The encouraging half-year results for Tongaat Hulett have been attributed to the various improvements in the agriculture and agriprocessing business’s sugar operations at a time when revenue was being negatively affected by lower international sugar prices.

For the half-year ended September 30, the company’s revenue increased by 3% to more than R8-billion and operating profit reflected a 9% increase to exceed R1.5-billion. Further, operating cash flow was R2.413-billion, up 0.5% compared with the R2.402-billion reported in the previous comparable period, while headline earings were up by about 17% to R773-million compared with R663-million in the second half of 2013.

Tongaat Hulett reported an interim dividend of 170c a share for the second half of 2014, up about 13% on the 150c a share reported for the 2013 period. Profits and cash flows for the full year were expected to reflect further growth over the 2013/14 year.

In a telephone interview with Engineering News, Tongaat Hulett CEO Peter Staude explained that the company was pleased with the results considering the current circumstances in the sugar industry worldwide.

“Sugar producers worldwide that are exposed to the current low world price are under pressure when one considers the substantial input cost increases over the past decade. The various protection measures implemented in each country of operation to improve local market sales volumes are starting to produce some benefits. The business experienced the impact on revenue of lower international prices, particularly for exports into the European Union (EU).”

With regard to reforms to the EU sugar market, Staude said what would transpire was still unclear to all the players in the market, explaining that individual countries in the EU were, through quotas, currently limited in how much sugar they could produce and sell into the market. But, a decision had been made that beyond October 2017 there would be no restriction on production.

“As a result, in combination with the low world sugar price, in the short term, the price in the EU has already dropped dramatically.”

However, offsetting the low world sugar price, Tongaat Hulett continued to reduce the cost of sugar production across all its operations, Staude stated, retaining the substantial reductions achieved in the 2013/14 year, including off-crop expenditure, while having to absorb input price increases.

The cost reductions a ton achieved by the company in 2013/14 were 14% in Mozambique, 16% in South Africa and 23% in Zimbabwe.

“We [were able to] consolidate that effort this year,” Staude commented, adding that Tongaat Hulett had also experienced “a record land year” in 2013 and was lucky that it could continue that momentum in the first six months of this year.

“Land conversion and development activities continue to unlock substantial value, albeit with operating profit recognised in this half-year being below that reported in the same period last year,” he said. The starch and glucose business had also done well, delivering a strong performance.

This year, Tongaat Hulett’s cane valuations were also not as negative as last year.

In addition, the company gained more market share, particularly in Zimbabwe, where the government had implemented improved local market protection in the form of tariffs and import licences on April 2014, Staude told Engineering News.

“In South Africa, Zimbabwe and Mozambique there is an increasing understanding, up to senior government levels, of the importance of better protecting local markets (especially to secure rural jobs) against imports from other surplus sugar producing countries, confirmed by the upcoming reforms to the EU sugar market. Better import protection would lead to lower exports,” he added.

On the back of this, the Zimbabwe sugar operations recorded an operating profit for the half-year amounting to R344-million compared with the R232-million in the same period last year.

However, in South Africa the overall increase in the reference price used in the import duty calculation to protect the local market against unfair import competition had a limited impact over the last six months, Staude pointed out.

The South African sugar operations, including the agriculture, milling, refining and various downstream activities recorded operating profit of R259-million compared with the R248-million reported for the second half of 2013. 

In Mozambique, sugar operations grew operating profit for the period under review to R226-million compared with R151-million in the corresponding 2013 period, while the Swaziland sugar operations reported an operating profit of R35-million. This was a drop compared with the R53-million generated in the 2013 comparable period as a result of the lower sucrose price as a consequence of a reduction in export prices into the EU.

Tongaat Hulett was looking to increase sugar production by some 400 000 t over the next four years, which entailed getting more sugar cane to the mill; a combination of better yields and sugar extraction.

Tongaat Hulett’s South African operations, which grew sugar production substantially last year to 634 000 t, were expecting sugar production this season to be between 525 000 t and 595 000 t, as a result of low rainfall in KwaZulu-Natal. However, production for the season is still expected to be well above the level of two seasons prior.

The Zimbabwe sugar operations were expecting a decrease in sugar production to between 440 000 t and 475 000 t for the full year on the prior year’s production of 488 000 t. This was mainly owing to no cane being diverted from the independent ethanol plant at Chisumbanje, which contributed 39 000 t of sugar equivalent in the prior year, and the impact of low dam levels for irrigation at the end of 2013, which only recovered in early 2014.

For Mozambique, an increase in sugar production of between 265 000 t and 280 000 t was expected for the full year, with the prior year’s production at 249 000 t.

“Agricultural improvement programmes are now well entrenched and these programmes, together with better weather conditions, should lead to higher cane yields and sucrose content in the cane, with the marginal cost of this sugar production being some 30% of the current low world sugar price,” Staude said.

He noted that Tongaat Hulett was looking to further reduce the cost of production in 2015/16. “Often when you have such a rapid reduction [in consumption] like we had last year, a period of consolidation [is needed] to adjust to operating at a lower cost base.”

The production cost side entailed multiple activities, he noted, a lot of them under Tongaat Hulett’s agriculture improvement programmes, which comprised paying significant attention to the management of specific issues such as controlling weeds in Mozambique. Staude added that the company had already reduced the cost of controlling weeds in Mozambique by half.

With regard to capital expenditure, Staude said Tongaat Hulett was going into a period of low capital expenditure on existing assets to concentrate on extracting more from these assets.

He added that the business was in a good position to benefit from multiple actions across all “its well-grounded strategic thrusts”, with its footprint in six Southern African Development Community countries, its ability to process both sugar cane and maize, electricity generation and ethanol opportunities, and increased momentum in land conversion.

Staude said he saw potential for more electricity and ethanol production, stating that a prerequisite was to have a clear procurement framework in place, which he thought could well happen in the next six months.