Tongaat-Hulett takes action to counter effects of strenghthening rand

Peter Staude, Chief Executive of Tongaat-Hulett said today that all the Group’s businesses have substantial future earnings improvement opportunities to be unlocked by management actions. The focus is on accelerating the execution of these actions to counter the effects of current conditions. These actions include volume growth initiatives, restructuring and cost reductions, rationalisation of facilities and optimisation of capacity utilisation.

Staude was commenting on Tongaat-Hulett’s trading statement released on SENS. Conditions for the year to date are such that the Group expects both earnings per share and headline earnings per share for the year ending 31 December 2003 to be substantially below those of the year ended 31 December 2002. At the current exchange rate and maize price, Tongaat-Hulett expects to report a headline loss for the year to 31 December 2003.

Tongaat-Hulett has previously advised shareholders of factors that impact on its results and it has distinguished between underlying operating profit and valuation items in the income statement. The interim results to 30 June 2003 included valuation adjustments that exceeded underlying operating profit and a headline loss of R190 million was reported. The exchange rate has moved well below the level of R7,50 per US dollar, which prevailed at 30 June 2003. The underlying operating profits earned by the Group for the year continue to be countered by substantial negative valuation adjustments, which arose predominantly in the first half.

At 30 June 2003, negative valuation adjustments of R375 million were reported for the first half of the year. At current exchange rates, there are further negative valuation adjustments mainly on offshore cash holdings and export debtors. At the current maize price, the charge in the income statement to 30 June 2003 in respect of the valuation of maize procurement contracts has not changed significantly. The maize futures position is being shortened in the second half of 2003 as the procurement contracts are managed for physical delivery during 2004.

Staude commented further that revenue is benefiting from sales volume growth. This is being offset by the negative impact of the movement in the exchange rate on export revenue, as well as by reduced domestic selling prices in the face of import threats. The low rainfall and the resultant reduced sugar production in South Africa, as well as a low world sugar price are negatively impacting underlying operating profit. The recently announced Moreland – IFA property transaction has boosted operating profit. Hulett Aluminium has achieved record sales volumes in the past quarter. A dividend of US dollar 2,75 million has been received and brought to account from Triangle Sugar Zimbabwe.

Tongaat-Hulett’s annual results for the year ending 31 December 2003 are expected to be released on 23 February 2004.

Possible closure of Tongaat-Hulett Sugar’s Entumeni sugar mill

The sugar industry in South Africa is facing its most extreme challenge in recent history brought about by a number of factors coming together at the same point in time, comments Tongaat-Hulett Group CEO Peter Staude. The most important of these factors being:

• The strengthening of the rand against the US$ to a level last seen early in 2000, together with cost push pressures since 2000 have rendered the industry less competitive in US$ terms. For example salary and wage levels are today 39% higher than they were in early 2000.
• The “dumped” world market price, at which less than 25% of the world sugar is sold, is at its lowest level in recent years in US$ terms.
• The recently announced reduction in the domestic market sugar price.
  

This environment has been exacerbated by poor rainfall in many parts of the cane belt with production in some of the worst affected areas reaching full-blown drought status.

At Tongaat-Hulett Sugar every action is being taken to deal with the challenges. This has resulted in the announcement today by Bruce Dunlop, Managing Director of Tongaat-Hulett Sugar, that the company has initiated consultations with Entumeni mill employees, their representative Unions and cane growers regarding the company’s proposal to close the Entumeni sugar mill.

The Entumeni mill is the smallest of Tongaat-Hulett Sugar’s 5 sugar mills in South Africa representing approximately 5% of the 9 million ton crushing capacity and has a complement of 120 permanent employees. The mill is Tongaat-Hulett Sugar’s highest cost producer and as such is not able to compete effectively, despite the best efforts of all concerned. Tongaat-Hulett Sugar has considered a number of alternatives for Entumeni’s future but believes that its continued operation cannot be justified in terms of the company’s drive to lower its production costs to meet the considerable challenges ahead.;

In order to face the challenges upon the industry, Tongaat-Hulett Sugar will continue to pursue strategies to lower its cost of production. One of the keys to achieving low cost production on an international scale is to ensure that milling capacity is fully utilised given the capital intensity and fixed cost nature of sugar milling. The proposed rationalisation of milling capacity, by closing the Entumeni mill and accommodating its cane supplies at the other Tongaat-Hulett Sugar mills, will contribute to lowering THS’ overall cost profile and improving its competitiveness.

