Tongaat Hulett Limited (TON) Earnings Call Transcript & Summary

Good morning, and welcome to Tongaat's interim results presentation for the 6 months ended 30 September '21. Tongaat Hulett has made significant progress in the turnaround initiated in 2019. This includes the strengthening of governance structures, stakeholder relationships and improved people capacity. Disposals worth ZAR 6.5 billion have been concluded and debt has been reduced by some 41% as we rebuild a fragile organization. We are moving forward as we build a more sustainable operational base underpinned by people, governance and process. Today, I'll be joined by members of the Tongaat leadership team as we present the results and outlook. I would like to thank the people that continue walking this road with us. Firstly, the 280-odd thousand Tongaat employees, who go the extra mile every day. We commend your hard work and commitment. Thank you. Our Board for their unwavering support and guidance. Shareholders, growers, customers, suppliers and other key stakeholders, thank you for your agility and support. And lastly, to our lenders, we would not be here today without your ongoing commitment. We have seen some additional headwinds during the year. Cyclone Eloise, the second storm in as many years to hit Mozambique and large parts of Zimbabwe, sadly damaging crops and infrastructure. COVID-19 is now into its 644th day from inception. We have embraced a changed operating model where people remain our key focus. Some highlights for the current year include: to date, 80% of our employees have been vaccinated. As we prepare for off crop, we are introducing mandatory vaccinations for team members and service providers. Vaccines are available to employees at their workplace. The most significant impact, however, was to our previous off crop maintenance, where we were unable to complete maintenance in time for the South African and, in part, the Zimbabwe mills, thus, delaying our start-up and impacting our annual performance. Hyperinflation in Zimbabwe is complex in accounting terms, plus even more complex in managing in-country costs, especially payroll, Rob will unpack this in more detail shortly. The July civil unrest forced us to shut our mills under emergency conditions. Arson resulted in some 1,700 hectares of cane being set alight, impacting supply and quality of cane. This saw much lost time and inefficiency at our mills. However, there is much to be positive about. Reduction in debt, plus 450,000 ZAR 450 million received from the sale of our starch business. We secured a strategic underwriter, namely Magister for ZAR 2 billion for our proposed ZAR 4 billion rights issue. We have improved our group treasury function. We continued payment of dividends from Zimbabwe. We continue improving our overall stakeholder relations and have achieved Level 2 B-BBEE status. Our new asset care strategy has been rolled out with detailed off-crop planning. We've hired in excess of 70 new, highly skilled employees into key positions in our business. We have step changed our agricultural practices, rescoped our land infrastructure commitments and continued improving our working capital management and have recently initiated a procurement savings project, which started delivering real value and will be baked into our future budgets. In terms of our operational highlights, for South Africa, we continue seeing stronger sugar demand with growth of over 3.5% in local sales. This, sadly, has been impacted by the low sugar availability due to poor milling performance. Following the devastating refinery loss last year, the refinery has fully recovered and is setting new performance records. Tongaat's brand, Huletts, has been revitalized and winning multiple marketing awards as we roll this out through Africa. However, the riot impact was significant at around ZAR 158 million for this period. This, coupled with the late start-up of the mills and processing large quantities of riot pain attributed to the poorer performance through the season. The Mozambique operation continues performing exceptionally well: improved local sales growth, good yield improvements despite weather -- adverse weather, our refinery producing 60,000 tons of fully certified refined sugar. And there are some green shoots on the metical and strengthening of the local economy. However, the 3% increase in interest rates has led to significant additional finance costs in this country. Our Zimbabwean business maintains positive momentum despite the challenges. There's continued local growth. Ongoing dividend and management fees are being paid. Our supply dams are near capacity, however, hyperinflation and lower yield have impacted performance. The property business was also impacted by COVID and civil unrest. Despite this, we concluded little over ZAR 100 million worth of deals to date with a further ZAR 145 million in the short-term pipeline. We also see this business with positive cash flows. And we have also strengthened our execution capability within the property team. ESG remains a key priority for the group. Our fraud risk management strategy is gaining traction. We've seen a 75% increase in tip-offs through the whistleblowing line to end November. The new forward management structure, as introduced, is gaining momentum and employee confidence. 51 employees have been dismissed or charged through these tip-offs. The business is seeing benefit of the restructured internal audit function introduced. And over the last 2 years, action to address control deficiencies have been implemented faster, with learnings adopted group-wide. The Board and [ ex gov ] Tongaat Hulett remains committed to holding those responsible for historic mismanagement accountable. The criminal investigation relating to the PwC Report finding is still with the NPA for a decision to prosecute. Civil action has been instituted against former directors and executives. The litigation process is taking time, and everything possible is being done to get these matters to trial. The safety management system was reviewed. And to this end, ISO 45001 and 14001 were introduced, and our plants are being certified. A little over ZAR 79 million has been spent on socioeconomic development initiatives, focusing on health care, education and basic services, such as water, electricity and sanitization. This included various partnerships with the International Red Cross Society and various government organizations. The salient financial features are as follows: The disposal in Namibia and Eswatini is reflected in comparative, and we have removed it to give you a clearer picture of the underlying performance. Revenue grew 5% to ZAR 8.5 billion. The Zimbabwe and Mozambique sugar operations saw pleasing revenue growth due to strong local demand. Revenue on a like-for-like basis, excluding the disposals, increased some 10%. Operating profit decreased by 23% to ZAR 1.3 billion. These movements reflect the impact of lower sugar production due to yields across the regions, and riots and other production-related challenges, specifically in South Africa, plus the increased dollar-denominated expenses in Zimbabwe. Excluding disposals, operating profit decreased by 10%. The group reported adjusted EBITDA of ZAR 1.5 billion, down 33% or 30% excluding disposals. A key strategic focus area has been to increase the cash generation from our operations, and I am pleased to note that this momentum continues. Cash flow from operations decreased by ZAR 174 million when compared to the prior period. And this includes a cash flow contribution of ZAR 91 million from disposed operations in the prior year. SA Sugar, in particular, produced a strong improvement in free cash flow generation, as did the property business. Efforts to reduce debt are starting to pay off, translating to net finance costs down by 50%, benefiting from lower debt in South Africa. The savings increased profit before tax by a pleasing 23%, showing our resilience and highlighting the massive importance in getting debt to sustainable levels. The prior period includes a ZAR 223 million profit before tax contribution from Namibia and Eswatini, which means that like-for-like profit before tax increased by 106%. But this was mostly related to a tax rate anomaly. The effective tax rate increased to 97% in this period versus 30% in the prior year, mainly because of deferred assets, which Rob will discuss later in the presentation. The deferred tax assets in South Africa will only become deductible once the operations have reached sustainable profitability. We reported negative basic and headline earnings due to profits being mainly generated in Zimbabwe with minority interest, whereas our tax and major interest will both sit in South Africa. We have made great progress in the past 18 months, reducing debt by 41% through disposals and cost and cash management. We further need to reduce this by around ZAR 4 billion, and we have 2 options at our disposal, a rights issue or further strategic asset sales. I'll now hand over to Rob to take us through a more detailed analysis of our interim results. Thanks, Rob.

