Chief executive officer’s report

The group achieved extraordinary results for 2008, with earnings increasing 81%, headline earnings per share 95%, ordinary dividends 74% and cash from operations 126% over the prior year.

INTRODUCTION
The group achieved extraordinary results for 2008, with earnings increasing 81%, headline earnings per share 95%, ordinary dividends 74% and cash from operations 126% over the prior year. These results were achieved despite the global financial crisis and the resultant impact on, in particular, drybulk shipping in the last quarter.

Throughout most of the year the group benefited from unprecedented demand for commodities particularly from the East (China and India). This demand overshadowed the supply of shipping capacity in worldwide trade, resulting in soaring drybulk shipping rates. These shipping rates were also positively impacted by port congestion and longer trade routes. It has, however, always been the group’s view that the large order book, in particular in capesize bulk carriers, would eventually have a negative impact on shipping markets. The sudden decline in drybulk shipping demand as a result of the global financial crisis brought this about far sooner and to a far greater extent than anticipated. Tanker markets on the other hand, were relatively steady throughout 2008, although they have more recently softened.

The strategies that the group has implemented in the past will, however, ensure that it is well positioned to cope with these challenges in 2009. The group has a strong balance sheet, a high level of contract cover and a modern, low cost and diversified fleet of ships. This, together with the positive liquidity position, will enable the group to take advantage of expansion opportunities at the appropriate time.

STRATEGIC PILLARS
Grindrod is pleased to report that the fundamental pillars which form the basis of its strategy have proven to be effective in safeguarding the group from the worst of the volatility this past year. It has strengthened its resolve to continue to grow the business based on these sound principles:

•

Preserving flexibility through diversification in the fleet
Grindrod currently operates a diverse fleet of ships which provides flexibility to balance the economic cycles through participation in various shipping industry sectors. Grindrod also believes that its market presence in these sectors enhances opportunities for both strategic expansion and the effective management and re-allocation, where required, of capital resources on an ongoing basis.

•	Reducing the cost of acquisitions through purchase options and opportunistic acquisitions
	The group has well priced charter extensions and purchase options on most of its long-term chartered handysize fleet and all of its chemical tankers, which provide the opportunity to become owners of these vessels during, or at the end of, the charter periods. Alternatively, these vessels can be redelivered to the owners at the end of the initial charters if this is considered more appropriate. These contractual option arrangements place the group in a strong position to optimise its fleet as market conditions dictate. The group has a reputation for making acquisitions at low cost in difficult market environments and is again positioned to participate in the right opportunities.

•	Ensuring utilisation and gaining a cost advantage by maintaining a modern fleet
	Grindrod’s fleet is younger than the industry average, which results in lower operating costs and makes its vessels more attractive to both charterers and those seeking transportation for specialised cargoes through contracts of affreightment. The high quality of the fleet is maintained through exacting standards on the group’s owned vessels and by regularly monitoring the quality standards on chartered-in vessels to ensure that they meet the group requirements. The modern design of the vessels in the group’s fleet leads to operating efficiencies, environmental benefits from increased fuel efficiency, lower emissions and fewer restrictions on operations. The fleet’s relative youth also provides an enhanced earnings ranking in the pools in which the group participates and lower operating and maintenance costs.

•	Securing visibility over future cash flows through significant forward contract cover
	Grindrod’s drybulk and tanker businesses combine a relatively low cost base with significant contract coverage on time charters-out, forward freight agreements and contracts of affreightment. At 31 December 2008, 62% of the drybulk and tanker fleet is contracted out for 2009, 41% for 2010, 22% for 2011 and 17% for 2012. In addition, approximately 9% of the fleet is contracted out for 2013 and 2014. Grindrod’s high proportion of forward charter coverage delivers visibility over future cash flows and reduces the earnings volatility across economic cycles.

•	Expand income streams through investment in Trading, Freight and Financial Services activities
	The group has diversified interests in Trading, Freight and Financial Services businesses which have started to show good financial returns and also provide a counter to cyclical patterns of shipping markets. The group has the flexibility to reallocate equity between shipping and these operations. The investment in these activities and in particular in ports and terminals over the past two years has positioned these divisions to continue to grow and increase their contribution to group profits over the short to medium term.

RESPONSE TO CHANGED ECONOMIC ENVIRONMENT

In order to reduce the effects of the current environment on its business and to protect its strong liquidity position, the group has taken the following actions over the past few months:

•	increased the level of contract cover in the Shipping operations. The group will continue to add to contract cover at appropriate levels and will consider further ship sales to lock-in profits and generate cash;
•	monitoring of counterparty risk on an ongoing basis in respect of all shipping and trading agreements;
•	debtors across the spectrum of activities are being carefully monitored;
•	review of capital expenditure;
•	emphasis placed on securing additional funding facilities both locally and internationally;
•	cash on hand spread between various banks to reduce large exposures to individual entities;
•	share buyback discontinued; and
•	conservative stance taken in Grindrod Bank in regard to its liquidity position.

