit 7.2 Internal audit should follow a risk based approach to its plan 7.3 Internal audit should provide a written assessment of the effectiveness of the company s system of internal controls and risk management 7.4 The audit committee should be responsible for overseeing internal audit 7.5 Internal audit should be strategically positioned to achieve its objectives Chapter 8 Governing stakeholder relationships 8.1 The board should appreciate that stakeholders perceptions affect a company s reputation 8.2 The board should delegate to management to proactively deal with stakeholder relationships 8.3 The board should strive to achieve the appropriate balance between its various stakeholder groupings, in the best interests of the company 8.4 Companies should ensure the equitable treatment of shareholders 8.5 Transparent and effective communication with stakeholders is essential for building and maintaining their trust and confidence 8.6 The board should ensure that disputes are resolved as effectively, efficiently and expeditiously as possible Chapter 9 Integrated reporting and disclosure 9.1 The board should ensure the integrity of the company s integrated report 9.2 Sustainability reporting and disclosure should be integrated with the company s financial reporting 9.3 Sustainability reporting and disclosure should be independently assured Notes 1. It has not been necessary to consider business rescue proceedings during the year under review. However, in terms of paragraphs and of King III, the board has ensured that the solvency and liquidity of the company is continuously monitored. 2. Given the experience and expertise of the members of the board, mentorship and professional development programmes have not been considered necessary during the year under review. 3. A governance framework applies across the group, but as five of the company s six operating subsidiaries are registered in countries outside South Africa, these subsidiaries are guided by local reporting and listings requirements. 4. Given the high level of attendance at meetings, the board does not consider it appropriate for non-executive directors fees to comprise a meeting attendance fee as well as a base fee. Fees are determined with due regard to relevant market surveys. 5. The Audit Committee reviews all disclosures in the Integrated Report. Non-financial sustainability matters are also dealt with by the Risk Management Committee. 6. The Audit Committee, not the Risk Management Committee, has responsibility relative to IT risks. 63

68 Sustainability continued Business ethics Our Strategic Intent embraces, as a fundamental principle, the requirement for all group operations to conduct business with honesty, integrity and in accordance with the highest legal and ethical standards. Our codes of conduct and business ethics embody our key principles and values and prescribe the conduct required of all employees to achieve these values. All group businesses are audited for risks relating to bribery, corruption, fraud and theft. We adopt a zero tolerance approach to all forms of bribery and corruption and, in line with principle 10 of the United Nations Global Compact Principles, which requires businesses to work against corruption in all its forms, including extortion and bribery, we have adopted an Anti-Bribery and Corruption Policy which applies to all our business relationships. This policy, inter alia, prohibits the giving and receiving of bribes or facilitation payments and the marking of political donations. The stringent procedures prescribed by this policy are implemented throughout the group operations. We have implemented an extensive training programme in pursuit of our goal of eliminating corruption and promoting ethical behaviour by group employees as well as third party service providers and contractors, who are also contractually required to comply with the policy requirements. During the year under review, a total of employees in management positions throughout the group as well as other key employees working in high risk areas underwent training. This training is also part of the induction process for applicable new employees. In line with our Fraud Policy, the Illovo Tip-Offs Anonymous reporting line operates throughout the group and enables both internal and external stakeholders to report any suspected wrong-doings anonymously. The reporting line is operated by independent service providers, Deloitte and Touche, and all matters reported are appropriately investigated. During the year under review, 71 reports were made to the Tip-Offs Anonymous line, all of which were investigated. This process resulted in five disciplinary enquiries which led to the dismissal of four employees. Of the two ongoing fraud investigations carried forward from 2012, one resulted in the dismissal of an employee and the second was finalised without any dismissal or prosecution. Compliance The group s compliance policies and procedures are aligned to international best practice and focus on a number of key areas, with a view to ensuring the efficient and sustainable management of our businesses. We have embarked on a comprehensive process of reviewing our compliance controls with a view to streamlining and enhancing these. An enhanced group compliance framework is being developed to embed the group strategy of compliance with all applicable laws and regulations, adherence to ethical corporate behaviour, and managing compliance for business value. Compliance is monitored on an ongoing basis by our group compliance manager and the internal audit function, in accordance with the group s compliance policies and procedures. Assessment of the group s legal compliance is also embodied in, and forms an integral part of, our comprehensive ERM framework which is more fully reported on pages 76 to 79 of this report. During the year under review, no instances of material non-compliance were noted and no judgements, damages, penalties or fines were recorded or levied against any group company, its directors or employees for noncompliance with any legislation. Combined assurance In accordance with the combined assurance model introduced by King III, Illovo has developed a framework to implement a comprehensive combined assurance process across the group. The Audit Committee and the Risk Management Committee are each responsible for monitoring the appropriateness of the group s combined assurance model, to ensure that it caters for the integration, coordination, and alignment of risk management and assurance processes, thereby optimising and maximising the level of risk, governance and control oversight across the group. The combined assurance process is more fully reported on page 79 of this report. The company secretary provides a report to the board annually on matters related to combined assurance. Board of directors Illovo has a unitary board of directors which comprises 14 directors, 10 of whom are nonexecutive directors. As required by King III, the majority of the non-executive directors are independent and are chosen for their business acumen and skills pertinent to the business of the group. Brief curricula vitae of all the directors appear on pages 128 to 129 of this report. The roles of the chairman and chief executive are distinct. The chairman is an independent non-executive director who is appointed annually by the board, on the recommendation of the Remuneration/Nomination Committee. New appointments to the board are made in accordance with the recommendations of the Remuneration/Nomination Committee and, following approval by the board, such appointments are subject to confirmation by shareholders at the next annual general meeting. The independence of the chairman and the non-executive independent directors is assessed on an annual basis, (in accordance with the criteria prescribed by the Companies Act and the JSE Listings Requirements), by the Remuneration/Nomination Committee, which provides an appropriate report thereon to the board. During the year under review, the independence of Mr D G MacLeod and Dr D Konar, who have both served on the board for more than nine years, was evaluated by the Remuneration/Nomination Committee, and both were found to be independent. In accordance with the company s Memorandum of Incorporation, at each annual general meeting of shareholders, not less than one-third of the non-executive directors (being those who have been longest in office since their appointment or last re-election) must retire, but may be proposed for re-election. The Remuneration/Nomination Committee conducts an assessment of the performance of each of the retiring directors who makes himself or herself available for re-election and submits its recommendations to the board. In turn, the board makes appropriate recommendations to the shareholders relative to the re-election of directors. The non-executive directors do not have service contracts with the company and 64

69 all remuneration paid to non-executive directors is in accordance with the approval given by the shareholders at each annual general meeting. The executive directors are full-time employees of the company and, as such, each has an employment agreement, the terms of which are in accordance with the company s standard conditions of service, save for the notice period, which has recently been amended to require that each executive director must give the company at least six months notice of termination of his employment, to ensure continuity for the operations. The Memorandum of Incorporation of the company provides that an executive director s appointment as a director terminates immediately upon the termination of his employment for any reason. Provision is made for professional development programmes for directors if required, but having regard to the experience and expertise of the current members of the board, this has not been considered necessary during the year under review. The company secretary provides the directors with updates on amendments to relevant laws, regulations and the JSE Listings Requirements. At each meeting of the board, directors are required to declare other directorships held and any other interests that might create a conflict of interest with their responsibilities as directors of Illovo, or in relation to any matter for discussion at a board meeting. Members of the board may, in appropriate circumstances, take independent professional advice at the company s expense. The company provides insurance cover for directors and officers legal liabilities within the ambit of that permitted in terms of the Companies Act. Board responsibilities The board is ultimately responsible for the effective control of 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 and in terms of which the board takes responsibility for: exercising leadership, enterprise, integrity and judgement in directing the company so as to achieve its Strategic Intent, and goals and objectives; acting as a focal point for and custodian of corporate governance; approving the strategic direction, and the goals and objectives of the company; always appreciating that strategy, risk, performance and sustainability are inseparable; ensuring that the business is a going concern; considering and approving annually the company s strategic plan and its operating and capital budgets; considering and approving all material investments, and acquisitions and disposals of business activities; defining and monitoring levels of materiality, reserving specific powers to itself and delegating other appropriate matters to the relevant board committees and/or management; determining the terms of reference of the board committees, and appointing or recommending the appointment of, as the case may be, the members of such committees; being satisfied that appropriate policies, procedures and practices are in place and are duly observed; identifying and monitoring the non-financial sustainability issues relevant to the business of the company; ensuring that the company maintains and develops good corporate governance standards; the governance of risk; identifying and monitoring the company s key risks and key performance indicators; ensuring that there is due compliance with all risk-related policies, procedures and standards; and that internal controls are effectively maintained and, where necessary, reviewed; ensuring that the company has an effective internal audit function; IT governance; being satisfied that the technology and systems used in the company are appropriate to its business needs; ensuring that the evaluation of the board, its committees, the chairman and individual directors is undertaken on an annual basis; endeavouring to ensure that the company complies with all relevant laws, regulations and codes of business practice; overseeing the preparation of and approving the company s annual financial statements, and ensuring that disclosures in the Integrated Report, particularly those pertaining to sustainability matters, are adequate and meet regulatory requirements; approving the company s interim and final results announcements, and determining distributions to shareholders; ensuring that: succession planning is undertaken; the remuneration strategy of the company is appropriate to the business; and remuneration levels of directors and senior management are appropriate; recommending to shareholders at the annual general meeting, the level of fees payable to the non-executive directors; and ensuring that there is effective communication with the company s shareholders and other key stakeholders. During the year under review, the board satisfied its responsibilities in compliance with its Charter. No new directors were appointed and no directors retired or resigned. Board meetings The board has six regular meetings each year and the company s Memorandum of Incorporation makes provision for decisions to be taken between meetings by way of written resolutions. In the year under review, six meetings were held. 65

70 Sustainability continued Board committees To assist the board in carrying out its responsibilities, various board committees have been appointed, details of which are furnished below. The board has defined and monitors levels of materiality, and has formally documented matters which are delegated to the board sub-committees and management by way of committee terms of reference and policies. For logistical reasons, the meetings of the various committees generally take place immediately prior to board meetings and consequently, the chairmen of the committees report to the board at the ensuing board meetings. Audit Committee In compliance with the Companies Act and the JSE Listings Requirements, the company has appointed an Audit Committee, whose responsibilities and activities are covered in the Audit Committee Report on pages 112 to 114 of this report. Audit committees are also established at operating subsidiaries. Social and Ethics Committee In terms of the Companies Act and the Companies Regulations, a Social and Ethics Committee was appointed in March 2012, which comprises eight directors, four of whom are independent, non-executive directors, the company secretary, the human resources executive, and a member of senior management who acts as the secretary of the committee. The responsibilities and activities of this committee are covered in the Social and Ethics Committee Report on pages 69 to 70 of this report. Remuneration/Nomination Committee The responsibilities and activities of the Remuneration/Nomination Committee are covered in the Remuneration Report on pages 71 to 75 of this report. Risk Management Committee During the year under review, the Risk Management Committee comprised five non-executive directors, four of whom are independent, three executive directors, the company secretary and five members of senior management, one of whom acted as the secretary of the committee. Information on the directors who are members of the committee and details of their attendance at committee meetings during the year under review are contained on this page. The committee operates under formal terms of reference approved by the board and meets at least twice a year. 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 group; reviewing any significant legal matters; reviewing the adequacy of insurance coverage; and providing reports and information to the Social and Ethics Committee. The committee gives particular focus to operational risks, including Attendance at board and committee meetings during the year ended 31 March 2013 Board Audit Committee Remuneration/ Nomination Committee Risk Management Committee Annual General Meeting Social and Ethics Committee A B A B A B A B A B A B Abdool-Samad M H (++) N/A N/A Carr Dr M I 6 6 N/A N/A 4 4 N/A N/A 1 1 N/A N/A Clark G J (++) 4 4 (++) Dalgleish G B 6 6 N/A N/A N/A N/A Hankinson M J N/A N/A Konar Dr D N/A N/A N/A N/A 1 1 N/A N/A Lister P A 6 5 N/A N/A N/A N/A N/A N/A 1 1 N/A N/A MacLeod D G ** Madi P M 6 6 N/A N/A 4 3 N/A N/A Molope C W N N/A N/A N/A N/A Mpungwe A R 6 6 N/A N/A N/A N/A N/A N/A Munday T S Pike R N (+) N/A N/A N/A N/A Riddle L W 6 6 N/A N/A N/A N/A N/A N/A Column A indicates the number of meetings held during the year the director was a member of the board/committee. Column B indicates the number of meetings attended during the year the director was a member of the board/committee. ++ Participation in his capacity as a member of the Executive Committee, as an attendee. + 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. 66

71 health and safety and compliance with the legislative and regulatory requirements in each country of operation. During the year under review, the committee satisfied its responsibilities in compliance with its terms of reference. In support of its responsibilities, a group ERM Policy and Combined Assurance Framework have been implemented for the purposes of procuring effective and consistent risk management across all group operations. In addition, an ERM framework ensures that necessary risk management processes and systems are developed and maintained. These are elaborated upon in the Risk Management Report at pages 76 to 79 of this report. Executive Committee The four executive directors constitute the Executive Committee, whose meetings are also attended by the executive responsible for human resources and the company secretary. Under the leadership of the CEO, the Executive Committee is responsible for pursuing the Strategic Intent and for implementing the strategic plan of the company as well as for managing its business and affairs generally. It acts as a medium of communication and co-ordination between the board and the operations and functions of the company, and reports to the board and board committees on all pertinent matters. The Executive Committee meets on a weekly basis and, assisted by the company secretary and the human resources executive, reviews operational performance, capital programmes, major investment and capital expenditure proposals, as well as issues of strategic importance to the group, for recommendation to the board. Daily involvement of the members of the Executive Committee with operational and functional executives ensures the interactive nature of the overall management reporting structure. Company secretary The company secretary, Ms J A Kunst, is responsible for carrying out all the duties of a company secretary as prescribed by section 88 of the Companies Act, King III and the JSE Listings Requirements, which she is appropriately empowered by the board to fulfil. In addition, she is responsible for overseeing the legal, secretarial, governance, compliance, sustainability and corporate citizenship functions. Ms Kunst holds a BA LLB, Dip Mar Law, was a practising attorney for 35 years, and is considered by the board to be suitably qualified to carry out these functions. In accordance with the JSE Listings Requirements, the board has carried out a formal annual evaluation of the company secretary s performance and competence and has concluded that she is both competent to perform her duties and is a fit and proper person for the position. The board has also evaluated and concluded that the company secretary retains an arm slength relationship with the board. She is not a director of the company, nor is she related to, or in any other manner connected with, any of the directors in any manner which could cause there to be a conflict of interest. All directors have access to the professional services and support of the company secretary, inter alia, with regard to legislation, corporate governance and compliance matters. Annual evaluations The members of the board undertake formal annual evaluations of the performance of the board and the board committees, which are presented to and discussed at the meetings of the board and board committees. Annual evaluations of the chairman and the company secretary were also carried out by the board, while an annual evaluation of the financial director was carried out by the Audit Committee and reported upon to the board. The evaluations undertaken in March 2013 concluded that the performance of the board and its committees, as well as that of the chairman and company secretary, was generally adjudged to be good. JSE sponsor J P Morgan Equities South Africa Proprietary Limited acts as the company s sponsor in compliance with the JSE Listings Requirements. 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 IFRS and the Companies Act. They are based on appropriate accounting policies which have been consistently applied, except when otherwise stated, in which case full disclosure is made. Internal controls 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, dependent upon the particular circumstances, including: 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 acts as an independent appraisal function established to conduct reviews of operations and procedures and report findings and recommendations to management, the Audit Committee or the board, as may be appropriate. The head of the department reports 67

72 Sustainability continued functionally to the chairman of the Audit Committee and administratively to the financial director, and also has unrestricted access to the chief executive, the Audit Committee, and the chairman of the board. The independent auditors, through the audit work they perform, confirm that these 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. Going concern The directors regularly assess the solvency and liquidity of the company and believe that the business will be a going concern in the year ahead. The auditors concur with the opinion of the directors. Information technology (IT) The board has assigned the responsibility of monitoring IT governance to the Audit Committee. Management has conducted an analysis of the implications of the relevant chapter of King III relative to its IT management philosophy, and has appropriately enhanced its governance framework and processes. The IT policies and procedures cover, inter alia, the use and safeguarding of the company s information and IT systems, the use of social media, disaster recovery plans, and the regular updating and improvement of IT technology. An IT steering committee, under the chairmanship of the financial director, is responsible for carrying out the responsibilities assigned to it in terms of an IT Steering Committee Charter, which include, inter alia, motivating and monitoring IT project budgets, the IT governance framework, integrating a strategic IT planning process in line with the business strategy development process, identifying and exploiting opportunities for IT to improve the company s performance and sustainability. The general manager: group IT reports to the Audit Committee on all these matters. Dealing in securities The company has a Code of Conduct for dealing in the securities issued by any of the group s listed companies. Directors and company secretaries of Illovo and its major subsidiaries are required to obtain clearance from either the group chairman or chief executive officer before dealing in these securities. 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. Access to information The company has complied with the requirements of the Promotion of Access to Information Act, The relevant manuals are available on the company s website: No requests for access to records or other information were received during the year under review. Communication with stakeholders and shareholders The company is committed to the timeous and transparent reporting of all relevant matters to its shareholders and other stakeholders as required in terms of the Companies Act and the JSE Listings Requirements as reported on at pages 80 and

