SAFCOL Presentation to Parliamentary Portfolio Committee on Public Enterprises

05 November 2014

Prof. Somadoda FikeniInterim Board Chairperson

GROWTH THROUGH PARTNERSHIP

1

SAFCOL REPRESENTATIVES

Prof Somadoda FikeniInterim Board Chairperson

Nomkhita MonaGroup Chief Executive Officer

Zoliswa MashininiGroup Chief Financial Officer

Julia MphafudiGroup Senior Executive: Human Capital Management and Transformation

2

Mandate, Vision, Mission and Values

SAFCOL Group Structure

Strategic Pillars

Operations

Current state of log industry

Competitor Matrix

Performance & Audit Report

Human Capital Management and Socio-Economic Development

Land Claims

Key Risks and Challenges

Outlook

3

MANDATE

To conduct forestry business which includes timber harvesting, timber processing and related activities, both domestically and internationally

VISION

Being a world-class, global business engaged in multi-functional forestry, revolutionising the integration of forests and communities.

MISSION

Our mission is driven by an unwavering commitment to facilitate the sustainable economic empowerment of communities and the alleviation of poverty through:

• Implementing needs-driven interventions; and

• Becoming a partner of choice for land claimants.

CORE VALUES

Passionate about our forests, communities, customers and people * Have a social and

environmental conscience * Trust founded on integrity and loyalty * Equality, fairness

and empowerment

* Respect for diversity * Focus on innovation and excellence 4

5

SAFCOL BOARD of DIRECTORS

6

SAFCOL GROUP EXCO

7

8

South Africa• Spread over

187 320 ha –with 121 000 ha planted

• 18 plantations

Mozambique• Initial IFLOMA plantations

cover 31 754 ha• In partnership with

Mozambican government (20%ownership)

• 4 plantations• Licensed for expansion by an

additional 69 360 ha closer tothe Beira port.

OPERATIONS

9

SAFCOL’s main subsidiary, Komatiland Forests (KLF) manages 187,320ha across 18 plantations in Mpumalanga, Limpopo and KZN

Owns and operates the Timbadola mill in Limpopo and rents two sawmills on the Highveld

22% of SAFCOL sawlogs processed internally

64% of available land is commercially planted with the remaining 36% comprising conservation areas, wetlands, grasslands, thickets and indigenous forests

Planted area 93% pine with 7% Eucalyptus and Wattle

Growing stock managed over 30 year rotation for sawlogs and 6-12 years for other products

KLF is able to sustainably harvest 1.447 million m3 annually

10

The fact that KLF’s revenue from processing operations grew from 26% in 2008 to 33% in 2014 (36% of sales revenue), shows the significance of processing own sawlogs

SAFCOL holds 80% of the Mozambican IFLOMA initiative with a landholding of 31,754ha in partnership with the government of Mozambique

80% of the shareholding is KLF –20% held by, Mozambique’s State Shareholding Management Institute

Total landholding area is 31,754 ha in extent- 16,178 ha is plantable for commercial forestry

SAFCOL has recently completed a bankable feasibility study –61,000 ha for IFLOMA II

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Forestry

CORE OPERATIONS

12

Processing

CORE OPERATIONS

13

The South African log industry is domestically focused with an emphasis on production of pulp logs

The size of the South African timber market is 18.5million m3

There is an oversupply of logs in South African market

South Africa imports 90,000m³ of softwood lumber and 74,000m³ of plywood per year

SAFCOL currently does not export any logs or by-products

Owns about 8% of South African timber market

Owns more than 25% of pine saw log market

Major producer of larger diameter pruned logs in South Africa

Local demand for larger diameter logs has declined -SAFCOL is therefore unable to realize the value invested for 30 years into these types of trees

Current state of South African log industry

South Africa SAFCOL

0

20

40

60

80%

Pro

po

rtio

n o

f SA

log

pro

duc

tio

n

Pulp logs

68%

Saw logs

22%

Other

10%

0

20

40

60

80

100%

Prop

ort

ion

of S

AFC

OL

plan

tatio

n st

ock

Pulp logs

10%

Saw logs

88%

Other

2%

14

SAFCOL’s closest competitor is York Timber, while also competing with SAPPI and MONDI

CompanyPlantation

areaTurnover

(R billions)Vertical

IntegrationArea of

operationProducts

121 000ha R0.86BProcess only 22% of volume

Mainly SA, Mozambique

Logs and lumber

61 000ha R1.2BFully up to retail level

Mainly SA and distribution into Southern Africa

Logs, lumber,plywood, veneer

554 000ha R63B FullySA, Swaziland,Europe, USA

Pulp, paper, logs and lumber

307 000ha R75B Fully SA, Europe, AsiaPulp, paper and wood chips

Competing forest owners are all fully integrated and have higher turnovers while SAFCOL processes only a small proportion of production internally

