Illovo Sugar : 2016-06-03 Illovo Preliminary Report for the year ended 31 March 2016

Microsoft Word - 2016-06-02 Web Interim Report for the six months ended 30 September 2015 (4) 31May16.docx

ILLOVO SUGAR LIMITED

(Incorporated in the Republic of South Africa) (Registration number 1906/000622/06) Share Code: ILV

ISIN: ZAE000083846

("Illovo" or "the Company")

PRELIMINARY REPORT FOR THE YEAR ENDED 31 MARCH 2016 Salient Features

• Low export sugar prices and weak domestic demand, particularly in Malawi

• Group sugar production down 14% due to direct and indirect drought effects

• Operating profit decreased by 14.8 % and headline earnings per share by 36.5%

• Downstream diversification rationale, evidenced by 26% growth in downstream operating profit

• Good progress in evolving sales mix away from the EU market

• Record ethanol production and electricity co-generation

• Pleasing cost efficiency gains through continuous improvement

Quote:

Gavin Dalgleish, Managing Director, commented:

"The 'perfect storm' of sustained low export sugar prices, reduced domestic demand in Malawi, currency volatility and high interest rates in various jurisdictions, exacerbated by the impact of the regional drought on sugar production, weighed heavily on business performance. Nonetheless, the downstream business delivered a strong financial performance, while the group continued to improve the sales mix away from the EU by growing sales volumes in key regional markets. Cost-reductions, efficiency improvements and the culture of doing more with less have become further embedded in the business.

Forecasts of the global sugar production deficit for 2015/16 continue to grow, which together with a strengthening Brazilian Real has contributed to a recent recovery in world market prices, off seven year lows. Good progress has been made in improving the sales mix,

developing regional and domestic markets and structural thereby mitigating some of the downside to these results."	cost reduction programmes,
Enquiries: Illovo Sugar Limited	031 508 4300
Gavin Dalgleish, Managing Director, Mohammed Abdool-Samad, Financial Director, Chris Fitz-Gerald, Group Communications Manager Instinctif	011 447 3030
Morne Reinders	082 325 1810

Overview

The Illovo group has endured a 'perfect storm' of macro challenges during the twelve months to 31 March 2016. Direct and indirect drought impacts across all six countries of operation, currency volatility and high interest rates in various jurisdictions, and reducing domestic sales demand in Malawi, as well as on-going pressure on sugar export revenues, combined to weigh heavily on the group's results.

Despite these difficult conditions, the downstream business delivered a strong financial performance, while the group continued to grow regional sales volumes by expanding access to key markets. Cost-reduction and efficiency improvement benefits were realised as the culture of continuous improvement becomes further embedded in the business.

The tough sugar commercial environment saw total group revenues reduced by 0.7% to R13 169.9 million which, in turn, resulted in the operating margin falling from 12.5% to 10.7%. Operating profit decreased by 14.8% to R1 410.2 million, while headline earnings per share declined by 36.5% to 113.6 cents, well within the guidance range of 25% to 45% HEPS decline year-on-year provided in the trading statements published on 25 May 2015 and 18 September 2015. The contribution to operating profit by country was: Zambia 35% (2015: 35%), Malawi 32% (2015: 38%), Tanzania 16% (2015: 9%), Swaziland 10% (2015:

4%), South Africa 8% (2015: 13%) and Mozambique -1% (2015: 1%). By activity, the

contribution to operating profit was: sugar production 59% (2015: 71%), downstream 24%

(2015: 16%) and cane growing 17% (2015: 13%).

Review

Lower than normal rainfall persisted across the Southern African region, impacting river, dam and lake levels in Swaziland, Zambia, Malawi and South Africa. These stressed growing conditions not only reduced sugar cane yields but also increased vulnerability to pests such as yellow aphids. These drought effects and the flood damage suffered in Mozambique during January 2015 resulted in a sharp decline in end-of-season cane supply across all countries of operation. Year-on-year sugar production decreased by 14% from 1.760 million tons to 1.512 million tons.

World sugar prices recovered from seven year lows during August 2015 to break the 15 USc/lb resistance level during March 2016, driven largely by an expected world production deficit in 2016 and strengthening of the Brazilian Real. Whilst this price recovery bodes well for the year ahead, the August 2015 low had the effect of depressing regional export prices. Although the decline in EU market prices appeared to level off and firm slightly during the period under review, the weaker Euro continued to impact on profitability.

Strong domestic and regional markets remain fundamental to the business. Good progress has been made with initiatives to grow these markets, with regional sales reflecting steady growth compared to the prior period.