Thanks, Gavin, and good morning, everyone. I look forward to the opportunity of taking you through Tongaat's interim results for the 6 months ended 30 September 2021. But to start, I would like to thank my finance teams for all the hard work and effort that has gone into finalizing these results amongst a number of competing priorities as well as to our new auditors, Ernst & Young, who have had to transition to the audit of our group in a very short space of time. I am very pleased to say that these interim results have again been reviewed by our auditors. With the seasonality of a sugar business, our interim results are also challenging to understand as factors, such as timing and weather, can play a significant role in understanding the underlying business performance. However, for this reporting period, the complexity has increased for a number of reasons. Firstly, our comparative period includes contributions from Namibia and Eswatini that were disposed of in the prior year. As these businesses were not considered a major business segment, these results have been included as part of our continuing operations despite being sold and, therefore, this impacts on like-for-like comparability. We have also reviewed a number of our accounting practices, and this has unfortunately resulted in a restatement of certain prior-period financial information. As previously reported, hyperinflation, currency and currency dynamics in Zimbabwe continue to have a material impact on our business. Also overshading these results is the unfortunate impact of the civil unrest on both our South African sugar operation and property sales in the period. And ordinarily, cane valuations in our interim results would reduce as we harvest cane. However, in the current year, they have actually increased, improving operating profit. The effective tax rate of the group, as Gavin has mentioned, has also increased to 97% and the mix of profits and how these are shared with minority shareholders has resulted in negative earnings being attributed to the THL shareholdings. So there is a lot to digest, and I'll work through the following slides and do my best to unpack each item for you. However, the end result of all of this is a loss per share from continuing operations of ZAR 1.74 compared to earnings of ZAR 0.80 in the comparative period with a similar outcome at the headline earnings level. In addition, no dividend has been declared for the interim period. Despite all of the above, our focus has remained on reestablishing a sustainable capital business -- capital structure and to provide stability for our business. So moving to hyperinflation. With the size of our Zimbabwe operations, hyperinflation has a material impact on our group. Annualized inflation is stabilizing, having reduced from a peak of 838% to a low of 50% in August 2021. However, in recent months, we are seeing inflation trending upwards, with November '21 inflation reaching 58%. This increase is being driven by the widening gap between the official and unofficial exchange rates in the country. At 30 September '21, the official exchange rate was ZWL 85 to the U.S. dollar, while the unofficial rate was ZWL 170, representing a 99% premium on the official rate. In terms of IFRS, we are required to use the official exchange rate to translate the profits from Zimbabwe into rands. If we were to use the unofficial exchange rate, which is depicted in that table, it would reduce the reported operating profit of Zimbabwe by approximately 50%. And at the group level, this will be a reduction of 30%. While the accounting for hyperinflation is 1 thing, it is important to understand how this gap between the 2 exchange rates impacts us as a business. As the gap widens, so it becomes difficult to continue selling sugar locally in foreign currency, while complying with the country's regulations. These foreign currency sales are an important source of U.S. dollars for our business. Over the past 12 months, there's also been a growing demand for foreign currency payments and a general dollarization of the businesses' costs, which we've had to balance very carefully in order to facilitate the payments of dividends and operational support fees, which for the past 6 months have totaled ZAR 140 million. Local currency costs have also experienced more frequent revisions, while opportunities to purchase goods in advance to secure lower pricing have been limited. Hyperinflation has also seen a swing in our cane valuations from a loss of ZAR 318 million in September 2020 to a gain of ZAR 212 million, which has increased operating profit year-on-year by ZAR 530 million. All in all, a lot of complexity. On the restatements, obviously, the last thing any CFO wants to stand up and present is a set of financial results with correction of errors included. The impact of the restatements on both our September '20 and March '21 results is shown on the right-hand edge of the slide. To understand the impact of reissued statements, I've grouped them into 2 buckets, being timing errors and classification errors. The timing differences affect the South African sugar operation and relate to us assigning -- not assigning sugar that was work in progress in the mill over the reporting period of value as well as recognizing export proceeds and the related levy payments in advance. The combined impact of correcting the timing errors increased the September 2020 operating profit by ZAR 65 million as well as earnings per share by ZAR 0.48, bringing the September 2020 result to ZAR 0.80 per share. These timing differences have been resolved by the end of the season, and so there is no impact of these restatements on the 31 March 2021 financial results. In respect of the 2 classification errors, the first is very technical in nature and specific to the South African sugar industry. In summary, certain redistribution and export adjustments made at an industry level have -- and which were required to ensure each sugar miller has an equitable share of the local market, were previously shown as revenue. And we have now shown these on a separate line on the face of the income statement. The final error is the most significant and relates to the method used to adjust cost of sales for hyperinflation, but it is also the most disappointing, as on the introduction of hyperinflation accounting, we held a workshop including advisers to ensure that we got the numbers correct. Again, it becomes very technical, but in effect, we were previously adjusting cost of sales for inflation from the date the sugar was sold, effectively when the cost of sales were recorded in the income statement. And now we're adjusting it from the date the sugar was actually produced. This has resulted in a reclassification between operating profit and net monetary loss. However, the quantum of the error is material. For September 2020, the result is a reduction in both operating profit and the net monetary loss of ZAR 305 million. While for March '21, the amount increases to ZAR 711 million. Thankfully, there has been no change to profit for the year or earnings. I can assure you these are genuine errors, and I sincerely apologize for the outcome as reliable and transparent reporting is something that's very important to us as a business. But now moving to the financial performance. As Gavin has mentioned, revenue has grown by 5%. However, gross margins have declined from 35% to 33%. From the waterfall graph on the right of the slide, you can see the impact on the margins of the favorable cane valuation movement coming through as well as the negative impact of the dollarization and cost revisions in Zimbabwe, which we discussed previously. In summary, though, gross margins in Zimbabwe have normalized to around 28%, which is in line with the September 2018 results, which is the last set that we published before we adopted hyperinflation accounting. So there is a normalization element to that. Generally, though, margins have been affected by the 10% reduction in sugar production, which is largely attributable to the impact of the riots and other operational challenges in the South African sugar operation. There is some offset though provided by a strong performance in Mozambique. Operating profit in the prior period includes ZAR 230 million related to the Eswatini and Namibian businesses that were disposed of, and ZAR 180 million of that related to the profit on the disposal of the business itself. What is very pleasing to see is the reduction in net finance cost by 50% overall with the non-repeat of FX losses in Zimbabwe owing to the stability of the official exchange rate over the period. It is also clear to see the benefit of the ZAR 6.5 billion in concluded debt reduction transactions on the interest costs in South Africa. However, there has been some offset from the 3% increase in Mozambique's prime lending rate. The effective tax rate of 97% has resulted from us not recognizing a deferred tax asset on tax losses in South Africa. So in effect, we do not have a tax shield in the September '20 -- in the September '21 results. In addition, there is the nondeductible net monetary loss in Zimbabwe, which has become standard for our reporting periods. However, the decision as to when we're going to recognize the deferred tax in order to create that tax shield is going to be driven by how quickly we can restructure the debt and reduce our interest costs. Reducing our interest costs will allow us to generate a taxable income, and that will mean we can start recognizing the deferred tax assets again. Now in unpacking the makeup of the financial performance, we'll start by looking at the revenue for each of the businesses that was generated in the 6 