Top Business Portfolio November 17, 2009

Tsb Sugar: 1965 to today
Tsb Sugar Holdings, founded in 1965, operates three mills in SA, one each in Malalane, Komatipoort, and Pongola (acquired from Illovo Sugar as from 1 August 2009). Following the Pongola mill acquisition, Tsb Sugar now produces about 700,000t of sugar per year (in a normal season), or about 35% of all sugar produced in SA.
Tsb Sugar, a 100% subsidiary of Johannesburg Stock Exchange-listed Remgro Ltd, has also invested in citrus agriculture and produces animal feeds from by-products from the sugar manufacturing process.
Salient dates:

• 1965 - Transvaal Suiker Beperk is founded.
• 1966 - The company Quality Sugars is formed to act as the marketing distribution agent for Tsb's sugar.
• 1967 - Tsb's R20m sugar mill receives its first cane and starts with the production of sugar.
• 1985 - Molatek animal feed factory is commissioned. Today Molatek supplies an extensive range of advanced concentrates, licks and energy products for beef, dairy cattle, sheep, goats, horses and ostriches, etc.
• 1994 - Komati Sugar Mill, one of the most modern mills in the southern hemisphere, is commissioned.
• 1998 - Production at Komati Mill is doubled.
• 2004 - Tsb transfers its citrus business to Golden Frontiers Citrus to form a BEE (black economic empowerment) partnership. Tsb acquires 100% ownership of Booker Tate.
• 2005 - Tsb acquires a 25.58% shareholding in RSSC. Tsb and RSSC form a 50:50 partnership marketing company, Mananga Sugar Packers.
• 2006 - Transvaal Suiker Beperk changes its name to Tsb Sugar. Komati Mill's production capacity is increased from 420t to 500t of cane per hour as a result of boiler expansions. The mill now has capacity to crush 2.6m tons of cane, producing 320,000t of raw sugar in a 38-week season.
• 2009 - Tsb acquires the Pongola Mill from Illovo Sugar.

Structure today
Under Tsb Sugar Holdings is Tsb Sugar RSA, which has five main divisions, namely:
Sugar agricultural operations, divided between Tsb Agriculture (own sugar farms); the different companies in which Tsb is involved in joint ventures following land claims; and a third element in which Tsb works with independent commercial and small farmers to increase their production.
Sugar milling and refining operations.
Transport operations, divided between transport from the fields to the mills in a separate company called NCC, which is currently 100% owned; and transport of sugar from the mill to the market (Tsb-owned).
Quality Sugars, the sugar marketing division.
Molatek animal feeds division.
Also under Tsb Sugar Holdings is the international division, called Tsb Sugar International which encompasses all operations beyond SA, including its interests in Swaziland and in Booker Tate.
Also under Tsb Sugar Holdings is Tsb Sugar Citrus Holdings which it co-owns with the Industrial Development Corp (IDC), Golden Frontier Citrus (GFC); and, with the Bosveld Sitrus group of Limpopo, it owns Komati Fruits, which markets GFC Fruits.

Land reform at the heart of Tsb’s future
Land reform is an important issue for SA as a country and for the agrifood sector especially. But Tsb Holdings makes no secret of the fact that for its core sugar operations, it is a matter of pure survival. Says Tsb Sugar Holdings' MD, John du Plessis: "To survive we have to make a success of land reform." Says Vusi Khoza, general manager corporate communications Tsb Sugar: "If anything makes us panic it is supply of cane. We absolutely must have sufficient cane for the mill to be profitable."
That supply of cane depends on the farmers who produce the cane. And their land, in the Mpumalanga Lowveld (Nelspruit to Komatipoort) area where Tsb primarily operates, has been more than 80% under land claim.
The process of land reform is relatively far advanced in that area - a few years ahead of the process in the KwaZulu-Natal sugar-producing areas, for instance.
Land claims and land reform affect every single operation of Tsb - most notably its sugar cane supply, but also its large citrus interests in the Mpumalanga Lowveld and northwards.
Tsb's experience is of broader (and vital) interest to the SA agrifood sector generally because many processors are experiencing limits in agricultural raw materials production - or at least uncertainties of supply - because of land reform. In some cases, processors are not expanding their operations because they believe the domestic supply of those commodities will fall.
