Sasini Limited (SASN.ke) 2019 Annual Report

We have Extracted the Chairman’s Statement from the 2019 annual report for Sasini Limited (SASN.ke), listed on the Nairobi Securities Exchange: 

Overview

The Group’s performance for the financial year ended 30 September 2019 was disappointing compared to the prior year. The Group recorded a loss after tax of KShs 337.7 million compared to an after-tax profit of 293.5 million in the previous year.

This has been one of the most difficult years operationally with several challenges ranging from weather related production failures to increases in production costs compounded by drops in global auction prices for both tea and coffee. We recorded failed short rains in the October-November 2018 period at the start of the financial year and subsequently the long rains in the March-May 2019 months were also dismal. This affected all our agricultural activities and meant that from the onset it was going to be a difficult production year for all our crops of tea, coffee, avocado and macadamia.

The main avenue for selling our key products also collapsed from early on in the financial year. The tea auction saw prices that have not been recorded for over 10 years and likewise the prices at the Nairobi Coffee Exchange were well below the planned expectations for the coffee business. In both these cases, we achieved average prices well below our cost of production which meant we went into loss making situations for our main business lines for the whole year.

The avocado business maintained a steady and profitable performance in its 2nd year of full operation but was also heavily affected by a poor crop and harvest due to the failed rains in the year. We shipped 55% of our intended volume as our key catchment areas for fruit were hit heavily by dry weather and therefore related poor yield.

During the year, we launched the macadamia commercial processing and trading having completed the capital investments in the construction of the factory in late 2018. The regulatory processes and the acquisition of prerequisite licences and certification we needed to initiate the business meant we could only start trading in the last quarter of the 2019 financial year. We were able to process all the nuts in shell we had in our opening stocks and embarked on the crucial aspect of identifying, interacting with and building commercial alliances with potential clients for this business line. In years going forward, this business unit is poised to be a central part and contributor to our operations and profits.

We also completed leadership and management changes for the business that saw our new Group Managing Director Martin R. Ochieng’ join us on 1st March 2019, to replace our previous Group Managing Director who left in September 2018. Secondly, we also onboarded our new Managing Director Mr Silas Njibwakale, for our tea business Kipkebe Limited on 1st April 2019 to replace our long serving Managing Director for Kipkebe Limited who proceeded on retirement. These two leaders joined the group middle of the financial year and at a difficult time with the need to drive operational improvements especially in the tea business. On top of the focus needed in the tea business, the new Group Managing Director has embarked on stabilizing the coffee business as well as progressing the avocado venture and launching the commercialisation of the macadamia business unit. I would like to report that they have continued to settle well and the board and the whole organisation are looking forward to their strong contribution in driving our business ahead.

BUSINESS ENVIRONMENT

Tea production during the year declined to 9,318 tonnes of made tea against 10,804 tonnes achieved in the previous year (a drop of 14%). We recovered from the labour strike that had affected our operations towards the end of the previous year and had no significant labour issues during the financial year. We continued to struggle with poor green leaf quality in the initial stages of the financial year which also further exacerbated our price realisation in the market. Our tea sales in the auction dropped to 6,890 tonnes from 8,104 tonnes the prior year, while the teas sold through private treaties also dropped to 2,310 tonnes compared to 2,499 tonnes the prior year.

The coffee estates produced 986 tonnes of coffee compared to 891 tonnes produced in the previous year, a significant achievement in light of the weather-related challenges. To try and mitigate the poor auction prices for both tea and coffee, the business engaged in aiming to sell more of these two commodities privately though the price realisations in the private treaties were not that much better than realisations in the auctions. The average price realized for tea dropped drastically to USD 1.62/kg compared to USD 2.03/kg in the previous financial year. The average price realized for coffee was USD 3.07/kg compared to USD 4.29/kg in the previous year.

The cost of labour has also continued to rise as the labour unions continued to demand higher wages during the year. The pending 4-year CBA discussions were concluded resulting in increases in wages that heavily affected our cost of production.

Comparatively, the annualised cost of production for tea and coffee increased during the year. To initiate measures aimed at addressing this, the company has driven a lot of focus on improvements in green leaf supply both from its own estates and from its out-grower programmes. We initiated the use of technology in tea harvesting to help contain the ever-rising cost of production in our tea business and ensure sustainability going forward.

The company’s Board remains committed to enhancing shareholder value by continuously reviewing operating procedures, mitigating business and organisational risks, innovation and sound technological interventions to ensure the business remains sustainable. In the year under review, the board showed its commitment to the continuity of the business by completing investment into the macadamia and avocado business units, and assisting in the initiation of measures aimed at tackling the cost of production in the tea business through the use of innovative technology.

Collective Bargaining Agreements (CBAs) with Kenya Plantations and Agricultural Workers Union (KPAWU) and its impact on the Cost of Production The tea and coffee industries’ wage negotiations that take place every two years have continued. The pending CBA for the tea industry for 2016, 2017, 2018 and 2019 which had not yet been concluded was concluded and signed during the year at 7%, 8%, 8% and 9% respectively. This has resulted into a continued increase in the cost of production and compelled the company to employ technology in tea harvesting and other cost containment measures in operations and manage costs to enable sustainability of operations now and in the future.

SUSTAINABILITY AND SOCIAL RESPONSIBILITIES

Education/Social Welfare

We continued our focus on education as we see this to be an important investment that we make in the lives of our staff and the surrounding communities where our estates are. The group has four primary schools and one secondary school within the tea plantations and also supports schools around our coffee operations.