In commenting on the possible closure of the Entumeni mill, Peter Staude said that this was just one of the initiatives being taken by Tongaat-Hulett Sugar. Every aspect of the business is being re-examined and actions will be executed to mitigate the impact of the current situation.

Hulett Aluminium questions background to Alcoa’s antidumping petition

Hulett Aluminium, the South African based producer of aluminium rolled products, with a rolled products worldwide market share of less than 1,2%, questions the background to an antidumping petition filed against it in the United States by Alcoa, the world’s largest aluminium producer.

The market segment cited by Alcoa in its antidumping petition constitutes less than 1% of the total United States market for aluminium rolled products and Hulett Aluminium has expressed its surprise at Alcoa’s claim of injury to the local industry.;

The fall off in demand in the related aerospace sector, in which Alcoa has the major market position, has led to downward pricing pressures in the engineering, tooling plate and die applications sector cited in the antidumping petition.;

The particular product specified by Alcoa is aluminium rolled plate, alloy 6061, with a thickness greater than 0.25 inches (6,3mm), which is not sold in South Africa by Hulett Aluminium.;

No petition has been filed against Chinese and Russian producers who tend to offer the lowest prices in the United States.

Hulett Aluminium will defend the antidumping petition filed by Alcoa.

Tongaat-Hulett impacted by valuation items at half-year

Tongaat-Hulett announced that the strengthening of the Rand and the reduction in commodity prices, especially maize, together with the consistent application of accounting statements AC133 and AC112 would lead to a substantial charge to the income statement for the period to 30 June 2003. This announcement is being made ahead of its release of half-year results as the impact of the valuation adjustments relating to the recognition and valuation of certain contracts and balance sheet items can now be determined.;

African Products has secured maize to meet customers’ requirements through to late 2004. The mark-to-market valuation adjustments due to a 40 to 45 percent decrease in the maize price in the last six months, to a level below farmers’ input costs, will result in a charge to the income statement of R255 million.;

African Products has followed a consistent strategy of securing the bulk of its maize requirements during the maize planting season and does not buy on speculation. The focus is on price stability, the genetically modified free status of the maize, locality and other quality issues. Maize is purchased from various sources, including direct purchases from farmers, contracts with traders and the use of the futures market. An element of African Products’ procurement has been a hedging strategy that reduces the impact when maize prices rise while keeping the maize price stable into a second season if the market price falls.;

Cash continues to be held offshore for growth opportunities and the application of the exchange rate at 30 June 2003 will result in a reversal of R61 million of previous unrealized translation gains.

There are also ongoing and less significant impacts arising, inter alia, from the valuation of export debtors, inventories, foreign loan hedges and financial instruments.;

The magnitude of all period end valuation adjustments is such that it will exceed core underlying operating earnings for the half-year. This will result in a loss at the headline earnings level for the six months to 30 June 2003.;

Operating margins remain under pressure and each of the Group’s businesses is implementing actions to improve profitability.

The unaudited results for the half-year ended 30 June 2003 will be released on 4 August 2003.

Graph of comparative maize prices

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Tongaat-Hulett re-commissions a sugar mill in Mozambique

Tongaat-Hulett will be holding a ceremony to mark the re-commissioning of its rehabilitated sugar mill at Xinavane in Mozambique on 6 June 2003.

The Xinavane Sugar Mill, jointly owned by Tongaat-Hulett Sugar (49%) and the Government of Mozambique (51%), is situated approximately 136km north-west of Maputo.;

The replacement value of the sugar mill and surrounding sugar cane estates (6 300 hectares) is estimated to be well in excess of R500 million. In the 2003 season, the Xinavane Sugar Mill will produce 52 000 tons of VHP raw sugar, crushing at 132 tons of cane per hour in a 30-week crushing season. Plans are in progress to expand the factory to 150 tons of cane per hour by 2005, increasing the capacity to 70 000 tons of sugar in a 30-week crushing season. In the longer term, there are plans to double the annual capacity of the mill to 140 000 tons of sugar.

His Excellency, the President of the Republic of Mozambique, Joaquim Alberto Chissano, will open the rehabilitated mill.