But Tsb - both in sugar and in citrus production - is creating, supporting and building a model in which land reform can be a success both for an agribusiness company like itself and for the country (which includes food processors). This is now a point of innovation and pride for Tsb.
Says Du Plessis: "We have not resisted the process of land reform but have asked how to make it work. It is here to stay and we have to ensure the sustainability of the solutions. Where there are risks, there are opportunities. We are trying to turn the risk into an opportunity."
Before the whole land restitution process, Tsb had title deeds to about 8,500ha of cane lands. It was also supplied with cane by commercial farmers and small farmers.
Following all envisaged restitution, Tsb will have title deeds to only about 1,200ha, mainly around its two mills (Malalane and Komati). However it will be involved in production of cane via joint ventures with communities on another 11,000ha.
As the cane yield on joint venture farms is, on average, higher even than the yield achieved by commercial farmers, Tsb expects what could have been a negative to have been turned into a positive for itself and its partners (because of higher cane production).
A different, unique solution
Within Tsb, discussions on how to handle restituted farms productively have been going on for many years. Tsb's joint ventures on such farms have been going on for only three years.
Tsb's experience is that the types of problems are always the same, says Du Plessis: "Management, technical expertise and finance."
Those fundamental problems are also the problems which plague small sugar farmers, of which most sugar companies in developing countries have considerable experience (including Royal Swaziland Sugar Corp (in which Tsb has a 27% stake)).
Tsb has had previous experience with small sugar farmers, following development by the previous white SA government of cane growing areas in "homelands" in the Mpumalanga Lowveld.
But farmers on restituted lands are in a different category because whereas small farmers own their farms in the conventional sense, the SA land reform process creates an entirely new type of ownership which might be called "commercial communal ownership". This is because farms are restituted to communities, not to individuals.
This requires a different solution - in fact, a unique, SA-made solution.
"Much of the initial problem is in managing expectations (following the community's acquisition of the land)," says Khoza.
"Often in the past individual (white) commercial farmers entered into joint ventures or lease agreements with communities which had received their land. But often the community became unhappy with the first dividends and repossessed the land to work it themselves. Then typically they found out that farming is not so easy."
Says Du Plessis: "The challenge is also in getting the communities to be able to manage big businesses - these farms are not small businesses! This involves developing people and installing structures and processes."
This problem was always apparent and Tsb's discussions with the government began not long after SA's first democratic elections.
The initial SA government model for land reform was that the government bought land and associated businesses from (white) commercial farmers, who invariably moved away. The communities took their places, with whatever management they set up.
The concept was that the new owner-communities could and would run the farms, and the main constraint was resources.
If the new owners were lucky, the government gave them resources.
There were many failures, even when government did deliver those additional resources.
With many priorities and limited capacity, the national government's focus was not on this. However, the atmosphere is now more positive because of increased government focus on sustainability.
Evolving from this background, the joint ventures which Tsb has implemented already on three large restituted community-owned farms in the past 3-4 years, have involved the initial election of trustees from the communities, followed by negotiations with them and the land claims commissioner.
Two more joint venture agreements are currently pending. Each joint venture is linked to one tribal authority.
Says Du Plessis: "The community decision-making process is obviously lengthier (than with individual commercial farmers) and there can be power struggles within the community. A community can have a mind of its own apart from that of its elected representatives."
The negotiations have typically resulted in joint venture management companies with boards in which the communities have a 50% holding. The communities own the land 100%.
Dawie van Rooy, director: RSA operations (with focus on cane supply), re-emphasizes that handling this correctly was an absolute necessity - "it is what can kill our business."
"It is also essential that we deal with the government, the beneficiaries and Tsb. There are other stakeholders but these are the directly-affected partners. If land reform is a success, it most affects those three, and particularly the last two."
"This is a broad concept in which joint ventures are between strategic partners and the community (not just Tsb). It could also be with former farmers. If a past settlement solution is in place, we stand back because we don't want to be seen as dominating and participating in every solution.
"This is a solution for us to ensure our cane supply, not for us to make money. This is in contrast to some joint venture developments in Limpopo where agribusiness companies and smaller companies see land claims as a profit opportunity.
"If there is no solution in place, we get involved and try to create a solution. There is always politics involved, but we have our first prototypes.