months. As indicated, revenue for the period has grown by 5%, but if we exclude Namibia and Eswatini operations, this increases to 10%. Generally, the commercial environment within the local and global sugar markets has been stronger than in previous years, benefiting all our regions. In Zimbabwe, we have seen local market sales increase by 23%, although sales in the comparative period were restricted by various COVID-19-related measures that were imposed by government. The Mozambique operation has introduced a range of new pack sizes, and this has contributed to an 11% increase in local market sales, which is a record first half performance for the industry in Mozambique. In South Africa, revenue has held its own against a very strong comparative period to September 2020, with volumes being just 3% lower. If you recall, the comparative period included the benefit of sales volumes on panic buying, various food parcel initiatives and other outcomes that were in response to the hard lockdown imposed by the government as a result of COVID. As we move down the income statement, the adjusted EBITDA is a key measure for us as management to assess business performance. It excludes the volatility caused by the fair value adjustments to biological assets and ensures that our operating profit is closely aligned with our cash generation. During the past 6 months, adjusted EBITDA totaled ZAR 1.5 billion and had decreased by 33% compared to ZAR 2.3 billion in the prior period. What is pleasing to see is how the 10% revenue growth in Mozambique translated to a 50% improvement in adjusted EBITDA for the period. This highlights the importance of having a strong local sugar market on the profitability of the business. Consequently, the contribution of Mozambique has -- to group's profit has grown from 15% to 33%. Corporate costs in the period have also reduced in light of finalizing the contractual relationships with underlying subsidiaries that allows us to recover the cost of centralized services from those businesses. In addition, there has been a reduced level of restructuring activities over the past 6 months. It is also worth noting that the property business has come close to breaking even in spite of the depressed property market limiting sales activities. Detracting from this growth, however, is the impact of the normalized margins in Zimbabwe that we've discussed as well as the lower sugar production in South Africa. And despite of the decreased financial performance of the Zimbabwe business year-on-year, it still contributed 62% of the group's adjusted EBITDA. Now moving to the operating profit segment. At the operating profit level, much of the reasons for the decrease period-on-period have already been discussed and are still applicable to this measure. However, it is worth highlighting that the operating profit reduction of 23% is lower than the reduction in adjusted EBITDA. And that's owing to the favorable biological asset movement that came through in Zimbabwe, which we highlighted as one of the complexities. In addition, the decrease in operating profit would only have been 10% if the results of the Namibian, Eswatini operations had been excluded. Now to the statement of cash flows. The focus on cash flows across the group remains our biggest area of attention, and liquidity is tracked on a daily and weekly basis. Before getting into the numbers, I'd just like to highlight that this cash flow statement is presented including the combined results of the continued operations and the discontinued operations. So it's the one area still in our financials where you'll still see the starch business coming through and its impact on cash flows. Overall, in terms of cash flows, the lower profits have translated to lower cash flows from operations. However, this has been largely offset by substantially reduced investment in working capital. This reduction in the investment has been impacted by the nonrepeat of the investment into maize stocks related to the starch operation, which is significant at ZAR 470 million. In Zimbabwe, there have also been a few opportunities to prepay for goods, and that has resulted in less working capital being tied up. While in Mozambique, the business has experienced a normalization of its payables balances post the conclusion of its debt refinance. Lastly, the sugar stocks in the South African business are abnormally low after the impact of the sugar loss at the refinery at the end of the last financial year as well as the lower production volumes. In respect to capital expenditure, there has been a big focus on ensuring that there's adequate reinvestment into the operating assets to try and improve operating performance. In the past 6 months, the group spent ZAR 212 million in CapEx compared to ZAR 234 million in the previous period. However, it should be noted that the comparative number includes ZAR 42 million related to starch again as well as ZAR 55 million related to a one-off project to rehabilitate the milling line in the Maidstone mill in South Africa. Overall, cash generated for the period before servicing borrowings totaled ZAR 805 million, of which ZAR 423 million was required to pay interest and ZAR 361 million used to reduce debt. What I really wish to specifically highlight on the slide is that roughly 80% of our operational cash flows are generated in Zimbabwe and Mozambique, but 85% of the debt is located in South Africa. In this regard, I've included a new slide showing the cash flow by business segment. The segmental cash flow excludes finance cost and taxation, so it's just a measure of operational performance. And some of the observations are that the group has accessed ZAR 140 million of the ZAR 311 million cash generated in Zimbabwe, which is a significant portion. The South African businesses, sugar property, net of the corporate costs, generated a combined cash flow of ZAR 182 million, but paid interest of ZAR 270 million during the period. The Mozambique business, which generated 47% of the group's cash flow, required ZAR156 million to service its finance costs. And in terms of the lender agreements, surplus cash flows cannot be distributed to South Africa. And this slide simply highlights the dynamic of where the cash is earned versus where the debt is requiring to be serviced. Which brings us to the debt and the significant reduction thereof. Compared to September 2020, gross borrowings have reduced by 41%. Finance costs settled in cash totaled ZAR 423 million and highlight, as I had in the previous slide, the significant liquidity constraint that this place on the business. It also highlights the imperative to further reduce our debt. Borrowings have decreased by ZAR 268 million since 31 March 2021, mainly due to the receipt of the escrow proceeds related to the starch sale that we agreed with lenders could be used to support liquidity and creates headroom on our facilities rather than used for debt reduction. Lastly, the prime lending rates in Mozambique increased by 3%, which has increased the cost of debt funding, and together with timing differences on working capital flows, contributed to a covenant breach at 30 September 2021. This covenant breach has subsequently been waived by the lenders, but it did result in us having to classify ZAR 570 million worth of long-term debt as a current liability in Mozambique. Now before I hand back to Gavin, I just wish to cover off the 2 debt refinances that we completed during the period. Firstly, in South Africa, we concluded the debt refinance on the 6th of December 2021. So it's very fresh. After -- and this was after the impact of the riots' impact our liquidity and resulted in us having to renegotiate a number of the terms that we had agreed in July 2021. These terms mainly related to measures to improve liquidity and headroom for the business, which had come under pressure in the last 6 months. It's also resulted in a reduction in the term loan of ZAR 450 million, and that also subsequently increased the Property PIK by the same amount. The ZAR 450 million is effectively the starch proceeds that we've used for liquidity. In addition, provision has been made for a temporary increase in our overdraft facilities of ZAR 200 million to bring these to ZAR 500 million between the periods, December and March each year, and this is really to support the peak of our working capital cycle. Overall, the principle of this debt refinance remains in line with what we communicated in July. The new package provides us with a clear indication of what sustainable debt is. And to be clear, this debt is supported from cash flows out of SA Sugar property as well as dividends from -- and management fees from the African sugar operations. And it also provides the business with some financial stability, which, as the process of refinancing the debt has extended over 9 months, is critical for the business. In addition, the debt package provides us with time to raise capital and repay the remaining debt, which is not sustainable. Moving to the Mozambique debt refinance. While this debt refinance was less complex, it was still, however, had its own dynamics. The debt refinance totals ZAR 1.1 billion and was concluded on the 30th of July 2023. And this provides the business with certainty of funding for the next 24 months. Now you'll see that the leverage ratio for the business is 2.2x the EBITDA. And while this is not considered high in South African terms, when you're in Mozambique with an 18% interest rate, it is essential that we seek to de-gear this business as possible because all of the cash flow from operations is going to service debt. And with that, I'll hand back to Gavin to take us through the outlook. Thank you.