Announcement – Directors

Two Executive Directors, Messrs DG Aitken and JB Magwaza, have reached retirement age after playing a leading role throughout Tongaat-Hulett for many years.

Mr JB Magwaza, who joined Tongaat-Hulett on 1 January 1975, will retire with effect from 31 July 2003. He will remain on the Tongaat-Hulett Board as a Non-Executive Director.

Mr DG Aitken, who joined Tongaat-Hulett on 23 June 1969, will relinquish his responsibilities as Group Financial Director on 30 September 2003. He will remain a Director of the Tongaat-Hulett Board for a further five months until his retirement on 29 February 2004.

Mr MH Munro, who is currently the Financial Director of Hulett Aluminium, has been appointed Group Financial Director and an Executive Director of the Tongaat-Hulett Board with effect from 1 October 2003.

Annual general meeting trading update

At the annual general meeting of the company held today the following statement was made:;

“In recent years, the Group’s investments in major manufacturing projects in Southern Africa have generated the planned growth in sales, boosted by exports, and while many new opportunities in marketing and sales have been created, the Group’s results are now more sensitive to exchange rate fluctuations. The movement in the Rand is not helping us at the moment; it continued to strengthen in the first quarter of 2003 and in that period, the domestic maize price almost halved. The financial effects of the application of AC 133 on maize procurement contracts are currently being assessed. Furthermore, a lower sugar crop is expected this year following poor rainfall in the cane growing areas. Earnings for the first six months of 2003 are therefore likely to show a major reduction, with some improvement expected during the second half.

Against the background of an uncertain world economy and exchange rate volatility, our underlying operations remain sound, with continued growth in sales revenues. Management is focused on reducing overheads, minimizing expenditure and maximizing cash flows.;

The Group’s balance sheet is strong and despite the anticipated setback in earnings, the Group will endeavour to maintain its interim dividend for the half year.”

Tongaat-Hulett Group reports strong growth for financial year

The Tongaat-Hulett Group reported strong growth in volumes, revenue and operating earnings for the year to 31 December 2002, assisted by the weak rand which prevailed generally throughout the year but which had strengthened significantly by year end.

Speaking from Amanzimyama, the Group’s headquarters at Tongaat in KwaZulu-Natal, CEO Peter Staude said revenue from continuing operations rose by 22 percent to R6,1 billion and operating earnings were 24 percent higher at R738 million. The year-end valuation of underlying reserves of GBP 42 million pertaining to offshore cash resources resulted in an unrealised translation loss of R151 million, compared with a corresponding gain of R255 million last year. This has resulted in headline earnings per share declining by 36 percent. Excluding the translation adjustment, headline earnings per share increased by 30 percent to 523,4 cents.

The Group was in a net cash positive position for the first time since the commencement of the major investments in African Products and Hulett Aluminium. Over the past two years, the Group has approved some R550 million for investment in projects all focussed on unlocking more value from existing businesses. The board has declared a final dividend of 190 cents per share, which, together with the interim dividend of 80 cents per share, amounts to an unchanged total dividend for the year of 270 cents per share. The balance sheet remains healthy with a further increase in shareholders’ equity to R4,6 billion. Net borrowings have declined from R377 million at the start of the year to a closing net cash position of R7 million.

African Products, delivered a strong performance in 2002, overall volumes grew from 578 000 tons in 2001 to 616 000 tons driven by a 10 percent growth in domestic sales. A drop in export volumes from 71 000 tons in 2001 to 64 000 tons, precipitated by the high maize price and a strong rand was offset by an improved product mix that realized higher margins. Operating earnings for the year before interest grew to R220 million.

In a year in which the international aluminium market has seen depressed demand and pressure on margins, Hulett Aluminium increased revenue by 28 percent to R3,2 billion showing a 35 percent compound annual growth rate over the past three years. Rolled products sales volumes in the last quarter improved significantly and were 23 percent ahead of average sales in the first nine months of the year. Operating earnings before interest grew by two percent to R272 million, the Group’s 50 percent share of which amounted to R136 million (2001 – R134 million).

Moreland, widely acknowledged as having created one of South Africa’s leading property growth nodes in Durban, achieved a strong cash flow performance in 2002 and increased revenue by eight percent to R146 million in spite of four interest rate hikes and high property rates on vacant land in Durban.

