Tongaat-Hulett taking action to enhance earnings

28 February 2004

HIGHLIGHTS AND SALIENT FEATURES OF HALF-YEAR RESULTS
The Group recorded headline earnings of R56 million for the half year. This is an improvement of R255 million from the headline loss in the same period last year.

The management actions taken throughout the Group to improve profitability have not yet fully impacted on Tongaat-Hulett’s results – the benefits of these and further actions will flow into the second half of 2004 and beyond.

Strong balance sheet with net debt to equity at 15,7%.

Interim dividend up 25% at 50 cents per share.

Moreland achieves milestone operating profit of R117 million.

Tongaat-Hulett Sugar’s actions to enhance future earnings in full swing.

African Products’ open maize futures position has been eliminated and the substantially revised approach to maize procurement will have a positive impact towards the end of 2004.

Hulett Aluminium continues to grow volumes, improve the sales mix and reduce costs, on the way to ensuring that the objectives of the Group’s major investment in aluminium rolled products are realised.

TAKING ACTION

“The management actions taken throughout the Group to improve profitability have not yet fully impacted on Tongaat-Hulett’s results. All the operating companies have programmes in place, which span the next two years, to grow earnings through internal actions. Benefits will increase as the solid progress made in the first half of 2004 is combined with the additional actions being taken,” said Peter Staude, Chief Executive of Tongaat-Hulett. “The focus is on optimising how the businesses operate and how Group wide issues are dealt with. Moreland’s performance shows what can be achieved.”

MORELAND ACHIEVES ANOTHER MILESTONE

Moreland continued to capitalise on the solid platform of its leading property developments and the prime land previously under sugar cane, increasing revenue for the first six months by 318% to R272 million. A milestone underlying operating profit of R118 million (2003: R20 million) was achieved.

Staude said that the buoyant property market, especially on the KwaZulu-Natal North Coast, is contributing to Moreland unlocking extensive value from its Zimbali, La Lucia Ridge and Umhlanga Ridge developments. Outstanding performances were achieved in the residential and resort portfolios due to the strong demand for new phases and developments launched during the period. Sales also increased in both the commercial and industrial portfolios. The Group continued to proactively manage the transition from sugar to property development on the KwaZulu-Natal North Coast.

Criteria for downstream investments are being developed and opportunities assessed. The focus will be on capturing full value from land developments to sustain long term profitability and reduce the impact of industry cyclicality.

The National Transport Minister, the KwaZulu-Natal Premier and the KwaZulu-Natal Finance and Economic Development MEC have reaffirmed government’s intentions to progress with development of the King Shaka International Airport and Dube Trade Port at La Mercy. The KwaZulu-Natal government has engaged with Moreland in order to progress this on a co-operative basis.

TONGAAT-HULETT SUGAR CONFRONTS HOSTILE EXTERNAL ENVIRONMENT…

Tongaat-Hulett Sugar’s revenue of R1,2 billion for the half-year was 15% below the comparable period last year, with underlying operating profit reducing to R38 million from R183 million. Sales volumes in South Africa were 211 767 tons and raw sugar export volumes at 120 345 tons were affected by lower carry-in stocks. The particularly small crop harvested in 2003 resulted in an increase in the production cost per ton of sugar that was carried forward and sold in the first half of 2004. This, together with the decrease in the South African domestic sugar price in October 2003 and the strengthening Rand’s effect on export realisations, depressed margins in the first six months of the year. In Mozambique, domestic market sales grew by 24% in the drive to increase market share. Triangle continues to operate profitably in the difficult Zimbabwean economic and business environment. Dividends of R21 million were received from Triangle and brought to account.

Year on year, consolidated sugar production for the 2004 year is expected to grow by 5,8% to 1,113 million tons. Sugar production from South African operations is estimated to increase by 9% to 712 000 tons while that of Mozambique is expected to rise to 99 000 tons (2003: 82 000 tons). In Swaziland, Tambankulu is estimated to produce the raw sugar equivalent of 52 000 tons. Triangle Sugar in Zimbabwe is expected to produce 250 000 tons this year.

… WITH ACTIONS TO ENSURE FUTURE SUCCESS IN FULL SWING

Tongaat-Hulett Sugar’s actions completed in the first six months included the closure of the Entumeni sugar mill with the diversion of cane to the Amatikulu mill, the closure of the sugar head office, downsizing of centralised services and the reorganisation of the South African milling operations from five mill structures to two regional business units. The benefits of these and the further substantial actions being taken will flow in future periods. Restructuring costs of R22 million have been incurred in the current period.

A benchmarking exercise to increase the benefit from the refining value chain has been completed. Efforts to leverage the technology base will see a new refining technology pilot plant deployed in Brazil for trials. Cane procurement initiatives to lift milling capacity utilisation in South Africa by about 10% includes the confirmation of some 501 000 tons of additional cane per annum with a further 331 000 tons being explored. Tongaat-Hulett Sugar is actively involved in Mozambique’s participation with other Least Developed Countries for earlier and greater “Everything-But-Arms” preferential access into the EU market.

