CHAIRMAN’S STATEMENT AND CHIEF EXECUTIVE’S REVIEW FOR YEAR ENDED 31 MARCH 2022
*Adjusted EBITDA is operating profit adjusted to exclude depreciation, amortisation, any impairment (or reversal thereof) and fair value adjustments relating to biological assets.
Despite the relative slowdown in annual inflation from 241% in March 2021 to 72.7% in March 2022, the economic environment remains volatile and hyperinflationary. The Zimbabwe Dollar (ZWL) suffered a 69% depreciation on the Foreign Currency Auction System (FCAS) during the period under review. The increased volatility of the exchange rate towards the end of the period under review has made the operating environment challenging. The Company (Hippo Valley Estates Limited) continues however, to pursue value preservation strategies in the hyperinflationary environment. Unemployment remains high, with the bulk of the population managing on the back of informal businesses and agricultural projects. While efforts continue to be made to liberalise the currency regime to ease liquidity challenges and inflation gradually, policy uncertainty and the impact of capital controls continue to hamper economic turnaround.
Over the past 3 months, cases from the Omicron-driven 4th wave have continued to decline globally. This trend has been mirrored within the Company’s operations. Midway through 2021, the Company, in a Public-Private Partnership, embraced vaccination as key in management of the COVID-19 pandemic. This program has been extremely successful and as at 15th May 2022, over 99% of the workforce had been vaccinated. This is ahead of the rest of Zimbabwe generally, where less than 50% of the population is vaccinated. The easing of lockdown restrictions and increased business hours in response to decline in COVID-19 cases is expected to continue aiding economic recovery efforts.
Cane and sugar production (tons) for the year ended 31 March 2022
Cane deliveries from the Company’s plantations (miller-cum-planter) decreased by 14% from prior year. This was mainly due to lower yields that emanated from a combination of yellow sugarcane aphid infestations and water logging of soils induced by incessant rains received between December 2020 and March 2021 that adversely impacted crop development.
In addition to this, early start-up of the milling season in April 2021 resulted in crushing of younger cane occasioned by a strategic decision to reposition the milling season so as to maximise growing and milling efficiencies in future seasons. Private farmer deliveries improved by 31% due to an increase in area harvested largely attributable to new developed area under the Kilimanjaro project and ‘carry-over’ cane from the previous season. Overall, total cane milled was in line with prior year, as the drop in miller-cum-planter was offset by private-farmer deliveries. Sugar produced by the Company increased by 3% due to better cane quality and favourable mill efficiencies. The requisite off-crop maintenance work was satisfactorily carried out from December until start-up of crushing season in May 2022 thereby positioning the mill for improved performance in the 2022/23 production year.
The Zimbabwe sugar industry has a single marketing desk at brown sugar level, administered by Zimbabwe Sugar Sales (Private) Limited (ZSS). The Company’s share of total industry sugar sales volume of 394 000 tons (2021: 440 000 tons) for the year ended 31 March 2022 was 53.2% (2021: 50.0%). Total industry sugar sales into the domestic market for the year at 356 000 tons (2021: 325 000 tons) were 10% higher than prior year, driven by strong domestic demand. Industry export sales however, decreased by 67% to 38 000 tons (2021: 115 000 tons) following redirection of supply to the local market in view of the increased demand. Price realisations on the local market also remained firm in current purchasing power terms. While local market USD sales were firm at the beginning of the year, these subsequently slowed down owing to limited availability of foreign currency within the economy. Management continues to align local prices to changes in cost structures where possible.
The financial results of the Group have been inflation adjusted to comply with the requirements of IAS 29 Financial Reporting in Hyperinflationary Economies (‘IAS 29′). As such, the commentary on financial performance is based on inflation adjusted financial results except for revenue, operating profit and adjusted EBITDA where commentary is based on both historical and inflation adjusted financial results. Historical figures are included as supplementary information alongside the inflation adjusted financial results to enhance comprehension and analysis. In complying with the requirements of IAS 29 and IAS 21: The effects of Changes in Foreign Currency Rates, the Directors applied, where appropriate, necessary judgements and assumptions with due care. However, users are cautioned that in hyperinflationary environments inherent economic distortions may have an impact on these financial statements. As such, the Directors would like to advise users to exercise caution in the use of these abridged inflation adjusted financial statements in relation to the reporting currency and conversion to comparative currencies.