Tongaat-Hulett Sugar delivered particularly impressive performance increasing operating earnings by 49 percent to 420 million for 2002. This was achieved through higher cane and sugar production, improved export realizations as well as higher returns and restructuring in Swaziland and Mozambique.;

Triangle Sugar, in Zimbabwe, which is accounted for to the extent that dividends are received, continues to operate resiliently in a demanding environment. In 2002, dividends received from Triangle totalled R71 million (2001 – R76 million) net of withholding tax, representing a seven percent reduction on last year. Difficult trading conditions are likely to persist in 2003, underpinned by concerns over the future remitability of dividends from Zimbabwe.

The Group has adopted AC 137 (Agriculture) and as a consequence no longer accounts for its sugar operations on a seasonal basis. In addition, maize futures and option contracts are accounted for as derivatives or cash flow hedges where the requirements for hedge accounting have been met. Comparative figures have been restated for the accounting policy changes, where applicable. The adoption of AC 137 and the change in accounting policies in relation to the sugar operations, maize futures and option contracts has resulted in comparative figures being adjusted where applicable and had a R9 million favourable effect on the prior year’s earnings after tax and resulted in equity reducing by R18 million, property, plant and equipment by R84 million, working capital by R89 million and deferred tax by R14 million with increases in growing crops of R132 million and financial assets of R9 million. Current year earnings after tax have increased by R9 million as a result of the change in accounting policies.;

Staude is confident that the Group is well positioned to continue to deliver strong growth in revenues while at the same time reduce its cost base. He pointed out that the Group’s results are increasingly impacted by changes in the value of the rand. Should the rand remain at current levels, earnings for 2003 will be lower than those for 2002.

Tongaat-Hulett Group unlocks value from investments

The Group’s three internationally competitive businesses – starch & glucose sugar, and aluminium – have produced good earnings growth in the six months to the end of June 2002.

“The Group is unlocking substantial value from its recent major investments in African Products and Hulett Aluminium with strong operating earnings growths from both these divisions,” said Peter Staude, CEO of the Tongaat-Hulett Group.

Revenue from continuing operations rose 17 percent to R3 billion, and earnings were up 28 percent at R350 million after dividends from Triangle were received and net interest paid.;

As expected the strengthening of the rand to June this year has had an adverse effect on headline earnings, which nevertheless rose seven percent.

Had it not been for a loss of R57 million on the translation of £41 million in strategic cash resources, headline earnings would have risen by 34 percent.

On the other hand strong divisional cash flows enabled the Group to substantially reduce its net borrowings from R377 million to R161 million during the interim period.

In addition the board has decided to adjust the ratio between the interim and final dividends and has declared an increased interim dividend of 80 cents per share (2001: 62 cents).

African Products achieved a growth in revenue of 43 percent and in operating earnings of 83 percent.;

“Under pinning this performance was a strong 11 percent growth in the local market for starch & glucose products, which was partially driven by improved customer exports and import substitution, a doubling in export earnings boosted by a weaker rand, and the maintenance of the average maize input costs at well below the prevailing market prices,” said Staude.;

Sugar production from all operations is expected to rise by 13 percent to 1,25 million tons. South African operation’s contribution is expected to be 840 000 tons (last year actual production was 756 000 tons) while the higher cane and sugar production in Swaziland and Mozambique are increasingly contributing towards improved earnings.

Despite the deteriorating socio-economic conditions in Zimbabwe the operation there is expected to produce 280 000 tons of sugar, an increase of six percent on last year’s figure.

The Group has, to date, received R31 million in dividends from the Zimbabwe operation, however it cautions that the difficult economic and business environment may impact on receipts in the second half of the year.

Hulett Aluminium continued to produce outstanding results, increasing revenue by 20 percent to a record R1,5 billion, while earnings before interest and tax were R176 million up 52 percent compared to the corresponding period in 2001. The Group proportionally consolidates 50 percent of Hulett Aluminium.

These results were achieved despite difficult market conditions with international demand and margins in dollar terms being at their lowest level for many years.

” The business is steadily improving its sales mix as it moves up the product profitability curve, growing its capability to produce products with more challenging and stringent quality requirements. It continues to improve its market share in key targeted product groupings and geographic locations,” said Staude.

While the Group remains on track to deliver strong growth in volumes, revenue and operating earnings, it cautioned that headline earnings would be significantly influenced by the value of the Rand for the remainder of the year.