DIVISIONAL OVERVIEW

Shipping

The tanker market remained largely stable in the past year, however, both record highs and all time lows were experienced in the drybulk shipping markets. The effects of the credit crisis impacted on the global economy, resulting in a significant reduction in shipping activity. In spite of this, Shipping continued to be the major profit contributor at 83% of total earnings. This was mainly due to the high level of contract cover, increased tanker and drybulk earnings, substantial profits from ship sales at a high point in the market and the benefit from a weaker Rand/US Dollar exchange rate.

The following sale, purchase and chartering transactions were concluded during 2008:

Ships delivered	Ships ordered	Ships sold/redelivered	Contracted sales
1 x 40 000 dwt products tanker	2 x 32 000 dwt handysize bulk carriers	2 x 12 800 dwt products tankers (sold on delivery)	1 x 6 155 dwt products tanker
1 x 16 500 dwt products tanker (50% owned)	1 x 52 378 dwt supramax bulk carrier (two-year charter)	1 x 28 424 dwt handysize bulk carrier (chartered ship sold)	1 x 40 000 dwt products tanker
2 x 12 800 dwt products tankers (sold on delivery)		2 x 34 700 dwt handysize bulk carriers (sold)	1 x 40 000 dwt products tanker (50% owned)
1 x 32 260 dwt handysize bulk carrier (long-term charter – 50%)		2 x 170 000 dwt capesize bulk carriers (chartered ships redelivered)
1 x 29 600 dwt handysize bulk carrier (long-term charter)

During the year, an option to purchase a chartered handysize bulk carrier was exercised.

The Shipping division has a solid contract base with a young and low cost fleet which has positioned it to meet the anticipated challenges in the short to medium term.

Trading

Trading had an excellent second half, which resulted in earnings growth of 104% for the year.

Grindrod increased its shareholding in Cockett Marine and Oreport Holdings to 100% in 2008. These acquisitions now provide a sound base to leverage the skills and relationships within the division and to generate sustainable returns.

Operating income in all three businesses improved through focused trading, good position management, improved logistics management and tighter cost control. In agriculture, volume was consciously relinquished in favour of higher margins.

There is continued volatility across all markets with weak demand for certain resources which have resulted in reduced production. While the division has been able to maintain its own credit lines, the lack of credit and liquidity has had a significant effect on the market as a whole.

The focus for the next year is to improve operating margins, develop the Asian trading hub, leverage existing relationships and possible investment in new origination businesses.

Freight Services

The Freight Services division came under pressure in the fourth quarter of 2008 along with the collapse in commodity and shipping markets, with the worst affected businesses being the Intermodal and Logistics operations. Dry and liquid bulk terminal operations were largely unaffected by the slowdown in the last quarter and are still expected to perform in line with budget in 2009 as the majority of the volumes handled through these facilities are base commodities such as coal, phosrock, clinker, sulphur, fertiliser, vegetable oils and molasses which are expected to be largely unaffected by the global slowdown. Despite current market conditions, volumes through the car terminal in Maputo are expected to increase in 2009 as contracts are concluded with automotive manufacturers to move a portion of their vehicles through Maputo, combined with the benefit of Höegh Autoliners using Maputo as a hub.

Volumes through the Intermodal operations are expected to decline in 2009 along with the downturn in container traffic. Seafreight’s container volumes are expected to decline in 2009. The business will, however, benefit from substantially lower charter rates on vessels and a lower fuel price.

The businesses operating in the durable goods sector (furniture and automotive) are expected to remain under pressure in 2009, with the forecast recovery in the automotive sector only expected in 2010.

Freight Services experienced strong growth in earnings of 74%, particularly from terminal and intermodal activities.

Development of infrastructure

A number of significant infrastructural projects were expanded during the year as follows:

Maputo

•	terminal and port operations;
•	Matola coal terminal;
•	first phase development of a car terminal; and
•	first of a planned six-phase bulk liquid storage tank farm.

Richards Bay

•	bulk terminal export and import handling capacities.

Durban

•	import facility in the drybulk terminal operations.

Walvis Bay

•	handling operations of the drybulk terminal.

As a result of these expansions the group has significant capacity for growth. The detail of the planned and current capacity is set out in the divisional review.