"The basis of success is that the outside partner in the joint venture - for instance ourselves - must have money and expertise. There are two focus areas: production and the transfer of skills to the beneficiaries. In starting the JVs, there is a strategic process of planning and whatever plan is decided upon, we implement it.
"The claims arise as a result of communities having been moved off that land, so they are obviously no longer living there. Mostly they do not want to return, but it they do, there are also housing issues. Municipalities don't want uncontrolled development.
"The joint venture is conducted as a normal company but there is transfer of skills at all levels - including the company board and management.
"The joint ventures have their own personnel (often former Tsb personnel), but support services and management are provided by Tsb in most cases.
"There is also enterprise development - we encourage members of the beneficiary communities who are not directly involved but have businesses to approach us to see what they can supply."
Khoza believes that the reason why Tsb has been successful so far is the resources and energy that it has put into this. "You can have the theoretical model but we really get into the communities and work. The model was evolved through a long process of discussion, but what makes it work now is the energy we put in."
"Also the fact that the land claim process is more advanced than with the rest of the sugar companies," Van Rooy adds.
Achieving a win-win situation
Says Van Rooy: "Although there are high expectations, there is now general agreement (though there are always individuals who disagree) that communities don't have the means to undertake this kind of farming. So we try to achieve a win-win situation, in:
* Creating a flow of income to the beneficiaries. The community owns the land and the JV leases the land, so the community benefits from the lease revenues and the dividends from their shares in the JV company. The JV agreements vary between 10 and 22 years, according to the type of land and who owned it previously. On the land previously owned by Tsb, the agreements are longer.
* Empowerment of the communities - for instance, when money is spent on education, members of the communities are preferred.
* Opportunities for individual claimants (as employees and suppliers).
"The long-term view is that most of the employees, managers and service providers will be from the beneficiary communities, so that they will have a huge stake in the success of the farms. Also, over time, the shareholdings of Tsb in the JVs will decrease.
"We are also looking at other links in the value chain - for instance transport of the sugar from the farms to the mills, where BEE (black economic empowerment) will be implemented. All of this requires good relations with the communities.
"We think there will be a lot of goodwill between ourselves and the communities, that they will feel comfortable working with us and that they will continue with the arrangement. There is a lot of comfort with our involvement in just three years and they are expressing satisfaction."
The measure of the success of this type of arrangement is that where previously there were large tracts of restituted land on which the communities were "going it alone", now all of it in the Mpumalanga Lowveld has or will be transferred to JV arrangements (whether Tsb is involved or not).

Tsb acquires Pongola Sugar Mill
The Pongola Sugar Mill was acquired from Illovo by Tsb (from    1 August 2009) as part of Tsb's strategy for growth.
Illovo is focusing increasingly on LDCs (lease developed countries) and EBA (Everything But Arms) sugar exports, which are allowed from most other African countries, but not from SA.  Illovo, a much larger company than Tsb, has previously sold other mills in SA, namely the Umfolozi and Gledhow mills.
Tsb is also on the lookout for other sugar-related investments in Africa, but is currently more focused on SA and Swaziland.
Tsb approached Illovo to purchase the Pongola mill because there are many similarities and compatibilities between Pongola and Tsb's Mpumalanga Lowveld operations. Pongola is aligned to Tsb's core competencies in that:
But, as in the Mpumalanga Lowveld, a large portion of cane lands in Pongola are under land claim, so production levels are highly vulnerable.
When land claims occur, the tendency is for the current farmers to freeze production-related spending and cease investment until the matter is resolved.
This is a natural human reaction - even in normal commercial sales of land. The difference with land claims is that the process is protracted - often more protracted than the land claims commissioner's own initial indications.
Tsb deals with this by communicating as much as possible to farmers that if they allow their farms and production to decline:
- This often results in cash flow problems, which snowball.
- The land claims commissioner does a final inspection before taking over land, and if the farm has deteriorated the original price promised may not be paid.
- It has challenges in manufacturing and skills availability, where Tsb's skills in increasing productivity and the effectiveness of mills will be applied.
There are also similarities in that both the Mpumalanga Lowveld and Pongola are under irrigation - and both have higher sucrose yields per hectare than the KwaZulu-Natal cane-growing areas, which are rain-fed.