AFRICAN PRODUCTS IS IMPLEMENTING A NEW APPROACH TO MAIZE PROCUREMENT

African Products’ underlying operating profit for the first half of 2004 reduced to R7 million (2003: R67 million). The high priced maize procured during the previous cycle, under the previous business model, and the strengthening Rand’s effect on domestic selling prices and export margins were the main influencing factors. Domestic volumes of starch and glucose declined by 6%, compared to the first half of 2003, due to imported glucose in the spray drying industry and increased imports of final products such as confectionery. Export volumes reduced by 21% due to the strengthening currency. Initiatives to maintain key export markets and combat imports in the local market are ongoing with significant success in terms of volumes recovered for the second half of 2004 and for 2005. Fixed cash costs have been held at levels below those of the comparable periods in 2002 and 2003. The ongoing efficiency programmes yielded savings in variable costs.

All unhedged maize futures contracts have been eliminated and the substantially revised approach to maize procurement will have a positive impact towards the end of 2004. Based on current consumption, the higher priced maize will all have been used by October 2004.

Two product pricing models have been developed. The short term back-to-back fixed tonnage contracts is where maize is priced when the customer agrees the product price. The longer term fair return model is based on a negotiated margin for African Products with the customer making the decision when to price the maize.

HULETT ALUMINIUM GROWS VOLUMES, IMPROVES MIX AND REDUCES COSTS YET AGAIN

Hulett Aluminium’s underlying operating profit increased by R78 million, with the Group’s share being 50% thereof. Rolled products sales volumes grew to 142 000 tons annualised, a 19% increase over the same period last year. This was achieved despite an interruption on the Camps Drift hot mill that affected output for approximately two weeks. Local sales increased by 5% and exports by 26%. The mix improved, with sales of clad products and exports of closure sheet being three times those of the first half of last year while exports of can end stock and painted products continued to show strong growth. Total rolled products manufacturing costs, excluding metal, have been limited to an increase of 4% despite the growth in volumes, resulting in a 13% reduction in conversion costs per ton. The impact on the half year results of the stronger Rand offset much of the approximate R110 million benefit that was gained from improved capacity utilisation, more profitable sales mix and cost performance.

SUSTAINABLE DEVELOPMENT

The Group continued with its BEE procurement and employment equity related achievements. This was evidenced by its ratings in the May 2004 Financial Mail/Empowerdex Top Empowerment Companies Survey with fourth place for procurement and fifth for employment equity. A major highlight during the period was the procurement of 5 000 tons of maize from emerging farmers.

The Group’s emphasis on safety continued and the lost time injury frequency rate decreased from 1,50 to 0,49 over the last twelve months with the total recordable case frequency rate showing improvement from 2,50 to 1,12.

The Group’s achievement in sustainability was rewarded with inclusion in the JSE’s Socially Responsible Investment (SRI) Index. Relationships with government in the Southern African region continue to grow from strength to strength.

FINANCIAL RESULTS

The Group recorded headline earnings of R56 million, generated off revenue for the half-year of R2,95 billion (2003: R3,0 billion). These earnings show an improvement of R255 million from the headline loss in the same period last year.

The Group’s underlying operating profit decreased by R80 million and the valuation adjustments charged against income improved by R354 million, compared to the 2003 interim results. This led to the total operating profit improving to R159 million from the 2003 first half loss of R115 million. Operating profit is the total of underlying operating profit, valuation adjustments, restructuring costs and Triangle dividends received.

The valuation adjustments charged against income amounted to R21 million, compared with the charge of R375 million for the first half of 2003. These items relate mainly to the valuation of certain contracts and balance sheet items based on the exchange rate and maize price at the end of the period. The open maize futures position reported in previous periods has been eliminated and a valuation gain of R18 million has been realised, compared to the R255 million charge in the same period last year.

Cash flow before dividends and financing activities was R337 million better than in the first half of 2003. The Group’s balance sheet remains sound with net borrowings as a percentage of equity at 15,7% (2003: 14,9%). The board declared an interim dividend for the half-year of 50 cents per share (2003: 40 cents per share).

“Today, Tongaat-Hulett is a Group with four sizeable, strategically well positioned and focused businesses,” said Staude. “The Group has a solid asset and business base and, with its strong balance sheet, is ideally positioned to capitalise on opportunities that may arise.”

OUTLOOK

All the operating companies have programmes in place, which span the next two years, to grow earnings through internal actions. Benefits will increase as the solid progress made in the first half of 2004 is combined with the additional actions being taken.

Hulett Aluminium and Tongaat-Hulett Sugar will benefit from sales that are being booked for late 2004 and into 2005 at higher US dollar prices than those of earlier in 2004.

The Group expects headline earnings for the second six months of 2004 to be considerably above those for the first half, on the basis of similar exchange rates, with underlying operating profit having a sensitivity of approximately R10 million for every 10 South African cents move against one US dollar.


Peter Staude
Chief Executive Officer

Amanzimnyama, Tongaat
2 August 2004

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