73 SOCIAL AND ETHICS COMMITTEE REPORT In accordance with the Companies Act and the Companies Regulations, a Social and Ethics Committee was established by the board in March The committee comprises eight directors, being Messrs P M Madi (chairman), M H Abdool-Samad, G J Clark, G B Dalgleish, D G MacLeod, T S Munday, L W Riddle, and Mrs C W N Molope, four of whom are independent non-executive directors, Ms J A Kunst, the company secretary, and Mr N M Hawley, the human resources executive. A member of senior management acts as secretary to the committee. The committee operates under formal terms of reference in terms of which it is required to meet at least twice a year in order to fulfil the functions assigned to it in terms of the Companies Regulations and such other functions as are assigned to it by the board from time to time in order to assist the board in ensuring that the group remains a responsible corporate citizen. The committee met twice during the period under review. At each of its meetings it receives reports from other committees and management, and in turn reports on relevant matters within its mandate to the board. This report, which describes how the committee has discharged its responsibilities in respect of the financial year ended 31 March 2013, will be presented to the shareholders at the annual general meeting to be held on 17 July Responsibilities The objectives and responsibilities of the committee, which are aligned with the committee s statutory functions as set out in the Companies Act and Companies Regulations, form the basis of an annual work plan. The specific activities required to be monitored by the committee, with reference in particular to adherence with relevant legislation, regulations and codes of best practice, include the following: social and economic development, including the group s standing relative to the UN Global Compact Principles, the OECD recommendations regarding the combating of corruption, and South Africa s Employment Equity Act and B-BBEE; good corporate citizenship, including the group s positioning and efforts in promoting equality, preventing unfair discrimination and combating corruption, the group s contribution to the development of communities in which it operates or markets its goods and the group s record of sponsorships, donations and charitable giving; the environment, health and public safety, including the impacts of the group s activities and products on the environment and society; consumer relationships, including the group s advertising, public relations and compliance with consumer protection laws; labour and employment, including the group s standing relative to the ILO Protocol on decent work and working conditions, and the group s employment relationships and contribution to the educational development of its employees; and generally, the monitoring of the social, ethics, economic, governance, employment and environmental activities of the group. The objectives that support Illovo s sustainability policy include the promotion of environmental health and public safety and good corporate citizenship, including the promotion of equality, the prevention of unfair discrimination and the reduction of corruption. Performance during 2012 During the year under review, the committee attended to the following aspects of the work plan; UN Global Compact Principles In accordance with the Companies Regulations, the company s activities are to be examined against the 10 UN Global Compact Principles. It is recognised that this will be an ongoing process, and the committee has elected to begin this process by initially focusing on the following three principles: human rights, child labour and the environment. The respects in which the group has espoused these principles are reported on more fully elsewhere in this report. Our initiatives in relation to child labour are reported at pages 81 and 92 and we are very pleased that during the year under review we received positive acknowledgment from the Malawi government and trade unions for our endeavours to combat the scourge of child labour. The precautionary approach to environmental challenges required by principle 7 is dealt with under the Environmental Impact section at page 94 and our initiatives relative to the development and diffusion of environmentally friendly technologies are reported at page 94. Ethics The Anti-bribery and Corruption Policy, Fraud Policy, Code of Conduct and Business Practices and Code of Ethics (referred to in the Corporate Governance Report), which embody our key principles and values were reviewed. A Whistle-Blowing Policy, which facilitates the Illovo Tip-Offs Anonymous reporting line, was approved, with an appropriate balance between encouraging reporting and discouraging malicious and frivolous reporting. Labour Our Employment Equity Policies embody our commitment to implementing employment equity across the group. Our Employment Equity forums continue to provide input into the employment equity management of the group. During the year under review, particular attention was given to our compliance with the South African Broad-Based Black Economic 69

74 Sustainability continued Empowerment Act, as well as to the development and advancement of local talent in the other countries in which the group operates. These initiatives are elaborated upon on pages 90 and 91 of this report. Skills development remains an area of focus and the various skills development programmes that have been implemented are reported on more fully on page 90. Health and safety The group continues with its endeavours to constantly improve its health and safety practices. These continue to improve annually and are reported on pages 87 to 90 of this report. During the year under review, particular focus was given to the safe evacuation of employees from various territories in emergency situations, through the review of our crisis management plan and evacuation procedures. In relation to health measures, attention has been given to the impact of HIV and Aids and malaria initiatives. Our extensive health care programmes are reported on more fully at pages 87 to 89 of this report. Socio-economic development In line with our Strategic Intent to be welcomed in the communities in which we operate, Illovo strives to support the advancement of all communities where its operations are located and our Corporate Social Investment Policy entrenches this philosophy. Sustainable community development is achieved, inter alia, through employment, procurement and supply chain development. The group provides much-needed employment and other social benefits in the areas in which it operates. In addition to employment, the group provides revenue to the emergent farmers who supply sugar cane to our factories and other suppliers of services and goods, thereby directly and indirectly benefiting the surrounding communities as a whole. The numerous contributions we make in these communities are elaborated upon on pages 82 and 83 of this report. Sustainability The group s sustainability framework gives focus to energy and emissions, biodiversity, water, sustainable farming practices, economic factors including out grower development and agricultural productivity, and product responsibility. These matters are elaborated upon on page 82 to 113 of this report. The key sustainability risks and opportunities which received focus in the year under review were: energy and carbon management; increased focus on water usage, by adopting a water footprint methodology; and a culture of continuous improvement and doing more with less in agricultural productivity, an initiative to be embedded across the group. Consumer legislation The group s adherence to the consumer protection laws in the countries in which it operates is regularly monitored as more fully reported on page 102 of this report. Evaluation of committee performance An evaluation of the performance of the committee was carried out in March 2013 as part of the evaluation process detailed in the Corporate Governance Report. The evaluations recognised that the although the committee was in its formative stages, it has had an encouraging start and that progress with the many objectives outlined in the annual work plan was still to be made. 70

75 REMUNERATION REPORT Composition and meetings The Remuneration Committee and Nomination Committee are combined to form the Remuneration/Nomination Committee which consists of five non-executive directors, four of whom are independent. The members of the committee are Messrs M J Hankinson, D G MacLeod, T S Munday, P M Madi and Dr M I Carr. When dealing with remuneration matters, the committee is chaired by Mr M J Hankinson and when dealing with nomination matters, the committee is chaired by Mr D G MacLeod, the chairman of the board. The chief executive (Mr G J Clark) attends meetings by invitation and the human resources executive (Mr N M Hawley) attend meetings by invitation. The committee is required to meet at least three times a year. In the past year, four meetings were held, attendance at which is reflected in the table on page 66 of this report. Role and responsibility The committee acts under formal Terms of Reference approved by the board and is responsible for the assessment and approval of the remuneration strategy for the group. The committee is tasked with the development and determination of the company s general policy on executive and senior management remuneration, and the positioning of senior executive salary packages relative to local and international industry benchmarks, such that they are sufficient to attract, retain and motivate executives of the quality required by the company. The salary packages include basic salary, annual bonuses, performance-based incentives, share incentives and retirement benefits. The committee also gives consideration to the composition of the board and board committees and makes appropriate recommendations in this regard to the board. The committee has satisfied itself that the relevant non-executive directors remain independent, notwithstanding their tenure having exceeded nine years. The committee also plays an integral part in succession planning relative to senior executives. For the year under review, the committee met its responsibilities in compliance with its terms of reference. On an annual basis, the committee: reviews the company s remuneration policy for approval by the board and shareholders; reviews and approves the remuneration packages of the executive directors and senior managers of the group; approves the salary mandate to be implemented for the group s employees in the various countries of operation, which includes the foreign allowances paid to employees who are deployed on assignment into these countries; approves the group s short-term performance bonus scheme for the forthcoming year and signs off on the awards achieved in the prior year; approves the annual award of options to the group s longer-term aligned Phantom Share Incentive Scheme; makes recommendations to the board on the fees payable to the company s non-executive directors; reviews the group s ongoing succession plan to ensure that the group has catered for ongoing staffing of top talent; reviews the performance of all executive and non-executive directors on an annual basis; and ensures compliance with relevant legislation. During the course of the year, the committee engaged the services of remuneration consultants to audit and review the level of the executive director s roles and remuneration when compared with peer group companies. On the basis of the subsequent report, the committee was satisfied that these are in line with positions of similar content and complexity in the market. In keeping with the Remuneration Committee s Terms of Reference the chairman is required to report to the board after each meeting and attend the AGM to respond to any questions from shareholders on remuneration. Remuneration philosophy and policy As far as possible, the committee aligns the outcomes of the remuneration policy with the interests of shareholders and also seeks to encourage and reward the longer-term sustainable growth of the group. The principles of the remuneration policy are designed not only to attract, retain and motivate employees, but also to reward them for their contribution to the group s operating and financial performance taking into account market conditions at both industry and country levels. In line with the company s strategy, the remuneration philosophy and policies also recognise the importance of our people in the continued growth and sustainability of the group and its overall performance. Apart from fixed remuneration, an element of variable remuneration in the form of short and longer-term incentive schemes is also catered for and linked to the achievement and performance of specified targets and objectives, with payment being made out of increased returns to shareholders. This also assists in attracting and retaining key personnel. General salary and wage reviews The committee also ratifies the salary mandates, and the wage mandates that determine substantive wages and benefits for the unionised category of employees, through collective bargaining processes with representative trade unions in all countries of operation. Criteria adopted for determining non-negotiated salary and wage increases are as follows: individual performance reviews; CPI (inflation); 71

76 Sustainability continued market surveys, where the group subscribes to pegging key high performing employees at the median to upper quartile of the market; internal equity where applicable; short-term incentives, whereby all employees participate in a performance-related bonus scheme (PRBS) designed and implemented on a financial year basis, and are remunerated against pre-set performance criteria at the end of the group s financial year. The targets are both of a financial and operational nature, directly relevant to the performance expectations for each operation in the ensuing year. The former are set against financial parameters such as growth in headline earnings per share (HEPS) and profit after tax (PAT), as well as achievement of relevant return on net assets (RONA) targets. The latter typically relate to the achievement of set line-of-sight production forecasts and safety standards and well defined operational efficiency metrics which are readily measured and progress towards achievement thereof is communicated to participants on an ongoing basis; and long-term incentives, including the Share Option and performancerelated Phantom Share Scheme (PSS), which is extended to key senior staff members, are directly aligned to the company s share performance and incorporate a performance hurdle, thus only being of value when beneficial to shareholders. These schemes are more fully referred to below and on pages 108 and 109 of this report. Other substantive benefits include in-house health care facilities, medical aid contribution subsidisation and provident and pension funds. In countries where these do not exist, company contributions to national security insurance-type funds are paid. Executive remuneration The executive directors are full-time employees of the company and, as such, each has an employment agreement, the terms of which are in accordance with the company s standard conditions of service, save for the notice period, which has recently been amended to require that each executive director must give the company at least six months notice of termination of his employment, to ensure continuity for the operations. The group aims to adhere to the broad guidelines of executive remuneration as contemplated by King III, in respect of remuneration packages of the company s executive directors and senior managers, ensuring that the following is achieved: Guaranteed remuneration The positioning of guaranteed remuneration packages is aligned between the market median and upper quartile of local and international industry benchmarks. To this end, external consultants are used to ensure that these levels are conducive to the attraction and retention of key skills. The guaranteed remuneration packages are based on the complexity of the role of each director and senior manager and his/her performance and contribution to the group s overall performance. Contributions towards medical, retirement and disability benefits, as well as car allowances are applicable to all senior employees in accordance with the rules of the relevant company scheme. Short-term incentive The PRBS mentioned above is also applicable to executive management, motivating and focusing them on specific annual targets. In addition to the financial targets mentioned hereinabove, individual specific objectives identified by the Remuneration Committee for that particular executive function are also set. The attainment of these targets contributes towards the achievement of the company s strategic objectives, which are aligned to the delivery of sustained shareholder value. The PRBS is capped at 125% of annual salary for executive directors and senior general managers. The breakdown of the targets is as follows: Group financial results 80% Working capital management 10% Key performance objectives 35% Total 125% Long-term incentive This is currently catered for by the PSS that was introduced in 2005, and previously by the closed Illovo Sugar 1992 Share Option Scheme. Illovo 1992 Share Option Scheme None of the directors hold any options in the closed 1992 Share Option Scheme, all such options having been exercised. The shares in the company held by the directors as at 31 March 2013 are reflected on page 108 of this report. Illovo Phantom Share Scheme Further information regarding the PSS is reflected at page 109 of this report. The PSS is cash-settled and therefore is not classified as a share incentive scheme in terms of the JSE Listings Requirements. It is directly aligned to the company s share performance. It incorporates a financial performance hurdle and benefits only accrue where positive real growth in shareholder returns has been achieved, which entails that one-third of the options granted may only be 72

77 exercised in each of the third, fourth and fifth years following the date of grant, provided that certain financial hurdles are met. During the year under review, there were 142 recipients of the scheme. Financial performance hurdle, information and allocations: A performance base is set as being the average HEPS achieved over the preceding three financial years, with one-third of the options granted in that year vesting in years three, four and five. A performance target hurdle is also set, which requires that the group HEPS cumulative performance from year of grant must exceed the cumulative South African gross domestic product (GDP) for the same period: cumulative GDP plus 2.5% for 50% of the vested options to become exercisable; or cumulative GDP plus 5.0% for 100% of vested options to become exercisable. If the target hurdle is achieved at the end of the third financial year from date of grant, the options become exercisable, subject to the vesting rule referred to above. In the event that the target hurdle rate is not achieved at the end of the third financial year from date of grant, vested options accrue until the target is met, provided that this is within the 10-year option life. The performance targets were introduced in 2007 and performance has been as follows: grant date 2007: HEPS outperformed GDP plus 5% at the end of year three. Therefore vested options are exercisable (ie subject to the vesting rule referred to above); grant date 2008: HEPS outperformed GDP plus 2.5% at the end of year five. Therefore 50% of the options for this year are exercisable as the hurdle has been met at GDP plus 2.5% (ie subject to the vesting rule referred to above); grant date 2009: HEPS underperformed GDP plus 2.5% at the end of year four. Therefore vested options remain unexercisable; grant date 2010: HEPS underperformed GDP plus 2.5% at the end of year three. Therefore vested options remain unexercisable; and the 2011 and 2012 allocations are still to be measured against the threeyear HEPS target. Phantom options granted to executive directors The table below reflects the phantom options previously granted to executive directors, those granted during the year under review, any phantom options exercised during the year under review, and the unexpired and unexercised phantom options as at 31 March 2013: PHANTOM OPTIONS GRANTED TO EXECUTIVE DIRECTORS Options as at 31 March 2012 Option price (cents) Options granted during the year Options exercised during the year Exercise price (cents) Options as at 31 March 2013 Expiry date Abdool-Samad M H Clark G J Dalgleish G B MacLeod D G # Riddle L W # Options granted to Mr D G MacLeod whilst an executive director. 73

78 Sustainability continued Compensation of executive directors/prescribed officers remuneration of executive directors/prescribed officers for the year ended 31 March 2012 Salary R 000 Bonus R 000 Retirement, and medical contributions R 000 Other benefits** R 000 Total R 000 Abdool-Samad M H # Clark G J Dalgleish G B* Riddle L W Stuart B M Zarnack K x Total # Appointed on 1 September 2011 * Appointed on 16 September 2011 Retired on 31 March 2012 x Resigned on 31 May 2011 ** Notes 1 The amount reflected as having been paid to Ms K Zarnack following her resignation as financial director last year comprised an amount equal to her annual basic salary, company contribution to retirement, company contribution to medical aid, vehicle allowance, and a termination payment of R These amounts were approved by the Remuneration Committee. 2 The payments made to Mr M H Abdool-Samad (our current financial director) consequent upon his agreeing to move to Durban and taking up employment with Illovo last year included a take-on bonus of R , a relocation allowance of R , the usual annual vehicle allowance in 2011 and other sundry employment benefits. These payments were also approved by the Remuneration Committee. remuneration of executive directors/prescribed officers for the year ended 31 March 2013 Salary R000 Bonus R000 Retirement, medical and UIF contributions R000 Car allowances R000 Housing allowance R000 Option gains R000 Total R000 Abdool-Samad M H Clark G J Dalgleish G B Riddle L W Total Other than the directors, there are no employees of the company who are prescribed officers, as defined in the Companies Act, the directors being the only persons who exercise, and who are empowered to exercise, or who regularly participate to a material degree in the exercise of, general executive control over and management of the whole, or a significant portion of the business and activities of the company, as contemplated in regulation 38 of the Companies Regulations. 74

79 fees paid to non-executive directors for the years ended 31 March 2012 and 31 March R R000 Hankinson M J Konar Dr D MacLeod D G** Madi P M Molope C W N Mpungwe A R Munday T S Williams R A (retired 19 July 2011) 643 Carr Dr M I # Lister P A # Pike R N # Total ** The chairman s remuneration is approved by the Remuneration Committee, having regard to the complexity of his role and his expertise in the sugar industry. # These directors, who are nominated for appointment by Illovo s majority shareholder, 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 on which they serve. Post-retirement medical aid Post-retirement medical aid contributions paid on behalf of past directors amounted to R for the year under review, compared to R for the year ended 31 March

80 Sustainability continued RISK MANAGEMENT REPORT Risk management is an integral part of Illovo s business sustainability management, with the three critical components, ie economic, social and environment. The safety, security and preservation of our people and property are essential for the group s sustainable growth. The Risk Management Committee is responsible for the oversight of the assessment, mitigation, management, and monitoring of risk across the group. Management is tasked with the continuous process of developing and enhancing its comprehensive systems for risk identification and management. In the business environment, change and uncertainty are constants. These create both risks and opportunities, which can either erode or enhance value for the company. Illovo strives to manage these risks within our risk tolerance, consistently, comprehensively and economically through effective ERM. A comprehensive ERM process was initiated during 2012 and has been embedded across the group. This process is intrinsically linked to our efforts to achieve a high level of corporate governance and compliance with the risk management requirements of King III. It focuses the risk management practices to deal effectively with uncertainty, to capitalise on opportunities, to meet objectives and stakeholder expectations, and enhance strategic and tactical decision-making. Risk assessments in line with the ERM framework are conducted regularly, with the resulting risk improvement plans being closely monitored. The monitoring of risk improvement plans is an integral part of the risk management process, and ensures that any residual risk exposures are properly and timeously managed. Salient risks and their relevant mitigating strategies are subject to regular assessment by the Risk Management Committee and are given particular consideration in the annual strategic plan which is approved by the board. Business continuity plans for all group operations are incorporated in the ERM framework and training to ensure capability to deal with business interruptions to the business is carried out at all operations. Summary of material sustainability risks The salient risks identified through our ERM process in the year under review are set out in the following table which reflects the top strategic, financial and operational risks from both an inherent risk (without mitigating controls) and residual risk (with mitigating controls) perspective, considered to have potentially the most material impact upon the group if realised. SUMMARY OF MATERIAL SUSTAINABILITY RISKS Key: E = extreme; H = high; M = moderate; L = low Without mitigating controls With mitigating controls Description of risk ENVIRONMENT 1. Weather Impact of abnormal weather conditions, including climate change related risks such as changes in mean temperature, precipitation and other physical climate drivers Inherent risk Residual risk Mitigation/controls/opportunities E M Drainage systems, dykes and canals Irrigation systems in place at most non-south African operations Lightning protection River and dam level monitoring Use of forecasting Early warning system for flooding 2. Sustainability imperatives Risks associated with air emissions, effluent and waste not being in compliance with changing environmental legislation Legal sanction and reputational damage due to non-compliance with regulations and licences Continually evaluate cane varieties (drought resistant) utilising the expertise of SASRI M L Continuous improvements and implementation of treatment measures for effluent and solid waste Use of renewable biomass as primary energy source reduces overall carbon footprint, improves reputation and contributes towards climate change mitigation Compliance with local environmental laws 3. Power/electricity supply M L Improvement of cogeneration capacity and efficiencies from renewable fuel sources, allowing for power self-sufficiency, reducing the consumption of primary energy Opportunity: Export of excess power to the national grid 76