 Value-adding to sugar
Sugar is a commodity so local and international commodity prices are of vital importance to producers and processors. Value-adding is one way to increasing margins on the product itself.
However for a sugar mill company, producing co-products is an additional option for increasing profitability.
A sugar mill is, says John du Plessis, already a "clean business" because it creates useful by-products and is almost energy self-sufficient. For instance, a mill generates much of its own power; and water from the mill goes back into the cane fields, as does ash and filter cake for fertilizer.
Molasses with its inverted sugars - fructose and glucose - can be used to make cattle feed and/or ethanol.
Tsb took the cattle feed route in 1985 when it commissioned the Molatek animal feed factory, adjacent to the Malalane mill.
Currently, the most obvious next step (and most valuable step for the SA economy) in the development of co-products by sugar mills is co-generation of electricity.
Co-generation using bagasse taken from the cane fields is established technology; its application is a matter of negotiation on an industry level with the government and Eskom. The main barrier to such co-generation has always been low electricity rates paid by Eskom and the lack of clear in-feed mechanisms.
Says Du Plessis: "Cane is one of the best substrates for co-generation. The focus should be on getting the regulatory framework sorted out."
The sugar industry was not included in the more generous renewable energy feed-in tariff (REFiT) guideline tariffs for feeding into the grid electricity recently announced by the National Energy Regulator of SA (NERSA).
But if electricity tariffs continue to be increased by large amounts each year (as has happened in the past two years), it is possible that in the long run co-generation (and fuel ethanol production) may become economic without huge government (or NERSA) assistance.
Another possible next step in co-products is to produce ethanol. However, throughout the world, successful fuel ethanol industries have only been created with the support of government subsidies or concessions, and such structures do not currently exist in SA. Internationally, 80% of ethanol production is now for fuel.
All other sugar ethanol producers in the region produce potable ethanol (Illovo and NCP in SA, and RSSC and USA Distillers in Swaziland). However, the potable market is currently saturated.

Booker Tate
The acquisition by Tsb of Booker Tate gave Tsb a knowledge base in sugar which would be hard to beat, says John du Plessis, who was appointed MD of Tsb Sugar Holdings earlier this year.
Du Plessis, who was previously MD of RSSC and before that a Booker Tate consultant, has worked in many countries.
Booker Tate itself has a long history in countries of the British Empire and later the Commonwealth. It was initially owned by Tate & Lyle and Bookers as a knowledge-based company which served parastatals in third world/developing countries.
Booker Tate was bought from Tate & Lyle by SA company Murray & Roberts in 2000; in 2004 it was bought by Tsb. Booker Tate became a subsidiary of Tsb Sugar International, an arm of Tsb which has a similar purpose to Booker Tate within Africa.
Booker Tate's two offices in SA - in Malalane and Durban - now take responsibility for all operations in Africa, while its head office in Thame, England, takes responsibility for its businesses in the rest of the world.
Currently Booker Tate's clients are in Swaziland, Uganda, Nigeria, Guyana, Belize, Indonesia, Papua New Guinea and Saudi Arabia.
Internationally, Booker Tate offers ongoing corporate and technical management - but as with consultants generally, its objective is to "work ourselves out of a job", when the client company itself takes over (after the staff has been trained).
For instance in Papua New Guinea and Belize, Booker Tate is currently relinquishing corporate management and reducing its involvement to technical management only.
In the past 50 years Booker Tate has completed over 1,500 assignments in more than 120 countries.
Du Plessis says although the company had a wonderful knowledge base, it did not have the vehicle to turn this to a profit. "There is probably no other company worldwide that has the same depth of knowledge in sugar and sugar cane production. However, the business model was to support parastatals, so the company had to reinvent itself."
For Tsb, Booker Tate gave access to the world market and the most advanced technologies. Currently Booker Tate:
Has huge agricultural information (for instance, soil analyses in Tanzania) which does not become outdated.
Has skills which position Tsb to access opportunities and look at investments.
Derek van Niekerk, operations director of Booker Tate, says the company is the part of Tsb directed towards growth and new businesses.
Booker Tate's major success since it was acquired by Tsb was Tsb's investment in Royal Swazi Sugar Corp (RSSC), and thereafter the setting up a joint packaging operation with RSSC.
