Johannesburg - Illovo Sugar, Africa's biggest producer of the sweetener, says headline earnings per share dropped 58 percent in the first half as sugar production locally dropped 10 percent because of the ongoing drought, and it experienced pressure on export prices.
In its results announcement for the six months to September, published on Monday morning, the sugar producer also notes operating profit declined 37 percent. The company did not declare a dividend.
However, it added, its diversification strategy rationale was positively underscored by growth in downstream profits and regional sales volumes increased-diversion away from the European Union.
Illovo notes the “tough commercial environment and a change in the timing of sales” trimmed revenue 7 percent to R5.5 billion and weighed on its operating margin, which dropped from 23.5 percent to 16.1 percent.
Headline earnings per share came in at 71.7c.
It explains the lower than usual rainfall not only reduced yields, but also increased vulnerability to pest and disease such as yellow aphids. In South Africa, the drought has reduced the total cane supply to the group's factories by 20 percent on a comparable year-on-year basis. Flood damage suffered in Mozambique during January 2015 further decreased late season cane supply.
The current drought is the worst SA has experienced since 1992 and has led to several farmers facing bankruptcy as well as several provinces being listed as disaster areas.
Because of these adverse weather conditions, sugar production for the period decreased from 1.28 million tons to 1.16 million tons. In September, the group decided to close its furfural-based nematicide business in the US because of protracted difficulties in obtaining registration with the US Environmental Protection Agency for application of the product on food crops. A loss of R216 million was recorded on the closure of the business.
Commenting on the results, MD Gavin Dalgleish says the “business challenges of regional drought, sustained pressure on export sugar prices and reduced demand for sugar in Malawi continue to weigh on the business performance”.
Despite this, its downstream business delivered a strong operational and financial performance, while the group continued to improve the sales mix away from the European Union by growing regional sales volumes in key markets, he says.
Dalgleish adds cost-reduction, efficiency improvement and the culture of doing more with less has become further embedded in the business.
Looking ahead, Dalgleish noted forecasts for sugar suggest there will be a global production deficit this year which - together with market speculation - has moved prices off seven-year lows. This, as well as its initiatives to improve the sales mix and to develop regional markets, will benefit the full year earnings, he adds.
“Structural cost reduction programmes will continue to build on the good results achieved to date".
Illovo expects full-year sugar production to be 10 percent lower than last year.
It expects headline earnings per share for the year to March to be between 25 percent and 45 percent lower than the previous year, while its closure of its US plant will drop earnings per share by between 50 percent and 70 percent.
“While this interim reporting period has been extremely difficult on a number of fronts, the consistent on-going growth in world and African sugar consumption, the expectation of a global production deficit, shift in sales mix away from the EU and operational efficiency improvements signal improved medium-term prospects,” it says.
IOL