81 SUMMARY OF MATERIAL SUSTAINABILITY RISKS CONTINUED Key: E = extreme: H = high: M = moderate; L = low Description of risk LEGAL AND REGULATORY 1. Stakeholder relations Reputational risks associated with relationships with growers, community, government, and NGOs 2. Direct and indirect tax exposure Exposure to complex tax legislation in the international environment HUMAN CAPITAL 1. Industrial action People precipitated action that results in business activities/processes being adversely affected Skills and capabilities OPERATIONAL 1. Contractor performance Failure of significant contractors to perform in accordance with contractual terms 2. Exceptional input cost increases Cost pressures on fuel, electricity, fertiliser etc, impacting margins and long-term competitiveness Labour productivity 3. Cane supply Inadequate supply of cane to meet production requirements in respect of quantity, quality and timing Agricultural development and maintaining areas under cane Yield performance Land tenure/expropriation Competitive crops Cane varieties Irrigation effectiveness Supply security Electrical power Pests and disease Availability of plant and equipment Cane roots Without mitigating controls Inherent risk With mitigating controls Residual risk Mitigation/controls/opportunities H M Pro-active engagement with, and support of growers Pro-active engagement with government and local communities Active social investment programmes H M Engagement with tax authorities on all new transactions Tax returns reviewed by the group tax department prior to being submitted to tax authorities Independent assessment of complex tax related transactions H M Technical training and succession planning to meet operational requirements Maintenance of union collaboration Annually negotiated legal Collective Agreements (normally registered in the Industrial Court) Ongoing liaison with local authorities (in some instances with national officials) Facilitation by management of new union entry to the business H M Contractual agreements, with appropriate penalty and cancellation clauses Evaluation of contractor performance Induction procedures, where appropriate Suitable reference and background checks undertaken Interrogate/track record of relationship between contractor and subcontractors H M Centralised inbound and outbound supply chain contracts Natural hedges to purchase US$ goods and services, in particular in Malawi Key supplier relationships Spread of contracts, where possible H M Irrigation on MCP land Planting cane varieties Weather forecasting Increasing area under cane Replant programmes Provision of extension services, where appropriate Proactive engagement with government and financial institutions/donors to provide cost effective funding for grower development and ratoon management and development Proactive engagement and support of growers Cane supply agreements Mill energy efficiency improvement (becoming self-sufficient in electricity cogeneration) 77

82 Sustainability continued SUMMARY OF MATERIAL SUSTAINABILITY RISKS CONTINUED Key: E = extreme: H = high: M = moderate; L = low Without mitigating controls With mitigating controls Description of risk Inherent risk Residual risk Mitigation/controls/opportunities OPERATIONAL continued 4. Currency exposure Exposure to fluctuations in exchange rates. E M Hedging policies and procedures Forex cash flow forecasting Centralised Treasury function Group Treasury Policy STRATEGIC 1. Country/investment risks Unstable political regimes Unfavourable legislative changes and policies Government relations Treasury Committee H M Engagement with governments to ensure the views of stakeholders are represented Anticipating and contributing to relevant changes in legislation and policy International SOS Consultants to monitor political situation in operating countries MARKET 1. Price/market risk Exposure to pricing variations, particularly due to World Sugar Price volatility, changes in market demand and supply, and market protective measures implemented by governments Due diligence to cover political risk on any new investments Financial investment policies Insurance H M Focus on driving costs down Strategy to establish operations in deficit markets, making imports uncompetitive due to tariff protection and logistics advantages Develop niche markets so as to be less reliant on exports HEALTH AND SAFETY 1. Occupational health H M Health care facilities and wellness programmes focusing on primary and secondary health care, occupational health, HIV and AIDS, malaria and tuberculosis and other tropical diseases, working closely with national programmes in countries of operation 2. Employee safety H L Safety training; mandatory group management systems, standards and performance requirements based on best practice standards 78

83 Combined assurance A comprehensive combined assurance process (depicted in the diagram below) has been implemented in the last 12 months as part of the governance practice recommended by King III. This process is based on a combined assurance model which requires assurance to be effected on three levels, ie by management, internal assurance providers and external assurance providers. Combined assurance process The combined assurance framework, which covers all the business operations of the group, is monitored by the Audit Committee and the Risk Management Committee, ensuring the integration, coordination, and alignment of risk management and assurance processes, thereby optimising and maximising the level of risk, governance and control oversight across the group. A combined assurance forum, which meets on a quarterly basis, has the following main objectives: to engage with the board through the Audit Committee and the Risk Management Committee to determine the desired level of assurance required in each area; to review all assurance activities on an ongoing basis; to highlight and review the current areas of concern (emerging and/or existing risk) for management; to ensure coordination, reporting and communication with stakeholders; to develop a common view of business risk themes; and to formulate the assurance activities necessary to ensure broad and efficient coverage. The combined assurance forum provides assurance that current control measures in place are adequate. The combined assurance plan is reviewed and updated on a quarterly basis and is used to provide an overall opinion and assurance to the Risk Management Committee on an annual basis. Review, monitor and framework Risking mapping Improve controls Identify key controls Identify assurance gaps Analyse and assess assurances on controls Identify assurance providers 79

84 Sustainability continued STAKEHOLDER ENGAGEMENT As noted on page 14 of this report, Illovo recognises that its long-term sustainability objectives are supported through engaging with our stakeholders to address matters of mutual interest. The following table sets out the key stakeholders identified across the group and includes a brief explanation of the relevant interactions: KEY STAKEHOLDER Employees Trade unions Shareholders; investors; analysts Media Regulators: JSE; Lusaka Stock Exchange; Malawi Stock Exchange and other regulators Customers Raw material suppliers: providers of sugar cane Suppliers and service providers Governments Communities; traditional and civil society TYPE OF INTERACTION An array of internal communication channels are used to engage with employees across the group regarding ongoing business-related information and strategy, training and personal development, including the use of group staff magazines, intranet, a customised Illovo business understanding programme, managing director s briefs and notice boards. Approximately 89% of all Illovo employees are unionised and the group interacts across a range of labour forums, e.g. regular union meetings, collective bargaining forums, etc, to ensure sound employee relations and compliance with internationally recognised labour practices Bi-annual investor/analyst presentations; one-on-one meetings; site visits; regular operational and financial communications; annual general meetings Regular interaction with all forms of media to communicate developments, successes, strategy, financial results and to deal with issues which are reported in the public domain. Interaction includes one-on-one interviews, site visits, media statements, SENS announcements, the group website and general contact to promote understanding The company and its subsidiaries comply with the various regulatory requirements in the countries in which they operate, including regular contact and interaction with these regulators and relevant government departments Trade market: Ongoing interaction with supermarket chains and wholesalers; promotion of sugar distribution and depot systems amongst existing/potential entrepreneurs; direct consumer stakeholder contact; involvement in community-based initiatives; support of annually-sponsored sporting events. Industrial market: Customer interaction in respect of both sugar and downstream products; focus on specific technical, logistical and operational requirements of the customer with ongoing liaison through various channels Ongoing communication at both industry and local level with grower associations and member groups; operational discussions of mutual concern; contact through industry structures, e.g. SASA, SA Cane Growers Association, Swaziland Sugar Association, Sugar Producers Association of Zambia, Maragra Outgrowers Association, Tanzania Sugar Producers Association, etc. 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 update meetings; negotiation of service level agreements Ongoing discussion at industry and company level with government departments and industry bodies relating to sugar cane growing and milling across the group together, for example, with departments dealing specifically with land reform and rural development in South Africa, etc; regular contact to update government representatives on the state of ongoing business, strategy, capacity expansions, etc; and ongoing interactions/communications with development initiatives and agencies such as the New Partnership for African Development (NEPAD), together with African trading blocs such as the SACU, SADC, Common Market for East and Southern Africa (COMESA) and East African Customs Union (EACU) Strong identification and communication with communities surrounding operations relating to cane development, community/company projects of mutual interest; support of community-based social investment requirements; provision of community infrastructure and advocacy of community issues 80

85 The group participates in relevant public policy development through sugar industry structures, tripartite business, labour and government public policy development structures, and other business associations. Our involvement in the facilitation of broader national strategic objectives continues through participation in organisations such as the National Business Initiative in South Africa, along with our 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 addition, there is ongoing contact with chambers of commerce and other relevant business forums across the group, together with Illovo s associations with international sugar-specific organisations such as the EU African, Caribbean and Pacific/ Everything But Arms lobby initiatives. In its employment practices, the group remains committed to human rights and fair treatment of our employees in line with the United Nations Global Compact Principles and the ILO Conventions on employment, which in most countries of operation are also enshrined in employment-related legislation. Illovo s Codes of Conduct and employment policies are explicit in their commitment to equity and ensuring that neither forced labour nor child labour takes place at any of our operations. As a consequence of this commitment to human rights and fair employment practices, for the year under review, the group did not incur any fines for non-compliance with relevant legislation in any of the countries in which we operate. At a National Child Labour conference organised and held by the Malawi government during the year, our efforts to address the empowerment of children and eliminate child labour were commended, and it was recommended that other industries in the Southern African region should use Illovo s corporate social responsibility and child labour interventions as best-practice models. The conference included the attendance of international bodies such as the ILO, FAO, Elimination of Child Labour in Tobacco (ECLT from Geneva) together with representative government ministries and all agricultural players in Malawi. Proactive strategies to eliminate the risk of child labour within our supply chain are implemented by requiring the adherence of our suppliers to the principles enshrined in our Code of Conduct. Total cane supplies from outgrower schemes across the group amounted to 4.2 million tons generating revenue of R1.697 million, thereby promoting economic growth, enterprise development and job creation in rural locations. 81

86 Sustainability continued ECONOMIC IMPACT As a creator of wealth and a major employer across six African countries, Illovo plays a significant economic role. We frequently contribute towards empowering emerging markets and supplement local governments efforts to provide associated communities with infrastructure, education and health care. We also create value by transforming raw materials into products for our many customers, make substantial payments to the value chain of suppliers, contractors, distributors, customers; employees and to governments through direct and indirect taxes, as well as to shareholders and other providers of capital. The group s value-added statement on page 8 of this integrated report shows the wealth we have been able to create through manufacturing, trading and investment and our subsequent distribution and reinvestment in the business. This statement, together with our five-year review of financial performance and statistics on pages 9 to 11 underscore Illovo s major economic position within the Southern African region. Local economies In line with our Strategic Intent to be cognisant of the rural locations of our operations and our corporate governance objective of being socially responsible, we strive to support the advancement of all communities where our operations are located. Sustainable community development is achieved inter alia through our employment, procurement and supply chain development, as well as direct and indirect support for outgrower initiatives. Employment Illovo provides substantial employment, with the group s aggregate permanent employee complement as at 31 March 2013 standing at Temporary employment was also provided to people on a fixed-term contract basis and a large number of contractors on projectspecific work across the group. Preferential procurement A key component of our B-BBEE strategy is to promote small, medium and micro enterprises and black-empowered business. We have a preferential procurement policy in place that encourages the participation of historically disadvantaged communities in economically beneficial activities. This commitment extends beyond the realm of South Africa, where Illovo supports the long-term growth and stability of the surrounding communities at our other operations by sourcing materials and services of a correct quality at an acceptable premium, notwithstanding the economic advantages that would otherwise be gained by sourcing bulk supplies and technologies through the group procurement function in South Africa. Outgrower development and revenue We work closely with local farmers through established cane grower development schemes and recognise, through partnerships with national governments, development partners and private sector companions, the need to develop sustainable farming business models. This business model has created more opportunities for us to adopt an holistic and integrated approach to address the social, economic and environmental challenges faced by the communities. The model further promotes linkages to all the parts of the value chain providing agricultural, technical, financial and administrative competences, together with assistance to access grants and other funding opportunities for agricultural projects, such as irrigation schemes. Total cane supplies from outgrower schemes across the group amounted to approximately 4.2 million tons, generating revenue of R1.697 billion in 2012/13. This revenue promotes economic growth, enterprise development and job creation through support services such as cane hauling and land preparation within the communities concerned. This significant growth in the volume of sugar cane supplied by outgrower schemes, amounting to almost 30% of total cane throughput, reflects our commitment to supporting the development of sustainable, commercially-directed farming business models and governance systems in our farming communities. Other notable developments during the year included: In Malawi, EU funding of an additional development of 680 hectares of land under cane at Kasinthula, adjacent to our Nchalo mill, through the Shire Valley Cane Growers Trust. The project involves 340 farmers with the final phase-four of the project planting completed in March Also at Nchalo, the first full commercial harvest of cane from The Kaombe Trust farm. In 2012, the Trust invested around R into market infrastructure and is in the process of developing an integrated development programme incorporating health, education, environment and income-generation projects. These and other outgrower projects at Nchalo in Malawi have accounted for a steady increase in cane deliveries to our mills, rising from tons in 2011/12 to tons in 2012/13, representing a significant increase of 58%. At Dwangwa, the benefits of similar outgrower projects resulted in a 3% increase in cane supplied by this sector during the 2012/13 season. In Swaziland, we have continued our partnership with LUSIP. This large-scale irrigation programme initiated by the government of Swaziland and supported by a major capacity expansion of our Ubombo mill at Big Bend, is providing a comprehensive small-scale grower intervention with future potential to develop additional agricultural land for small-scale farmers. Through their increasing cane deliveries, sugar production at Ubombo is expected to exceed tons in the medium-term. In Zambia, outgrower cane development and expansion initiatives continued to deliver positive results with million tons of cane delivered to our Nakambala factory in 2012/13, representing a 13% increase in total cane supply year-on-year. This good performance included cane supplied from the Magobbo Project, involving 94 outgrowers 82

87 who produced tons of cane at an average annual yield of 166 tons of cane on 430 hectares of land. Together with the major factory and agricultural expansion of this operation, and financial support from their own Mazabuka Cane Growers Trust and the EU, the Magobbo growers have formed a collective farming unit which is now benefiting from water supply, irrigation and drainage, land development and crop establishment projects commenced three years earlier. Within our South African subsidiary company, Illovo SA, several investment grants amounting to more than R150 million have been allocated to small-scale growers by South African provincial and national government for development schemes which are administered and managed by ourselves on behalf of the growers. This forms part of ongoing initiatives coordinated by Illovo SA and local cane growing bodies to increase cane supply from the small-scale grower sector and includes rehabilitation of existing land under cane, as well as the development of new land to sugar cane agriculture. The SETHUSE cane development project near our Umzimkulu mill, involving the planting of hectares of community land to cane, is just one example of a number of initiatives, including the continued productiveness of settled and unsettled land claim farms, aimed at increasing small and medium-sized cane deliveries to around two million tons in six years time. Financial assistance received from government In general, Illovo receives limited financial assistance from governments, as noted above in South Africa, and in our other countries of operation in the form of tax relief/credits, subsidies, investment grants, research and development grants, awards and financial assistance from export credit agencies or financial incentives. Case study: The Kilombero Community Trust Celebrating a decade of partnership Established in the 2002/03 sugar milling season, the Kilombero Community Trust set out to promote sustainable economic enterprises within the Ruaha valley community, driven by the broad aims of increasing the quantity, quality and reliable supply of cane to Kilombero s two factories, thereby generating sufficient income for the socio-economic development of this remote, rural area. Drawing on all the available linkages through our partners, the Trust benefited significantly from a million grant from the EU, and during the past 10 years has achieved the following milestones: the development of rural infrastructure, including the rehabilitation of 62 km of roads, out of a total target of 125 km. This has improved the reliability and timeliness of cane deliveries to the mills and has brought about an overall reduction in cane transport costs, vehicle wear and tear and vehicle turn-around times; the considerable strengthening of outgrower association capacity through the engagement and support of locallybased farming organisations, local area officers and village agricultural extension officers, together with the creation of a Farmers Field School to provide agricultural training and extension services to improve outgrower cane husbandry practices; and outgrower cane supplies to Kilombero in 2012/13 increased by 17% to tons compared to that of last year. In turn, we have provided technical skills and physical support through the provision of wide-ranging extension services, particularly in respect of land levelling, soil texture analysis, pests and disease surveys, advice on drainage and irrigation, mapping services and surveying and collation of harvesting data. Significantly, Illovo has also provided key assistance in the securing of loans and grants for the realisation of the Trust s objectives and in addition to ongoing administrative support, has engaged directly with the outgrowers and outgrower organisations in negotiating an equitable cane supply agreement to manage the long-term success of the partnership. Through such interventions and support programmes, the financial risk for communities is significantly reduced and income is generated within the communities to support further enterprise development and poverty alleviation in rural areas. 83