However, it has not resulted in any other major investments by Tsb since then. Says Van Niekerk: "We have looked at other projects and in some cases we were not successful with tenders. How much can be gained on a new project? It depends on what the current status is - each project is different."

Golden Frontiers Citrus
In the early 1990s Tsb owned 200ha of citrus as part of its cane farms. Citrus was a thriving sector at that time and Tsb decided that this could be a diversification.
Hence the establishment of Golden Frontiers Citrus (GFC) which has, since then, expanded to become one of the largest growers, packers and marketers of citrus in SA.
Today, says Dr Hoppie Nel, MD of GFC, GFC has 1,700ha of citrus under its control, including three of its own farms, and five pack houses. Its citrus varieties cultivated include Star Ruby, Rose, Marsh, Delta, Valencia and Midnight.
No processing is done - only packaging, primarily of grapefruit for export, via Maputo and Durban ports.
The high quality of all of GFC's products secures premium prices.
SA exports about 90m cartons of citrus per year, of which 50m are oranges. SA exports 10-11m cartons of grapefruit, of which GFC accounts for 2.5m or about 20% of SA's exports. Grapefruit is a higher-margin product than oranges.
In addition, GFC exports 1m cartons of oranges and 200,000 cartons of litchis annually, and produces 1m cartons of bananas every year for the local market.
In 1998 GFC established its own internal marketing company; Komati Fruits, which is now co-owned by the Bosveld citrus producing group of Limpopo.
In 2004 Tsb sold 49% of GFC to the IDC, which is warehousing it for a future BEE deal.
A leader in standards
GFC is particularly known for being a leader in meeting the varied and complex standards required for exports, including Globalgap (formerly Eurepgap) and many other individual standards required by retailers.
Besides good agricultural practices (GAPs) there are also many ethical criteria for which it has to be audited for compliance to standards of remuneration, safety of workers, disciplinary procedures and environmental matters. These are particularly required by British supermarkets.
There are also a number of food safety requirements, particularly of Japanese and German retailers, which require special care in selecting which chemicals may be used in the production process.
Its best practices on cultivation, irrigation methods and management have allowed it to reach an export percentage of 65% of its production.

The story of the Selati brand
Selati is the story of the building of a big brand - in fact, the biggest retail sugar brand in SA today, by volume sales. According to ACNielsen figures for retail sales of sugar in SA, Tsb has a retail market share of approximately 35% - compared to its production share of about 22%.
Huletts Sugar currently has about 33% of the retail market as read by ACNielsen, and Illovo has 4.5%. The rest of the retail market is made up of house brands, imported brands, etc.
However, Tsb is under-represented in the SA industrial sugar market, where it has a share of about 14%. Illovo is particularly strong in the supply of industrial sugars.
Tsb's acquisition of the Pongola mill will mean that Tsb's production will rise by about 150,000t/year - from about 550,000t/year currently to about 700,000t. This means that Tsb will then account for about 30% of SA's sugar production and for about 33% of the sales of SA Sugar Assoc sugar to the SA retail market (this includes imports).
A commodity market
Retail sugar is a basic commodity market. All of the SA-made sugars are of high quality and of the same whiteness and sweetness. So how to market in such a situation?
Quality Sugars, the marketing division of Tsb Sugar, was bought from a private trader, Leo Shaffer, in 1993, shortly before deregulation of the SA sugar industry in 1996. Shaffer had sold to the major retail chains by personal relationships.
Quality Sugars today consists of a packaging plant in Malalane and a marketing branch in Johannesburg. It packs and distributes more than 360,000t/year of sugar and sugar products for the local market and sells about 180,000t into the export market.
Peter Harland was appointed general manager marketing of Quality Sugars in September 1993. He had FMCG expertise, as did the entire marketing and sales team he appointed. He says that today Quality Sugars focuses its efforts on service and quality.
Although all sugar is a massive-volume industry with low margins, retail sugar has slightly better returns due to the range of products sold - from 250g to 25kg pack sizes - than industrial sugar. In industrial sugar, packaging counts for nothing because sugar is simply an ingredient.
Nonetheless, there has been fierce competition in the industry on the retail brand level since deregulation in 1996.
As the retail product is intrinsically virtually indistinguishable for consumers, differentiation between the sugar companies is based on service and relationship with the trade.
