SAFCOL Presentation to Parliamentary Portfolio Committee on Public Enterprises 05 November 2014 Prof. Somadoda Fikeni Interim Board Chairperson GROWTH THROUGH PARTNERSHIP 1
SAFCOL REPRESENTATIVES Prof Somadoda Fikeni Interim Board Chairperson Nomkhita Mona Group Chief Executive Officer Zoliswa Mashinini Group Chief Financial Officer Julia Mphafudi Group Senior Executive: Human Capital Management and Transformation 2
Mandate, Vision, Mission and Values SAFCOL Group Structure Strategic Pillars Operations Current state of log industry Competitor Matrix Performance & Audit Report Human Capital Management and Socio-Economic Development Land Claims Key Risks and Challenges Outlook 3
MANDATE To conduct forestry business which includes timber harvesting, timber processing and related activities, both domestically and internationally VISION Being a world-class, global business engaged in multi-functional forestry, revolutionising the integration of forests and communities. MISSION Our mission is driven by an unwavering commitment to facilitate the sustainable economic empowerment of communities and the alleviation of poverty through: Implementing needs-driven interventions; and Becoming a partner of choice for land claimants. CORE VALUES Passionate about our forests, communities, customers and people * Have a social and environmental conscience * Trust founded on integrity and loyalty * Equality, fairness and empowerment * Respect for diversity * Focus on innovation and excellence 4
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SAFCOL BOARD of DIRECTORS 6
SAFCOL GROUP EXCO 7
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South Africa Spread over 187 320 ha with 121 000 ha planted 18 plantations OPERATIONS Mozambique Initial IFLOMA plantations cover 31 754 ha In partnership with Mozambican government (20% ownership) 4 plantations Licensed for expansion by an additional 69 360 ha closer to the Beira port. 9
SAFCOL s main subsidiary, Komatiland Forests (KLF) manages 187,320ha across 18 plantations in Mpumalanga, Limpopo and KZN Owns and operates the Timbadola mill in Limpopo and rents two sawmills on the Highveld 22% of SAFCOL sawlogs processed internally 64% of available land is commercially planted with the remaining 36% comprising conservation areas, wetlands, grasslands, thickets and indigenous forests Planted area 93% pine with 7% Eucalyptus and Wattle Growing stock managed over 30 year rotation for sawlogs and 6-12 years for other products KLF is able to sustainably harvest 1.447 million m 3 annually The fact that KLF s revenue from processing operations grew from 26% in 2008 to 33% in 2014 (36% of sales revenue), shows the significance of processing own sawlogs 10
SAFCOL holds 80% of the Mozambican IFLOMA initiative with a landholding of 31,754ha in partnership with the government of Mozambique 80% of the shareholding is KLF 20% held by, Mozambique s State Shareholding Management Institute Total landholding area is 31,754 ha in extent- 16,178 ha is plantable for commercial forestry SAFCOL has recently completed a bankable feasibility study 61,000 ha for IFLOMA II 11
CORE OPERATIONS Forestry 12
CORE OPERATIONS Processing 13
The South African log industry is domestically focused with an emphasis on production of pulp logs Current state of South African log industry South Africa SAFCOL Proportion of SA log production 80% 60 40 20 0 68% Pulp logs 22% Saw logs 10% Other Proportion of SAFCOL plantation stock 100% 80 60 40 20 0 10% Pulp logs 88% Saw logs 2% Other The size of the South African timber market is 18.5million m 3 There is an oversupply of logs in South African market South Africa imports 90,000m³ of softwood lumber and 74,000m³ of plywood per year SAFCOL currently does not export any logs or byproducts Owns about 8% of South African timber market Owns more than 25% of pine saw log market Major producer of larger diameter pruned logs in South Africa Local demand for larger diameter logs has declined - SAFCOL is therefore unable to realize the value invested for 30 years into these types of trees 14
SAFCOL s closest competitor is York Timber, while also competing with SAPPI and MONDI Company Plantation area Turnover (R billions) Vertical Integration Area of operation Products 121 000ha R0.86B Process only 22% of volume Mainly SA, Mozambique Logs and lumber 61 000ha R1.2B Fully up to retail level Mainly SA and distribution into Southern Africa Logs, lumber, plywood, veneer 554 000ha R63B Fully SA, Swaziland, Europe, USA Pulp, paper, logs and lumber 307 000ha R75B Fully SA, Europe, Asia Pulp, paper and wood chips Competing forest owners are all fully integrated and have higher turnovers while SAFCOL processes only a small proportion of production internally 15
PERFORMANCE AGAINST SHAREHOLDER MATRIX Element of Strategic Intent Key Performance Area KPI Achieved actuals Annual Targets Reason for variance FINANCIAL AND COMMERCIAL SUSTAINABILITY Financial Returns EBITDA / Revenue Return on equity excluding fair value movements and translation gains (losses) 2% 8% Performance is below target as a result of depressed markets -1% 3% Negative variance is due to the losses incurred as a result of lower revenue than budget and depressed markets Creditworthiness Gearing Ratio 1% 50% Lower capital expenditure, resulting in lower than anticipated utilisation of asset-based financing Cash Interest Cover 12 2 This is due to positive cash flow generated from operations. The net interest to date is positive R7m, due to more interest being earned than paid. Working Capital Management Current Ratio (Excl. NCAHFS) 3 4 In line with target Cash Ratio 1.3 1.5 This is slightly below target due to a higher increase in current liabilities than anticipated.
