HIGHLIGHTS AND SALIENT FEATURES OF RESULTS FOR THE 2004 YEAR
EARNINGS ENHANCING ACTIONS
“The past year was focused on actions to grow earnings. Tongaat-Hulett is rapidly adjusting to the stronger currency and is building earnings momentum,” said Peter Staude, Chief Executive of Tongaat-Hulett.
Management’s profit improvement actions across the Group, which have started taking effect, largely offset the effects of factors such as the strengthening Rand, high priced maize and the small sugar crops harvested in 2003 and 2004. In 2004, the Group’s total operating profit improved to R364 million from R80 million in 2003. The mix of businesses in the Group was again a strength in 2004.
Staude continued, “By the end of 2004, solid progress had been made with the new business model and African Products is poised for a turnaround in 2005. Maize pricing is now in tandem with customer pricing.”
African Products experienced a year of transition, with a move to a new maize procurement and product pricing model, and the commencement of a profit recovery. Operating profit improved to R63 million (2003: loss of R104 million) despite the pressure of the exchange rate on local pricing and export contributions, together with the high priced maize procured under the previous business model. Domestic sales volumes of prime products were 2% below those of 2003 as a result of the pressure from imports of starch and glucose in African Products’ markets and imports of finished products in its customers’ markets. A large proportion of the volumes lost to direct imports were regained during the last quarter of 2004. The maize priced under the previous procurement approach was utilised by the end of October. The maize for all sales thereafter was priced when product prices and volumes were agreed with customers. Using this approach, more than 35% of the maize required for 2005 has been priced against product prices with margins that will contribute to a return to an acceptable level of profitability for African Products. Fixed cash costs were again held below the 2002 levels, with ongoing focus on procurement practices and manning structures.
“The improved results in the Group’s aluminium business, Hulett Aluminium, have been achieved notwithstanding the impact of the strengthening of the currency. The established base enables the remaining 25 percent of rolled products production capacity to be utilised at significantly higher levels of profitability,” said Staude.
Hulett Aluminium improved its operating profit to R150 million (2003: R5 million), with the Group’s share being 50% thereof. The focus remains on increasing volumes, improving product mix and reducing unit costs. These factors have together generated financial benefits approaching R450 million in the past two years, and have largely offset the effects of the strengthening Rand. Hulett Aluminium started benefiting late in 2004 from rising US dollar rolling margins, especially in North America and Asia. As one of the few independent rolled products producers that are able to manufacture high quality, higher margin and technically demanding niche products, the business continues to experience strong demand. Total sales volumes of rolled products grew by 10% to 144 000 tons. Local market sales grew by 11%, particularly in the transport, automotive and packaging sectors. Export sales growth was limited to 10% by the increased local demand and the available production output. Production was hampered by a fire on the Camps Drift hot mill in May 2004 and a four week strike in the second half of the year. The average output of rolled products in the last quarter increased to 160 000 tons annualised. The rolled products target for 2005 is 175 000 tons, moving towards 200 000 tons in the years thereafter. Conversion costs per ton decreased by 5% in 2004 as a result of the volume growth and cost savings, particularly in metal recycling. The aluminium extrusion operation grew local market sales by 13% and increased profitability, as did the commercial products businesses.
Staude commented, “The visibility of the value of the Group’s land is increasing. Moreland has made good use of its development expertise, combined with the buoyant property market, to unlock value at an increased pace.”
Moreland’s platform of prime property developments established over the past decade has enabled it to capitalise on the favourable resorts and residential property market and post a record operating profit of R182 million (2003: R90 million). New projects were launched during the year, with outstanding performances achieved in the Zimbali resort and the Ilala and Izinga Ridge residential projects in La Lucia and Umhlanga respectively. Increased sales have been achieved in the Umhlanga Ridge New Town Centre including sites for apartments and offices. Several large transactions were concluded at RiverHorse Valley Business Estate, a partnership with the eThekweni Municipality (Durban), and Briardene Industrial Park. The three new major road developments in areas where Moreland operates are opening-up new development nodes for substantial future growth. A number of environmental impact studies and planning programmes are due to be completed in 2005 to maintain Moreland’s current momentum.
“Tongaat-Hulett Sugar has successfully undertaken many earnings enhancing actions in this challenging time. These have already started to take effect and, together with additional initiatives that have been identified, place the business in the ideal position to benefit in the years ahead,” said Staude.
Tongaat-Hulett Sugar’s profit from operations, before interest, totalled R184 million (2003: R202 million). This includes dividends from Triangle, the equity accounted share of operating profit at Xinavane in Mozambique and is before restructuring costs. The relatively low sugar crop for the second year in a row, together with the decrease in the South African domestic sugar price late in 2003 and the strengthening Rand’s effect on export realisations, depressed margins in 2004. Sales volumes in South Africa were 464 365 tons with raw sugar export volumes at 291 922 tons. The recent increase in the international sugar price has not yet impacted the financial results.
Sugar production for the 2004 year grew by 2,8% to 1,081 million tons. Production from the South African operations increased by 11% to 724 000 tons while that of Mozambique rose to 85 000 tons. In Swaziland, Tambankulu produced the raw sugar equivalent of 50 000 tons. Triangle Sugar in Zimbabwe produced 222 000 tons.
Actions completed this year by Tongaat-Hulett Sugar include the closure of the Entumeni mill with the diversion of cane to the Amatikulu mill, the closure of the sugar head office, downsizing of centralised services and the reorganisation of the South African milling operations from five mill structures to two regional business units. Restructuring costs of R29 million were incurred in 2004. The Mozambique operations achieved a turnaround with a positive contribution to earnings. Triangle Sugar continues to operate profitably in the difficult Zimbabwean economic and business environment. LOOKING AHEAD – A POSITIVE OUTLOOK
Staude said, “Tongaat-Hulett is an established group of four strategically positioned and focused businesses, with an effective balance of expertise, size, diversity and growth opportunities. A change process is underway, having a positive impact both on how the businesses operate and how Group wide issues are dealt with. The Group has strengthened and invested in its operating companies, all of which have unique competitive positions that cannot easily be replicated. The platform that has been established with these businesses has resulted in the Group now being in an ideal position to deliver substantial earnings growth. This, together with its significant growth opportunities, sees the Group well positioned to deliver value for stakeholders well into the future.”
Tongaat-Hulett is well placed to increase the returns in its businesses and there are signs of improving economic conditions in the areas where it operates. The benefits of the actions being taken across the Group to grow earnings will increasingly be reflected in future financial results. Considerable earnings growth is expected in the year ahead.
Peter Chief Executive Officer
Amanzimnyama, 18 February 2005