Says Harland: "Most of all the trade wants consistency of merchandising - that what is on the shelves today needs to be replenished for tomorrow. The trade does not want to carry large stocks - they want the suppliers to carry the stocks. In practice, this means more frequent deliveries."
Tsb has benefited from its structure, in which all of the packaging logistics and supply chain responsibilities were made subordinate to the marketing team, which was given considerable operational flexibility.
Tsb's logistics department, which falls under Quality Sugars, can store about 38,000t of packed sugar. It distributes between 1,500t and 1,800t of sugar daily via road and rail.
Quality Sugars' sales and marketing office is in Johannesburg, in the centre of the main inland market, which has been of benefit.
But Tsb's biggest opportunity came in the 1990s when, with deregulation, SA Sugar Distributors (SASD), a joint company of Huletts and Illovo, had to be broken up. In the dissolution agreement, Huletts left the inland market to Illovo, where Illovo was not established.
Illovo has not succeeded in gaining significant penetration following the withdrawal of Huletts.
But Tsb took the gap created by the withdrawal of the Huletts brand and made some dramatic market share improvements.
Reflecting its focus on consumers and its leading-brand position, Tsb today is sugar "category captain" for most of the large retailers.
Generally, category management means tracking the rate of sales for the different brands at the till and approximately reflecting this on the retail shelves. It also compares return on retail shelf space in value.
While it might be expected that the category captain would favour itself, in fact says Harland, because smaller brands cannot be "cut in half", they often gain percentage facings which are larger than their market share percentages - and the leading brands may get commensurately lower percentage facings.
However there are advantages in that Tsb produces many of the retailers' house brands, which offers synergies in driving the category, he says.
The consumer orientation of Tsb has also been seen in its launching of a number of tiny niche sugar products including demarara sugar, crystals, shakers and Muscovado. These are finicky, time-consuming and costly products, and they only amount to 2% of the business - but they do add value, says Harland.
Increased competition
The addition of Pongola's production to Tsb is likely to increase competition between SA's two major sugar retail brands - Selati and Huletts - to gain market share in each of the other's traditional heartlands.
Tsb will be seeking more market share in the coastal areas; Huletts is likely to seek the same in the inland areas.
Huletts currently dominates SA coastal retail sales and has about 12% of the Gauteng market. Tsb is insignificant in the KwaZulu-Natal and Eastern Cape markets but has about 20% of the Western Cape market.
"Retailers will let Tsb into coastal areas because they don't want to be dominated," says Harland, "but our product will have to be competitively-priced and we will have to merchandise better, smarter and more efficiently in areas where we have relatively little infrastructure currently."
Market trends
Regarding the sugar consumer market, Harland says that in more sophisticated markets, sugar has negative connotations because of obesity, dental caries and diabetes. These markets see an opportunity in promoting high-value, higher-margin products such as sweeteners.
Dieticians say that sugar can play a substantial role in a balanced diet and that if people do not get sugar in a direct form, they get it in other forms (for instance from processed foods).
The sugar companies therefore direct their brand marketing efforts at the lower end of the market where there is a huge number of consumers.
There, sugar is typically an essential item in food cupboards which are sparsely-stocked - along with chicken, maize meal, rice and cooking oil. Those consumers do not have chocolates, sweets and processed foods.
SA's direct sugar consumption totals about 1.9m tons per year (all sugar marketed in SA, including imports from Swaziland, Brazil and other countries). Volume growth of the consumer market is about 1.5%/year, compared to population growth of 2-3%/year.
* Royal Swazi Sugar Corp (RSSC) is Swaziland's largest sugar-producing company (and the largest producer of potable ethanol in Southern Africa). RSSC and Tsb Sugar jointly formed Mananga Sugar Packers (MSP), a marketing company that packs, sells and distributes sugar. Some of the sugar produced in Swaziland is allocated to independent packers to pack for sale mainly into the more lucrative SA market. A protocol between SA and Swaziland allows these packers to gain access to the SA market at a price advantage (compared to the discount they would suffer on world markets). Mananga Sugar Packers' brand, First Sugar, a retail price-fighter brand, is distributed in SA areas close to Swaziland, in KwaZulu-Natal and Free State. MSP also packs house-brand sugars for some of the major SA retailers. - Teigue Payne