Thanks, Rob. Let us now look at the future of Tongaat. As you have seen today, the turnaround of Tongaat is progressing well, despite the headwinds experienced. Restoring the balance sheet and delivering on our ESG commitments has been core to our efforts. We have implemented new asset care and investment programs, battened down on infrastructure obligations and are working with the city to deliver on these. And we continue attracting high-caliber individuals to work in our business. Moving to a Level 2 B-BBEE contributor also allows us additional commercial opportunities. We now focus on significantly dialing up operational performance to meet the growing sugar demand on the continent. Looking at regional opportunities. We see Africa's population set to double by 2050, according to a recent The Economist report. South Africa holds some of the best production cost credentials in the sugar world. Sub-Saharan Africa's per capita consumption is half global average and is set to see the largest increase in coming years. There is equally opportunity to leverage positive market conditions. We see in Mozambique the huge per capita consumption growth potential. Our Sugar Masterplan is already bearing fruits. The massive deficit markets offer opportunity for South Africa and our neighboring businesses. The global sugar price has also shown significant improvement, and we at Tongaat, are into all of these opportunities. We remain a major regional agri-business, farming around 60,000 hectares of land with over 16,000 hectares of developable land and greater than 9,000 hectares of prime developable land around KwaZulu-Natal. We have access to 118,000 hectares of cane feedstock, sufficient installed capacity to allow for significant medium- to longer-term growth, a material societal pillar for employees, the entire value chain and the largest supporter of small-scale and previously disadvantaged farmers. Many communities rely on Tongaat, full stop. Failure of Tongaat Hulett is not an option for any of us. However, it's now time for a new chapter at Tongaat. We have 2 primary focuses: sugar and property. The core strategy is delivering cost leadership as a sugar producer focused on South Africa, Zimbabwe and Mozambique and capitalizing on our portfolio of premier commercial properties in KwaZulu-Natal. We believe our focused strategy will create value in the industry and the environment in which we operate. Our strategy has evolved since the sale of the starch business. We now have a very focused and clear strategic intent, which at its core, revolves around growing cane and expanding our feedstock by 25% of our current performance, expanding our milling performance by some 30% plus commercializing our assets and providing earnings growth. All of this is underpinned by people and processes. We also see the next phase of our journey, shifting from stabilizing the business to growing the business. Let us move to our medium-term outlook, and let me welcome each leader of our business units to provide a high-level commitment for the medium term. Dave, Aiden, Lukas and Dan, welcome.

