RCL Foods says Tongaat Hulett’s failure to pay sugar levies is denting its profits

RCL Foods, which manufactures Selati Sugar, Rainbow and Yum Yum peanut butter, among other goods, has issued a trading statement advising shareholders that headline earnings per share (Heps) and earnings per share (EPS) for the year to June 2023 are expected to be down at least 30% compared with the reported Heps and EPS for the year to June 2022. 

RCL Foods said Heps is expected to be at least 35.6 cents lower than the comparative period’s reported Heps of 118.6 cents, and EPS is expected to be at least 34.2 cents lower than the earlier reported 114 cents.

This decline is mainly driven by the special levy raised by the South African Sugar Association (Sasa) on the group’s sugar business unit, the significant impact of rolling blackouts across all operations in the current period, and unrecovered feed costs in its Rainbow division.

The South African sugar industry has been in flux in recent times. In October 2022, Tongaat Hulett Sugar was placed in voluntary business rescue to avoid bankruptcy in the aftermath of massive fraud discovered in 2018. 

At the end of March, Tongaat Hulett’s business rescue practitioners (BRPs) halted payments to sugar industry stakeholders, putting them at war with the wider industry. Payments resumed at the end of April.

The sugar producer owes about R1.4-billion to Sasa. The payments fund grower associations, which make quarterly payments to individual grower councils. Without these payments, the growers are forced to step in. 

Tongaat’s failure to pay levies affects about 20,700 small-scale sugarcane farmers and more than a thousand large-scale commercial farmers.

The Gledhow Sugar Company followed suit, entering voluntary business rescue in April this year, which heaped even more pressure on the sector, as it too failed to pay its levies.

In March, RCL Foods referred the matter to the Sugar Industry Tribunal. 

RCL Foods and other sugar sector stakeholders believe that the levy is a  statutory obligation which cannot be unilaterally suspended by the BRPs during business rescue. 

In a statement on Tuesday, RCL said: “Pre-commencement levies and redistribution payments owed to Sasa have not been paid and this was aggravated by the decision of the appointed business rescue practitioners of Tongaat Hulett Sugar to suspend payment of their statutory industry obligations as at 31 March 2023. 

“As a consequence, the remaining industry participants have had to bear additional costs in the form of a special levy imposed by Sasa in terms of the Sugar Act 9 of 1978 and Industry Agreement in order to cover the resulting shortfall.”

To date, the net impact of these special levies on RCL Foods is R234-million (pretax). 

It is not known whether these unpaid levies and redistribution payments from Tongaat and Gledhow will be recovered. 

The group’s financial results are expected to be released on 4 September 2023. 

Last month, Tongaat Hulett’s creditors voted to postpone the date on which they must decide on approving the business rescue plan to the end of September, allowing the BRPs to amend the business rescue plans to take into account “various developments”, which include engagements with the potential strategic equity partners. 

On 26 April, the BRPs applied for a declaratory order in the Durban High Court, asking that the court confirm that section 136(2)(a)(i) of the Companies Act 71 of 2008 empowers BRPs to suspend Tongaat Hulett Limited’s (THL’s) payment obligations to Sasa. The respondents in the application are due to file their answering papers in the coming weeks.

The BRPs told Daily Maverick that many parties are affected by Tongaat and its subsidiaries’ financial distress, many of which rely on THL for their livelihood.  

They said they are sensitive to the huge impact of this business rescue on several organisations, people and the province, but under business rescue, the ability of a company to pay its obligations arising from pre-business rescue contracts/agreements is highly dependent on the availability of post-commencement finance without exposing the company to undue risk. 

“It is important to note that the BRPs are working hard to develop a business rescue plan that considers all these factors. Being forced to pay sugar levies could undermine its business rescue process, which would be ‘catastrophic’ for the whole industry, including its employees and 23,000 sugar farmers.” 

In the court documents, they said it is “irrational and arbitrary to permit creditors to claim immediate payment of a debt owing to them merely because those creditors are organs of state or regulators”. DM

Correction: This story was updated to reflect that Tongaat's BRPs resumed payments at the end of April.