88 Sustainability continued SOCIAL IMPACT Our core business principles are based on the contribution that we can make to the economic and social development and wellbeing of our stakeholders and the communities within which we operate. We recognise the importance of our people in the delivery of Illovo s stated goals and objectives. Human resource policies and operational strategies take into account the business needs of our group s operating entities with direction from the corporate office. They appropriately include an understanding of national imperatives and relevant legislation in each country of operation and alignment is achieved through our group Strategic Intent. Underpinning this strategy, 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. The effective management of human resource issues, in alignment with Illovo s Strategic Intent, has a material bearing on the group s capacity to create and sustain value. In order to achieve our objectives, we have structured human resource expertise to provide group-wide and companyspecific guidance in the areas of: staffing and targeted manpower succession planning, coupled with the provision of psychometric assessments where applicable; foreign staffing deployment and administration; organisational development, structure and change management; talent and performance management programmes that combine to deliver formal career planning; technical skills and managerial development coupled with business understanding programmes; senior and executive programmes designed to ensure that our leadership is at the cutting-edge of business trends; employee reward and benefits incorporating payroll and policy administration via sound human resource information management and systems; ensuring the maintenance of collaborative industrial relations; B-BBEE-linked employment equity and localisation programmes; the health and welfare of employees and their dependants; and best practice benchmarking via relevant measurable human resource metrics. People highlights permanent employees and on average seasonal and fixed-term contract employees, adding value in six countries of operation, Safety indicators improved, with a reduction in the group 12-month rolling average DIFR from 0.24 to 0.16, R57 million was invested in employee training and development during 2012/13; approximately 76% of employees receiving regular performance and career development reviews; Talent and performance management embedded, allowing for ensuring career conversations and planning to be formally addressed; Emerging Leaders Programme aimed at senior management development designed to support both employment equity and localisation objectives; In South Africa, the ongoing employment equity target of ensuring that greater than 70% of all external recruitments and internal promotions are from designated groups, was again achieved; Retention of Level 5 contributor status in terms of the Codes of Good Practice on B-BBEE, despite strengthened legislated targets as a result of the company being measured against targets set for years 6 to 10 in terms of the relevant Act; Supplementary training support in relation to the group s continuous improvement activities; and The introduction of an International Experiences Programme resulting in the selection of young engineering graduates to gain work experience at AB Sugar, the group s majority shareholder. Employee relations Success in a competitive industry cannot be achieved without a motivated, committed and unified workforce that is focused on achieving common objectives. To this end, we strive to create an environment in which our employees feel valued and support the company s values, strategies and priorities. For Illovo, as a multi-national organisation, communication with our employees is considered an important criterion towards the building of their understanding of the company. To this end, we present an annual groupfacilitated Business Understanding Programme to all employees, and in 2012/13, approximately of our people were exposed to this programme. With diverse and widespread senior management teams operating across six countries, regular communication forums and executive-led site visits are also undertaken. At group and country management team level, formal management forums are held, aimed both at reviewing operational performance and engagement in strategic planning processes. In our observation of the UN Global Compact and based on the ILO declaration on fundamental principles and rights at work, we comply with internationally recognised labour practices as legislated in our countries of operation, ensuring that sound employee relations prevail. Freedom of association is acknowledged and where our employees have adequate representation, recognition agreements are put into place. Collective bargaining forums, which determine the levels of wage rates and other substantive employment conditions via negotiated collective agreements, 84

89 Trade union membership as a percentage of non-management employees (%) ensuring that employees are enabled to contribute fully to the business objectives in their areas of expertise. Relationships with the trade unions in the business are managed by human resources departments through open communication forums which allow for internal issues to be effectively dealt with. Trade union representatives are included in formal joint management-worker health and safety committees. Total employment Malawi Zambia South Swazi- Mozam- Tanzania Africa land bique 2012/ /12 are established in all countries of operation. The management of collaborative relationships with trade unions, along with open communication forums, allows for internal issues to be dealt with as effectively as possible. Trade union involvement is a normal part of this process and on average 89% of our non-management employees are unionised. During the year under review, the wage negotiation process resulted in unprocedural industrial action by employees in Zambia. Operations were negatively impacted for a period of seven days with a concomitant loss in sugar production. However, this loss was offset by production gains effected towards the end of the season. The core objective of the company s employee relations strategy focuses on: enabling productive collaboration with organised labour unions on collective bargaining and other issues: employee engagement and communication; and We provide substantial employment with people employed on a permanent basis and some seasonal employees at peak periods engaged on a fixed-term contract basis. Good rains fell in the 2012/13 summer rainfall period in South Africa on the south coast of KwaZulu-Natal which, in 2010 and 2011, had experienced severe drought conditions. This resulted in the temporary closure of the Umzimkulu sugar mill which, in a normal season, employs more than 250 people. The mill recommenced milling operations in the 2012/13 season with a full complement of staff. We continue to place emphasis on ensuring diversity within both our local workforce and senior management positions. This is aimed at increasing internal capacity building and the promotion of the advancement of members of the local communities, thereby stimulating the creation of economic benefits in these areas. In the first instance, local vacancies are advertised in the countries of operation to ensure preference is given to local candidates, whereafter consideration is given to external candidates. However, on occasion, key positions are filled by seconding or employing persons working at other group companies. Members of our senior management are appointed by executive management according to group policy guidelines, in line with countrybased local hiring and localisation policies. Organisational effectiveness and talent management The staffing of our operations within effective organisational structures with competent personnel, both from an operational and managerial perspective, remains a priority to ensure that our goals and objectives are achieved. We continue to focus on talent management and manpower succession planning to develop and retain managerial and technical skills, especially within our identified key disciplines and positions. A structured approach to career reviews leads to individual career and performance plans, contributing to both the succession and retention of key personnel, ie, through being an employer of choice. Total complement of permanent and non-permanent/fixed contract employees Malawi Zambia South Africa 2012/ / / / / /12 Permanent Non-permanent Swaziland Mozambique Tanzania 2012/ / / / / /12 Permanent Non-permanent Total 2012/ /12 Permanent Non-permanent

90 Sustainability continued Remuneration and benefits Remuneration Percentage of local citizens employed in senior management (%) Our remuneration packages are merit-based and market-competitive in all countries of operation and are appropriately reviewed. Similarly, short and long-term incentives such as performance-related bonuses, share purchase and phantom share schemes are utilised and are reviewed periodically and updated when necessary to cater for targeted outcomes We strive to be an employer of choice and offer competitive wages above country-based standard minimum wages. Local entry-level minimum wages are, in all cases, above those set according to in-country government labour legislation and statutes, while other wage levels are determined through negotiations with relevant country labour unions via collective agreements and bargaining councils. All labour-related practices are framed within the context of the ILO Decent Work Agenda, to which most countries of operation are signatories. Additional benefits In addition to competitive wages, we offer our employees additional benefits based on factors such as performance or length of service. In addition to the opportunity for eligible employees to purchase shares in our employee share purchase schemes, during the year under review, the group spent approximately R183 million on the provision of benefits to our employees, focused primarily on accommodation and amenities, health care and education. Accommodation The accommodation that we offer our employees and their families varies between formal staff housing, informal villages and hostel dwellings for fixedterm contract employees. The accommodation includes the provision of utilities such as potable water and electricity, together with basic day-to-day maintenance eg sanitation management. During 2012/13, R85 million was spent on employee accommodation including the associated amenities. Educational assistance As part of our ongoing commitment towards social empowerment, we assist eligible employees with costs associated with their dependants education. Assistance further includes the allocation of bursaries, grants and loan funding for higher/further education. We also support local projects to upgrade schools, such as classroom-building, and provide assistance to improve school administration and management at a number of schools across the group, some of which are funded entirely by Illovo. During 2012/13, R18 million was allocated to education. Retirement funding schemes In addition to the benefits of legislated national retirement funds, we offer membership of a number of provident and defined contribution pension funds. Elected employee trustees represent the interests of members and assist with the prudent management of the various funds. The benefits associated with our retirement schemes include, inter alia, retirement, death, disability, funeral, critical illness and life insurance. Malawi Zambia South Swazi- Mozam- Tanzania Africa land bique Employee turnover (%) Malawi Zambia South Swazi- Mozam- Tanzania Africa land bique / / * * Compared to 2011/12, this decrease is largely as a result of expert expatriate personnel deployed to work on the ethanol distillery project. Employee share purchase schemes Share purchase schemes are offered to eligible employees of our listed subsidiaries in Malawi and South Africa with employees in Swaziland able to participate in the South African scheme. The share purchase scheme provides our employees with the opportunity to share directly in the continued profitability and growth of the business. In the different categories, employee turnover was as follows % Malawi Zambia South Africa Swaziland Mozambique Tanzania Age M F M F M F M F M F M F < >

91 Health and safety management systems The NOSA Integrated Five-star System covering safety, health and environmental management is implemented at our cane growing and factory operations, all of which were accredited with a minimum Four-Star NOSA rating during the year under review. Both the agricultural operations and distilleries in South Africa have received Occupational Health and Safety Management System OHSAS 18000:2007 accreditation. Occupational safety Safety performance improvement remains a core priority focus, with ongoing initiatives around the group. Our goal is to achieve an increasingly safer workplace while promoting a culture of safety among staff so that injuries are reduced and safety rules are understood and upheld. Each operation has developed safety improvement strategies to ensure robust processes are implemented to manage health and safety. These processes are implemented in accordance with the statutory requirements of the relevant in-country occupational health and safety regulations, as well as group policies. Health and safety committees are active at each operation, with full staff representation, reporting directly to senior management to ensure compliance with all internal and legal requirements. We measure our safety performance using the industry standard DIFR, which is based on hours worked. The DIFR rate includes lost time injuries and restricted work cases where employees were not allowed to carry out work different from their normal duties. The group DIFR ended at 0.16 which was an improvement from the 0.24 of the previous year and is well within the target of 0.4. Regrettably, one of our employees died during a routine cane burning activity despite prescribed precautions having been taken in these circumstances. To reduce the risks associated with field burning activities, additional controls have been implemented and procedures/ training updated accordingly. Health Highlights The opening of the newly-constructed Nyandeo Hospital, jointly financed by our own operations and key stakeholders at Kilombero, Tanzania The inauguration of the new Zambia Sugar Medical Centre during the 2012/13 season by the Zambian Minister of Health; Final completion of the new Maragra Açúcar Medical Centre in 2013/14; The hosting at Maragra of the annual SADC Malaria Day celebrations, including Ministers of Health from all SADC country members. The launch in our area of operation of the malaria vector control programme under the auspices of a public-private partnership agreement between our Maragra operation and the Mozambique government. Occupational health Providing a working environment in which our employees can operate in a healthy, energised and engaged manner is vital to maintaining personal development and to our business success. We strive to provide a workplace free from undue health risk emanating from our core activities. We also aim proactively to reduce workplace health risks by anticipating, assessing Company expenditure per employee benefit category, excluding contributions to retirement funds (Rm) 2012/13 11% 26% 2011/12 10% 33% 8% 3% Total R183 million 6% 3% Total R193 million 52% 48% Accommodation Health Care Education Community Environmental Some examples of additional benefits offered to employees Retirement funds Contribute towards post-retirement benefits Includes risk benefits such as death, disability and critical illness Accommodation Health care Predominantly on estates outside of South Africa, combined with associated utilities Group-run primary health care clinics/hospitals (the use of which extend to employees direct dependants), or medical insurance Public health services (provision of potable water and the proactive prevention of dread diseases eg malaria via co-ordinated spray and educational programmes) Educational assistance Assistance with dependants education often with the direct provision and administration of schools and educationalists Allocation of bursaries, grants and loan funding in support of achieving higher/further education Environmental Community Includes the provision of amenities such as potable water, sanitation, electrification, sewerage disposal and refuse removal Includes club and community centres, day-care centres, estate community policing and estate football league and other sport sponsorship 87

92 Sustainability continued and managing health risk, and providing access to quality health care and educating, informing and empowering our management and staff to take responsibility for their own health and wellbeing. Occupational health is a primary function of medical services delivered at all of our operating sites. Qualified nursing practitioners and doctors provide occupational health services, including regular job-related medical examinations, base-line assessments and ongoing monitoring and management of health status, such as hearing and lung-function testing. During the year under review, medical assessment procedures were conducted on permanent and seasonal employees, together with all contractors. Employees who work in demarcated risk areas are subjected to base-line medical examinations on engagement and routinely monitored by the occupational health care staff during their career with Illovo. Our group medical consultant is engaged in all matters of health and safety and takes particular responsibility for ensuring that the more significant health hazards are appropriately managed in the workplace. Occupational diseases The reporting of occupational diseases is largely determined by the legal framework within the countries in which we operate. Other than in South Africa, which has clear legislation in this area, internal definitions based on accepted criteria are used due to a lack of suitable legal definitions in other countries. One case of noise-induced hearing loss was reported in South Africa. Health care services Access to health care is provided to all our 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. Total spend on employee health in 2012/13 amounted to R62 million. Where no other public medical facilities exist, these services are extended to members of our surrounding communities at nominal cost. We operate 24 primary health care clinics and four hospitals, staffed with 10 full and nine part-time doctors, together with other clinical and auxiliary staff. In South Africa, the health facilities are clinic-based and focus on occupational and primary health care services, whilst at other operations, the majority of our facilities are hospital-based and focus on primary and secondary health care, occupational health, HIV and AIDS, malaria and other tropical diseases. Communicable diseases HIV and AIDS We continue to experience the effects of the HIV epidemic on our operations and have implemented management plans to address these. We adhere to the policies of the countries of our operations. Our business strategy is aligned with that of UNAIDS, referred to as the Triple Zero strategy of zero new cases of HIV; zero deaths amongst people living with HIV and AIDS, and zero discrimination. Our efforts are thus aimed at identifying and maintaining the negative status of the majority of our employees, determining which employees are HIV-positive and ensuring that they are on suitable medical management programmes, and work to reduce stigma and discrimination around HIV and AIDS. Our current HIV prevalence amongst permanent employees is 22%, which is similar to that of companies in our sector and geographic spread. Tuberculosis Tuberculosis is a focus of our medical services, particularly in areas of HIV prevalence. Our efforts are directed at prevention in HIV-positive individuals through prophylaxis, and the early diagnosis and treatment of tuberculosis in employees. We continue to apply the successful Directly Observed Treatment Short-course DOTS strategy, which lends itself very well to workplace health services. Illovo safety statistics for 2012/13 Operation DIFR DIFR 2012/ / /12 DIFR target Malawi Zambia South Africa Swaziland Mozambique Tanzania * A disabling injury is one that results in death, permanent disability, permanent partial disability or temporary disability and includes injuries that result in an employee being booked off-duty for at least one full shift following the shift in which the injury occurred. Other safety performance statistics Fatalities Total number of work-related Fatal Injuries 1 (Nchalo) LTIs Total number of Lost Time Injuries, exclusive of First Aid Cases and/or Medical Treatment Cases 61 LTIFR Lost Time Injury Frequency Rate, calculated as the number of LTIs per man-hours worked 0.16 Injuries TIFR Total number of Injuries On Duty (IODs), inclusive of Medical Treatment Cases (MTCs), LTIs and Fatalities Total Injury Frequency Rate, calculated as the number of injuries (fatalities, LTIs and MTCs) per man-hours worked

93 Malaria Malaria remains a key challenge at our operations in Mozambique, Malawi and Tanzania. We are confident that, building on our successes in South Africa, Swaziland and Zambia where we have virtually eliminated malaria transmission on our estates, we will also achieve the same outcome in these countries. We have reviewed our Integrated Malaria Control Strategy at these operations and are implementing new programmes. We have been heartened by the success in Mozambique where we have entered into a public-private partnership with the government of Mozambique to extend the reach of our indoor residual spray programme to the surrounding community. Early indications are that this programme is working well. We will be meeting the government of Malawi in the new season to discuss joint measures to control malaria in the districts in which we operate. In Tanzania, we have engaged with the Research Triangle Institute LLC, an international research company which administers funds on behalf of organisations such as the Bill and Melinda Gates Foundation and USAID, for technical support on malaria activities in our area of operation. Case study: AMECA Trust Delivering healthcare to rural communities Illovo Sugar (Malawi) Limited is pleased to have been part of the initiation of an important health care project originated by the UK-based AMECA Trust ( in collaboration with the Kaombe Traditional Authority, which in March 2013, donated eight hectares of community land in the Kaombe region of the Lower Shire River in Malawi to the project for the establishment of a healthcare clinic complex adjoining The Kaombe Community Farm. With part financial sponsorship provided by Illovo and the Kaombe Community Farm Trust, and subject to securing further adequate donor funding, the AMECA Trust is to establish a primary healthcare clinic at Kaombe, the initial phase of which will be for outpatient provision. It is hoped that over time, the clinic could expand to provide in-patient care, specialist clinics and a minor surgical procedures. The donation made by Illovo is to be utilised for the purchase of the medical equipment required by the facility. The establishment of this rural healthcare clinic and the promotion of quality community health care, will benefit Illovo s employees and the local communities, as well as enabling the AMECA Trust to realise its long-held aspiration to build a rural health clinic in an area of need. Other public health Initiatives Illovo continues to provide clean water and sanitation to employees living on company estates, thereby reducing the transmission of waterborne diseases. We continue to provide Maternal and Child Health, Reproductive Health and Neglected Tropical Disease (for example Bilharzia) services. Non-communicable diseases Conditions and diseases such as obesity, high blood pressure, smoking and diabetes mellitus and various cancers are an emerging health care issue in developing countries. We are implementing control programmes at all our operations in this regard. 89