Introducing Dave Howells, MD, Sugar South Africa. Dave has 21 years' experience in the sugar industry. He was appointed MD of the South African sugar operation from June 2021.

Good morning. It is my privilege today on behalf of the Tongaat Hulett South African team to share our medium-time strategy to boost sugar and animal feeds production in our business that supports our market-leading brands. Firstly, we will ensure that we will crush all available cane, which is currently in the region of 5.4 million tons, by returning our raw mills to optimal performance. Secondly, we'll do that by focusing on our raw mills' reliabilities and recoveries. This will ensure that we will increase our raw and refined sugar produced, and this will happen through us implementing the following core initiatives: strengthening the technical resources throughout our factory operations. This has already commenced and resulted in more consistent late-season performances in the current year. We have prioritized resources for the planning of our annual off-crop maintenance shuts and, critically, the execution thereof, commencing with the coming maintenance shut in January next year in readiness for the new season starts in March and April '22. Known critical repairs at each operation have been identified and are actively being addressed in a phased and planned rollout. On a positive note, our central refinery with a new leadership team, has already shown encouraging improvements in recent months, and have an ongoing focus for continual yield enhancements that will optimize refined sugar production and further strengthening our market-leading white sugar brand. Importantly, we have launched accelerated in-house training programs that will focus on uplifting our operating skills across our operating levels from shop floor to senior management, having learned from the positive experiences gained in the refinery turnaround. Thirdly, our market-leading animal feeds business, Voermol, benefits its production capacity from improved raw sugar production, supporting the further expansion of this important adjacent business. By implementing these performance enhancement initiatives, we are building sustainable growth and profitability in our sugar and animal feeds business, whilst leveraging the benefits being afforded by the Sugar Masterplan process and demonstrating our commitment to growing a sweet future. Thank you.

Introducing Aiden Mhere, MD, Sugar Zimbabwe. Aiden has 22 years executive management experience in the sugar industry. He has been the MD of the Zimbabwe sugar operation from 2019.

