Don MacLeod (66)
BCom, AMP (Oxford)
Joined the sugar industry in 1971
Appointed to the board in 1983
Chairman of Nomination Committee
Member of Remuneration Committee
Member of Risk Management Committee
Member of Social and Ethics Committee
The past year was a pleasing one for Illovo and I am glad to be able to report good financial results and much improved operational performance from the business due to ongoing initiatives to build production capacity and enhance operational efficiency. The progress made in respect of a number of strategic projects is most pleasing as they ensure that the group will continue to grow in line with its vision to be a world class, low cost and highly efficient organisation operating on the African continent, adding value to its core products of fibre, sugar and molasses.
The company is in good shape with a strong balance sheet, healthy cash generation and robust cane sugar assets across Africa. Illovo’s objective is to be a major player in every country in which it operates and to be the majority shareholder and manage the business for which it is responsible with local investors having an interest through a minority shareholding. However, we operate in a world that is constantly changing and uncertain, and Illovo is not alone in needing to overcome significant economic, market, labour and socio-economic challenges within the African continent and the world at large.
Although the Southern African region has seen improved economic growth compared to many other parts of the world, the region suffers from high levels of unemployment, lack of infrastructure and extreme poverty. Rising costs are a concern particularly as they also affect the purchasing power in the local economies, thereby potentially restricting the ability to pass on increased costs without impacting on offtake. The continuing devaluation of the Kwacha in Malawi and its impact on the local people is especially a worry for the group. The level of sugar imports into South Africa and Tanzania has negatively impacted on market offtake in these countries. Discussions with these governments to obtain better import protection are ongoing. An application to address the level of tariff in South Africa has been lodged with the authorities in which it is stressed that the industry is a low-cost producer in world terms and is suffering from dumping of surplus sugar from the world market. The Swaziland industry, as part of the SACU, is also negatively impacted by these imports. The importation of significant quantities of sugar could have a material impact on employment in the rural areas in both countries.
The recent wave of industrial unrest in the mining industry and the Western Cape fruit farms in South Africa is of concern particularly as it has often been violent. The company experienced unprocedural industrial action in Zambia during the past year which, although of limited duration, was most unfortunate as the business has the framework to address labour and related issues in an appropriate manner without resorting to unbecoming conduct which impacts negatively on all concerned.
Protecting Our People
Safety remains a significant item on every board agenda and it is most pleasing to report that the group’s safety record in respect of both disabling injury and total injury frequency has shown a major improvement over the last couple of years with the past year reflecting a 23% improvement over the previous year. I regret that we had one fatality in the past year and the objective is to eliminate any such occurrence by focusing on behavioural performance and entrenching rigid health and safety standards, and thereby nurturing a safe operating culture across the organisation.
Our people are key to achieving our strategy. Attracting and developing our people is central to our business strategy and we apply a consistent people management approach across all our operations. Regrettably, we have not made the progress we aspire to in transforming our senior management levels, both in South Africa and in our other areas of operation. We do, however, have a pool of talent in junior management and training, development and mentorship programmes are in place to promote advancement to meet our goals through our targeted succession plans.
Domestic Markets The Key
Generally, a strength of the Illovo business lies in the diversity of our market opportunities. A strong presence is maintained in the domestic markets in all the countries in which we operate. In addition, we have preferential access to markets in the EU and USA while in Africa, regional markets in close proximity to our operations remain a strong focus. Lobbying for continued favourable access to the EU markets beyond 2015 has been a major area of focus and involvement during the past year and it is hoped that an extension to the current regime will be achieved. The world sugar market reflects a surplus of production over consumption and the world price has declined and is trading in a range of US17 to US19 cents/lb currently. The world price impacts directly only on a small proportion of total group sales but indirectly regional sales prices are affected.
Generally relations with the various governments in the countries in which we operate remain positive and constructive.
Structural reform to the sugar industries is anticipated in two of the countries in which Illovo operates. In South Africa discussions continue regarding a new Sugar Act with implementation by government anticipated in 2015. The Swaziland industry is also involved in a review to the structure of that industry whereby increased responsibility for marketing would devolve on the milling section of the industry.
Working In Our Communities
The group has an extensive social investment role across the vast areas in which we operate, this is particularly relevant as most of our operations are situated in rural areas. In addition to the employment of 12 600 permanent employees and another 18 000 seasonal employees, the group’s businesses form the economic and social backbone of the local communities in the areas in which we operate providing infrastructure, health care facilities, schools and many other community benefits amounting to expenditure of R197 million in the 2012/13 season. As a buyer of goods and services we also play an important role in supporting local businesses which provides further employment and drives socio-economic development in local communities. This, combined with significant agricultural and manufacturing investments, has resulted in Illovo having a material impact on job creation and poverty alleviation in the regions in which it operates.
Access to health care is provided to all our employees and their dependants either through a network of group-run primary health care clinics and hospitals or through the provision of medical insurance schemes. We operate 24 primary health care clinics and four hospitals. We continue to take a proactive stance against life-threatening epidemics such as HIV and Aids, malaria and tuberculosis. These diseases are being managed largely on a preventative and integrated basis. Strategies controlling the spread of HIV and AIDS include preventative programmes together with an established in-house wellness programme.
Matters of corporate governance have become critical issues for shareholders around the world. Good governance practices are fundamental to creating, protecting and sustaining shareholder value. Illovo’s directors and employees strive to ensure that the company is managed in an efficient, accountable, responsible and ethical manner and its governance structures are in line with King III and the new Companies Act.
Our board’s approach to governance is to stay abreast of, and implement relevant local and international best practice. We monitor developments in the various countries in which we operate to ensure local requirements are met. The past year saw the formation of the Social and Ethics Committee of the board. The Risk Management Committee has in the past year implemented an Enterprise Risk Management Policy and a combined assurance framework to ensure that the key risks that may impact on the business are managed in such a way as to provide reasonable assurance regarding the achievement of Illovo’s objectives.
In South Africa, the company has a level 5 contributor status in terms of the Codes of Good Practice on B-BBEE.
The group continues to evaluate opportunities for further footprint expansion in Africa but careful assessment of the risk will remain crucial to any new opportunity being progressed. Ethanol and molasses beneficiation opportunities in Malawi and Zambia continue to be evaluated along with power cogeneration and increased furfural production options across the group. Illovo continues to make steady progress towards its objective to increase its sugar production to more than two million tons per annum and optimise the return on every stick of cane. Plans to achieve the strategic intent, vision, goals and objectives have been put in place in an environment of continuous improvement and best practice. The group is among the lowest cost and most efficient sugar producers in the world, is an efficient supplier into the domestic markets in which it operates and through its marketing and distribution expertise is able to deliver sugar to Europe, the United States and the region.
The next few years will see focus on capacity utilisation and productivity improvements across the group. Weather and volatile exchange rates will continue to be factors impacting on the business. The business is sound and many opportunities are available to grow the existing base business while a further footprint expansion is possible but will be subject to rigorous risk assessment.
I would like to thank each of my fellow board members for their continued commitment, contribution, valuable guidance and wise counsel throughout the past year.
My thanks go to Graham and the executive management team for the focused manner in which they implemented our strategies during 2012/13 and for delivering a strong set of results.
We are fortunate to have committed employees across the group and I thank them on behalf of the board for their efforts this past year.