94 Sustainability continued Development and training The ongoing retention and development of our employees are key strategies for ensuring the sustainability and growth of our business into the future, as well as for attaining our employment equity and localisation targets. Key retention strategies include creating a work environment in which our employees are challenged to exercise their talent to the full, a strong focus on accountability, performance standards, regular performance feedback, shop floor communication, and forums for team problem-solving and continuous improvement. Our long-standing Business Understanding Programme continues to be used as an inclusive culture-building tool, with some permanent and seasonal employees having participated in workshops. A variety of employee development strategies and activities have been deployed. To this end, the group invested approximately R57 million in this area over the year under review, representing 3.26% of the group payroll. A wide range of leadership and educational programmes are offered to our employees with the aim of encouraging lifelong learning through training and education, providing them with the opportunity to improve their qualifications, learn new skills, upgrade and realign skills with new technologies, and improve overall work effectiveness. In this way, we encourage our people to reach their full potential while affording Illovo the opportunity of recruiting for key roles. The group s talent management programme brings structured formality to this process and ensures we have a talent pipeline to provide the required number and quality of managers and specialists for operations. Training programmes offered at Illovo Examples of the type of programmes include: the continued development, refinement and implementation of performance management systems, together with ongoing technical competency training to ISO standards, individual career-pathing and operational excellence; the implementation of a customised supervisory development programme; the delivery of group-based management development programmes, aimed at both first-line and upper management, with 135 managers having completed these programmes during the year under review; leadership programmes, conducted in partnership with business schools, targeting high potential middle, senior, general and executive managers identified via the succession planning process, with 27 managers having completed these programmes in 2012/13; early in-career six-month rotation of graduates between Illovo and AB Sugar s operations. During the year under review three graduate engineers were deployed in China, Spain and England respectively; the provision of Illovo bursaries to 36 students mainly from the engineering discipline, to further their tertiary education in preparation for inclusion into the Management Trainee Programme, upon successful completion of their studies. In the year under review, at any given time, there were 62 graduates progressing through this programme. Mentorship programmes were conducted for all new graduates and their mentors in support of this programme; structured formal technical trainee programmes and apprenticeships, with 70 and 93 employees presently enrolled in such programmes across the group; continuous improvement training to support the implementation of structured continuous improvement projects; the leveraging of operational best practice across the group via subject matter expertled seminars and off-crop workshops held at all operations across the group; the implementation of an on-line Learning Campus in South Africa, focused mainly on factory operating and engineering practices, to be rolled out to all other countries of operation in the forthcoming year; accredited arrangements in South Africa for graduate accountancy to continue their chartered accountant studies whilst in full-time employment with the company, through the Training Outside Public Practice programme; the encouragement of employees to further their studies in fields relevant to their positions through a study assistance scheme which is available to all permanent employees; and Adult Basic Education and Training (ABET) to assist employees in need with opportunities to improve their personal job competencies and facilitate their future career development. This programme in South Africa is aligned with the National Qualifications Framework to assist in building formal education qualifications. Diversity and equal opportunity In line with the UN Global Compact Principle on the ILO declaration on fundamental principles and rights at work, Illovo is not only committed to the principle of upholding the elimination of discrimination in respect of employment and occupation, but is also committed to eliminating the effects of past discriminatory practices in this regard. To realise fully the growth of our organisation, we work to ensure that our workforce sufficiently reflects the demographic profile in terms of race and gender of the economically active population of the regions in which we operate. Human resources development spend as a % of payroll in 2012/13 Malawi Zambia South Africa Swaziland Mozambique Tanzania 2012/ /

95 While abiding by local laws and regulations, we actively promote equal opportunity and fair treatment in employment through the elimination of unfair discrimination. We also encourage inclusiveness with regard to human resource practices irrespective of race, gender, nationality or religious affiliation in an effort to promote global diversity throughout our workforce. For instance, there is no arbitrary distinction on remuneration levels based on any of these grounds and any differentiation is based on objective grounds largely related to performance and market considerations, although in some cases, it is based on length of service where these are mainly a product of past agreements with trade unions. In South Africa, Illovo is committed to contributing to and promoting social transformation in the interest of nation building, most notably through the continued advancement of B-BBEE initiatives. Employment equity is a socio-economic and business imperative that strives to ensure that South Africans from all cultural backgrounds are able to participate in, and benefit from, the activities of the economy in a fair manner. We submit annual Employment Equity and Income Differential reports to the Department of Labour and the Employment Equity Commissioner respectively, which detail progress made in respect of the company s Employment Equity Plan, a key pillar of our B-BBEE programme. Progress is monitored through a group Central Co-ordinating Forum which includes representation from local consultative forums in place at the various operations. Relevant statistics in respect of designated employees are shown in the table below. Compared to 2011/12, they again reflect positive progress, particularly in the recruitment and promotion of senior management, an area that has received considerable focus over the past few years, ie 68% (2012: 63%) and skilled ranks, up to 99% (2012: 89%). We continue to give overall focus to designated appointments in the more senior levels of management. Relative to the Codes of Good Practice on B-BBEE (the Codes), issued in terms of the Broad- Based Black Empowerment Act 2003, for the year ended 31 March 2012, the company was audited by an accredited external verification agency and its rating was re-confirmed as a Level 5 contributor. This achievement was against the background of a more stringent measure of compliance implemented by the South African Department of Trade and Industry. This rating earned Illovo a ranking of 88th place overall in the Empowerdex/Mail & Guardian Top Empowerment Companies report in South Africa, up eight places compared to The company was the highest performer in respect of socio-economic development. In the 2012 report we disclosed the actions to be implemented by Illovo to improve its rating to 65% or above, notably: increasing the number of black women employed under the employment equity pillar; increasing the number of learnerships offered to black qualifying learners under the skills development pillar; and increasing preferential procurement from Black women-owned businesses. Despite dropping marginally on our scorecard as a result of the new and increased compliance targets, these opportunities are still being pursued with the following progress noted: the number of black women employed in South Africa increased from 310 for the year ending March 2011 to 327 for the same period in 2012; in respect of learnerships, there was a marginal improvement from 1.57% to 1.70%; and procurement from black women-owned businesses improved from 1.30% to 1.98%. Development and training investment 2012/13 7% 41% 2011/12 10% 7% 6% 9% Total R57 million 7% Total R45 million 33% 39% 41% Technical training Management training Safety and health awareness Business alignment programmes Education-type programmes The component B-BBEE verified scores Element Score (%) 2012 Score (%) 2011 Maximum possible score (%) Ownership equity Management control Employment equity Skills development Preferential procurement Enterprise development Socio-economic development Aggregate

96 Sustainability continued Human rights We are distinctly aware of the diverse cultures and the differences in laws, norms and traditions which the business needs to acknowledge and respect. Illovo is committed to upholding the values of the international community, in particular the United Nations Universal Declaration on Human Rights, the United National Global Compact Principles, the ILO, Tripartite Business Declaration of Principles concerning Multinational Enterprises and Social Policy and the ILO Core Conventions on Labour Standards, and the ILO declaration on fundamental principles and rights at work. In respect of upholding international norms, Illovo supports and respects the protection of internationally proclaimed human rights and endeavours to ensure that we are not complicit in human rights abuses. We do not tolerate discrimination of any kind, nor any form of forced or child labour. As reported under stakeholder engagement, in Malawi we have measures in place to proactively address the risk of child and forced labour and at group level have initiated engagements with the ILO in this regard. We strive to provide fair working conditions and maintain a safe and healthy working environment. Open communication is encouraged to resolve workplace issues between team members or between our employees and management. Where employee issues cannot be resolved by direct line management, these are taken up through various dispute resolution mechanisms. Permanent employees receive training in these values, which include unfair discriminatory practices and employee and trade union rights, as part of induction upon commencement of service. Human rights principles are also included in Illovo s labour relations policies pertaining to safety, health and environment, and corporate social responsibility. In South Africa, human rights abuses are monitored by the South African Human Rights Commission, under the auspices of the Human Rights Commission Act 54 of Outside of South Africa, communications relating to human rights abuses are generally directed through the relevant labour unions. The company has a robust, independently managed anonymous reporting facility, Tip-offs Anonymous, which employees and people outside the group may utilise to report any wrong-doing anonymously. During the year under review, no incidents of discrimination, limitation or violation of employees rights to exercise freedom of association and collective bargaining, or of forced, compulsory or child labour, were reported by any Illovo employees or any other persons. There were also no violations of the rights of indigenous people, and none of the operations were identified as posing any significant risks in this regard. Community citizenship As embodied in our Strategic Intent, we endeavour to be cognisant of the rural locations of our operations and the impact that they have on job creation and poverty alleviation in these areas, as the prosperity and sustainability of our business is closely aligned to the wellbeing and advancement of these communities. The aim of Illovo s social investment activities is to contribute to the development of thriving and vibrant societies against the background of our stated intent to be welcomed in the communities in which we operate. We are ever mindful of the rural and relatively underdeveloped nature of these locations, characterised by limited infrastructure and significant development needs. These challenges are most evident in our countries of operation outside South Africa, four of which are classified by the United Nations as Least Developed Countries. Consequently, as a long-term investor and major economic partner of the Southern African region in which we operate, the group has developed a social compact with its communities and people, and today administers wide-ranging social investment programmes aimed at infrastructural development, job creation, health and wellbeing, education, the provision of potable water and sanitary services, involvement in community projects and promoting culture and sports development. Community projects motivated by its members and designated company representatives are subject to a thorough assessment to ensure they meet the prescribed long-term criteria of being meaningful, sustainable and have sufficient community reach and participation. Initiatives are managed either at a group or business unit level, depending on circumstance. During the year under review, we contributed R14 million towards social investment projects, mostly for the benefit of the communities within the immediate vicinity of the operations. RELEVANT STATISTICS FOR DESIGNATED EMPLOYEES Representative areas Percentage designated 2012/13 Percentage designated 2011/12 Senior management level All management levels Skilled level Management trainees Recruitment and promotions: Senior management Management all levels Skilled All levels

97 Ongoing social investment activity includes: upgrading of schools and administration assistance at schools; 27 schools in five countries benefiting from this support; ongoing support of government and corporate education-related campaigns, including national literacy programmes, teacher support initiatives and provision of equipment; and support of community-based welfare and fund-raising organisations across the group, involving national health initiatives, feeding schemes, upgrading of public facilities and self-help programmes. Social investment spend 2012/ /12 Categories Rm Rm Health care Education Community Donations Total Public policy We participate in public policy development through: sugar industry structures; tripartite business, labour and government public policy development structures; civil and local authorities; and other relevant business associations. We are proactively involved in the facilitation of broader national strategic objectives through participation in organisations such as the National Business Initiative and the NEPAD Business Forum (NBF), along with membership across the group of other public and private forums to promote and assist the economic environment. Public policy in South Africa The sustainability of our cane supply is a primary focus of public policy in South Africa as 50% of the total cane area supplying cane to our mills has been subject to land claims in terms of the Restitution of Land Rights Act, To date, just over 7% of the area claimed has been successfully transferred to claimants, leaving 38% still under claim. 5% of the land subject to claim has been de-gazetted by order of the Land Claims Court. While the protracted process of settling land claims continues, independent cane growers affected by the process are reluctant to reinvest in their crops, thereby impacting further on cane yields. Reduced reinvestment has been evident in delayed replant in some areas and reductions in key inputs such as fertiliser, resulting in declining cane yields and overall cane supply. To counteract this, we have a well-established strategy for working with the affected growers, land claimants and the government to ensure that such farms are appropriately transferred in accordance with the terms of the restitution process. Illovo assists the sugar industry and government in developing best practice regarding the submission, control and implementation of grant and loan funding for agricultural development under the umbrella of land reform. Land reform committees are active in all of our mill areas and we are playing a leading role in sugar industry land reform initiatives. This is being achieved through close collaboration with the SASA, via broad consultation with both growers and other millers in an effort to expedite grower development and thus ensure future growth and sustainability of cane supply from claimed properties. Area under cane (AUC) 2012/13 Operation Total auc Hectares Total auc transferred Hectares Total area still subject to claim Hectares % Noodsberg Sezela Eston Umzimkulu Total * Of the hectares of cane land still subject to land claims, the validity of such claims representing approximately hectares is in dispute and has been referred to the Land Claims Court by the landowners. 93

98 Sustainability continued ENVIRONMENTAL IMPACT Illovo s direct environmental impacts are primarily associated with our agricultural and manufacturing operations. As the largest sugar producer in Africa, Illovo has a substantial agricultural footprint. It uses intensive manufacturing processes that consume water, generate solid waste and result in emissions to air and discharges to water bodies. Our environmental sustainability reporting, guided by the GRI, is structured to reflect the inputs, outputs and modes of impact the organisation has on the environment. Materials, energy and water represent three standard types of inputs used by all of our operations. These inputs result in outputs of environmental significance, which are captured under the parameters of emissions, effluent and waste. Land and biodiversity are also related to the concepts of inputs to the extent that they can be viewed as a natural resource. Environmental philosophy Our underlying environmental philosophy is continually to investigate means to reduce the environmental impact of our operations. Against the background of our Strategic Intent principle to maximise the return on every stick of cane, we are particularly mindful of the possible impacts of our operations on the use of natural resources and strive to minimise our impacts through efficient use in a responsible and sustainable way and through committing ourselves to continuous improvement. We strive to comply with all applicable in-country environmental regulations. Environmental management at our operations is implemented according to the NOSA Integrated Five-Star Management System and ISO In respect of the UN Global Compact, with reference to the Rio Declaration on the environment and development, Illovo s precautionary approach is that when considering new business ventures and expansions, comprehensive due diligence and environmental impact assessments are undertaken to ensure that potential negative environmental impacts are identified and mitigated. We have identified energy, water, air emissions, effluent and waste, and biodiversity as the most material environmental indicators throughout the group s operations. In addition to reporting on the environmental aspects of the company s operations, this section also demonstrates how the other UN Global Compact principles associated with the Rio Declaration on the environment and development, namely, the initiatives to promote greater environmental responsibility and encouraging the development and diffusion of environmentally friendly technologies, are integrated in how Illovo conducts its operations Technology, research and development Illovo s future sustainability objectives are underpinned by technology, research and development. In order to optimise the return from our existing installed capacity, we have well established in-house resources which provide technical expertise in agricultural production and sugar and downstream product manufacturing to all operations. A centralised core of expertise exists to ensure technical standards are optimised 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 our operations, and in the planning and implementation of approved projects. Our collaboration with regard to the application of new technology and energy and process performance optimisation between our own technical service function and AB Sugar is ongoing. This collaboration is expected to benefit Illovo in the long term. Benchmarking to improve productivity and reduce unit costs is a major area of attention at all operations, with resources having been allocated to enhance operational performance and benchmarking across the group. The roll out of the group s continuous improvement initiative has further focused the effort to do more with less as we strive to reduce inputs into our business. This initiative features as significant investment in capability to drive ongoing efficiency improvement. We also participate in operational performance benchmarking and best operating practices within the AB Sugar group. We continue to benefit from research and development undertaken by the South African Sugar Milling Research Institute (SMRI) and the South African Sugar Research Institute (SASRI). 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 own resources, we undertake ongoing collaboration with both local and international research organisations, and contract work is outsourced as appropriate. Operational aspects Agriculture As far as our agricultural operations are concerned, we have adopted farming practices based on field conservation guidelines as advocated by the SASRI, so as to ensure agricultural production on a sustainable basis with minimum impact on the environment. This includes applying careful consideration to land use planning when developing new and re-establishing existing cane fields, optimal placement of field and access roads, the most suitable method of field establishment so as to conserve soil and water, protection of existing environmental features such as rivers, wetlands and catchment areas, and the systematic 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 cane yield of the plant reduces below a predetermined level, whereafter replanting is undertaken. This generally takes place every seven to ten 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. 94

99 Our agricultural operations in South Africa are rain-fed, whilst in our other countries of operation the crops are to a large extent also reliant on irrigation which 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 in terms of industry guidelines. The adoption of green cane harvesting practices, without burning, takes place where feasible. This practice benefits the soil whereby the leaves and the tops of the cane plant are left behind during the harvesting process, providing for moisture retention and organic matter containing nutrients for the soil. As an alternative the leaves and tops can be collected offering potential to our operations as a renewable fuel for the sugar factory boilers. We have successfully integrated the use of cane leaves and tops as biomass feedstock to supplement bagasse as fuel for our sugar factory boilers, in Swaziland and Malawi. In a further example of sustainable agricultural operations, the South African based World Wildlife Fund, in partnership with the Noodsberg Cane Growers Association, and supported by our own Noodsberg sugar factory and refinery, was instrumental in the development of a Sustainable Sugar Cane Farm Management system for growers, termed SUSFARMS. This concept is based on three fundamental principles for sustainable sugarcane production natural assets are conserved, critical ecosystems services are maintained and agricultural resources are used sustainably. Performance relative to the principles is judged according to verifiers, making for a potentially creditable certification system for implementation at other sites. In the meantime, SASRI has enhanced the SUSFARMS model as the basis for their extension activities and through our membership of the South African sugar industry, we contribute to the pursuit and practice of the SUSFARMS ideology. Case study: Illovo Malawi rallies to prevent food shortages Commencing in early 2012, Illovo operations in Malawi turned their agricultural expertise to growing maize in a concerted effort to help lessen the hardships suffered by communities in the Lower Shire Valley, who were experiencing severe food shortages. Supported by the Malawi president, Dr Joyce Banda, and her government, the company produced around 370 tons of maize on its own irrigated land holdings, which was delivered to poverty stricken people within the first quarter of The beneficiaries were children in orphanages, the elderly, the physically challenged and the sick, who were identified as the most in need, particularly as they were not currently benefiting from other famine relief operations in the area. In total, households, extrapolating into vulnerable people, based on the national average of six people per household, benefited from the donation. In addition, orphans in Chikhwawa, Nsanje, Thyolo and Blantyre regions were reached, as were hundreds of physically challenged people living in Blantyre. The Chikhwawa District hospital received 300 bags of maize, with 50 bags going to the Chikhwawa District Social Welfare Office to benefit the sick and the needy. For those involved, the exercise was a humbling experience and overall, an example of stakeholder interaction in which the response of our Malawi business reacted to the call of these distressed communities. Illovo has undertaken the lead role in developing the AB Sugar sponsored Sugar Cane Centre of Excellence concept to target continuously improving agricultural resource productivity under the theme of more with less. This will in the medium and longer term enhance the sustainability of the natural resources in the inbound supply chain. 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 fuel for boiler steam and ultimately electricity 95