In historical terms, revenue recorded a 76% increment to ZWL22,7 billion (2021:ZWL12,9 billion) driven by positive market and product mix. Operating profit improved by 62% from ZWL6,2 billion to ZWL10,0 billion. Adjusted EBITDA receded by 15% from ZWL3,6 billion to ZWL3,1 billion, weighed down mainly by raw material costs and currency dynamics. The increase in raw material costs was driven by global commodity price increments compounded by the conflict between Russia and Ukraine. The change in mix of cane supply emanating from increased deliveries from private farmers also contributed to increased operating costs, as private farmer associated costs are relatively high.
Inflation adjusted revenue increased by 4% to ZWL30,1 billion (2021: ZWL28,9 billion), furthermore, operating profit and profit for the period increased by 29% to ZWL6,3 billion (2021: ZWL4,8 billion) and by 38% to ZWL4,1 billion (2021: ZWL3,0 billion) respectively. Adjusted EBITDA decreased by 49% to ZWL3,1 billion (2021: ZWL6,1 billion) owing mainly to the currency dynamics embedded in the Consumer Price Indices.
Net cash outflow from operating activities was ZWLO,05 billion, compared to prior year net cash inflow of ZWL3,3 billion occasioned by decreased EBITDA. Capital expenditure was ZWL857 million (2021: ZWL631 million) out of which ZWL312 million (2021: ZWL389 million) was for root replanting. As a result of the decreased EBITDA, the Company had a net borrowing position of ZWL457 million at 31 March 2022 compared to a net cash balance of ZWL1,5 billion in prior year.
The Board declared and paid an interim dividend of ZWL108 cents per share during the year ended 31 March 2022. In view of the uncertainties that prevail in the economic environment coupled with the desire to ensure that adequate working capital is maintained in the business, the Directors have not declared a final dividend for the year ended 31 March 2022.
Environmental, Sustainability & Governance
A total of 7 (2021: 4) Lost Time Injuries were recorded during the year, and a Lost Time Injury Frequency Rate of 0,063 (2021: 0,036). Regrettably, the Company witnessed 1 fatality (2021: nil) following an animal attack during an anti-poaching exercise in Mteri Game Park. This resulted in restructuring of the Game Park in order to ensure a better equipped anti-poaching unit. The year also saw resumption of certain activities that had been put on hold due to COVID-19 restrictions, as such several measures are being put in place to re-conscientise employees on safe work behaviour in response to this and the relatively unsatisfactory safety performance recorded.
During the year under review, the Company was however recognised and awarded as one of the top 100 Sustainable and Responsible businesses in the nation for its sustainability initiatives that continue to benefit not only the employees, but the communities around it. The Company is at an advanced stage of acquiring FSSC 22000 certification for its main production line of SunSweet brown sugar. To date, the system has been fully documented and verified through internal audits.
The Company continues to make efforts to strengthen its corporate governance and inculcate a culture of integrity and ethics daily in line with one of its key values. During the year, several audit findings were closed and new policies and procedures were introduced in order to enhance the control environment.
Projects and Initiatives
Hippo Valley Estates Limited, in partnership with sister company Triangle Limited, Government and banks continue to progress the cane expansion project, Project Kilimanjaro. Government has since allocated 700ha of the developed sections of the 4 000ha Kilimanjaro Project to 41 new beneficiaries as part of the economic empowerment and social transformation process. Harvesting of the 562 ha fully planted is in progress with a yield of 121 tons cane per hectare having been realised to date, whilst the balance of 138ha is currently being planted to complete the Empowerment Block. Development on the remaining 3 300ha (of which 1931ha are fully bush cleared, land preparations and other infrastructure substantially progressed) remain on hold pending resolution of tenure issues relating to this block, which are being progressed with Government, further to which appropriate funding mechanisms will be put in place.
In order to further contribute to socio-economic transformation and to facilitate inclusion of more local farmers in the sugar value chain, the Company together with Triangle Limited, is actively assisting new farmers who have been allocated virgin land with clear water rights and in areas close to the mills, with technical and commercial feasibility studies, mobilization of funding and where required actual development of the land to sugarcane on a full cost recovery basis. Good progress has been made with respect to the development of 1 168ha of Pezulu Project with one local bank having availed US$5,2m (about 50% of the total development cost) with other banks indicating a willingness to fund the balance.