Thank you. On behalf of Hulett, Zimbabwe, I would like to share with you our aspirations for the medium term. Our forecast is to achieve a sustainable increase in the supply of feedstock at our 2 mills at Hippo Valley and Triangle, targeting annual deliveries of 4.5 million tons, an uplift of 29% and with 26% above prior year and the current year estimate, respectively. Increasing our cane feedstock will be achieved through a number of initiatives that include: replanting a minimum of 10% of farmed cane area annually; targeting high yield in varieties that are disease resilient and tolerant to impacts of climate change; leveraging smart technologies to improve land preparation, soil health, drainage, irrigation and fertilization systems, disease and pest control and mechanizing routine [indiscernible] of our operations; prioritizing the completion of the 3,300 hectare project in Kilimanjaro. And as part of our broad best transformation and employment drive, we will continue to partner locals to develop new cane farms and co-manage low-yielding plots. Our goal is to optimize our manufacturing assets to increase raw sugar production by at least 30% and stabilize the refinery to consistently produce high-quality, bottler-grade sugar. To deliver on these targets, we are developing and implementing robust actions to improve off-crop planning and execution, maintain a prudent capital expenditure profile, strengthen partnership with strategic suppliers, improve technical capability. That includes skills development at all levels. With our per capita consumption of sugar of 22 kgs, which is well below the historic levels of 26 kgs, we anticipate continued strong local demand for both table and industrial sugar at the back of a growing population. We are accordingly building strong brands and continue to explore deficit market opportunities. We foresee expansion opportunities in ethanol at the back of the mandatory regulatory framework requiring a 20% blending ratio with potential to increase to 25%. With ZAR 306 million repatriated in dividends and management fees in the prior year and ZAR 140 million paid to debt in the current year, successful realization of our goal to increase and stabilize feedstock will position our operations well to deliver returns to our shareholders in a consistent and sustainable manner. Thank you.

Introducing Lukas Van Deventer, MD, Sugar Mozambique. Lukas has over 22 years of experience in FMCG and operations across Africa and Saudi Arabia. He joined the Mozambique sugar operations in September 2019 and is now the MD of Sugar Mozambique.

Thank you. Good morning. On behalf of my business unit, Mozambique, I'm happy to share with you our medium-term plan. Mozambique has, over the past 18 months, performed extremely well, and we expect this performance to continue. The key focus has been and will be -- continue to be the agricultural part of our business, which is an important driver for our mills' feedstock. Feedstock is provided from both MCP, miller cum planter fields, as well as from our agro fields also known as small-scale growers. Our focus is on improving the yields through improved farming practices, ensuring that the crop gets to optimal irrigation, fertilizing as well as ensuring best practices to reduce the risk of pest infestation on the growing crops. Despite of our renewal and growth strategy, we are focused on improving our root age profile by replanting roots in the region of 1,600 hectares annually. We have seen good improvements on yields of the replanted cane last year. The land preparation for the replants have been outsourced to optimize efficiencies of this aspect of the business. On the milling side, we have Xinavane mill that performs consistently well and rates in the top-performing mills in South Africa. For this season past, we had excellent overall plant efficiencies of 88% versus a target of 87%. And from a loss time available, we achieved 4.09% versus a target of equal to or less than 5%. The focus remains maintaining this level of performance and looking to continuously improve efficiencies and effectiveness of our mills. The refining is once again having a good year and will produce approximately 60,000 tons of refined sugar and has for the second year produced all bottler-grade sugar required by the market. We expect to fully utilize our refinery over the medium term. The further focus of our business is the development of capacity and capability of our employees, which will deliver cover for the future. Apart from our EIT program, we also have a number of middle managers who partake in an MDP program. Development and retention of our employees is high on the priority list for now and moving into the future. Domestic sales for Mozambique is very positive. Overall versus the previous year, we are trending at 11% up. Both the consumer channel as well as the industrial channel have performed positively. This is despite the market challenges faced through COVID restrictions implemented by government and the unfortunate situation in the north. A big focus on the sales side has been to improve the market reach; to improve distribution channels, especially in the north region where we lacked previously. In addition, we have introduced into the market new pack sizes that is better suited to consumer needs and improve affordability through differentiated pricing. We do believe with a focus on pricing and improved availability, we should be able to improve the per capital consumption from the current 8 to around 10 kgs per capita in the medium to longer term. To further grow the opportunity in Mozambique, we are looking at ethanol project that would be externally funded. This diversification opportunity is supported in principle by the government as it is in line with their own 2024 vision, mostly around job creation and working towards being more self-sufficient as a country. We are confident that with these initiatives and the positive trend in the business, we will be able to consider dividends by 2024. Thank you.

Introducing Dan Marokane, Chief Business Transformation Officer. Dan has over 20 years' experience in the energy and infrastructure sectors. He has been group executive from January 2018 and is now the Chief Business Transformation Officer.