100 Sustainability continued Percentage consumption of energy types across Illovo operations 2012/13 3% 5% 2011/12 3% 7% 1% 6% 1% 1% 3% Bagasse Coal Electricity Imported steam 85% 86% Biomass and wood Other generation. This electricity is capable not only of 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 of our sugar factories, and under normal operating conditions, our factories are self-sufficient in terms of energy requirements, save that the downstream plant at Sezela relies on power from the national grid. Whilst our factories outside South Africa also supply power for cane irrigation, supplementary electricity supplies are required from external sources, particularly during the factory off-crop maintenance periods. Fortunately, these periods coincide with the rainy seasons, when there is a limited need for irrigation. In Swaziland, an integrated cogeneration plant enables the factory to export power into the national grid. The unique process of utilising bagasse and biomass as an energy source also results in our group having minimal reliance on fossil fuels, such as coal, for its energy requirements. Coal usage within the group comprises only approximately 5% of total energy usage. Downstream As the major by-product of the sugar manufacturing process, molasses, is used in several value-added downstream applications. In South Africa generally, the majority of molasses is used as a constituent of animal feeds and by the fermentation industry for the manufacture of ethanol and yeast. We utilise a significant portion of molasses output in the production of ethanol at our Merebank plant in Durban and Glendale distillery on the KwaZulu-Natal north coast. In Malawi, molasses is supplied for the production of fuel and potable ethanol, whilst in Tanzania, our new ethanol distillery will make use of all the molasses produced by both of our Kilombero sugar mills. At the Sezela complex on the KwaZulu-Natal south coast, a portion of the bagasse is converted to produce value-added downstream products, comprising furfural and its derivatives. The residual bagasse from this process is then routed back to the sugar factory boilers for steam and electricity generation. Materials Input materials used are relevant to the company s sustainability as they impact on our contribution to: the conservation of the global resource base; efforts to reduce resource intensity; and management of the operations overall costs. Where practical, we use input materials, in both cane growing and sugar and downstream processing, that supports the sustainability initiative. Factory by-products, in the form of filtercake, vinasse and boiler ash are applied to the fields, while herbicides, pesticides and fungicides are applied at an average rate of less than one litre per annum for every seven tons of cane grown. Various chemicals are used in both sugar and downstream processing, with the biggest quantities being tons of caustic soda, tons of urea and tons of hydrochloric acid. Associated with the above, Illovo used five million litres of oils and lubricants, and tons of packaging materials. Energy Energy efficiency has become increasingly important to Illovo, given the growing demand for and increasing cost of energy, and the corresponding impact on the environment along with the risk of power outages from national grids. We are focused on reducing the environmental impact of our products, including efforts to drive new levels of energy-efficient performance. We proactively monitor and manage energy consumption throughout the group s operations, and constantly look for ways to improve the energy efficiency of its production processes. This includes employing better management systems, improving our own staff awareness and investing in new technologies. Sugar cane offers excellent opportunities and competitive advantages for the production of renewable energy sources compared to other agricultural crops. During the year under review, 91% of the energy consumed within Illovo s operations was sourced from renewable resources, replacing fossil fuel alternatives. Investing in renewable energy Various by-products of the sugar manufacturing process present the industry with the opportunity of generating the bulk of its energy requirements. A world-wide trend has seen sugar mills reaching a point where they have generated surplus energy to be exported, creating significant ecological and economic benefits. We have kept abreast with these developments and are pioneering cane trash biomass collection in the Southern African sugar industry. Cogeneration Dry, fibrous bagasse, remaining after the extraction of juice from the crushed stalks of sugar cane, provides us with a substantial renewable energy opportunity for cogeneration, replacing fossil fuel sources such as coal and electricity generated from coal, thereby reducing GHG. In addition to bagasse, certain of our 96

101 operations, Ubombo in Swaziland, Nchalo in Malawi and Noodsberg in South Africa, are able to supplement their cogeneration capacity by utilising additional green cane biomass and wood as boiler feedstock. During the year under review, these operations utilised approximately tons of biomass and wood as renewable fuel sources to produce heat and energy in their dual-fired boilers. We are continuing to assess opportunities to increase the cogeneration capabilities of all our operations. In addition to the environmental and cost benefits, cogeneration provides a potential source of additional revenue through the export of energy into national grids. With its integrated cogeneration facility, it is anticipated that our Ubombo mill in Swaziland will export 55 GWh to the national grid over a 48-week period by During the year under review, a total of GWh was exported to the grid. The sale of this renewable energy directly enables the SEC to reduce its Scope 1 emissions and consequently its customers Scope 2 emissions. Based on the Swaziland grid emissions factor published by the GHG Protocol, (a purchased electricity calculation tool 480kg CO 2 per MWh) the sale of this electricity enabled SEC to avoid tco 2 e in 2012/13. During the year, and on a test basis, Zambia Sugar also exported a small amount of power into the national grid. Bioethanol An additional renewable energy opportunity provided from the by-products of sugar processing is the fermentation of molasses to produce bioethanol. We continue to give consideration to entering the bioethanol market at certain operations, as we believe that there are significant potential commercial opportunities associated with renewable energy, which currently only represents a very small fraction of the total global energy use. Following a series of preliminary investigations, detailed technical feasibility studies in Zambia are currently underway. However, our move into the market will depend largely on the commercial viability and implementation of enabling blending regulations within the country. The production of bioethanol would provide us with the opportunity to further decrease our fossil fuel usage and GHG emissions further, as well as provide an additional revenue stream. Non-renewable energy The largest use of non-renewable energy across Illovo occurs within our South African subsidiary, Illovo SA, at four sugar mills and two ethanol distilleries. During the year under review, these manufacturing operations collectively consumed tons of coal, representing 85% of Illovo s total coal usage. In an effort to reduce overall coal consumption and improve energy efficiencies within these business units, we have initiated a broad-scale Performance Optimisation Plan (POP) at an operational level. Together with the planned increased substitution of coal with renewable sources of energy, such as bagasse, we anticipate that notwithstanding the increase during the year under review, there will still be a substantial reduction going forward in the consumption of coal and purchase of electricity. Illovo SA aims to reduce its coal consumption during the crushing season by 25% by 2017, from the 2009 base line. Continuing energy saving projects undertaken at operations within Illovo Sugar SA during 2012/13 The manufacture and use of polyfuel, a blend of natural organic compounds formed as by-product of the furfural manufacturing process, burned as a supplementary fuel in Sezela s boilers (previously a waste product with high disposal costs); and Energy mass balance assessments of the Sezela and Noodsberg mills in order to maximise factory modifications and monitor energy reduction equipment performance. Emissions In 2012/13, we again responded to the Carbon Disclosure Project (CDP), demonstrating our commitment to transparency concerning our GHG emissions reduction initiatives at our operations and to supporting global climate change mitigation. The group s primary source of energy is from the use of carbon-neutral bagasse which substantially decreases process GHG emissions at Illovo s operations, in comparison to the use of fossil fuel sources. Certain of our operations have adopted green cane harvesting where practical, which decreases agricultural emissions caused by the burning of sugar cane prior to harvesting. During green cane harvesting, green biomass is stripped off the cane, either mechanically or by hand, as an alternative to the traditional practice of burning. This trash removed from the cane is either left infield to render back into the soil, potentially improving soil moisture retention, nutrient levels and carbon sequestration, or used as a renewable boiler fuel. Green cane harvesting operations are currently being undertaken in Malawi, Swaziland and South Africa. Our group GHG emissions were as indicated in the chart overleaf. These figures are based on energy consumption figures which are then converted to carbon dioxide equivalents using the greenhouse gas inventory (also known as a carbon footprint ), which estimates the total amount of carbon dioxide and other GHG emissions emitted to, or removed from, 97

102 Sustainability continued the atmosphere over a period of time. Our greenhouse gas inventory is compiled following the WRI/WBCSD Greenhouse Gas Protocol Corporate Accounting and Reporting Standard (Revised Edition), which provides standards and guidance for companies and other organisations preparing a GHG emissions inventory (see for details). The inventory incorporates all operations over which we have direct operational control. GHG source categories covered in the inventory include: the combustion of fossil fuels, infield cane burning and GHG emissions associated with the generation of purchased electricity and steam. The approach applied for calculating GHG emissions involves the use of emissions factors. Emission factors are representative values relating the quantity of an emission with an activity associated with the release of that emission. Country specific emission factors have been applied where available, otherwise accepted international proxy emission factors have been adopted from reputable sources such as the Intergovernmental Panel on Climate Change (IPCC), UK Department for Environment or US Energy Information Administration. The electricity grid emission factors applied to our areas of operation vary significantly as a result of the GHG emission intensity of the electricity generation technologies utilised by the countries within which we operate. In terms of our strategy we aim to reduce GHG emissions across the group by 10.7% on the 2010 emissions level by Based on the projected increase in sugar production, the effective emissions reduction will be 34%. GHG emissions (1 000 tco 2 e) Scope 1 192* * 32 31* 32 30* * 14 12* Malawi Zambia South Swazi- Mozam- Tanzania Africa land bique 2012/ /12 Scope * Scope 1 emissions are as a result of fuel combustion while Scope 2 emissions are from electricity and steam purchases (see bar charts). Certain data reported in 2011/12, denoted with an asterisk (*), have been restated to the right to reflect: broader reporting boundaries; and alignment with Scope 1 and 2 definitions. Water conservation In 2012/13 we responded to the Carbon Disclosure Project Water, being transparent on our water use and the associated risks and opportunities. Ensuring access to a reliable supply of water is a critical strategic priority for Illovo to meet both its business needs and that of surrounding communities. Risk factors for sustainable procurement of water are exacerbated by issues of scarcity and accessibility across community and national boundaries and often involve interdependent factors that vary from country to country and region to region. We undertake water abstraction operations in compliance with existing water-use licences, which are issued by the relevant authorities within the countries of operation. Illovo s greatest water use is for cane irrigation in its own agricultural operations outside of South Africa. Illovo s greatest water use is for cane irrigation in its own agricultural operations outside of South Africa. Our operations in Zambia, Swaziland, Malawi and Mozambique are * Malawi Zambia South Swazi- Mozam- Tanzania Africa land bique 2012/ /12 under full irrigation while in Tanzania, the majority of our land under cane is irrigated, with the balance cultivated under rainfed conditions. Water abstraction for irrigation is likely to increase in future years as we expand our irrigation capacity to improve and increase cane supply, and formalise water supply agreements to assist in supplying water to small-scale outgrower developments. By comparison, process water requirements at our mills and downstream plants are minimal. Water is often recycled extensively through the factory in an open-loop system, following which Total water abstraction across all operations Volume (million litres) Percentage Source 2012/ / / /12 Surface (rivers) Ground (borehole) Municipal Total * Hoekstra A, Chapagain M, Aldaya M and Mekonnen M: The Water Footprint Assessment Manual, Setting the global standard. The Water Footprint Network, Earthscan, Washington DC and London (2011). 98

103 it is discharged to supplement irrigation water. Water discharge volumes and methods vary by site, but are usually monitored and regulated to ensure compliance with relevant national statutes. We continually evaluate and implement new processes to improve efficiencies in an effort to reduce overall water consumption and maximise the recycling of water in its secondary processes. Water conservation, use and availability have all been identified as material issues to the business. Consequently, Illovo s Sustainability Policy includes water governance criteria. Two of the key objectives of the Sustainability Policy are to reduce water consumption per unit of production within the organisation and to review waste water management so as to identify opportunities for improvement. The Illovo agricultural operations currently use an irrigation scheduling tool to manage the effective use of water on the irrigated estates. In addition, Illovo is currently implementing a Water Strategy and Framework in its agricultural operations so as to minimise the use of water and hence energy per unit of production. Case study: Ubombo Sugar Centre Pivot Conversion Project Illovo s Ubombo operation successfully completed a phased irrigation upgrade project which was undertaken to improve financial and economic viability, utilising land, water and energy on a sustainable basis. As part of the project which was implemented over a four year period, a total of R84 million was invested to install a water and energy efficient irrigation systems on land previously irrigated with a sprinkler system with high energy requirements. The project responded to increasing water scarcity in Swaziland and the need to use water efficiently and sustainably for the production of sugarcane. Since the completion of the project, water use per season has reduced by about 23%, and yields have increased by approximately 14 tons of cane per hectare, resulting in sugarcane production increasing by The water saving enabled the development of an additional 700 hectares which will produce about tons of cane. The project has also reduced energy use by about 20% and further reductions are expected as more of the existing pumps are replaced with more efficient units. As a result of the successful completion of the project, Ubombo Sugar is well positioned to continue to produce sugarcane in Swaziland on a more sustainable basis, with lower operating costs and high productivity per unit of land. Ubombo water use (m 3 /ha) Assessing water-related risks is an important component of the overall risk management strategy for our business. Illovo recognises that water is a global resource that requires local management. The risk management strategy identifies that risk factors concerning water are exacerbated by issues of scarcity and accessibility across community and national boundaries and often involve interdependent factors that vary from country to country and region to region. Ultimately, through developing a better understanding of our water-related risks we hope to be able to provide strategic direction to our operations and an elevated understanding of localised water resource risk factors. Examples of actions undertaken by the company to improve the management of water resources include the following: the major irrigation conversion project at Ubombo substituting sprinkler and furrow irrigation with more efficient centre pivot irrigation application systems, see case study adjacent; the installation of two new water-efficient linear irrigation systems at Kilombero in Tanzania; the concrete lining of bulk water supply canals at the Nchalo estate in Malawi, where porous soils form the foundation, to decrease water losses; m 3 /ha Trendline 99

104 Sustainability continued the re-use of treated process effluent as irrigation and/or process water in Tanzania, Swaziland, Malawi, Zambia and South Africa; the undertaking of water mass-balance assessments at all Illovo operations to provide accurate water consumption data resulting in improved water management; and the installation in 2011 of a refinery brine recovery plant at Noodsberg mill in South Africa, with the potential to recover 80% of the brine and 70% of the water contained within the factory effluent to be reused as process water. As a means to manage and monitor water use, we have sought specialist services to provide guidance with respect to improving our water footprint accounting and to standardise methods used to estimate water abstraction, which is currently estimated using pump abstraction flow rates and water mass balance calculations. In the current year we have completed a water footprint analysis of our Nakambala operation in Zambia using the Water Footprint Network Assessment Manual methodology and will complete the balance of the group sites in the coming year. In terms of general water related risk, although, as indicated below, some of Illovo s operations have been identified as being potentially exposed to water stress/scarcity projected to 2025, this does not imply that these operations will necessarily be exposed to business interruption or decreased production as the business is constantly developing mitigating actions. A high level risk assessment of the South African operations was carried out for the purpose of determining if our operations are located in waterstressed regions, using internal knowledge as well as the input of external consultants. Water management in South Africa is defined in terms of catchment areas which have been split into 19 water management areas (WMAs) identified in the National Water Resources Strategy developed in All of Illovo s South African operations fall within a WMA whose requirements for water already exceed availability. There is, however, room for development of supply infrastructure to augment the water supply. The current and future water availability status of the regions in which the other countries operations are under review. However, Illovo currently has sufficient water allocation to ensure current and projected future operation and the company has representation on the local regional catchment councils. Waste As part of our drive to use resources efficiently, we are currently working towards promoting waste minimisation and reduction at our operations through the reuse of resources where possible, and the recovery of recyclable waste. All waste generated by Illovo operations is managed and disposed of according to the specific regulations of the relevant country of operation. Where these do not exist, as is sometimes the case with environmental legislation and guidelines in developing countries across Africa, or have yet to be finalised, we ensure that the waste is disposed of in an environmentally responsible manner. Where possible, operations endeavour to reduce, reuse and recycle waste and make use of in-country service providers to remove waste off-site. South Africa is recently seeing the emergence of a new era in waste management with the promulgation of the National Environmental Management: Waste Act In response to this new act, a comprehensive legal review was undertaken by Illovo SA during the 2011/12 season to ensure adherence to the new legislative requirements. Outside of South Africa, operations are developing internal waste management strategies in order to provide suitable systems for waste disposal, including the licensing of hazardous and general landfill sites as well as the regular monitoring of effluent and emissions. In the year under review, the company generated tons of non-hazardous waste and tons of hazardous waste. Of the nonhazardous waste, 74% went to landfill, 19% was recycled, 3% reused, with the balance being composted, incinerated or stored on site. A large portion of the hazardous waste was either responsibly reused by another organisation or composted. The effluent produced outside South Africa is, after treatment to an acceptable level, disposed of under permit in local rivers, except for our operations at Dwangwa and Nchalo, where the effluent is retained in a dunder dam and then used for irrigation. Treatment outside Malawi varies from lime application to being mixed with clean water to being retained in settling maturation ponds, before discharge into rivers/ waterways. In South Africa effluent is, after various treatment processes at our different sites, discharged under permit either into rivers, the sea, settling dams, a municipal sewage works, or, as is the case with the Glendale distillery, used for irrigation under controlled conditions. The majority of operations measure the quality of effluent discharged in terms of chemical oxygen demand, biochemical oxygen demand, total suspended solids, total dissolved solids and ph. Effluent produced m 3 Malawi Zambia South Africa Swaziland Mozambique** Tanzania* 2012/ / * ** In our 2012 Integrated Report, the figure reported for effluent in Tanzania was , which excluded effluent used for irrigation. Accordingly, for proper comparison purposes, the above table reflects the adjusted effluent figure for 2011/12 as to include the effluent used for irrigation. The contrasting effluent volume data for Mozambique is as a result of a previously undetected calibration/measuring fault in the effluent management equipment used for this process. The fault was diagnosed at the commencement of the 2012/13 season, thus providing an accurate measure of effluent volume produced for this period, and for the future. 100

105 There were a number of initiatives which yielded positive results around waste management at the respective operations of the organisation. Environmental compliance During the 2012/13 season, Illovo spent R6.5 million on waste disposal, emission treatment and remediation costs and R21.1 million on prevention and environmental management costs. During the year under review, a litre effluent spillage occurred at our ethanol distillery plant at Merebank in South Africa as a result of a cracked gasket in the pipeline taking effluent from the factory to the sewage works. Various preventative measures have been taken. The pipeline is now inspected on a daily basis and, with piezometers in place, any leak will be detected immediately. In addition, daily pigging of the pipeline occurs and steps are taken to ensure that there are no blockages or pressure build-ups which may result in leaks. An adequately equipped emergency response team is on stand-by to attend to any observed leaks. At our Sezela factory, one breach of the environmental licence occurred due to the Chemical Oxygen Demand (COD) being above that stipulated in the permit. However, the average for the season is below the permitted limit. Temporary measures, in line with the Integrated Coastal Management Act, have been taken and the factory has undertaken a number of initiatives to minimize effluent discharge. Case study: Maragra waste reduction programme An efficient and environmentally-friendly waste management system was introduced at our Maragra operation, the two key objectives being waste prevention and minimisation, together with recycling and reuse of waste. The primary goal therefore was reducing the amount of waste produced in our employee villages, supported with ongoing messaging emphasising that prevention and minimisation are required to meet the objectives. This required the use of in-house training exercises and the posting of waste-reduction educational pamphlets and display boards around our operations and within the villages. In addition the project implemented an accessible recycle and re-use system to reduce actual waste residues which also involved selling recycled tins, glass bottles and plastics bottles to a Maputo-based recycling company, thereby generating a small revenue stream. During this process, around 280 colour-coded recycling bins, to differentiate between the three waste types of tin, glass and plastics, were purchased and placed at houses throughout the villages. Together with the distribution of like-coloured refuse bags, this system provides for a simple and effective waste recycling method. Internal resources were identified to carry out the local recycling of waste residue under the supervision of the parks and garden unit. The education and awareness initiative has resulted in a significant decrease in the total amount of solid waste generated on the estate with tons of waste sent to the landfill site in the 18-month period from October 2011 to 31 March 2013, and around six tons sold as recyclable waste. Records of waste management are maintained and used to set future targets. No enforcement notices, environmental prosecutions or environmental citations were issued to any of the group s operations and no fines or penalties were imposed. Agriculture and biodiversity We operate over vast tracts of land, some of which are situated in close proximity to areas of potential sensitivity. The protection of biodiversity issues is addressed formally in new projects through environmental impact assessments (EIAs) and in existing agricultural operations through managing farming activities according to field conservation guidelines as advocated by the SASRI, so as to ensure agricultural production on a sustainable basis with limited impact on the environment. Illovo makes every effort to preserve and manage the natural surrounding areas, as well as certain areas within the group s operations due to their high conservation status. We are mindful of our potential impacts on these areas and accordingly foster a number of initiatives to preserve ecosystem integrity and protect biodiversity. These include: 101