PERFORMANCE AGAINST SHAREHOLDER MATRIX Element of Strategic Intent Key Performance Area KPI Achieved actuals Annual Targets Reason for variance SUSTAINABLE FOREST MANAGEMENT Plantable area of forest under management Total gross stocked area SA 121 667 ha 121 100 ha Target exceeded Includes a provision of 500ha for delineation and excisions as agreed upon with the shareholder. IFLOMA 16 178 ha 16 411 ha Target achieved Includes a provision of 500ha for delineation and excisions as agreed upon with the shareholder. Temporarily unplanted area Area of forest under management that is certified under FSC SA 1.9% 3.0% Target exceeded: focussed management & conducive conditions IFLOMA 10.2% 18% Target exceeded: focussed management & conducive conditions Area to be planted IFLOMA 1 672 ha 1,500 ha Project suspended during the IFLOMA 2 0 ha 2,000 ha financial year % total forest area in 100% 100% Target maintained South Africa % total forest area in Mozambique* Application to the certification body Project suspended during the financial year
PERFORMANCE AGAINST SHAREHOLDER MATRIX Element of Strategic Intent SUSTAINABLE FOREST MANAGEMENT SOCIO- ECONOMIC TRANSFORMA TION Key Performance Area Processing Skills Development Corporate Social Investment KPI Achieved actuals Annual Targets South African Operations Timbadola (volume) 119 645 m 3 130 000m 3 Custom Cut Operations (volume) 114 796 m 3 150 000 m 3 Recovery Rate 49% 49% Reason for variance Upgrade Completed feasibility Study Submission of feasibility Study Mozambique Operations Volume 6 491 m 3 30 000 m 3 Project suspended during the financial Recovery rate* 43% 52% year Number of Management Trainees (Internship) in the programme Number of Artisans Trainees in the programme Number of Sector Specific trainees such as Foresters and Forestry workers in the programme Training spend : % of total training spend against personnel costs inclusive of1% skills levy. Implementation of the development charters 34 15 Target exceeded: Intake of forestry graduate trainees through External SAFCOL bursary scheme + additional ERP 10 6 Target exceeded: More funding received from SETA 120 20 Target exceeded: More funding received from SETA 3.5% 3% Target exceeded: More funds became available from SETA 13 Jobs created Infrastructure Total spend on Group CSI
Element of Strategic Intent SOCIO- ECONOMIC TRANSFORMAT ION Key Performance Area Employment Creation KPI Number of black management. Number of black management females Number of Black People with Disabilities. BBBEE Contributor Procurement Level BBBEE Total Procurement Spend Achieved actuals Annual Targets Reason for variance 84 70 Target exceeded: Qualifying applicants in management positions are mostly black 21 21 Target achieved 20 7 Target exceeded: Following an awareness campaign several employees then declared their disabilities. 2 2 Target achieved R676 853 977 R 607 302 586 Target exceeded: The entity embarked on a conscious effort to source BBBEE suppliers over and above what was anticipated SMME Procurement Spend % Local Content 96.22% 75% Target exceeded: services required by SAFCOL can be sourced locally Total % BBBEE contribution (of local content) Procurement Spend on Marginalised Group 85.66% 50% Target exceeded: service providers on database are BBBEE compliant % Black Women Owned % Youth Owned % PWD Owned 12.46 % Achieved as part of the above 6% Target exceeded: Increased women service providers 3% Information not specified and not available on the B-BBEE scorecards of suppliers. To be calculated manually going 1% forward. Number of Enterprises Developed Socio Economic Development - SED 21% 1% NPAT Budget allocation 13 Jobs created Infrastructure Total Spend on Target exceeded: NPAT for 2013/2014 was lower than budgeted, whilst already committed to projects based on