In our tea division, we maintain the nursery and primary schools providing free education to the children of employees, dependents and those from the surrounding communities. We drive ensuring that all children of school going age are in school, and strongly support our strict code of not using child labour in any of our business operations.

We continue to support this crucial development goal of education through bursaries, stipends and by providing funds to establish and improve schools near our plantations. We have continued to provide resources such as computers, laboratory equipment, sports kits and basic learning materials to the primary schools on top of giving shoes, mathematics sets and story books to primary school going children.

We have six day-care centres in our tea estates where toddlers are kept busy and fed on a daily basis as their parents go to work. We continue our commitment to improving the welfare of our employees and their families. The group provides social and welfare amenities to all our current population of permanent and seasonal employees of about 4,500 along with over 15,000 of their dependents living within the estates and we commit to continue this crucial aspect of being a good corporate citizen and being supportive to the communities we live and work in.

The group maintains a well-equipped Medical Centre with in-patient and outpatient treatment options within the tea plantations. It also maintains three satellite dispensaries with well-trained medical personnel and a diagnostic laboratory. The facilities also have ambulances on standby in the event that critical cases need to be transported to larger health facilities. These facilities cater for both the company employees and local community residents.

Smallholder Farmers and Community

The annual farmers’ day was held as usual on the 6th of December 2019 at our Kamundu Estate, in Kiambu. We used the opportunity to sensitise our out-grower farmers on financial literacy, sustainable farming techniques and technological interventions in the growing of coffee, macadamia nut and avocado trees as well as new investment options. This event has remained critical to us as we use it to enhance the skill sets of out growers in the three crop areas mentioned above. It has been so successful for us that we have decided to conduct a similar one for our tea out-grower farmers early in 2020. We have seen farmers acquire and implement these new skills resulting in better agronomy practices and ultimately better yields mutually benefiting both the farmers and the company. We have continued to avail new seedlings for tea, coffee, avocado and macadamia as well as fertilizer to support our out-grower programs in the surrounding communities where our estates are.

General sustainability

We view these farmers’ days as crucial contribution to helping our communities tackle poverty, hunger, and improve wealth and well-being. In addition to this, we are committed to improving quality education, advancing gender equality in our employment practices, providing clean water and sanitation in all our facilities, and enhancing life on land by adopting sustainable agricultural practices that ensure we play our part in combating land misuse by promoting responsible consumption and production in our operations. We have continued to stay committed to enhancing environmental sustainability through excellent forest management of the 1.2 million trees we have in our plantations and we will stay focused on this in years to come.

Our Rainforest Alliance certification is active and we have ensured that for both our tea and coffee operations, we adequately address the issues that positively enhance the environmental, social and economic challenges faced by our own tea and coffee estates, out grower farms and the surrounding communities. We have continued to use the knowledge we have acquired over the many years we have been successful in agriculture to inculcate the same sustainable approach in our new crop areas of avocado and macadamia. Having successfully launched both these new crops, we are happy to report that our approach to the new business lines is consistent with our general approach in conducting our traditional businesses under tea and coffee.

LOOKING AHEAD

In 2018, we initiated automated tea harvesting in our Magura tea estate and we continued this in 2019 with the expansion of the tea plucking machines into this estate as well as expanding this to Kiptenden tea estate. We will continue to advance this in our own estates and implement the technology to support the current manual tea plucking in a complementary approach. We continue with training of the workforce towards these new technologies and are confident that we will be successful. Our focus on quality green leaf harvesting and subsequent production of high-quality black tea remains intact.

We go into the new financial year with our avocado and macadamia businesses fully operational. We have continued to plant our own orchards with both crops in 2019 and will continue the planned and periodic roll out into 2020 to guarantee our future supply of both crops to support these business units. Our initial foray into the commercial markets for both crops has been very encouraging and our plans into the future include a strong contribution for our business coming from these two key crops to help diversify our income and reduce our reliance on tea and coffee.

For our traditional crops of tea and coffee, our focus will be driven by our continuous improvements in the areas of quality and strong management of our cost of production. We are confident that this will enhance our competitiveness in the market and give us the price realisations we need to stay profitable. In 2019, under the new Group Managing Director’s guidance, the management of the group and the board worked together to design and approve a new strategic framework that will guide our business operations in the next 3-5 years. Under this new approach, we will focus on six key pillars;

  1. Strongly drive a performance culture in the organisation to help enhance operational planning and execution of all business units;
  2. Continue a sharp focus on, and align the organisation to be, cost prudent in all its operations;
  3. Enhance our focus on commercial aspects to sharpen the organization’s sales and marketing efforts especially for our new business lines of avocado and macadamia;
  4. Increase our focus on talent planning, management, development and retention of our most crucial resource, our people;
  5. Strengthen our fiscal management to ensure sustainable financial health of the organization and be razor focused on managing organisational risk to help ensure organisational growth; and,
  6. Continue to build a compliant business based on sustainable ethics & practices in our commitment to contribute to the sustainable development goals for excellent corporate citizenship.

The Board will work very closely with management to ensure that these goals are driven aggressively and that the business continues to operate in an ethical and sustainable manner. The investment that the board and the company have driven into diversification (avocado and macadamia), ensures that our future is not only based on a stable foundation with tea and coffee but is also diversified into new and growing crop and consumption areas of fruits and nuts.

Acknowledgement

I would like to extend my sincere gratitude to the board members, management and staff of Sasini PLC and on behalf of the Board, sincerely acknowledge and thank our esteemed shareholders and partners for their unwavering support during this very difficult year. Please allow me to assure you all of our commitment in growing the shareholders’ wealth in the company and ensuring your investment remains secure.

Dr.JB. McFie, PhD
Chairman