106 Sustainability continued sustaining the Mhlongsinga Nature Reserve at Ubombo in Swaziland; sustaining the Nyala Park at Nchalo in Malawi; continued support of the Mwananchingwala Conservation Area adjacent to the Nakambala estate in Zambia; continued support of conservation projects to protect the Magombero Forest adjacent to the Kilombero estate in Tanzania; and ongoing support of the Malawian Government Reforestation Initiative. Product responsibility IIlovo manufactures a wide range of sugar and downstream products which are sold into domestic and international markets. We endeavour to produce consistently high-quality products for our consumers and as such have a formalised support structure to ensure an appropriate, ordered, groupwide response towards product stewardship. This includes a set of detailed standards relating to raw materials, packaging materials and to production processes. Customer health and safety The health and safety of our customers is of utmost importance for Illovo. We comply with all relevant safety, health, environmental and quality legislation in the relevant countries of operation as well as industry best practice standards: all of our production facilities have been certified under the ISO 9001:2008 quality management system; in South Africa, our Noodsberg, Umzimkulu and Illovo Syrup operations have received FSSC accreditation, while the Eston, Sezela and Merebank operations are currently making progress towards this accreditation. Our warehousing facilities in Germiston and Cape Town have also received ISO accreditation; our Nchalo (Malawi) and Ubombo (Swaziland) operations have received the FSSC accreditation while other operations in Malawi, Zambia, Tanzania and Mozambique are currently making progress towards this accreditation; and Noodsberg, Umzimkulu, Illovo Syrup and the operations in Malawi and Zambia are registered with the Supplier Ethical Data Exchange (SEDEX), a membership organisation for businesses committed to continuous improvement of the ethical performance of their supply chains. We ensure that our products do not pose unintended hazards to the health and safety of our customers. Certain downstream products: furfural, furfuryl alcohol, diacetyl, 2,3 Pentanedione, methanol and ethyl alcohol require specific handling and storage as they may be considered hazardous. To this end, all of our products are supported with Material Safety Data Sheet (MSDS) documentation, together with certificates of analysis which endorse the quality of the products, and provide recommended procedures relating to health, safety, handling and storage. This documentation is available on our website: Product and service labelling All products carry product labels containing pertinent product information, in compliance with the respective country legislation and labelling regulations. In addition, downstream products supplying the pharmaceutical industry are highly regulated and are required to meet the South African Food and Drugs Act standards. Any amendments to food labelling and advertising legislation is promptly adopted, as evidenced by the our rapid response to the new food labelling and advertising legislation promulgated in South Africa in March 2010 under the Consumer Protection Act, Market communications We strive to conduct all marketing and communication activities in a responsible manner and in accordance with the relevant legislation and country-specific requirements. Together with our advertising agencies, we subscribe to good marketing practices and the code of responsible advertising, including the communication rules and guidelines as prescribed by the Advertising Association of South Africa. There were no incident reports relating to marketing and communications, including advertising, promotion and sponsorship during the year under review. Customer relations Formal complaints from our customers are processed through an internal sugar customer care line facility in South Africa, Malawi and Zambia, details of which are reflected on all domestic sugar and syrup prepacks. This enables customers to contact Illovo directly to address any issues relating to products and/or service. Customer complaint procedures are implemented according to the Illovo Sugar Group Complaints Policy, which provides guidelines and best practice on how customer complaints are required to be handled and resolved and for maintaining an accurate customer complaints register. Support for our industrial customers is provided by a specialised department, providing valuable assistance to the group s industrial customers across all countries of operation. In respect of quality and technical support, additional support is supplied through factory visits, presentations and educational workshops. Regular supplier and customer audits are undertaken while customer feedback mechanisms guarantee open communication between Illovo and our customers subsequent to complaints and investigations. In Swaziland, Tanzania and Mozambique, customer complaints are handled directly by the respective marketing departments and distribution companies which distribute sugar within the countries of operation. All customer queries and complaints are investigated internally by Illovo operations and rectified where appropriate. Compliance As a result of its initiatives and interventions as reported above, in the year under review, we did not experience any incidents of non-compliance with any laws, regulations, standards or voluntary codes concerning product responsibility, ie, customer health and safety, product and service labelling, marketing communications and customer privacy. 102

107 Independent third party assurance Integrated Reporting & Assurance Services (IRAS) was engaged by Illovo to provide Independent Third Party Assurance (ITPA) over the sustainability content within Illovo s. Our engagement was limited to the sustainability content within the Integrated Report. Based on our reviews of the Integrated Report, as well as our interviews and desktop research exercises at both the group and operational level (inclusive of site visits to Sezela and Nakambala), the information contained within this Integrated Report is deemed fair, factual and reflective of Illovo s adherence to AccountAbility s AA1000AS principles of Inclusivity, Materiality and Responsiveness. A comprehensive assurance statement has been submitted to Illovo, and will be available on the company s website ( For information about our assurance processes and/or findings, please michael@iras.co.za. Michael H Rea Managing Partner 22 May 2013 Johannesburg 103

108 Condensed consolidated financial statements for the year ended 31 March 2013 Approval of condensed consolidated financial statements 106 Lodgement of returns with the Companies and Intellectual Property Commission 106 Independent auditor s report 107 Directors report 108 Audit Committee report 112 Condensed consolidated income statement 115 Condensed consolidated statement of financial position 116 Condensed consolidated statement of cash flows 117 Condensed consolidated statement of changes in equity 118 Notes to the condensed consolidated financial statements 120 The notes to the financial statements may be found on the company s website at Integrated Report 2013

109 Condensed consolidated financial statements Sales volumes of million tons of sugar, including exports to 28 countries in 2012/13, reflected an 11% growth compared to the previous season, with 63% of sales sold into the domestic markets of the countries in which we operate and 33% exported into preferential markets in the EU and USA and into neighbouring African countries. Integrated Report

110 Approval of condensed consolidated financial statements The directors of Illovo are responsible for overseeing the preparation and the integrity of the condensed consolidated financial statements of the group and the objectivity of other information presented in this report. In order to fulfil this responsibility, the group maintains internal accounting and administrative control systems designed to provide assurance that assets are safeguarded and that transactions are executed and recorded in accordance with the group s policies and procedures. The condensed consolidated financial statements, which have been prepared in terms of the measurement and recognition requirements of International Financial Reporting Standards, the information required by IAS 34 Interim Financial Reporting and the Companies Act, are an extract of the audited consolidated annual financial statements. These consolidated annual financial statements are electronically available on the group s website at These condensed consolidated financial statements have been prepared under the supervision of Mr M H Abdool-Samad, CA(SA) the group financial director. The group s independent external auditors, Deloitte & Touche, have confirmed that the condensed consolidated financial statements are derived from the consolidated annual financial statements and their unmodified report appears on page 107. The condensed consolidated financial statements which were prepared on the going concern basis, including the directors report and the Audit Committee report, and which appear on pages 108 to 121, were approved by the board of directors on 24 May 2013 and are signed on their behalf by: D G MacLeod Chairman G J Clark Managing director Lodgement of returns with the Companies and Intellectual Property Commission I hereby certify that for the year ended 31 March 2013, the company has lodged with the Companies and Intellectual Property Commission all such returns as are required of a public company in terms of the Companies Act, and that all such returns are true, correct and up-to-date. J A Kunst Company secretary Mount Edgecombe 24 May Integrated Report 2013

111 Independent auditor s report for the year ended 31 March 2013 The accompanying condensed consolidated financial statements of, which comprise the condensed consolidated statement of financial position as at 31 March 2013, the condensed consolidated income statement, condensed consolidated statement of changes in equity and condensed consolidated cash flows for the year then ended, and related notes, are derived from the audited consolidated financial statements of for the year ended 31 March We expressed an unmodified audit opinion on those consolidated financial statements in our report dated 24 May Our auditor s report on the audited consolidated financial statements contained an Other Matter paragraph Other reports required by the Companies Act (included below). The condensed consolidated financial statements do not contain all the disclosures required by International Financial Reporting Standards and the requirements of the Companies Act of South Africa as applicable to annual financial statements. Reading the condensed consolidated financial statements, therefore, is not a substitute for reading the audited consolidated financial statements of. Director s responsibility for the condensed consolidated financial statements The directors are responsible for the preparation of the condensed consolidated financial statements in accordance with the requirements of the JSE Listings Requirements for abridged reports, set out in note 1 to the condensed financial statements, and the requirements of the Companies Act of South Africa as applicable to summary financial statements, and for such internal control as the directors determine is necessary to enable the preparation of the condensed consolidated financial statements that are free from material misstatement, whether due to fraud or error. The directors are responsible for the preparation of the condensed consolidated financial statements in accordance with the framework concepts, and the measurement and recognition requirements of International Financial Reporting Standards, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Pronouncements as issued by Financial Reporting Standards Council, the information as required by las 34 Interim Financial Reporting, and the requirements of the Companies Act of South Africa. Auditor s responsibility Our responsibility is to express an opinion on the condensed consolidated financial statements based on our procedures, which were conducted in accordance with International Standard on Auditing (ISA) 810 Engagements to Report on Summary Financial Statements. Opinion In our opinion, the condensed financial statements derived from the audited consolidated financial statements of Illovo Sugar Limited for the year ended 31 March 2013 are consistent, in all material respects, with those consolidated financial statements, in accordance with the conceptual framework and the measurement and recognition requirements of International Financial Reporting Standards (IFRS), the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee, the information required by IAS 34 Interim Financial Reporting, and the requirements of the Companies Act of South Africa as applicable to summary financial statements. Other reports required by the Companies Act The other reports required by the Companies Act paragraph in our audit report dated 24 May 2013 states that as part of our audit of the consolidated financial statements for the year ended 31 March 2013, we have read the Directors Report, the Audit Committee s Report and the Company Secretary s Certificate for the purpose of identifying whether there are material inconsistencies between these reports and the audited consolidated financial statements. These reports are the responsibility of the respective preparers. The paragraph states that, based on reading these reports, we have not identified material inconsistencies between these reports and the audited consolidated financial statements. The paragraph furthermore states that we have not audited these reports and accordingly do not express an opinion on these reports. The paragraph does not have an effect on the condensed consolidated financial statements or our opinion thereon. Yours faithfully Deloitte & Touche Registered Auditors Per: G C Tweedy Partner 24 May 2013 Durban National executive: L L Bam (Chief executive), A E Swiegers (Chief operating officer), G M Pinnock (Audit), D L Kennedy (Risk advisory and legal services), N B Kader (Tax), T P Pillay (Consulting), K Black (Client and industries), J K Mazzacco (Talent and transformation), C R Beukman (Finance), M Jordan (Strategy), S Gwala (Special projects), T J Brown (Chairman of the board), M J Comber (Deputy chairman of the board). Regional leader: G C Brazier A full list of partners and directors is available on request. B-BBEE rating: Level 2 contributor in terms of the Chartered Accountancy Profession Sector Code Member of Deloitte Touche Tohmatsu Limited Integrated Report

112 Directors report for the year ended 31 March 2013 The directors have pleasure in presenting their report which forms part of the annual financial statements of the company and the group, for the year ended 31 March Nature of business The nature of the business of the company and its subsidiaries is fully described under the Business Overview section of this report from the outside cover flap to page 19. Review of operations Detailed commentary on the group s operations is given under the Commentaries section of this report on pages 26 to 55. Share capital As at 31 March 2013, the authorised share capital of the company was ordinary shares of 4 cents each and the issued share capital was ordinary shares of 4 cents each. Further details are set out in note 24 to the annual financial statements which may be accessed on the company s website on During the year under review, the issued ordinary share capital of the company increased from shares to shares as a result of options being exercised in respect of shares in terms of the Illovo Sugar 1992 Share Option Scheme. Shareholders An analysis of shareholders and their shareholdings is given on page 124 of this report. Pursuant to the provisions of section 56(3) of the Companies Act, an analysis of the relevant disclosures by nominee shareholders as at 31 March 2013 revealed three beneficial shareholdings equal to or exceeding 5% of the issued ordinary share capital. Details are given on page 124. Illovo Sugar 1992 Share Option Scheme During the financial year ended 31 March 2006, the introduction of the Illovo Sugar Phantom Share Scheme, which is more fully explained on page 109, replaced the further granting of share options in terms of the Illovo Sugar 1992 Share Option Scheme (the option scheme). The option scheme, however, although closed, continues to operate relative to share options previously granted. The Remuneration/Nomination Committee previously approved the granting of all share options in terms of the option scheme. Vesting periods for the share options are one-third after three years, two-thirds after four years, and the full allocation after five years, with the maximum period for the exercising of options being ten years. In terms of the rules of the option scheme, all share options were granted at the closing market price of the shares on the JSE on the trading day immediately preceding the day on which the relevant options were granted. As approved at the annual general meeting of shareholders held on 17 July 2002, a total of ordinary shares were reserved and placed under the control of the directors for the purpose of the option scheme. The tables below reflect the options granted to and exercised by the executive directors and senior managers as at 31 March 2013: Number of shares Options granted as at 1 April Options expired during the year under review 0 Options granted as at 31 March Options exercised, allotted and issued as at 1 April Options exercised during the year under review Options unexercised as at 31 March Options granted as at 31 March The options granted and unexercised as at 31 March 2013, are as follows: Number of shares Expiry date Option price (cents) May June All these options have fully vested. 108 Integrated Report 2013

113 Illovo Sugar Phantom Share Scheme The board approved the adoption of the Illovo Sugar Phantom Share Scheme (the phantom scheme) in 2005, and in 2007 introduced certain performance hurdles related to the future earnings of the company. Whilst the rules of the phantom scheme are modelled on those of the option scheme, the important difference is that options under the phantom scheme are cash settled rather than equity settled. As a consequence, the phantom scheme is not classified as a share incentive scheme in terms of the JSE Listings Requirements. The vesting periods are the same as those applicable to the option scheme; one-third becoming vested on each of the third, fourth and fifth anniversaries of the relevant grant date, with the maximum period for the exercising of options being ten years. In terms of the rules of the phantom scheme, the grant price of an option is determined as being equal to the average of the closing market prices of Illovo shares on the JSE for the 30 trading days immediately preceding the grant date of the relevant option. The cash settlement amount of an option is equal to the difference between the closing market price of Illovo shares on the trading day immediately preceding that on which an option is exercised and the grant price. The participants receive the equivalent net proceeds as under the option scheme, but without incurring broking fees which are payable under the option scheme upon the disposal of shares. The advantages to the company in adopting the phantom scheme include: there being no necessity to issue new shares when options are exercised, i.e. no share dilution; ease of administration; and tax effectiveness of the expense in the hands of the company; expensing of conventional options not being tax deductible. The Remuneration/Nomination Committee approves the granting of all share options in terms of the phantom scheme. Options granted to and exercised by executive directors and senior managers as at 31 March 2013 comprise: Number of shares Options granted as at 1 April New options granted during the year under review Options forfeited during the year under review (86 000) Options granted as at 31 March Options exercised as at 1 April Options exercised during the year under review Options unexercised as at 31 March Options granted as at 31 March The options granted and unexercised as at 31 March 2013 are as follows: Number of shares Expiry date Option price (cents) July October July July July July May May Details of options granted to executive directors, any options exercised during the year, and options unexpired and unexercised as at 31 March 2013, are provided in the Remuneration Report on page 73. Integrated Report

114 Directors report continued for the year ended 31 March 2013 Illovo Sugar Employees Share Purchase Scheme The Illovo Sugar Employees Share Purchase Scheme (the purchase scheme) was established in 1996 to give employees the opportunity of sharing directly in the profitability and growth of the company by assisting them to acquire shares in the company. Any contribution made by an employee for the purchase of shares is enhanced by a 10% company contribution, and the company pays for any trading costs. Employees may acquire up to shares in aggregate and shares in a continuous 12-month period, by means of regular monthly contributions (deducted from their salaries) or a lump sum payment. The purchase scheme is administered by a trust, the trustees of which are appointed by the board. During the year under review, the trustees of the purchase scheme undertook net purchases of shares in the company, thereby increasing the total number of shares held to Of these shares, which are all registered in the name of the trust, are held on behalf of 518 participants. All such shares have been fully paid for by the participants. A similar purchase scheme is operated in Malawi in respect of shares in Illovo Sugar (Malawi) Limited. Capital distributions An interim capital distribution (number 42) of 34.0 cents per share was declared on 14 November 2012 and a final capital distribution (number 43) of 61.0 cents per share was declared on 24 May 2013 (both by way of a reduction of contributed tax capital), making the total distribution for the year, 95.0 cents per share. In respect of the final capital distribution declared on 24 May 2013, and pursuant to the requirements of section 46 of the Companies Act, after due consideration, the board concluded that the company would satisfy the relevant solvency and liquidity test immediately after completing the proposed distribution. The interim capital distribution was paid on 7 January 2013 and the final capital distribution will be paid on 8 July Subsidiary companies The names and financial information concerning the subsidiaries of the company are set out in the notes to the financial statements which may be accessed on our website at Directorate and secretary The names of the directors and the company secretary in office at the date of this report are set out on pages 20 to 22 of this report. The details of the company s business and postal addresses are set out on the inside back cover. During the year under review, none of the directors resigned or retired and no new appointments were made. With effect from 1 April 2012, Mr D G MacLeod is independent and accordingly a lead independent director was not required for the year under review. As indicated in the corporate governance report, the independence of Dr D Konar and Mr D G MacLeod, both of whom have served on the board for longer than nine years, was assessed by the Remuneration/Nomination Committee in March 2013 and both were found to be independent. In terms of the company s Memorandum of Incorporation, Dr D Konar, Mrs C W N Molope and Messrs D G MacLeod and P A Lister retire by rotation at the forthcoming annual general meeting. All these directors are eligible and offer themselves for re-election. The Remuneration/Nomination Committee, having conducted an assessment of and are satisfied with the performance of each of the retiring directors, and the board, having accepted the recommendation of this committee, recommends the re-election of these directors to shareholders. The beneficial interests of the directors holding office at the end of the year under review in the issued ordinary share capital of the company as at 31 March 2013 were as follows: Direct Indirect Direct Indirect Clark G J Hankinson M J MacLeod D G Total No non-beneficial interests were held by any of the directors. There have been no changes in the above interests since the end of the year under review. The register of interests of directors in the shares of the company is available for inspection at the registered office. 110 Integrated Report 2013