Following recommendations from the Ministry of Industry and Commerce, a Tribunal constituting of three arbitrators was set up to determine commercial issues relating to the sugar milling agreement for the 2022/23 milling season. The arbitration is at an advanced stage, with anticipation of concluding the process within the current milling season.
The inputs and extension support to private farmers is ongoing. The Company continues to implement various vertical and horizontal sugarcane growth programs. A partnership framework whereby Tongaat Hulett Zimbabwe is co-managing certain underperforming out-grower farms is progressing satisfactorily. To date, 61 farmers have volunteered to partner with the Company in the co-management arrangement. Under the co-management framework some 593ha have been ploughed out and replanted to new roots.
Further to the previous update on progress with regard to land tenure, the Company is encouraged to advise that as at 30 June 2022, the Minister of Lands, Agriculture, Fisheries, Water and Rural Development (Ministry) had initiated the process for the issuance of 99-year leases with 3 lease blocks (out of a total of 8 lease blocks) issued in respect of Hippo Valley North. In consultation with the Ministry, the Company has requested certain changes to be effected on the lease documents, a process now being undertaken by Government Attorneys.
The Minister has assured the Company that the balance of leases will be signed once the review of the 99-year lease document has been completed. The Company is appreciative of the continued support it is getting from Government on this matter.
During the period under review James Pasipano Maposa, a long-serving and dedicated independent Non-Executive Director, passed away. The board wishes to express its condolences to James Pasipano Maposa’s family and also gratitude for the time served. Further, Lennox Bruce retired and Simon Harvey and Owen Hopelife Manasah resigned from the Board. The Board is grateful for their valuable contribution during their tenure and wish them well in their future endeavours.
The Board appointed two new independent Non-Executive Directors Nyasha Jill Jacqueline Mangwiza and Dudizile Kereditse Shinya, a new Non-Executive Director Tendai Masawi and a new Finance Director, Tapera Masarakufa. The Board will seek ratification of these appointments at the fourthcoming Annual General Meeting.
With Tugwi-Mukosi and Mtirikwi Dams close to full capacity, the industry is set to accelerate opportunities for horizontal expansion with new sugarcane projects, feeding off this robust water system, mainly for the benefit of new farmers who are keen to supply the cane to the mills. Water supply to the Mkwasine out-growers is however currently constrained on account of challenges on the Siya-Manjirenji system, with ongoing work to attend to the issue. The industry is also working closely with the Zimbabwe National Water Authority to enhance the industry water conveyancing infrastructure, to cope with the increasing farming and irrigation activities in the Lowveld. Significant improvements in yields on existing farms are expected in coming years at the back of continued technical support being extended to the farmers by the Company and the Zimbabwe Sugarcane Experiment and Research Station (ZSAES) in replant programmes, introduction of new varieties, focus on best farming practices and mechanization. The resultant increase in cane supply to the mills should improve operating efficiencies and cost competitiveness. The current crop is projected to yield more than the prior season following improved irrigation regimes, repairs to pumping installations and proactive initiatives to contain the yellow sugar cane aphid discovered in the region.
Although local demand for sugar remains strong as industry recovers from the impacts of COVID-19, the sugar industry is engaging authorities to ensure an even competitive playing field against cheap imports of sugar originating from surplus producers who enjoy duty protection in their host countries. This is also in an attempt to safeguard the health of the local population as some of the sugar imported is not Vitamin A fortified, as required by law. The substantial off-crop maintenance programme has been successfully completed and the mills have started the new season well with focus being on increasing production and capitalising on efficiencies.
Operating and trading conditions are likely to remain challenging in the current milling season, with farmers and millers contending with high cost pressures on account of both local and global inflationary dynamics, exchange rate volatilities, high cost of funding and supply chain bottlenecks, resulting in pricing of local products difficult in the short to medium terms. Procurement strategies for key raw materials have been enhanced and the Company anticipates being able to secure the critical inputs required for operations. It is also pleasing to note that the Government is open to engagements with the industry on the key issues of duty-free imports of sugar and appropriate pricing models to ensure that the industry remains viable whilst protecting consumers.
By Order of the Board
C F Dube
Chief Executive Officer
25 August 2022
Hippo Valley Estates 2022 Annual Report.pdf