Demand in Zambia continued to grow and Swaziland benefited from increased sales into the SADC region. Market conditions in Tanzania continued to improve as stricter enforcement of regulations reduced illegal sugar imports, whilst the announcement of a new import tariff structure in Mozambique bodes well for future sales. The strong Malawian Kwacha had an impact on informal regional trade flows, resulting in an inflow of sugar to compete against local production which, combined with high interest rates, depressed domestic demand.

The contribution to operating profit from downstream activities continued to grow (from 16% to 24%). The two alcohol production units in South Africa and the one in Tanzania performed well, with new production records set at the distillery and lactulose plant at Merebank. Good furfural production was achieved at the Sezela facility in South Africa. Relative to the prior year, electrical co-generation at the Ubombo mill in Swaziland increased by 17%.

As reported in September 2015, a decision was made to close the furfural-based nematicide business in the United States of America (US) following protracted difficulties in obtaining registration with the US Environmental Protection Agency for application of the product on food crops. A loss of R169 million was recorded on the closure and subsequent disposal of the business.

While the conversion of operating profit to cash remains strong, the impact of reduced sales volumes and lower demand has increased working capital requirements. The higher funding requirements, compounded by considerable increases in interest rates and currency volatility in Malawi and Zambia, increased financing costs by R101 million.

Outlook

The persistent dry weather conditions across the region and poor summer rainfall will further delay the anticipated sugar production recovery during the 2016/17 season, with a particularly adverse impact expected in Swaziland. Overall sugar production is expected to be similar to the 2015/16 season.

Notwithstanding this extended drop in physical performance, firmer pricing, improved sales mix, the flow through of cost savings initiatives and the commissioning of the Zambian refinery and energy efficiency project in South Africa should impact positively on the financial performance during 2016/17.

The recent recovery in world sugar market prices is encouraging. Increased import tariffs in Mozambique and efforts to improve the sales mix and to develop regional markets will benefit earnings in the year ahead. The recent weakening in the Malawian Kwacha should stem the flow of illegal imports into that market and improve domestic sales.

The Zambian refinery expansion and product alignment projects remain within budget and on schedule for commissioning during May and June 2016.

Structural cost reduction programmes and the group-wide continuous improvement programme should bring meaningful benefits to the group in the short to medium-term.

Capital Distribution

As announced on the Securities Exchange News Service (SENS) on 8 April 2016 and subsequently on 26 April 2016, Associated British Foods plc ("ABF"), through its wholly owned subsidiary, AB Sugar Africa Limited, made an offer to acquire all of the issued ordinary shares in Illovo (other than the 236 569 232 shares already owned by ABF Overseas Limited ("AOL")) by way of a scheme of arrangement in terms of section 114(1)(c) of the Companies Act, 2008, between Illovo and its shareholders (other than AOL) ("the Scheme"); or if the Scheme fails and ABF so elects, by way of a general offer to those

shareholders ("General Offer"), for a cash consideration of R25,00 per share ("Consideration").

A circular setting out the terms and conditions of the Scheme and the General Offer ("Circular"), and incorporating notice of a general meeting of shareholders on 25 May 2016, was distributed by registered post to shareholders on 26 April 2016, with a copy thereof posted on Illovo's website, www.illovosugar.co.za. On 25 May 2016, the shareholders voted in favour of the Scheme.

As set out in the Circular, the Consideration of R25,00 per share is calculated on the basis that Illovo will not make any distribution to its shareholders between 8 April 2016 and the settlement date of the Consideration. Accordingly, no distribution to shareholders for the year ended 31 March 2016 is being declared.

On behalf of the Board

TS Munday GB Dalgleish

Chairman Managing Director Mount Edgecombe

3 June 2016

CORPORATE INFORMATION Directors:

TS Munday (Chairman)*; GB Dalgleish (Managing Director); MH Abdool-Samad; MI Carr#*; J Cowper#*; G Gomwe^*; MJ Hankinson*; JP Hulley; S Kana*; D Konar*; PA Lister#*; CW Molope*; AR Mpungwe (Tanzanian)*; L W Riddle.

# British

^Zimbabwean

* Non-executive

Registered office:

1 Nokwe Avenue Ridgeside, Umhlanga

KwaZulu-Natal, South Africa

Postal address:

P O Box 194, Durban, 4000

Telephone: [phone]

Website: www.illovosugar.co.za

Transfer Secretaries: Link Market Services South Africa Proprietary Limited Rennie House, 13th Floor, 19 Ameshoff Street, Braamfontein, 2001

P O Box 4844, Johannesburg, 2000

Auditors: Deloitte & Touche Sponsor: J.P. Morgan Equities South Africa Proprietary Limited.