Acquisitions

An entry into the bulk liquid petrochemical transport market was achieved through the acquisition of a business in the third quarter of the year and the subsequent expansion of the fleet size to 32 tanker combinations. The fleet will be cautiously increased with the focus on expanding cross-border transportation as required.

The drybulk transportation fleet was expanded through the purchase of 58 super links during the year. The fleet now comprises 68 units.

Grindrod intends re-entering the rail sector through the conclusion of a joint venture with Solethu Investments, subject to the remaining conditions precedent being fulfilled, which will culminate in the establishment of a black empowered company. This business will provide locomotive leasing, rail operations and shunting services to its clients. The intention is to grow the locomotive fleet and rail wagons to support its client base and position itself to capitalise on business opportunities arising from any potential rail restructure in South Africa.

Disposals

During the course of the year, Freight Services disposed of its interests in the Sheltam Grindrod rail operation.

Subsequent to year-end, Grindrod concluded the sale of a 30% interest in the Maputo Car Terminal to Höegh Autoliners, the owner and operator of one of the largest automotive shipping lines in the world. Höegh Autoliners plans to use Maputo as its automotive hub port for the movement of vehicles in the Indian Ocean market.

A BEE transaction involving most of the South African based freight services activities was also concluded subsequent to year-end. Refer to the social performance report for details of this transaction.

Financial Services

The Financial Services operations achieved good growth in spite of declining equity markets and the slowdown in local economic activity.

During the year the Bank launched its first collective investments scheme, the Grindrod Diversified Preference Share Fund. Investors in the fund benefited from a commendable performance over the year. The Bank’s private client portfolios also showed resilient performance, again underscoring the benefits of long-term and conservative investment management.

The Bank is being conservatively managed in the current market. It has maintained a strong liquidity position and has not been unduly affected by the world financial crisis although transaction activity has declined. The Bank’s capital adequacy ratio of 16,5% is comfortably above the requirements for banks as stipulated under Basel II.

A challenging operating environment for financial service entities is anticipated in view of the ongoing financial crisis.

DIVISIONAL STRUCTURES

The group restructured its offshore operations and completed substantial preparatory work for a potential listing of its shipping operation. Although the environment is currently not conducive to a listing, management will continue to monitor capital markets and should conditions change, are positioned to respond timeously.

MARKET OUTLOOK FOR 2009

The financial crisis has not just impacted on shipping, but also the entire global economy and trade movement.

Drybulk shipping markets are expected to remain at weaker levels in the short to medium term. The market has recovered substantially from the extreme lows at the end of 2008 as a result of resumed commodity trading, although the potential delivery of a large newbuilding fleet in the short term is likely to result in volatility and will delay the market recovery. Substantial scrapping is taking place and a large portion of the newbuilding order book is expected to be cancelled, which will improve the supply/demand imbalance.

Tanker markets are expected to remain at relatively soft levels for the medium term due to the large order book and subdued demand growth. However, an improvement is anticipated as single hull ships are scrapped and new refinery capacity comes on-stream in areas that require transportation of products over longer distances to reach the major consumption markets.

The markets have further affected the movement of certain commodities, containers and durable goods. However, trade flows of some commodities such as thermal coal and agricultural products are expected to continue to show growth and will offset some of the volume declines. The expansion of the drybulk terminals in Richards Bay and Maputo was to service increased coal exports and further expansion of these facilities will go ahead as planned. Customer commitments have been received for the increased capacity on a 75% take-or-pay basis.

GROUP PROSPECTS

In spite of the current economic outlook, earnings growth is anticipated from the Trading, Freight Services and Financial Services businesses.

The group’s balance sheet strength and favourable liquidity position offer a high level of resilience in these markets and will create opportunities to expand through acquisition.

The credit crisis and the global economic downturn have impacted shipping freight movements and this, together with the anticipated growth in shipping fleets worldwide, is expected to result in continued softer shipping markets in 2009. While the group will continue to benefit from a high level of contract cover at prices above current spot rates and a low cost fleet of ships, there will nevertheless be a decline in the Shipping division’s profitability, given the extent of the deterioration in the markets.

Consequently, the group expects a reduction in earnings in comparison to the “super profits” achieved in 2008, but still anticipates acceptable returns on shareholders’ funds in 2009.

MANAGEMENT AND EMPLOYEES

Other than the appointment of Brendan McIlmurray as the executive responsible for the Trading division there have been no changes to the group’s executive during the year.

I look forward to continued support from the group executive and would like to thank them, all employees and the non-executive directors for their support over the past year. The group has an abundance of quality management and staff. With the high level of management expertise, skills and dedication of employees, Grindrod can face the challenges of 2009 with confidence.

A K Olivier

Chief executive officer

Durban

25 February 2009