Paarl / ZA. (pf) South African Pioneer Foods announced its unaudited financial results for the six months ended 31 march 2017.
Introduction
A confluence of various inhibitors contributed to a material decline in profitability for the first half of the financial year ended 31 March 2017. The most significant detractor was maize due to the unfavourable procurement position taken in 2016 in order to protect supply for South Africa’s leading maize brand. This decision was predicated on careful consideration of the available information at the time. The International Division was severely impacted by a raisin crop shortfall, African exports and a stronger rand. Group turnover increased by 2 percent, with the South African business increasing turnover by 4 percent and International declining by 11 percent.
Financial performance
Cost of goods sold increased by 10 percent due to significant raw material cost push, resulting in gross profit decreasing by 16 percent to 2.6 billion ZAR and the gross profit margin compressed from 31 percent to 26 percent.
Operating profit, before items of a capital nature, adjusted for the 2017 IFRS 2 share-based payment (SBP) charge and the related hedge gain on the Phase I B-BBEE (BEE) transaction, the 2016 SBP BEE transaction gain and once-off merger and acquisition (M+A) costs («adjusted»), decreased by 43 percent to 700 million ZAR and the adjusted operating profit margin declined from 12 percent to 7 percent. This, notwithstanding a sustained focus on cost management and the extraction of efficiencies.
The BEE SBP charge and the marked-to-market on the hedge relating to the BEE transaction amounted to a net charge of 3.1 million ZAR (the Pioneer Foods share price increased from 173.87 ZAR at 30 September 2016 to 176.61 ZAR at 31 March 2017) compared to a gain of 142.7 million ZAR (share price decreased from 195.76 ZAR to 139.04 ZAR with no hedge in place) in the prior period. The M+A costs amounted to 9.3 million ZAR in 2017.
Profit before income tax decreased by 53 percent to 648 million ZAR, after finance costs of 88 million ZAR (2016: 75 million ZAR). The share of profit of joint ventures and associates amounted to 30 million ZAR (2016: 42 million ZAR). The regression in the share of profit from joint ventures and associates can largely be ascribed to the performance of Bokomo Botswana that was also negatively impacted by the same maize procurement strategy as the Group. Bowman Ingredients (SA) and Future Life Health Products continued their excellent performances. Adjusted earnings per share (EPS) and headline earnings per share (HEPS) decreased by 48 percent and 47 percent to 256.5 and 253.4 cents per share respectively. In 2016, EPS was also adjusted for the impairment of the Quantum Foods Holdings shares held by the Phase II B-BBEE SPVs.
Divisional Performance
Essential Foods: The performance of Essential Foods was overwhelmingly impacted by maize. The margin drag on maize will cease from June as lower cost raw material comes into effect. Stringent cost management was enforced to partially mitigate the aforementioned. The bakery business continued to deliver volume growth and operating leverage. Pleasingly, the Aeroton bakery upgrade and expansion was commissioned in April. Pasta, flour and legumes contributed positively, whilst rice regressed amidst aggressive competition.
Groceries: The Groceries performance was disappointing, beverages in particular. Cost push inflation into the summer season coupled to a cooler summer inland, impacted volumes and margins significantly. Breakfast cereals, also affected by cost push inflation and competition, managed to increase profitability. The balance of the categories showed a significant improvement in profitability.
International: Profit contraction was the most severe in this division consequent to lower export beverage volumes and margins as a result of currency
devaluation in key markets, placing pressure on the Ceres value proposition in market. Raisins historically contributed materially to profitability of International. Profitability in the first half was eroded due to a smaller crop and a relative stronger currency. The UK business was affected by higher irrecoverable input costs due to Brexit. That said, Streamfoods has been efficiently integrated and the overall top line performance of the business was pleasing. Nigeria, whilst small, contributed positively increasing market share and profitability.
Financial position and cash flows
Strong cash generation continues to underpin the Group’s operations with cash generated from operations up by 27 percent to 875 million ZAR (2016: 690 million ZAR). Investment in working capital was pleasingly restricted to 167 million ZAR notwithstanding significant seasonal investment in the 2017 dried fruit crop.
Capital expenditure amounted to 369 million ZAR (2016: 349 million ZAR) with the expansion of the Aeroton bakery and the additional Weet-Bix line being the major projects.
In October 2016 the Group settled the obligation of 493.3 million ZAR for the forward purchase contracts on own equity. This transaction was entered into in 2016 to hedge the Group against the upside risk of the Group’s share price in terms of the BEE scheme. This obligation was disclosed as an accrual at 30 September 2016.
The Group acquired a 49.89 percent interest in Weetabix East Africa for 190 million ZAR on 3 March 2017. The Group’s investment in this entity is included as an interest in an associate from this date.
The Group’s net interest-bearing debt, excluding the 463 million ZAR third-party debt relating to the Phase II B-BBEE transaction partners, amounted to 1’425 million ZAR at 31 March 2017, with a debt to equity ratio of 18 percent (30 September 2016: 6 percent), compared to net debt of 501 million ZAR at 30 September 2016.
Outlook
We anticipate an improvement in performance in the second half of the financial year notwithstanding a constrained trading environment in South Africa. Various factors should assist in improving profitability, namely:
- Increased raisin supply, however at a lower level of profitability to the prior year
- Lower maize input costs from June
- Lower beverage input costs
- Aeroton bakery and Weet-Bix capacity
Pioneer Foods will continue to be vigilant for acquisitions as a growth vector to bolster the core business.