15

Element of

Strategic Intent

Key Performance

Area

KPI Achieved

actuals

Annual

Targets

Reason for variance

FINANCIAL AND

COMMERCIAL

SUSTAINABILITY

Financial Returns EBITDA / Revenue 2% 8% Performance is below target as a result

of depressed markets

Return on equity

excluding fair

value movements

and translation

gains (losses)

-1% 3% Negative variance is due to the losses

incurred as a result of lower revenue

than budget and depressed markets

Creditworthiness Gearing Ratio 1% ≤50% Lower capital expenditure, resulting in

lower than anticipated utilisation of

asset-based financing

Cash Interest

Cover

12 2 This is due to positive cash flow

generated from operations. The net

interest to date is positive R7m, due to

more interest being earned than paid.

Working Capital

Management

Current Ratio

(Excl. NCAHFS)

3 ≤4 In line with target

Cash Ratio 1.3 1.5 This is slightly below target due to a

higher increase in current liabilities than

anticipated.

PERFORMANCE AGAINST SHAREHOLDER MATRIX

Element of

Strategic Intent

Key Performance

Area

KPI Achieved

actuals

Annual Targets Reason for variance

SUSTAINABLE

FOREST

MANAGEMENT

Plantable area of

forest under

management

Total gross stocked area

SA 121 667 ha 121 100 ha Target

exceeded

Includes a provision

of 500ha for

delineation and

excisions as agreed

upon with the

shareholder.

IFLOMA 16 178 ha 16 411 ha Target

achieved

Includes a provision

of 500ha for

delineation and

excisions as agreed

upon with the

shareholder.

Temporarily unplanted area

SA 1.9% ≤3.0% Target exceeded: focussed

management & conducive conditions

IFLOMA 10.2% ≤18% Target exceeded: focussed

management & conducive conditions

Area to be planted

IFLOMA 1 672 ha 1,500 ha Project suspended during the financial yearIFLOMA 2 0 ha 2,000 ha

Area of forest under

management that is

certified under FSC

% total forest area in

South Africa

100% 100% Target maintained

% total forest area in

Mozambique*

Application to the

certification body

Project suspended during the

financial year

PERFORMANCE AGAINST SHAREHOLDER MATRIX

Element of

Strategic Intent

Key

Performance

Area

KPI Achieved

actuals

Annual

Targets

Reason for variance

SUSTAINABLE

FOREST

MANAGEMENT

Processing South African Operations

Timbadola (volume) 119 645 m3 130 000m3

Custom Cut Operations (volume)114 796 m3 150 000 m3

Recovery Rate 49% 49%

Upgrade Completed feasibility Study

Submission of feasibility Study

Mozambique Operations

Volume 6 491 m3 30 000 m3 Project suspended during the financial

yearRecovery rate* 43% 52%

SOCIO-

ECONOMIC

TRANSFORMA

TION

Skills

Development

Number of Management Trainees

(Internship) in the programme

34 15 Target exceeded: Intake of forestry

graduate trainees through External SAFCOL

bursary scheme + additional ERP

Number of Artisans Trainees in the

programme

10 6 Target exceeded: More funding received

from SETA

Number of Sector Specific trainees

such as Foresters and Forestry

workers in the programme

120 20 Target exceeded: More funding received

from SETA

Training spend :

% of total training spend

against personnel costs

inclusive of 1% skills levy.

3.5% 3% Target exceeded: More funds became

available from SETA

Corporate

Social

Investment

Implementation of the

development charters

13 Jobs created

Infrastructure

Total spend on Group CSI

PERFORMANCE AGAINST SHAREHOLDER MATRIX

Element of

Strategic Intent

Key

Performance

Area

KPI Achieved

actuals

Annual

Targets

Reason for variance

Employment

Creation

Number of black

management.

84 70 Target exceeded: Qualifying applicants in

management positions are mostly black

Number of black

management

females

21 21 Target achieved

Number of Black

People with

Disabilities.

20 7 Target exceeded: Following an awareness campaign

several employees then declared their disabilities.