Thank you, Lukas. Good morning on behalf of the property division. Tongaat Hulett continues to own a significant portfolio of premier land in KwaZulu-Natal, which is located in the areas lying between uMhlanga and just south of the Tugela River. These areas also includes the King Shaka, Aerotropolis land and also some land in the west of the city around the Ntshongweni area. The portfolio is split into 2, primarily the trading stock, whose sales are used to generate funds for the legacy infrastructure; and also the balance of the development land that is carried as strategic stock. In 2021, the portfolio was valued at just over ZAR 8 billion, ZAR 2 billion of that being in the trading stock and ZAR 6 billion being the balance of the development at market value. We have reengaged with the market, having packaged the portfolio in a manner that begins to respond to the current demands. In the process, we have targeted to talk to 75 developers and investors. And thus far, we have seen about 30% of the targeted group. There are some key messages that are coming out of these conversations, and I just want to touch on those key messages. The first one is that the COVID-19 has brought about demand in e-commerce servicing land. And we're seeing the need to actually adjust our portfolio to be responsive to that. The case around July riots have led to an increase in demand for industrial safe parks and also residential areas that support safer habitations. We've also seen a clear shift away from speculative developments that used to take place in the previous years. Whilst on the one hand, the banks have tightened their lending criteria to many of the developers. Finally, we see the discouragement that comes from the constraints in as far as the infrastructure is concerned within the eThekwini areas. These conditions present, of course, an increased risk for successful closing of the deal pipeline that we're working on. At the same time, the engagement also points out to a clear opportunity to unlock the property value if we were to enter into partnerships and co-investments with the developers. It is for this reason that our view is that a measured approach is actually required to realizing the property portfolio. It is for this reason that when it comes to the property, our focus and plan going forward is to conclude the current infrastructure framework discussions with the city of eThekwini and at the same time, use our strengthened sales and deal-making team to increase our sales pipeline, whilst also exploring opportunities for annuity income models that we can enter into. In the previous year, our sales were just under ZAR 150 million. We estimate that we'll end the current year at ZAR 230 million. And having done some work to repurpose and align our land portfolio to the shifting market requirements, we anticipate sales to be in the order of ZAR 350 million to ZAR 480 million in the short to medium term. Thank you. I'll now hand you over to -- back to Gavin. Thank you.

Thank you to the team for their unwavering commitment to Tongaat. All of this collated provides for a sizable improvement in our overall operations. In South Africa, it's about crushing cane and mill optimization. We have the feedstock. For Zimbabwe and Mozambique, it's about feedstock improvement via horizontal and vertical growth initiatives and adequately maintaining our mills to crush this cane. Ethanol and animal feed relies on sufficient feedstock availability from our mills. And then to land sales, this is a longer-term and more deliberate process. Here, we have initiated process to leverage this, and a fire sale is not a viable option for our land. With regard to our proposed rights offer, let me be clear on our optionality as for the lender agreement. First, we must initiate and successfully execute a rights offer for a minimum of ZAR 2 billion, including fees, by the end of March 2022. If this is not successfully completed, then secondly, we immediately initiate the process to sell off our strategic sugar assets, meaning breaking up the group. Shareholder support at the AGM is essential as disposals of strategic assets will destroy significant value. Our intention is very clearly to keep the group intact. Encouragingly, we have a strategic partner in Magister, who will provide for a ZAR 2 billion underwrite. But in order to remain below the 60% as agreed for shareholding, we will need shareholders to follow their rights. A fully supported and executed rights offer is the only viable option to reset the balance sheet. Magister is a regional commodity trading and agricultural investment company with decades of experience in agricultural production and commodity trading. Magister invests where it can add value by growing businesses, leveraging its experience and capability. They are long-term investors and support current management and recognize that THL should operate with lower debt levels. Rob will now take us through why the size of the rights offer is so important.

Thanks, Gavin. So to better understand the rationale for upsizing the rights offer from the ZAR 2 billion we spoke about in July, we need to go back to our thinking at the time when we signed the term sheet. At that point, the amount owed on the Property PIK instrument was ZAR 1.2 billion. We had also been in advanced negotiations on a major property sale of roughly ZAR 800 million. And this would leave us ZAR 400 million worth of property transactions to conclude over the next 3 years. This was deemed achievable. What we did not anticipate, though, was some of the liquidity challenges that lay before us. The impact of both the riots and other operational challenges on the outside South African sugar and property businesses created a liquidity shortfall, which as I mentioned earlier, meant we had to agree with our lenders that we redirect the ZAR 450 million escrow proceeds to support liquidity rather than use this to repay debt. This resulted in the Property PIK increasing from ZAR 1.2 billion to ZAR 1.6 billion. In addition, that property transaction fell through in September 2021. So where we sit today is with a Property PIK instrument of ZAR 1.6 billion, which represents 25% of the strategic landholding value, bearing in mind that this value has been determined on the basis of an orderly sales process. And to be specific, this is not the land which we consider trading stock in nature. This is the longer-dated land where we may not be able to realize the full development value if we dispose of it in the short term, especially in a depressed property market and in KZN in particular. In addition, from our experience in seeking an equity partner on the land portfolio, a project that we termed propco, the universe of investors for a property transaction of this size is limited. So with the relative size of the PIK and the roll-up interest at roughly 10.6%, we are concerned that we will not be able to dispose of enough land in sufficient time to preserve shareholder value. To contextualize the compounding effect of the interest, and assuming there's no reduction in the Property PIK over the next 3 years, the cumulative roll-up interest would equate to ZAR 580 million. This would bring the portion of the land required to be disposed of to roughly 35% of the portfolio, again, valued on an orderly course basis. So with the ZAR 2 billion underwriting secured, an opportunity exists for our existing shareholders to partner with Magister to remove the excess debt and ultimately preserve the value of the land in the business. Ultimately, under the upsized rights offer scenario, when we sell the land on an orderly basis, that higher value of the property will accrue back to our shareholders in time. We are confident that this will remove any overhang the debt has on our share price and also allow us a smaller amount of debt to refinance with a smaller lender group and on more commercial terms. So how does this rights offer will look? If we look at the scenarios on the slide in front of us -- and bear with us. It's a complex side, and it does need some time to digest, we have presented 2 options for illustrative purposes, one being the minimum rights offer amount of ZAR 2 billion as required by the banks versus an amount of ZAR 3.8 billion, which would settle both PIK instruments in full. Under the ZAR 2 billion rights offer scenario, after accruing for interest between December and March and taking into account various transaction fees, the amount raised would not be enough to settle the Equity PIK in full, leaving an amount of roughly ZAR 150 million outstanding. And while the interest saving on this scenario of circa ZAR 310 million per annum is significant, the ZAR 2 billion itself is not enough to achieve the minimum requirement for the banks. Looking at the upsized rights offer scenario, a ZAR 3.8 billion rights offer would leave Tongaat with only the sustainable debt left and with the ability to sell land holdings on an orderly course basis without undue pressure. The interest saving on this scenario would roughly be ZAR 630 million per annum. So just to recap on the time lines. For the Equity PIK, we have a number of milestones that we need to meet before March 2022, when the process must be concluded and the money must be banked. If we do not achieve the rights offer closure by the 14th of April, though, there is a marginal step on the interest rates applicable to all the facilities. In addition, if we miss one of these milestones, then we'll have to progress to the sale of strategic assets. Then on the Property PIK time lines, we have to submit and agree a property disposal plan by the 30th of April 2022, to avoid a step-up in interest of 2% on that PIK facility. We have until 30 June 2023, to conclude binding term sheets for sufficient transactions to repay the debt. And the cash is due before 30 June 2024. And with that, I'll hand back to Gavin. Thank you.