Financial Highlights The Group achieved the highest revenue (R894m) in 5 years Achieved R 511m net profit Cashflow grew by R69m year-on-year Our biological assets which were previously undervalued at R3 billion, were revalued to R3.67 billion The Group received an unqualified audit opinion 20
FINANCIAL PERFORMANCE 1 000 000 000 900 000 000 800 000 000 700 000 000 600 000 000 500 000 000 400 000 000 300 000 000 200 000 000 100 000 000 FINANCIAL PERFORMANCE 2013 / 2014 2012 /2013 Revenue Upward trend with 5% increase on prior year Cost of Sales Increase mainly driven by increase in land lease rentals Operating expenses Decrease mainly as a result of lower spending - Revenue Cost of Sales Operating Expenses 21
FINANCIAL PERFORMANCE 70% 60% 50% 40% 30% 20% 2013 / 2014 2012 /2013 Gross Profit Margin As a result of the increase in Cost of Sales driven by increase in land lease costs, gross profit margins decreased by 4% Net Profit Margin Significant increase in Net Profit Margin driven by fair value on biological assets (9% for 2013 to 57% for 2014) 10% 0% -10% Gross Profit Margin Net Profit Margin Operating Profit Ratio Operating Profit Ratio In the prior year profit included sale of property asset, resulting in a 4% profit ratio against -4% in the current year 22
SAFCOL GROUP STATEMENT OF FINANCIAL PERFORMANCE Financial year Amounts in Rand Thousands 2 014 2 013 Variance Variance % Revenue 894 374 855 608 38 766 4.5% Cost of sales 699 491 635 006 64 485 10.2% Other income 8 615 64 878-56 263-87% Operating expenses 239 275 251 207-11 932-5% Net investment revenue 11 286 11 988-702 -6% (Loss) / Profit before taxation excluding fair value adjustments -24 491 46 261-70 752-153% Fair value adjustments 731 445 63 028 668 417 1061% Profit before taxation including fair value adjustments 706 954 109 289 597 665 547% Taxation 196 174 35 470 160 704 453% Net profit for the year 510 780 73 819 436 961 592% 23
SAFCOL GROUP STATEMENT OF FINANCIAL PERFORMANCE Financial year Amounts in Rand Thousands 2 014 2 013 Variance Variance % ASSETS 4 857 663 4 090 818 766 845 19% Non-current assets 3 760 297 3 042 325 717 972 24% Current Assets (incl. current portion of biological asset) 724 611 710 680 13 931 2% Non-current assets held for sale 372 755 337 813 34 942 10% EQUITY AND LIABILITIES 4 857 663 4 090 818 766 845 19% Equity 3 608 575 3 103 102 505 473 16% Liabilities 1 249 088 987 716 261 372 26% Non-current liabilities 1 080 239 861 220 219 019 25% Current liabilities 168 849 126 496 42 353 33% 24
SAFCOL GROUP STATEMENT OF CASH FLOWS GROWTH THROUGH PARTNERSHIP Financial year Amounts in Rand Thousands 2 014 2 013 Variance Variance % Cash flow from operating activities 93 745 15 191 78 554 517% Cash flow from investing activities -34 652 6 724-41 376-615% Cash flow from financing activities 10 339 12 270-1 931 16% Total cash movement for the year 69 432 34 185 35 247 103% Cash and cash equivalents at end of the year 222 162 152 730 69 432 45% 25
FIVE-YEAR CASH FLOW TREND 250 Five-year trend of cash flows 200 150 100 50 0-50 -100-150 -200 2010 2011 2012 2013 2014 Cash flow from operations (R'mil) Cash and cash equivalents(r'mil) The Group generates cash from its operations: Improvement since FY2010 from negative R136 million to positive R83 million Cash and cash equivalents: Since FY2011, there has been increase in cash resources of more than 100%. 26
AUDIT REPORT 2013 audit qualifications resolved resulting in an Unqualified audit opinion for 2014. Material losses: R 1 million incurred as result of fraudulent activities at IFLOMA Remedial Action: R 800 000 recovered and criminal processes instituted Non-compliance to Treasury regulations: 1. Liability management: in respect of existing credit cards that were not cancelled. Remedial Action: engagement with National Treasury on card alternatives 2. Strategic planning and performance management: The corporate plan not aligned to shareholder compact. Remedial Action: alignment of corporate plan and shareholders compact for subsequent period 27
