JSE-listed sugar producer Tongaat Hulett’s cash flow from operations took a significant blow in the year ended March 31, owing to its sugar production reducing by a further 291 000 t to 1.023-million tons from 1.314-million tons and 1.424-million tons in 2015 and 2014 respectively.
Tongaat Hulett CEO Peter Staude told Engineering News Online that the results for the period under review represented the best results ever from the company’s starch and glucose, and property development divisions, but a very low point in the sugar business, as a result of poor growing conditions.
The company reported a 50.2% decline in cash flow from operations to R1.2-billion for the period, compared with the previous financial year’s R2.5-billion.
Revenue mustered 3.2% growth on the 2015 period’s R16.155-billion to yield R16.6-billion, while operating profit fell 13.5% to R1.8-billion on 2015’s R2.089-billion and headline earnings dropped 17.1% to R783-million from R945-million.
Sugar production generated revenue of R16.7-billion and an operating profit of R1.8-billion, 13.5% below that of last year, while the starch and glucose operation increased operating profit to R658-million on the R561-million of 2015, with ongoing improvement in the sales mix, enhanced by value-added products.
Land conversion and development activities generated operating profit of R1.115-billion from the sale of 121 developable hectares, an increase on the R829-million generated by the sale of 108 developable hectares in 2015.
The company explained that, overall, Tongaat Hulett’s profit for the next year would continue to be influenced by numerous substantial and varying dynamics, both positive and negative, and the full impact was difficult to predict at this stage. Cash flow, however, was expected to improve substantially, including a reversal of the working capital absorption of the 2015/16 year.
Staude continued to explain that the sugar growing conditions in the year under review were masking the progress the company was making on a number of fronts with agriculture improvement, irrigation efficiencies and in getting its roots in better shape. “. . . if we hadn’t [made these improvements] things would have been a lot worse than they were,” he averred.
Sugar volumes were impacted by lower cane yields owing to the severe drought in KwaZulu-Natal and poor growing conditions. In Mozambique and Zimbabwe, low rainfall and restricted irrigation levels, as a result of low water and dam levels, were experienced, while electricity availability, at times, also impacted on irrigation.
However, the imminent completion in Zimbabwe of the Tokwe-Mukorsi dam and, in Mozambique (Xinavane), the raising of the Corumana dam wall and the construction of the new Moamba dam on the Incomati river would diversify the water catchment area and provide increased stability in future water supply.
Further, the benefit of improved import protection and higher prices in the various local markets was largely not yet reflected in revenue earned in the 2015/16 year, owing to the timing of the increases. In addition to lower sugar volumes, export revenues were also impacted by a lower international sugar price, with regional deficit markets and European Union exports linked to that price.
Impacting sugar further in the year under review were multiple currency dynamics, with positive and negative effects compared with last year. Tongaat said, however, the next year should see the company benefit substantially from improved local sugar market revenues (volumes and prices) following the import protection measures implemented in South Africa and Mozambique (higher US dollar-based reference prices for the calculation of import duties) and Zimbabwe (import duties and import permit controls).
“[Further] the cane valuations at year-end reflect increased domestic market realisations going forward and the impact of a roots fair value cost increase in South Africa and Mozambique, reduced by lower cane yields than were expected at March, in line with current growing conditions,” Tongaat advised.
Staude stated, however, that "you are not going to have an El Niño every year and as the volume picks up, [so will the] profitability", adding that with all the company’s “agriculture improvement programmes . . .”, given good weather conditions, 1.6-million tons was within grasp.
Tongaat Hulett had more than 2.1-million tons of installed milling capacity, noting that little capital expenditure was required to use the additional available capacity, which had a replacement value of more than R20-billion.
“Production increases from higher yields on existing hectares under cane and using the existing installed milling capacity have a low marginal cash cost of some 4 US cents to 6 US cents a pound,” the company added.
However, total sugar production in 2016/17 was expected to continue to be impacted by the drought in KwaZulu-Natal and, in Zimbabwe, Mozambique and Swaziland, Tongaat noted that the quantum of irrigation had been reduced as a mitigation measure against poor rainfall and low dam levels.
“The estimate for sugar production in total for the 2016/17 season is between 990 000 t and 1 150 000 t, compared with 1 023 000 t last year. Rainfall during the summer of 2016/17 will determine whether more regular production levels return in 2017/18.”
The company added that the sustained decrease in sugar production costs of some R1.39-billion in real terms, achieved over the past three years, provided a good base for the next steps in the concerted cost reduction process in the sugar operations, particularly focused on bought-in goods, services, transport, marketing, salaries and wages.
“There is scope for considerable further reduction, with man-hour reductions focusing on flexible components and natural attrition, at the same time as eliminating non value-add activities and areas of waste.”
Although the nature of sugar milling and cane growing was such that there was a high proportion of fixed costs, the paradigms around such costs were being challenged to mitigate against future potential volume volatility. “Unit costs of sugar production will reduce further as these cost reduction processes continue, benefiting from future volume increases,” Tongaat advised.