Zambia Sugar ANNUAL REPORT 2008 Cover picture: The agricultural operations performed well during the 2007/08 season with an increase in the average cane yield being achieved. The onset of early and heavy summer rains affected harvesting and haulage operations, bringing the crop harvest to a premature end in December 2007. Production of sugar at the Nakambala factory Concerted efforts to improve domestic Preferential sales to the EU increased by 28% was constrained by very wet weather late in market sales in Zambia, including compared to last year, due to additional the season and the earlier than planned mill improvements to the company’s sugar export tonnages, including quota re- closure, with final output amounting to 234 000 distribution and depot systems and the allocations, being awarded to Zambia. The tons of sugar. The factory operated normally promotion of specific pack sizes, resulted in exports included increased tonnages of whilst preparations were made during the year a significant increase in demand, with sales higher-premium speciality sugars. for its expansion in the offcrop period. increasing by 17% above those of last year. ZAMBIA SUGAR EXPANSION A major agricultural and milling expansion is currently being undertaken at Zambia Sugar whereby an additional 10 500 hectares of irrigated cane fields are being developed by the company and its growers, and the factory expanded to produce 440 000 tons of sugar annually, an increase of 200 000 tons compared to production in 2006/07. During the year, an additional The agricultural development Milling capacity at the Nakambala The expansion work carried 2 085 hectares of land were includes the establishment of a factory was increased and sugar out during the 2007/08 season developed to cane by growers, comprehensive irrigation scheme to production in the 2008/09 extended to all parts of the factory. whilst in the current 2008/09 pump water from the Kafue River to season is expected to increase More than 1 500 people have been season, a further 7 500 hectares the cane fields. By completion, the significantly. employed and accommodated of cane development is being total length of canals constructed on site by Zambia Sugar to effect undertaken by the company and for the project will measure both the agricultural and factory its growers. 31 kilometres. expansion. ZAMBIA SUGAR Plc KEY FEATURES 2008 2007 Revenue (ZK’million) 585 303 570 096 Profit from operations (ZK’million) 69 629 133 371 Profit for the year (ZK’million) 127 780 101 162 Basic and diluted earnings per share (ZK) 23.6 18.6 Year-end market price (ZK) 560 170 Price : earnings ratio (%) 23.8 9.4 Dividends per share (ZK) 14.90 13.00 Number of shares in issue (000) 5 426 938 5 426 938 CONTENTS Company profile and operating locations 2 Directorate and senior management 3 Directors’ report 4 Analysis of shareholders 10 ANNUAL REPORT 2008 ANNUAL Corporate governance 12 Five year review 14 Value added statement 16 Annual financial statements - contents 17 Statement of responsibility 18 Report of the independent auditors 19 Notice of meeting 40 Shareholders’ diary 41 Corporate information 41 Form of proxy 43 ZAMBIA SUGAR Plc 1 COMPANY PROFILE Zambia Sugar Plc is listed on the Lusaka Stock Exchange. Illovo Sugar Limited of South Africa, through its wholly owned subsidiary Illovo Sugar Cooperatief UA, holds 89.7% of the issued share capital. The balance of shares is held by institutional investors and members of the public, including employees. Zambia Sugar is the largest sugar producer in Zambia. The Nakambala factory is located in the Mazabuka district and produces sugar from sugar cane grown on its own agricultural estates and from that supplied by independent outgrowers. Approximately 48% of sugar produced is sold on the domestic market for both industrial and home consumption, and about 23% is exported to the European Union under preferential trade agreements. The company also manufactures a range of sugar-based speciality products. Molasses, a by-product of the sugar milling process, is sold mainly as stock feed in to both domestic and regional markets. All sugar is sold under the Whitespoon label and direct-consumption domestic market sugar is Vitamin-A fortified. The Illovo Group has extensive agricultural and manufacturing operations in six African countries. It cultivates annually approximately 5.7 million tons of sugar cane on its own agricultural estates and produces around two million tons of sugar, which is sold principally to domestic and preferential markets, as well as to regional and world markets. Value-added operations include the production of furfural (used mainly in lube oil refineries for the purification of oils), furfuryl alcohol (used mainly to produce a resin in the foundry industry as a binder for foundry sands), Agriguard (an agricultural nematicide), diacetyl and 2.3–pentanedione (both used as high-quality natural flavourants), BioMass Sugar (a sugar cane-based fertiliser), ethyl alcohol, lactulose (a natural laxative), syrup and speciality sugars. OPERATING LOCATIONS Nakonde ANNUAL REPORT 2008 ANNUAL HEAD OFFICE Kasama Mazabuka – agricultural, Mansa sugar manufacturing, packing and distribution operations. Solwezi SALES DEPOTS Kusumbalesa Ndola Zambia Chipata Mongu Mumbwa Luangwa ZAMBIA SUGAR Plc LUSAKA Mazabuka 2 Livingstone DIRECTORATE Name Qualifications Appointed Position Non-executive Chairman G J Clark (52)*^# B.Acct.