The strong financial performances of recent years have given the Board the resources and confidence to pursue a range of investments primarily aimed at increasing throughput and reliability in UCL’s manufacturing plants. The objective has been to not only improve financial performance over
the short term by reducing production costs and increasing output but also to prepare the various divisions for future growth as well as improved resilience against tougher trading conditions.
The resulting Capital expenditure, which was in excess of R90 million during the year under review, has been funded from Working Capital. Together with a sharp fall in the profitability of Sugar, this has resulted in a drop in Cash resources. The overall Cash position has been further reduced by delayed SARS repayments, increased Receivables and increased Inventory. To date, UCL has specifically avoided Long Term Debt to finance these investments due to its higher pricing. As a result, the company’s Working Capital Facilities have been extended. However, greater liquidity can be restored by shifting debt into term loans while still maintain acceptable gearing ratios. Any future consolidation, therefore, will have more to do with lower profits than with Cash availability. As it is, the financial results for the year under review are substantially lower due to the difficulties experienced by the sugar industry.
Operating Profit for Sugar has fallen 78% primarily due to a major reduction in local demand and a substantial increase in exports where returns are lower than the cost of production. Sugar production on the other hand was up slightly while further gains have been made in reducing manufacturing costs. The company expects difficult trading conditions for sugar over the medium term. The local market demand is not expected to recover any time soon which pushes more sugar onto the export market resulting in a dilution of proceeds. The situation is exacerbated by the large increase in the cane crop compared to the average over the past decade. The implications for growers and millers is that both will need to exercise caution over what will inevitably be a period of restraint. This is where our recent spend on the mill will prove invaluable. Spending restrictions will not be such that maintenance and consequently mill performance, need suffer. Growers will similarly have to consider investments in new varieties and cost reducing initiatives, if they haven’t already done so. Staff retrenchments are at an all-time high throughout the industry as growers and millers seek to survive the current state of affairs. The challenge will be to find a balance between savings and committing to base line spend in order to optimise performance.
The significantly higher average exchange rate with the US Dollar has resulted in a strong recovery in the results of the Wattle Extract division. However, there was a notable reduction in volumes sold following economic turmoil in some of UCL’s sales destinations. We are yet to fully benefit from recent investments in equipment due to delays in fully commissioning the machines at design output. The upgrading of the sawmill has continued during 2018/19. Significant spending has been allocated towards improving the sawmill’s throughput in both the wetmill and drymill sections. There has been a significant improvement in financial performance following recent upgrades and improved productivity. However, we remain short of our target and we look forward to the completion of a host of current projects aimed at taking the mill beyond 340 cubes a day.
The overall less favourable result has required that the Board deviates from its target dividend policy in favour of a more prudent approach. A dividend of 5c per share has therefore been approved for 2018/19. In recognition of the good results relating to Wattle Extract, suppliers in this division have been awarded a supplementary price enhancement. This year, UCL’s Developing Growers were the beneficiaries of a larger share of the available profits. They benefited from a R400/t price enhancement, which represents an additional 20% above the current A Grade price. Despite the inherent challenges faced by this group of Growers, their performance has been noteworthy, particularly during the difficult harvesting conditions at the start and end of the season.
We look forward to additional growth in this sector in the years to come. Large scale growers also benefitted from a price enhancement of R190/t. UCL is openly committed to supporting the sustainability of all its Grower within the various crop categories and it is particularly pleasing when the company is able to share some of its gains with its valued suppliers.