Pioneer Foods salient features
- Revenue R9 billion up 11%
- Interim gross dividend per listed ordinary share 44 cents (2011: 40 cents)
- Adjusted operating profit (before items of a capital nature) R628 million down 5%
- Adjusted headline earnings R397 million down 6% Adjusted headline earnings per share 221 cents down 7%
After the figures for the reporting period were adjusted by R160.7 million for a once-off share-based payment charge on the B-BBEE equity transaction:
Group Managing Director Andre Hanekom commented:
“The volume decline of 6% in our product basket for the six months under review reflects the continuing strain of the consumer, with inflationary cost pressures persisting.
The resultant 17% increase in selling prices was not sufficient to recover cost and meant our margins contracted over the corresponding period. We are maintaining our diligent focus on cost control and efficiency gains to improve our margins and continuing to invest judiciously in growth assets to meet the anticipated recovery in demand as the economic environment improves.”
Commentary
Group revenue increased by 11% to R9.2 billion, with volumes declining by some 6% and selling prices increasing by some 17% on average over the comparative period.
Results for the reporting period have been substantially impacted by the R161 million once-off non-cash flow cost of the second-phase BEE transaction concluded in the reporting period. As a result, headline earnings declined by 44% to R236 million.
Adjusted headline earnings, excluding the impact of the R161 million, declined by 6% to R397 million or 221 cents per share. Adjusted operating profit, before items of a capital nature, declined by 5% to R628 million, with the Group operating profit margin contracting from 7.9% to 6.8%.
The investment in working capital increased by R511 million since the previous year-end. The impact of the substantially higher raw material prices on inventory at the reporting date was R117 million, buffered to an extent by lower stock volumes. Price inflation primarily caused debtors to increase by R104 million, whereas timing differences in settlements resulted in a decrease of R290 million in creditors.
In addition to the increased working capital investment, the second payment of R217 million in terms of the Competition Commission settlement was made. This limited the net cash generated from operations to R37 million for the reporting period.
Net cash applied in investment activities, largely relating to fixed assets, amounted to R324 million. The Group debt benefited from the R546 million cash received from the third-party financier and participants of the BEE transaction. Effective net interest-bearing debt was R813 million at reporting date or 14% of equity. However, in terms of IFRS, the cumulative debt of the BEE parties of R450 million due to the third-party financier is consolidated into the Group’s accounts and results in reported net interest-bearing debt being R1 263 million or 21% of equity.
The Sasko segment delivered a financial performance marginally ahead of the corresponding period. Volumes sold were in general weaker compared to the previous period due to unsustainable volume growth in the wheaten and bread product categories during the gross profit sacrifice period of the previous year.
In addition, the significant price inflation within the maize meal product category contributed to weaker demand. It should, however, be noted that national maize meal consumption remains at a relatively high level when compared to a few years ago.
Pasta volumes improved off a low base, but performance remained constrained given the continued exposure to increased imports of lower-cost products. Rice consumption in general benefited from the availability of competitively priced raw material from India, but with a negative impact on category profitability. Operating cost pressure from increased electricity and distribution costs remained a concern during the reporting period. Rigorous cost management, effective selling price strategies and focused service delivery remain core to all management activities.
During the reporting period the Board approved the project for a new bakery in KwaZulu-Natal. This bakery will replace the existing 40 year old bakery in Stanger, currently operating at capacity. This project will create additional capacity and improved efficiencies to enable increased market participation in the growing KwaZulu-Natal urban and semi-urban markets. The bakery is being built at Shakaskraal, north of Durban, and the total project cost will amount to R500 million. The bakery is expected to be fully operational at the end of 2013. The Group’s milling, poultry and distribution businesses in neighbouring African countries experienced macro trading dynamics similar to those in South Africa, resulting in a very competitive market environment and constrained performance. Sales and distribution of the Group’s product basket in Namibia and Botswana continued to grow. Additional wheat milling capacity was commissioned in Namibia and improved and expanded distribution warehousing capability became operational in Botswana. Approval by the Botswana Competition Authority was granted for the integration and expansion into broiler chicken rearing and production through the establishment of a joint venture with an existing operator in Botswana.
Agri Business
The financial performance of this segment was severely impacted by unprecedented high maize prices, increasing by more than 60%, which could only be partially recovered in final product pricing.
The feeds business managed to maintain current margins in spite of the higher raw material prices. Increased distribution costs are, however, a concern. From an operational point of view, Nulaid continued to perform well with satisfactory on-farm performance and improving feed conversion ratios. Although selling prices increased significantly, it was not sufficient to recover the substantial increase in the cost of feed, energy and distribution.
