Illovo 2018 annual report

We have extracted below the Chairman’s Statement from the 2018 annual report of Illovo Sugar (Malawi) (ILLOVO.mw), listed on the Malawi Stock Exchange:

During the 12 month period (September 2017 to August 2018), weather conditions at both estates remained erratic with the agricultural operations subjected to fluctuating periods of exceptionally wet weather particularly at Dwangwa during November to December 2017, and to very dry conditions in January 2018 at Nchalo. Inclement weather also affected the factory start-up for the new season at Dwangwa in April 2018 and also hampered new season operations at Nchalo during July 2018. Despite these periods of extremely wet weather, which raised the level of Lake Malawi, outflows from the lake continued to be restricted resulting in inadequate power generation by the Electricity Generation Company (EGENCO) which impacted on irrigation operations at the estates and those of sugar cane grower communities. The estates and surrounding grower schemes continued to be affected by pests and diseases resulting in additional chemical control requirements. However despite the on-going challenges the company’s own sugarcane yields reflected a pleasing recovery over the previous year. In addition, the benefit of the yield recovery plan at Nchalo, the investment in new and more efficient irrigation methods and the installation of additional complementary power generation sets has also started to deliver positive results. Conversely our smallholder farmers, despite on-going support from the business, are still struggling both financially and operationally and have continued to experience declines in overall sucrose levels in cane. Year on year cane crushed was almost the same at slightly over two million tons from a combination of both own and grower plantations.

Both factories faced challenges throughout the final stages of the 2017 season. Overall recoveries and plant performance were marginally down on expected levels with less sugar being made. The 2017 season closed at Nchalo in mid-November and at Dwangwa, in early December 2017. Offcrop maintenance programs began immediately thereafter. The new season, which commenced in April 2018, saw Dwangwa experiencing a problematic start-up with various plant operational challenges and rain delays, but with Nchalo starting well with excellent cane throughput. Unfortunately, unexpected rains in July affected cane harvesting activities and resulted in reduced cane supply to the mill. Overall year on year sugar production was down 11 000 tons.

With the on-going delivery of the commercial imperatives, including the quality drive along the entire route to consumer and business value chain, and with the continued promotional and customer focused activities by the commercial team, domestic market sugar sales showed very pleasing growth from 60 000 tons for the five month period April to August 2017 to 170 000 tons for the full year September 2017 to August 2018. The prompt assistance from Ministry of Industry, Trade and Tourism and Malawi Revenue Authority officials to actively curb the illegal import of sugar also contributed to the achievement of local market sugar sales growth.

Illovo Malawi’s socio-economic impact within the country remained significant in terms of employment, social investment and contribution to the Malawi fiscus.

With regard to the financial performance for the year ended 31 August 2018, headline earnings totalled K 16.4 billion compared to the preceding five month period, April to August 2017, of K 7.7 billion. Despite pro-active management of debt levels and repayment of some of the foreign debt during the year overall finance costs for the 12 month period September 2017 to August 2018 totalled K 5.9 billion (five months to August 2017 K 1.7 billion).

PROSPECTS

A return to more normal weather patterns, improvements in EGENCO’s power generation ability and in the longer term, the continuing positive effects of the agricultural yield improvement plans at Nchalo, and the development of strategies to return financial and operation stability to the smallholder sugar cane farmers, should result in positive overall improved cane crop yields and sucrose content in cane across all operations.

In terms of milling operations, both Dwangwa and Nchalo factories will continue to build on effective maintenance and capital investment programs and also in on-going people skills and capability development to ensure product quality, sustainability and improvement in operational levels and performance throughout all areas of the factory.

With regard to the commercial environment the business will continue its various successful initiatives in the local direct consumption market and extend the sugar delivery footprint to the wider consumer market. Sugar exports, into very challenging regional and deep water markets, will continue to be an area of focus for the commercial teams who will strive to optimise value in every ton of sugar sold.

Exchange, inflation and interest rate movements, and the debt levels of the company will continue to have a marked effect on overall business profitability. However the on-going performance, efficiency and cost control strategies that have been implemented, and continue to be deployed, will continue to build real business sustainability, improve operating margins and generate positive free cash flows into the future.

G B Dalgleish
Chairman

M A Bainbridge
Managing Director