2005 Interim Results : Building Earnings Momentum – Creating Value
8 Jan 2005HIGHLIGHTS OF THE INTERIM RESULTS FOR THE HALF-YEAR TO JUNE 2005
- Headline earnings of R208 million (2004: R53 million);
- Operating profit of R319 million (2004: R157 million);
- Earnings momentum is building as the strategy of growing earnings from the Group’s four strategically placed and focused operations is being executed;
- Interim dividend of 120 cents per share (2004: 50 cents per share).
BUILDING EARNINGS MOMENTUM – CREATING VALUE
Peter Staude, Chief Executive of Tongaat-Hulett said, “We have strengthened and invested in our operating companies, all of which have unique competitive positions that cannot easily be replicated. The platform that has been established with these businesses ideally positions the Group to deliver substantial earnings growth. The benefits of the multiple actions both completed and underway across the Group will increasingly be reflected in future financial results. This, together with Tongaat-Hulett’s significant growth opportunities, sees us well positioned to deliver value for shareholders as the Group moves forward.”
Staude said, “Hulett Aluminium is in a position where the increasing capacity utilisation yields significantly higher levels of profitability. The business is also moving into a phase of exploiting incremental expansion opportunities and feasibility studies on a number of projects are well advanced. A R54 million expansion of its plate manufacturing facilities was approved in July for a start-up within 17 months.”
Hulett Aluminium increased operating profit to R180 million in the first half of 2005 (2004: R88 million), with the Group’s share being 50% thereof. Rolled Products production increased to 168 000 tons annualised and sales volumes grew by 20% to 172 000 tons annualised. There was encouraging growth of value added exports by customers in the local market. Export sales volumes increased by 19% and sales opportunities well exceed the company’s available capacity. There has been sustained growth in higher value, more demanding export products, as sales of can end stock increased by 37%, closure sheet by 25% and heat treated plate by 15%. The benefit of improved international rolling margins in the first half of 2005 was reduced by the 7% stronger average Rand/US dollar exchange rate. Conversion costs per ton reduced by 15% as a result of greater output and the increase in total rolled products conversion costs being limited to less than 3%. The Rolled Products operation is well on track to further increase volumes in the second half of 2005, towards the full capacity which exceeds 200 000 tons per annum. The extrusion business achieved a sound operating profit performance.
Hulett Aluminium has established a reputation as an independent rolled products producer that is a viable and attractive alternative to the large multinationals and has successfully overcome the high barriers to entry in respect of the manufacture of demanding products at the upper end of the product profitability curve. This provides a sound platform from which to launch further growth opportunities at capital costs per ton of capacity which are considerably lower than the costs of its recent major expansion.
“African Products will benefit from the maize price moving towards export parity. The business is in the process of being re-energised with far-reaching restructuring at all sites. Direct savings of R15 million per annum are projected. The focus continues on opportunities to increase the range of higher value products, with good progress in adhesives and mining product initiatives,” commented Staude.
African Products has converted to the new maize procurement and product pricing model, and earnings volatility from maize valuations has been eliminated. Operating profit of R32 million is comparable to R7 million in 2004. Sales for the first four months were priced when maize was at import parity and this, together with low co-product prices, placed the business under pressure. The maize price moving towards export parity, as a result of the maize surplus in South Africa, started benefiting the business significantly from May 2005. African Products’ profit recovery is progressing. Sales of prime domestic products increased by 3,6% to 183 500 tons, with success in regaining volumes lost to imports. Actions are underway to reduce maize carrying costs, lower fixed costs, increase operating efficiencies and develop new business opportunities.
Staude said, “Tongaat-Hulett Sugar is beginning to reap the benefits of actions that have been taken over the past eighteen months and which are ongoing. These actions have enhanced first half earnings by R39 million and include rationalisation of milling capacity, reduction in milling costs, cane procurement projects, head office closure, greater leveraging of the Huletts® brand and other refining value chain initiatives.”
Tongaat-Hulett Sugar’s operating profit increased to R83 million (2004: R29 million) before Triangle dividends and restructure costs. Sales volumes in South Africa at 215 430 tons (2004: 211 767 tons) and raw sugar export volumes at 172 680 tons (2004: 120 345 tons) have increased due to growth in the domestic market and the sale of higher export stocks carried into 2005 from 2004 production. The small, drought-affected South African crop harvested in 2004 was nevertheless larger than the 2003 crop. The increased production volume resulted in a decrease in the cost per ton of sugar carried forward and sold in the first half of 2005. This, together with the improved sales tonnages and export realisations, has increased margins. Second half earnings are expected to improve with the higher 2005 sugar production and increasing benefits from the earnings enhancing initiatives. A Rand/US dollar exchange rate at R6,60 and a world sugar price above 9 US c/lb will improve export realisations per ton by approximately 11% in the second half of 2005.
Tongaat-Hulett’s sugar production for the 2005 year is expected to grow by 12% to 1,2 million tons. Production from South African operations is estimated to increase by 11% to 802 000 tons sugar (2004: 723 000 tons) while that of Mozambique is expected to rise by 28% to 109 000 tons (2004: 85 000 tons). In Swaziland, Tambankulu is expected to produce the raw sugar equivalent of 52 000 tons (2004: 50 000 tons). Triangle is expected to produce 250 000 tons of sugar (2004: 222 000 tons).
Tongaat-Hulett owns 23 000 hectares of cane land in South Africa of which 11 600 hectares are potentially under urban or tourism development demand. The Group has the expertise and competence to manage the dynamics of optimising cane supplies when conditions favour sugar production and unlocking substantial value from its land holdings when circumstances support property development. This value creation is currently occurring on the KwaZulu-Natal coast north of Durban, with Moreland’s established position being a key success factor. The current assessment of the value of the Group’s land, once developed by Moreland, exceeds R3 billion.
Staude continued, “Moreland is enhancing the value of the Group’s prime properties from the world class development platform it has established over the past decade. It is playing a key role in unlocking the potential of the Durban/Richards Bay coastal strip, making it one of Southern Africa’s fastest growing development corridors.”
Moreland’s operating profit for the half-year was R77 million (2004: R117 million). The industrial and commercial portfolios delivered strong performances. The resorts portfolio started benefiting in June from replenished stocks. The residential portfolio’s performance was lower mainly due to the delay in obtaining development approvals for the La Lucia Ridge Executive Village site, which are expected to occur in the second half of the year. The KwaZulu-Natal and Durban economies are growing strongly and with anticipated Government focus on growth and infrastructural spend, particularly in the run-up to the 2010 World Cup, this is expected to be sustained for the foreseeable future. The strength of the KwaZulu-Natal property market is expected to continue, with relatively low interest rates and the continual broadening of the market boding well for good performances across all portfolios. Progress has been made in securing environmental impact, zoning and development approvals for a number of major projects to ensure that sufficient serviced stocks are available to capitalise on demand. New phases of current projects and new niche projects are scheduled to be launched within the next six months. Negotiations are already underway on a few large sites at Mdloti South, Sibaya and Umhlanga Triangle.
A POSITIVE OUTLOOK
Staude concluded, “Tongaat-Hulett is growing earnings, benefiting from management actions both completed and underway across the Group and capitalising on the improved economic conditions in the areas where it operates. Actions include proactive optimisation of capacity utilisation, enhancement of sales mix, improvement of raw material procurement, growth of volumes, reduction of costs and capitalising on the Group’s property development platform. The benefits will increasingly be reflected in future financial results. Considerable earnings growth is expected to be reported for thr full year”
Chief Executive Officer
1 August 2005