Tydstroom was severely impacted by the record high maize prices. Sales volumes increased by 12% mainly in Gauteng. Selling prices increased by 8% in a competitive price environment, but were not sufficient to recover the higher input costs already mentioned.
Efforts to improve operational efficiencies throughout the value chain continue.
Bokomo Foods
The breakfast cereals business posted a sustained profit contribution, excluding intentionally higher marketing spend for the launch of Weet-Bix Bites, Nature’s Source Bites and Smurf Otees, delivering market share gains in the respective sub-categories.
The sales of dried fruit products are materially down in line with last year’s small vine fruit crop, but stronger international sales prices contributed to improved operating profit, despite the lower volumes. This year’s vine fruit crop is of a very good quality, but still smaller than an average crop. The baking ingredients, desserts, flavours and vinegar businesses all improved sales volumes and operational performance year on year.
The launch of Moir’s biscuits was successful and the extension of the product offering in the sweet and savoury biscuit category is proceeding to expectation. Financial performance is, however, constrained by start-up costs and increased marketing spend in excess of R20 million.
The UK cereal business showed good revenue growth, but operating profit was impacted by substantial raw material price increases which could not be fully recovered from the market.
The business of Heinz Foods SA continued its positive overall contribution to the Group results and achieved good volume growth. During the reporting period it exited the chilled foods category to allow for the full utilisation of this inland facility for the production of its frozen food product offering. New innovative microwavable product offerings were launched in the frozen product category. The Wellington’s product range continued to deliver positive sales growth.
Ceres Beverages
The good volume growth and satisfactory financial results achieved in all product categories in the first quarter of the reporting period was almost reversed during the second quarter as volumes declined in the ready-to-drink categories due to consumers migrating to cheaper products, particularly to the concentrate mixture category.
This decline in volumes as well as the significant increases in the cost of fruit concentrates, fuel and energy had a negative impact on the overall profitability of Ceres Beverages during the reporting period.
The commissioning of the new Wadeville plant is progressing well and the plant will be fully operational by the end of the financial year. Benefits from improved service levels and distribution savings by producing closer to the inland market are expected to outweigh the start-up costs of the plant and is expected to be realised as from the 2013 financial year.
Volumes in the fruit concentrate mixture category showed good growth as consumers supported these products as more affordable alternatives to the ready- to-drink products. Although the turnaround strategy implemented in this category was successful, it remains a fiercely competitive category.
Volumes in the Pepsi range of products continued to grow in a very competitive pricing environment.
The beverages category worldwide is under pressure due to the constrained spending power of the consumer. The profitability of Ceres Beverages will be influenced by the ability to recover the high input costs from the consumer, not only per specific product category, but also against other beverages. Double digit price increases have, subsequent to the reporting period, been implemented in certain categories in the marketplace to recover the increased input costs. The key focus areas remain operational efficiencies and margin management.
Prospects
We continue to negotiate shifting consumption patterns, volatile commodity prices and inflationary cost pressures with diligent price and volume management to protect margins without sacrificing quality for the benefit of the consumer. Our judicious and disciplined investment for future growth in our core operations is testimony to our belief that disposable income will increase and consumer spend will normalise over the medium term as the economic environment improves.
Interim dividend
A gross interim dividend of 44 cents (2011: 40 cents) per share has been approved by the Board.
The applicable dates are as follows:
Last date of trading cum dividend: Friday, 29 June 2012
Trading ex dividend commences: Monday, 2 July 2012
Record date: Friday, 6 July 2012
Dividend payable: Monday, 9 July 2012
A gross interim dividend of 13.2 cents (2011: 12.0 cents) per class A ordinary share, being 30% of the gross interim dividend payable to ordinary shareholders in terms of the rules of the relevant employee scheme, will be paid during July 2012.
Share certificates may not be dematerialised or materialised between Monday, 2 July 2012, and Friday, 6 July 2012, both days inclusive.
By order of the Board ZL Combi (Chairman) and WA Hanekom (Managing Director)
Paarl, 17 May 2012
Enquiries
Pioneer Foods: +27 21 807 5100
Andre Hanekom +27 82 808 3549 or ahanekom@pioneerfoods.co.za
Leon Cronje +27 82 801 7772 or lcronje@pioneerfoods.co.za
CapitalVoice: Johannes van Niekerk +27 82 921 9110