SOCIO-

ECONOMIC

TRANSFORMAT

ION

Procurement BBBEE Contributor

Level

2 2 Target achieved

BBBEE Total

Procurement Spend

R676 853 977 R 607 302 586 Target exceeded: The entity embarked on a conscious

effort to source BBBEE suppliers over and above what was

anticipated

SMME Procurement Spend

% Local Content 96.22% 75% Target exceeded: services required by SAFCOL can be

sourced locally

Total % BBBEE

contribution (of local

content)

85.66% 50% Target exceeded: service providers on database are BBBEE

compliant

Procurement Spend

on Marginalised

Group

% Black

Women

Owned

12.46

%

6% Target exceeded: Increased women service providers

% Youth

Owned

Achieved

as part of

the above

3% Information not specified and not available on the B-BBEE

scorecards of suppliers. To be calculated manually going

forward.% PWD

Owned

1%

Number of

Enterprises

Developed

21% 1% NPAT – Budget

allocation

Socio Economic

Development - SED13 Jobs created

InfrastructureTotal Spend on Group CSI

Target exceeded: NPAT for 2013/2014 was lower than budgeted, whilst already committed to projects based on budgeted allocations

Financial Highlights

• The Group achieved the highest revenue (R894m) in 5 years

• Achieved R 511m net profit

• Cashflow grew by R69m year-on-year

• Our biological assets which were previously undervalued at

R3 billion, were revalued to R3.67 billion

• The Group received an unqualified audit opinion

20

FINANCIAL PERFORMANCE FINANCIAL PERFORMANCE

-

100 000 000

200 000 000

300 000 000

400 000 000

500 000 000

600 000 000

700 000 000

800 000 000

900 000 000

1 000 000 000

Revenue Cost of Sales OperatingExpenses

2013 / 2014

2012 /2013

Revenue• Upward trend with 5%

increase on prior year

Cost of Sales• Increase mainly driven by

increase in land lease rentals

Operating expenses• Decrease mainly as a

result of lower spending

FINANCIAL PERFORMANCE

21

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Gross Profit Margin Net Profit Margin Operating Profit Ratio

2013 / 2014

2012 /2013

Gross Profit Margin• As a result of the increase in Cost

of Sales driven by increase in land lease costs, gross profit margins decreased by 4%

Net Profit Margin• Significant increase in Net Profit

Margin driven by fair value on biological assets (9% for 2013 to 57% for 2014)

Operating Profit Ratio• In the prior year profit included

sale of property asset, resulting in a 4% profit ratio against -4% in the current year

FINANCIAL PERFORMANCE

22

SAFCOL GROUP STATEMENT OF FINANCIAL PERFORMANCE

23

Amounts in Rand Thousands 2 014 2 013 Variance Variance %

Revenue 894 374 855 608 38 766 4.5%

Cost of sales 699 491 635 006 64 485 10.2%

Other income 8 615 64 878 -56 263 -87%

Operating expenses 239 275 251 207 -11 932 -5%

Net investment revenue 11 286 11 988 -702 -6%

(Loss) / Profit before taxation excluding fair value adjustments -24 491 46 261 -70 752 -153%

Fair value adjustments 731 445 63 028 668 417 1061%

Profit before taxation including fair value adjustments 706 954 109 289 597 665 547%

Taxation 196 174 35 470 160 704 453%

Net profit for the year 510 780 73 819 436 961 592%

Financial year

SAFCOL GROUP STATEMENT OF FINANCIAL PERFORMANCE

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Amounts in Rand Thousands 2 014 2 013 Variance Variance %

ASSETS 4 857 663 4 090 818 766 845 19%

Non-current assets 3 760 297 3 042 325 717 972 24%

Current Assets (incl. current portion of biological asset) 724 611 710 680 13 931 2%

Non-current assets held for sale 372 755 337 813 34 942 10%

EQUITY AND LIABILITIES 4 857 663 4 090 818 766 845 19%

Equity 3 608 575 3 103 102 505 473 16%

Liabilities 1 249 088 987 716 261 372 26%

Non-current liabilities 1 080 239 861 220 219 019 25%

Current liabilities 168 849 126 496 42 353 33%

Financial year

GROWTH THROUGH PARTNERSHIP

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SAFCOL GROUP STATEMENT OF CASH FLOWS

Amounts in Rand Thousands 2 014 2 013 Variance Variance %

Cash flow from operating activities 93 745 15 191 78 554 517%

Cash flow from investing activities -34 652 6 724 -41 376 -615%

Cash flow from financing activities 10 339 12 270 -1 931 16%

Total cash movement for the year 69 432 34 185 35 247 103%

Cash and cash equivalents at end of the year 222 162 152 730 69 432 45%

Financial year

FIVE-YEAR CASH FLOW TREND

• The Group generates cash from its operations: Improvementsince FY2010 from negative R136 million to positive R83 million

• Cash and cash equivalents: Since FY2011, there has beenincrease in cash resources of more than 100%.

