The tough commercial sugar environment saw JSE-listed sugar producer Illovo’s group revenues reduce by 0.7% to R13 169.9-million which, in turn, resulted in the operating margin falling from 12.5% to 10.7%, during the 12 months to March 31.

"The 'perfect storm' of sustained low export sugar prices, reduced domestic demand in Malawi, currency volatility and high interest rates in various jurisdictions, exacerbated by the impact of the regional drought on sugar production, weighed heavily on business performance,” stated Illovo MD Gavin Dalgleish in a statement on Friday.

Nonetheless, he said the downstream business delivered a strong financial performance, with 26% growth in downstream operating profit, while the group continued to improve the sales mix away from the European Union by growing sales volumes in key regional markets.

“Cost-reductions, efficiency improvements and the culture of doing more with less have become further embedded in the business.”

Operating profit decreased by 14.8% to R1 410.2-million during the period under review, while headline earnings per share (HEPS) declined by 36.5% to 113.6c, which Illovo pointed out was well within the guidance range of a 25% to 45% HEPS decline year-on-year provided in the trading statements published on May 25, 2015, and September 18, 2015.

Zambia’s contribution to operating profit was 35%, unchanged from the previous financial year, while Malawi added 32%, down on 2015’s 38%; Tanzania 16%, up from 9%; Swaziland 10%, growing from 4%; South Africa 8%, declining from 13%; and Mozambique fell to –1%, dropping from the 1% reported for 2015.

By activity, sugar production contributed an operating profit of 59%, falling from the 71% achieved in 2015; downstream was up to 24% compared with the 2015 financial year’s 16%; and cane growing increased to 17%, up on the 13% reported in the previous comparable period.

“Forecasts of the global sugar production deficit for 2015/16 continue to grow, which together with a strengthening Brazilian real has contributed to a recent recovery in world market prices, off seven year lows,” noted Dalgleish.

He added that good progress had been made in improving the sales mix, developing regional and domestic markets and structural cost-reduction programmes, thereby mitigating some of the downside to the results for the 12 months to March 31.

However, the persistent dry weather conditions across the region and poor summer rainfall will further delay the anticipated sugar production recovery during the 2016/17 season, with a particularly adverse impact expected in Swaziland. Illovo expected the overall sugar production to be similar to the 2015/16 season.

Notwithstanding this extended drop in physical performance, firmer pricing, an improved sales mix, the flow through of cost-savings initiatives, and the commissioning of the Zambian refinery and energy efficiency project in South Africa should impact positively on the financial performance during 2016/17.

The recent recovery in world sugar market prices was encouraging, said Illovo.

“Increased import tariffs in Mozambique and efforts to improve the sales mix and to develop regional markets will benefit earnings in the year ahead [while the] recent weakening in the Malawian kwacha should stem the flow of illegal imports into that market and improve domestic sales.”

Further, the company noted that its Zambian refinery expansion and product alignment projects remained within budget and on schedule for commissioning during May and June.

In addition, the structural cost-reduction programmes and the group-wide continuous improvement programme were expected to bring meaningful benefits to the group in the short to medium term.