(Hons.), A.C.A. 2001 Operations Director – Illovo Sugar Executive Directors J P M de Robillard (61)# Dip. Sugar Tech. 2005 Managing Director J A Blumberg (48) B.Compt., M.B.L. 2005 Financial Director D M Kabunda (45) B.A.(Pub.Admin.), M.B.A. 2008 Human Resources Director R M L Katowa (47) B.A., M.B.A. 2002 Marketing Director S D Langton (47) Pr.Eng., B.Sc.Eng. 2008 Operations Director Non-executive Directors F M Banda A.C.I.S., F.C.M.A. 2002 Director of companies A B Chikwanda*^ B.Sc.(Econ.) 2001 Director of companies REPORT 2008 ANNUAL D G MacLeod^# B.Com., A.M.P.(Oxon) 2001 Managing Director – Illovo Sugar Ltd A R Mpungwe B.A.(Hons.) 2007 Director of companies M D Mwanakatwe B.A., A.C.C.A., F.Z.I.C.A. 2005 Director of companies D Patel 2006 Director of companies K Zarnack*# C.A.(S.A.) 2005 Financial Director – Illovo Sugar Ltd SENIOR MANAGEMENT Name Qualifications Joined Operating responsibility L Sievu (46) F.C.C.A., F.Z.I.C.A., A.C.M.A. 2004 Corporate affairs R Dehrmann (41) H.N.D. Mech.Eng. 2007 Factory ZAMBIA SUGAR Plc H P Veenstra (51) M.Ag.Mgt.(Ag.Econ.) 2003 Agriculture 3 * - Audit Committee Member ^ - Remuneration Committee Member # - Risk Management Committee Member 4 ZAMBIA SUGAR Plc ANNUAL REPORT 2008 DIRECTORS’ REPORT DIRECTORS’ PRINCIPAL ACTIVITIES The principal activities of the company are the cultivation of sugar cane and the production of sugar for sale in to local and export markets. REVIEW OF OPERATIONS The company’s operations recorded a net profit after taxation of ZK127 780 million. It produced 233 569 tons (2007: 244 850 tons) of sugar in the 2007/08 season, with sales of 243 023 tons (2007: 249 978 tons), supplemented from existing stocks. During the year Zambia Sugar spent capital of ZK13 953 million on the replacement of assets and ZK411 192 million on the further expansion of the business. A total of ZK19 500 million was spent on the refurbishment and overhaul of factory plant and machinery to ensure that the factory is kept in sound condition, that strategic plant is adequately protected against breakdown and that product quality meets global standards. AGRICULTURE The agricultural operations performed well with an increase in the average cane yield being achieved. The onset of early and heavy summer rains affected harvesting and haulage activities, bringing the crop harvest to a premature end during December 2007. Consequently, cane production of 1 088 000 tons for the season was substantially less than that achieved last year. The weather conditions during the growing period have been favourable and a good crop is forecast in the coming season. PRODUCTION Overall factory performance for the season was disappointing due to a number of operational and mechanical problems. Production REPORT 2008 ANNUAL was further constrained as a result of the very wet conditions late in the season and the earlier than planned mill closure, with final sugar output of 234 000 tons being achieved. Good progress continues in upgrading skills of the factory maintenance and operational staff and similar efforts are planned for the new season. MARKETING Concerted efforts to improve domestic market sales in Zambia, including improvements to the company’s sugar distribution and depot systems and the promotion of specific pack sizes, resulted in a significant increase in demand, with sales increasing by 17% above those of last year. Preferential sales to the EU increased by 28% compared to last ZAMBIA SUGAR Plc year, due to additional export tonnages, including quota re-allocations, being awarded to Zambia. The exports included increased tonnages of higher-premium speciality sugars. Sales were also made into the SACU 5 market in terms of SADC Sugar Protocol arrangements. The supply of sugar to regional markets decreased during the year under review due to the increased domestic demand and preferential sales. DIRECTORS’ REPORT (continued) EU SUGAR REGIME REFORM The reform of the EU continues to take effect and since implementation domestic sugar quota renunciations have amounted to 5.6 million tons. The EU Commission had set a target for quota withdrawals of six million tons, and is able to make a final ‘across-the-board’ cut in quotas in 2010, if there is an imbalance between supply and demand at that time. However, it appears likely that following the latest renunciations, the European market will stabilise.