-200

-150

-100

-50

0

50

100

150

200

250

2010 2011 2012 2013 2014

Cash flow from operations(R'mil)

Cash and cashequivalents(R'mil)

Five-year trend of cash flows

26

• 2013 audit qualifications resolved resulting in an Unqualified audit opinion for2014.

• Material losses: R 1 million incurred as result of fraudulent activities at IFLOMA

Remedial Action: R 800 000 recovered and criminal processes instituted

• Non-compliance to Treasury regulations:

1. Liability management: in respect of existing credit cards that were not cancelled.

Remedial Action: engagement with National Treasury on card alternatives

2. Strategic planning and performance management: The corporate plan not alignedto shareholder compact.

Remedial Action: alignment of corporate plan and shareholders compact forsubsequent period

AUDIT REPORT

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AUDIT REPORT…CONTINUED

Remedial Action:

Disciplinary process underway

Policies and Procedures relating to irregular, fruitless and wasteful expenditure

have been developed

Procurement Policy review is in the process of finalisation

ERP system functionality to detect instances of missing documentation (e.g. tax

clearance certificates)

HUMAN CAPITAL MANAGEMENT

SAFCOL has over 5000 employees

The following HCM programmes were implemented in 2013/14:

• 250 jobs profiled and graded

• Succession planning for females and core positions

• Accelerated development of black managers and professionals in core positions

• New Performance Management System

• Health and Wellness Programme for all employees

• 15 HCM policies developed

EMPLOYMENT EQUITY STATUS

Programme Male Female Total

A C I W A C I W

Top Management 0 0 0 0 2 0 0 0 2

Senior Management3 0 0 1 1 0 0 1 6

Professionally

qualified 25 2 1 32 14 1 3 5 83

Skilled 59 1 0 15 45 5 0 16 141

Semi-skilled 683 1 1 4 118 7 2 11 827

Unskilled 494 0 0 0 182 1 0 0 677

TOTAL 1264 4 2 52 362 14 5 33 1736

SOCIO-ECONOMIC DEVELOPMENT • R6.6 million was invested on CSI initiatives in 2013/2014.

• 13 social compacts to foster development of neighbouring communities

• The community infrastructure development projects include - Building market stalls- School desks - Farming equipment- Dignity Packs- Community

Halls/centres

• Established more than 15 Cooperatives which provide 500 sustainable jobs

• Assisted 2 Enterprises to purchase 8 trucks, this allow them to participate in themulti- million transportation of logs business

• Built a Desk Manufacturing Factory with 20 youth producing school desks, creatingemployment and encouraging entrepreneurship

SKILLS DEVELOPMENT PROGRAMMES

78 leaners participated in a leanership programme

34 interns and 13 artisans participated in Internship programme

366 community members participated in Adult Education Training

500 community members trained on variety of interventions includingcomputer, sewing, school desk manufacturing and upholstery

15 career exhibitions with 3500 participants

R2 million spent on bursaries for employees and school leaving youth

LAND CLAIMS

Status Mpumalanga Limpopo KwaZulu-Natal Total

Researched 13 1 - 14

Gazetted 3 10 1 14

Approved - 3 - 3

Transferred - - - -

16 14 1 31

61% of the SAFCOL’s land is under claim

Settlement model being discussed with claimants

Ngome land claim

is being fast

tracked

Challenges

Unlawful land occupation

Lack of communication with claimants, on progress,

by responsible departments

Disputes between the claimants

Inability to sell the log volumes

Future role of SAFCOLSkills retention

34

Unresolved land claims

Changes in External Environment

Incorrect business model

RISKS AND CHALLENGES

Increasing operational cost

Old sawmill equipment

SAFCOL’s OUTLOOK

Financial/ commercial sustainability

Sustainable forestry management

Enhanceddevelopment contribution

Timbadola upgrade and expansion

Export logs

IFLOMA expansion

Plywood mill and co-generation facility

Green Energy

These initiatives meet the objectives of enhanced development, financial and commercial sustainability and sustainable forestry management to varying degrees

35

Change business model: Increase own processing

36Thank you

FSC CERTIFIED• Fully FSC certified in SA• Pre-certification completed in Mozambique

SHEQ • Group obtained 82.76% compliance score

representing four stars (NOSA)• Annual internal environment and safety

audits were conducted at operational units

BUSINESS• Sustainable and looking at new growth

opportunities • Grow large diameter logs over a 30 year

rotation