AUDIT REPORT CONTINUED Remedial Action: Disciplinary process underway Policies and Procedures relating to irregular, fruitless and wasteful expenditure have been developed Procurement Policy review is in the process of finalisation ERP system functionality to detect instances of missing documentation (e.g. tax clearance certificates)
HUMAN CAPITAL MANAGEMENT SAFCOL has over 5000 employees The following HCM programmes were implemented in 2013/14: 250 jobs profiled and graded Succession planning for females and core positions Accelerated development of black managers and professionals in core positions New Performance Management System Health and Wellness Programme for all employees 15 HCM policies developed
EMPLOYMENT EQUITY STATUS Programme Male Female Total A C I W A C I W Top Management 0 0 0 0 2 0 0 0 2 Senior Management 3 0 0 1 1 0 0 1 6 Professionally qualified 25 2 1 32 14 1 3 5 83 Skilled 59 1 0 15 45 5 0 16 141 Semi-skilled 683 1 1 4 118 7 2 11 827 Unskilled 494 0 0 0 182 1 0 0 677 TOTAL 1264 4 2 52 362 14 5 33 1736
SOCIO-ECONOMIC DEVELOPMENT R6.6 million was invested on CSI initiatives in 2013/2014. 13 social compacts to foster development of neighbouring communities The community infrastructure development projects include - Building market stalls - School desks - Farming equipment - Dignity Packs - Community Halls/centres Established more than 15 Cooperatives which provide 500 sustainable jobs Assisted 2 Enterprises to purchase 8 trucks, this allow them to participate in the multi- million transportation of logs business Built a Desk Manufacturing Factory with 20 youth producing school desks, creating employment and encouraging entrepreneurship
SKILLS DEVELOPMENT PROGRAMMES 78 leaners participated in a leanership programme 34 interns and 13 artisans participated in Internship programme 366 community members participated in Adult Education Training 500 community members trained on variety of interventions including computer, sewing, school desk manufacturing and upholstery 15 career exhibitions with 3500 participants R2 million spent on bursaries for employees and school leaving youth
LAND CLAIMS Status Mpumalanga Limpopo KwaZulu-Natal Total Researched 13 1-14 Gazetted 3 10 1 14 Approved - 3-3 Transferred - - - - 16 14 1 31 61% of the SAFCOL s land is under claim Settlement model being discussed with claimants Unlawful land occupation Challenges Lack of communication with claimants, on progress, by responsible departments Disputes between the claimants Ngome land claim is being fast tracked
RISKS AND CHALLENGES Inability to sell the log volumes Unresolved land claims Changes in External Environment Incorrect business model Skills retention Future role of SAFCOL Old sawmill equipment Increasing operational cost 34
SAFCOL s OUTLOOK Change business model: Increase own processing Financial/ commercial sustainability Sustainable forestry management Enhanced development contribution Timbadola upgrade and expansion Export logs IFLOMA expansion Plywood mill and cogeneration facility Green Energy These initiatives meet the objectives of enhanced development, financial and commercial sustainability and sustainable forestry management to varying degrees 35
BUSINESS Sustainable and looking at new growth opportunities Grow large diameter logs over a 30 year rotation FSC CERTIFIED Fully FSC certified in SA Pre-certification completed in Mozambique SHEQ Group obtained 82.76% compliance score representing four stars (NOSA) Annual internal environment and safety audits were conducted at operational units Thank you 36