115 Directors remuneration At the forthcoming annual general meeting: as contemplated by King III, shareholders will be requested to pass a non-binding advisory vote, approving the company s remuneration policy; and pursuant to the requirements of section 66(9) of the Companies Act, shareholders will be requested to pass a special resolution to approve the following annual fees payable to the non-executive directors with effect from 1 April 2013, plus an additional fee of R per day for any additional services undertaken at the request of the company (eg, a site visit or a non-routine meeting): Rand per annum Current Proposed R R Board Chairman** Other members Audit Committee Chairman Other members Remuneration/Nomination Committee Chairman Other members Risk Management Committee Chairman Other members Social and Ethics Committee Chairman Other members ** The fee paid to Mr D G MacLeod as chairman of the board is inclusive of all other committee membership fees and is payable monthly in arrears. All other fees are paid quarterly in arrears. This fee is not paid to Mr D G MacLeod as chairman of the Nomination Committee, due to the inclusive nature of his fee as chairman of the board. This fee is not paid to Mr R N Pike as chairman of the Risk Management Committee as the directors nominated for appointment by Illovo s holding company, have 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. Given the generally high level of attendance at meetings, the board does not consider it appropriate for non-executive directors fees to comprise a meeting attendance fee as well as a base fee. The executive directors receive no fees or other remuneration for their services as directors. Having taken appropriate advice, the directors are of the view that section 66(9) of the Companies Act does not apply to the remuneration paid to the executive directors as employees of the company. Integrated Report

116 Audit Committee report for the year ended 31 March 2013 At the forthcoming annual general meeting, pursuant to the requirements of section 94(2) of the Companies Act, shareholders will be requested to pass an ordinary resolution appointing the members of the Audit Committee. Financial assistance to related or inter-related companies or other legal entities At the forthcoming annual general meeting, shareholders will be requested to pass a special resolution pursuant to section 45 of the Companies Act, authorising the directors, by way of a general authority, to allow the company to provide direct or indirect financial assistance to any company or other legal entity which is related or inter-related to the company, subject to the relevant provisions of section 45. Holding company ABF Overseas Limited is the holding company of with a 51.4% interest in its issued share capital. ABF Overseas Limited is a wholly-owned subsidiary of Associated British Foods plc which is therefore the ultimate holding company of Illovo Sugar Limited. Associated British Foods plc is listed on the London Stock Exchange. Auditors At the forthcoming annual general meeting, pursuant to the requirements of section 90(1), read with section 61(8)(c) of the Companies Act, shareholders will be requested to pass an ordinary resolution re-appointing Deloitte & Touche as the company s independent registered auditors for the financial year ending 31 March Special resolutions passed by subsidiary companies During the year under review, a special resolution was passed by East African Supply Proprietary Limited, a wholly owned subsidiary of, to convert its par value shares of R1.00 each to no par value shares and subsequently to increase the authorised shares from to No material or other special resolutions contemplated by paragraph 8.63(i) of the JSE Listings Requirements were passed by any of the company s subsidiaries during the year. Subsequent events There have been no material changes in the affairs or financial position of the company and its subsidiaries since the end of the period under review. Audit Committee report This report incorporates the requirements of the statutory responsibilities of audit committees, as contemplated in section 94 of the Companies Act. Composition of the committee In accordance with its terms of reference, the company s Audit Committee comprises at least three non-executive, independent directors with the financial expertise required to properly advise the committee in the execution of its duties. The members of the committee for the year ended 31 March 2013 were Dr D Konar, Messrs M J Hankinson and T S Munday, and Mrs C W N Molope. The committee is chaired by Dr Konar who attends the annual general meeting in his capacity as such. Although they are not members of the committee, the chairman of the board, Mr D G MacLeod, and Mr R N Pike who is one of the non-executive directors nominated by Illovo s holding company, as well as appropriate members of executive committee, senior management and the independent external and internal auditors attend the meetings of the committee. The independent external and internal auditors have unrestricted access to the committee and its chairman. Election of committee at annual general meeting Pursuant to the provisions of section 94(2) of the Companies Act, which requires that a public company must elect an audit committee at each annual general meeting, it is proposed in the notice of annual general meeting to be held on 17 July 2013 that Dr D Konar, Mrs C W N Molope and Messrs M J Hankinson and T S Munday be re-appointed as members of the Audit Committee until the next annual general meeting in Meetings In the past year, three meetings of the committee were held, attendance at which is reflected in a table on page 66 of this report. 112 Integrated Report 2013

117 Terms of reference and functions The committee has formal terms of reference approved by the board, which were reviewed and amended during the year. The main objectives of the committee, as incorporated in the terms of reference, include: promoting the overall effectiveness of corporate governance within the Illovo group; acting as an effective means of communication between the board, and the independent external auditors and the internal auditors; satisfying the board that adequate internal financial controls are in place, and that material financial risks have been identified and are being effectively managed and monitored; and assessing the impact of the general control environment on the statutory audit, and reporting to management any areas of perceived control weaknesses. During the year under review, the committee satisfied its responsibilities in compliance with its terms of reference, including the following: the review and approval of the scope of independent external and internal audits; the review of the level of effectiveness of both the independent external and internal auditors; the review and approval of the internal audit charter; in conjunction with executive management, the consideration of the appointment of the group internal audit manager; being satisfied with the performance of the internal audit function; recommending the appointment of the independent external auditors to the board for approval by the shareholders, and approving their remuneration; establishing a policy in respect of and approving the extent of non-audit services undertaken by the independent external auditors; the review of reports from both the independent external and internal auditors, including management s responses thereto; assessing the effectiveness of internal policies and procedures; ensuring that all material financial risks are identified, assessed, monitored and managed; being satisfied that no material breakdown in internal controls occurs; considering the company s accounting policies and reviewing their compliance with International Financial Reporting Standards and other relevant regulatory requirements; the review of and recording going concern assumptions; the review of the company s interim reports, results announcements, and annual reports; being satisfied that management suitably addresses information technology risks and information security; being satisfied that the company complies with the JSE s Listings Requirements; and receiving and dealing with any complaints relating to accounting practices, independent external and internal audits, and the content or auditing of financial statements or any related matter. Integrated Report

118 Audit Committee report continued for the year ended 31 March 2013 Statutory duties In the execution of its statutory duties during the past financial year, the Audit Committee: confirmed the appointment of both Deloitte & Touche as the independent external auditors and Mr G Tweedy as the registered auditor responsible for the audit; satisfied itself that the independent external auditors were independent of the company; agreed the terms of engagement of and determined the fees payable to the independent external auditors; ensured that the appointment of the independent external auditors and the registered auditor complied with the provisions of the Companies Act; pre-approved the non-audit services provided by the independent external auditors, in terms of a policy in this regard previously adopted by the committee; noted that it had not received any complaints, either from within or outside the company, relating either to the accounting practices, the independent external and internal audits of the company, or to the content or auditing of its financial statements or any related matter; and performed its other functions as determined by the board in terms of its terms of reference. Regulatory requirements Pursuant to the provisions of the JSE s Listings Requirements, the committee: confirmed that it had adopted a policy with regard to non-audit services provided by the independent external auditors; satisfied itself of the appropriateness of the expertise and experience of the financial director, Mr M H Abdool-Samad; and satisfied itself that the appointed independent external auditors and registered auditor were duly accredited as such on the JSE s list of auditors. Legal, regulatory and corporate governance requirements Pursuant to King III, and based on specific procedures performed by the independent external auditors, the committee satisfied itself with the expertise, resources and experience of the company s finance function. The committee reviewed legal matters that could have a material impact on the group and considered reports provided by management, internal audit and the independent external auditors regarding compliance with legal and regulatory requirements. Appointment of independent external auditors Pursuant to the requirements of section 61(8) of the Companies Act, requiring that shareholders approve the appointment of the independent external auditors on an annual basis, the committee has recommended to the board, which in turn has recommended to the shareholders, for consideration at the forthcoming annual general meeting, that Deloitte & Touche be appointed as the company s independent registered external auditors for the year ending 31 March Annual financial statements Having reviewed the audited annual financial statements of the group, which are electronically available on the group s website at particularly to ensure that disclosure was adequate and that fair presentation had been achieved, the committee has recommended the approval of the annual financial statements to the board. On behalf of the Audit Committee Dr D Konar Audit Committee chairman May Integrated Report 2013

119 Condensed consolidated income statement for the year ended 31 March 2013 Audited Audited March March Notes Rm Rm Revenue Cost of sales Gross profit Distribution expenses Administrative expenses Other operating expenses Operating profit Dividend income Net financing costs Interest paid Interest received (36.2) (20.7) Foreign exchange losses/(gains) 12.7 (9.1) Profit before taxation and non-trading items Share of profit from associates Material items (163.7) Profit before taxation Taxation Profit for the year Attributable to: Shareholders of Non-controlling interest Statement of other comprehensive Income Adjustments in respect of cash flow hedges 0.8 (3.3) Tax effect of cash flow hedges Actuarial losses on post-retirement obligations (17.9) (9.3) Tax effect of actuarial losses on post-retirement obligations Movement in defined benefit pension plans (22.5) 10.2 Tax effect of movement in defined benefit pension plans 3.4 (2.9) Hedge of net investment in foreign subsidiary (64.8) (84.3) Tax effect of hedge of net investment in foreign subsidiary 14.5 (3.0) Foreign currency translation differences (231.2) Total comprehensive income for the year Attributable to: Shareholders of Non-controlling interest Earnings per share (cents)* Basic Diluted * See note 4 for headline earnings per share. Integrated Report

120 Condensed consolidated statement of financial position as at 31 March 2013 Audited Audited March March Rm Rm ASSETS Non-current assets Property, plant and equipment Cane roots Intangible assets Investment in associates Investments Loans Deferred taxation asset Current assets Inventories Growing cane Trade and other receivables Factory overhaul costs Derivative financial instruments Cash and cash equivalents Total assets EQUITY AND LIABILITIES Equity attributable to shareholders of Share capital and premium Share-based payment reserve Non-distributable reserves Distribution reserve Retained earnings Non-controlling interest Total equity Non-current liabilities Long-term borrowings Deferred taxation liability Deferred income Provisions Current liabilities Short-term borrowings Trade and other payables Bank overdraft Taxation Provisions Derivative financial instruments Total liabilities Total equity and liabilities Integrated Report 2013

121 Condensed consolidated statement of cash flows for the year ended 31 March 2013 Audited Audited March March Rm Rm Cash flows from operating activities Operating profit before working capital movements Working capital movements (506.4) (291.6) Cash generated from operations Net financing costs (279.6) (244.6) Taxation paid (196.1) (209.0) Dividend income Deferred income Distributions/dividends paid (458.0) (370.3) Net cash inflows from operating activities Cash flows from investing activities Replacement of property, plant and equipment (291.4) (239.2) Expansion capital expenditure (640.8) (198.0) Net expansion of area under cane (28.4) (0.2) Capitalisation of product registrations (10.5) (12.4) Proceeds on disposal of plant and equipment Proceeds on disposal of property Funding from non-controlling interest Net movement on investments and loans (25.1) (76.6) Net cash outflows from investing activities (947.7) (508.7) Net cash outflows before financing activities (817.6) (162.3) Cash flows from financing activities Long-term borrowings (repaid)/raised (245.7) Short-term borrowings raised/(repaid) (541.5) Issue of share capital net of associated costs Net cash (outflows)/inflows from financing activities (27.0) Net (decrease)/increase in cash and cash equivalents (844.6) Cash and cash equivalents at beginning of year Exchange rate translation (71.3) 17.5 Cash and cash equivalents at end of year Integrated Report

122 Condensed consolidated statement of changes in equity at 31 March 2013 Share capital and premium Rm Share-based payments reserve Rm Translation reserve Rm Balance at 31 March Total comprehensive income for the year: Profit for the year Actuarial losses on post-retirement obligations Movements in defined benefit pension plans Cash flow hedges Hedge of net investment in foreign subsidiary (87.9) Foreign currency translation Issue of share capital 1.9 Change in non-controlling shareholding Realised profit on disposal of property Distributions/dividends paid Transfer to distribution reserve (303.6) Transfer of credit foreign currency translation reserve to retained earnings (190.3) Balance at 31 March Total comprehensive income for the year: (211.7) Profit for the year Actuarial losses on post-retirement obligation Movements in defined benefit pension plans Cash flow hedges Hedge of net investment in foreign subsidiary (44.3) Foreign currency translation (167.4) Issue of share capital 3.1 Change in non-controlling shareholding Realised profit on disposal of property transferred to retained earnings Distributions/dividends paid Transfer to distribution reserve (437.5) Transfer of debit foreign currency translation reserve to retained earnings Release of non-controlling shareholders transactions to retained earnings Gain on redemption of preference shares Balance at 31 March Integrated Report 2013

123 Other non-distributable reserves Rm Distribution reserve Rm Retained earnings Rm Attributable to the shareholders of Rm Non-controlling interest Rm Total Rm (2.4) (6.7) (6.7) (6.7) (2.4) (2.4) (0.3) (2.7) (87.9) 0.6 (87.3) (4.2) (262.1) (262.1) (108.2) (370.3) (0.3) (12.9) (12.9) (12.9) (13.3) (13.3) (5.8) (19.1) (0.3) (0.3) (44.3) (6.0) (50.3) (167.4) (63.8) (231.2) (82.0) 82.0 (354.4) (354.4) (103.6) (458.0) (211.7) (31.2) Integrated Report

124 Notes to the condensed consolidated financial statements for the year ended 31 March Basis of preparation The condensed consolidated financial statements are prepared in accordance with the requirements of the JSE Limited Listings Requirements and the requirements of the Companies Act applicable to summary financial statements. The Listings Requirements are for the condensed consolidated financial statements to be prepared in accordance with the conceptual framework and the measurement and recognition requirements of International Financial Reporting Standards (IFRS), the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and also, as a minimum, to contain the information required by IAS 34 Interim Financial Reporting. The accounting policies applied in the preparation of the consolidated financial statements from which the summary financial statements were derived are in terms of International Financial Reporting Standards and are consistent with those accounting policies applied in the preparation of the previous consolidated annual financial statements. Audited Audited March March Rm Rm 2. Net financing costs Interest paid Less: capitalised to property, plant and equipment (21.7) Interest received (36.2) (20.7) Foreign exchange losses/(gains) 12.7 (9.1) Material items Profit on disposal of property Impairment of investment in Mali project (173.5) Profit on disposal of previously impaired assets 3.1 Material profit/(loss) before taxation 4.6 (163.7) Taxation (0.3) Non-controlling interest (2.1) Material profit/(loss) attributable to shareholders of 4.6 (166.1) 4. Determination of headline earnings Profit attributable to shareholders Adjusted for: Profit on disposal of property (1.5) (9.8) Loss on disposal of plant and equipment 1.7 Impairment of investment in Mali project Profit on disposal of previously impaired assets (3.1) Total tax effect of adjustments (0.2) Total non-controlling interest effect of adjustments Headline earnings Number of shares in issue (millions) Weighted average number of shares on which headline earnings per share are based (millions) Headline earnings per share (cents) Distributions paid Distribution number 39 of 34.0 cents per share (final 2011) paid 11 July Distribution number 40 of 23.0 cents per share (interim 2012) paid 9 January Distribution number 41 of 43.0 cents per share (final 2012) paid 9 July Distribution number 42 of 34.0 cents per share (interim 2013) paid 7 January In respect of the year under review, the directors declared a final capital distribution of 61.0 cents per share which will be paid to shareholders on 8 July The distribution will be regarded as a return of capital and shareholders will be liable for any potential capital gains tax consequences. No liability has been raised for this distribution. 120 Integrated Report 2013

125 Audited Audited March March Rm Rm 6. Other salient features Capital commitments Contracted Approved but not contracted Contingent liabilities Segmental analysis The following is an analysis of the group s revenue and results by reportable segment. Operating Total Capital Revenue profit assets expenditure Depreciation Rm Rm Rm Rm Rm Business segments Year to 31 March 2013 Sugar production Cane growing Downstream and cogeneration Year to 31 March 2012 Sugar production Cane growing Downstream and cogeneration Operating Total Capital Revenue profit assets expenditure Rm Rm Rm Rm Geographical segments Year to 31 March 2013 Malawi Zambia South Africa Swaziland Mozambique Tanzania Year to 31 March 2012 Malawi Zambia South Africa Swaziland Mozambique Tanzania Note: Total assets exclude cash and cash equivalents, deferred tax and derivative financial instruments. Integrated Report

126 Shareholder information Analysis of shareholders 124 Notice of annual general meeting 125 Directors curricula vitae 128 Glossary of terms 130 Form of proxy attached Shareholders diary inside back cover Corporate information inside back cover 122 Integrated Report 2013

127 Shareholder information At the heart of our operations is an ongoing commitment to the communities in the rural locations in which we operate, providing much-needed employment, social benefits and supply opportunities in these mostly developing regions with significant infrastructural needs. In addition to maintaining our high level of social investment, amounting to R197 million in 2012/13, much of the work we undertake in our surrounding communities involves the personal involvement of our own people and their families, characterising our core objective to be welcomed in the communities in which we operate. Integrated Report