Thanks, Rob. We remain committed and optimistic about the future potential of Tongaat Hulett. Keeping the group intact and reducing debt is a priority. We must allow management time to focus on future growth and diversification opportunities, which unlock shareholder value, while protecting the legacy of more than 0.5 million people in our combined value chain. We impress on shareholders to carefully consider our options and support our plans for the rights issue. Thank you. And please take a minute to appreciate one of our success stories before we take any questions. [Presentation]

Thank you very much. Due to COVID protocols, today, Gavin and Rob won't be on stage to answer questions, but they will still be providing inputs on the questions that have been provided. Our first question is, why did Tongaat Hulett not engage with all of its shareholders equally on the rights issue?

Thanks, Virginia. Yes. Certainly, in terms of the compliance with the Companies Act, we are required to engage with shareholders owning more than 5% share in the company. But we, in actual fact, asked the TRP for an exemption and, in fact, engaged with shareholders below the 5% to try and get as much coverage as possible.

Thanks, Gavin. The next question, also for you, Gavin, is who approach who? Did Magister approach you or did you approach them?

Thanks, Virginia. While exploring a possible equity capital raise through a rights offer, Tongaat was approached by Magister Investments, an existing minority shareholder, who expressed interest in strategic equity investments in our business.

Thank you, Gavin. Rob, in terms of the current inflation rate in Zimbabwe, I know you did cover it in some detail, but I didn't know if there was anything more that you wanted to say. The question was, what is the current rate of inflation in Zimbabwe? And how long has it been at these levels?

Yes. Thanks, Virginia. I think we covered it in a fair bit of detail. The current rates as of November is 58%. That's obviously the official rates over there. But I think what you've seen with the unofficial rate being double the official rate, you're seeing an additional amount of inflation coming through informally in the market. So there's a bit of dynamic, and that's why we stress the hand-in-hand view of both the unofficial rates and inflation on the business. And I think you'll see that trend upwards, and we've seen the official rate sort of close a little bit that gap that's been released. But the 2 have a big dynamic on our business. Thanks, Virginia.

Thanks, Rob. The next question is for Gavin. What is the cost of the Mozambique ethanol project? And is this part of the reason for the equity raise?

No, certainly not the reason for an equity raise. Tongaat Hulett is exploring various medium- to long-term diversification opportunities to unlock future value for shareholders. And a potential ethanol plant in Mozambique is one of these opportunities being explored. There's certainly no final decision to proceed with this project, and we continue reflecting and evaluating many different opportunities across the region. But certainly, when we are ready to go to market to look for funding, we will -- it will be announced at the right time.

Thank you, Gavin. Rob, the next question is for you. And it is what exactly are the current covenants of the group? And when may they be breached and why? Who agrees to these covenants?

We've disclosed in the subsequent events note in the financial statement, all the covenants and the terms of the new debt. So I urge shareholders to have a look at that specifically. Our covenants generally -- or our covenants were generally around leverage ratio and the interest cover ratio and then the debt service cover ratio. So they're pretty standard from that perspective. The first measurement, one point is in March 2022. And thereafter, they'll be measured every 6 months. Ultimately, when it comes down to it, the ordinary course sort of covenant towards the end of the debt refinance package changed to a 2.5x leverage ratio. We do make -- we do have some allowances of a higher leverage ratio as we gear down. So for instance, our March '22 leverage ratio will be 13.4x EBITDA, trending to 4.9 and then down to 2.9 and 2.5. So those are the covenants, they're all disclosed there. And I think the other point is this is obviously a negotiated position between ourselves and the lenders. It's based on our debt refinance model that we pulled together, which is effectively a 5-year forecast and shared with the lenders. We've aimed for about 20% headroom and buffer on those. So thanks, Virginia.