Paarl / ZA. (pf) South African Pioneer Foods posted condensed annual financial statements for the year ended 30 September 2013.
| Salient Features: | ||
| Revenue | 20’551 million ZAR | plus ten percent |
| Final gross dividend per listed ordinary share | 0,86 ZAR | plus 23 percent |
| Operating profit (before items of a capital nature) | 1’057 million ZAR | plus two percent |
| Adjusted operating profit (before items of a capital nature) | 1’271 million ZAR | plus nine percent |
| Earnings per share | 2,74 ZAR | minus 18 percent |
| Earnings per share for continuing operations | 3,84 ZAR | plus 13 percent |
| Headline earnings per share | 3,89 ZAR | plus 15 percent |
| Adjusted headline earnings | 826 million ZAR | plus 13 percent |
| Adjusted headline earnings per share | 4,56 ZAR | plus twelve percent |
| Net asset value per share | 3’598 cents | plus five percent |
Chief Executive Phil Roux: «Significant change is under way at Pioneer Foods to position the organisation more competitively. Notwithstanding the aforementioned, the organisation has shown resilience by producing a fair set of results in a constrained and highly competitive market environment. Certain categories excelled while others encountered stronger headwinds. That said, clarity of strategic direction enabled by a more efficient business model should bode well for medium term prospects for the organisation».
Introduction
Pioneer Foods has shown resilience by producing a fair set of results in a constrained and highly competitive market environment. Certain categories excelled while others encountered stronger headwinds. The business environment within which Pioneer Foods operates continues to be extremely challenging. The South African consumer is experiencing substantial pressure on several fronts. Consumer confidence is low, household debt levels are high and discretionary income limited, translating to price sensitive and more discerning shopper behaviour.
The fast-moving consumer goods sector is also experiencing increased competition from both local and international market entrants. The combination of a soft and highly competitive market makes it difficult to pass the full impact of input cost increases on to consumers without volume loss. Strategically, it is therefore imperative that we continue to invest in our Power Brands in keeping with our strategic intent of being a leading branded consumer goods organisation.
The Group also faced some internal challenges over the past six months as a new strategy and business model were initiated. Although disruptive, these transformational changes are gaining traction and will reposition the organisation to capitalise on its underlying potential.
Unbundling of Quantum Foods and impairment
In September 2013, Pioneer Foods announced its intention to unbundle Quantum Foods and to list the business as a separate legal entity on the JSE in 2014. The listing will be subject to market conditions and regulatory requirements, and other acceptable corporate actions will be considered. Accordingly, Quantum Foods has been accounted for as an «asset held for sale» and a «discontinued operation» in terms of IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations for the year under review. As a result, the net assets of Quantum Foods had to be valued at the lower of its carrying amount or fair value less cost to sell. An independent valuation resulted in an impairment of the net asset value of Quantum Foods by 232,0 million ZAR, the amount of which is included in items of a capital nature of discontinued operations. This impairment is largely the result of the continued macro challenges in the broiler industry. Results for 2012 in the statement for comprehensive income were restated to reflect Quantum Foods as a discontinued operation.
Financial Review
Revenue from continuing operations during the year under review increased by nine percent to 17,0 billion ZAR. This was largely as a consequence of increased sales prices, as volumes across the Group´s basket increased by only one percent. Revenue increased by ten percent to 20,6 billion ZAR inclusive of the discontinued operations of Quantum Foods.
Cost of goods sold from continuing operations increased by ten percent resulting in a decline in gross profit margin from 30,1 percent to 29,5 percent. Significant increases in production input costs and exchange rate volatility placed pressure on margins. Rigorous cost management contained the increase of operating costs, after adjustments as described below, to seven percent.
Operating profit has been impacted by non-recurring reorganisation costs of 69 million ZAR, as well as a share-based payment charge of 146 million ZAR, relating to the Phase I B-BBEE transaction, as a result of the share price increasing from 53,00 ZAR to 87,50 ZAR in the reporting period. In the comparative period the share price declined from 59,00 ZAR to 53,00 ZAR, resulting in a gain of 36 million ZAR. Comparative results of the previous year have further been impacted by a once-off, non-cash flow charge of 161 million ZAR, relating to the Phase II B-BBEE transaction. Headline earnings were further impacted by the recognition of a deferred income tax asset of 74 million ZAR.
Operating profit from continuing operations, before items of a capital nature, and adjusted in the respective periods for the abnormal costs as described above, increased by seven percent to 1’270 million ZAR with an operating margin of 7,5 percent (2012: 7,6 percent).
Headline earnings of continuing operations, adjusted as described above, increased by ten percent to 819 million ZAR or 452 cents per share.
Headline earnings for the Group, adjusted as described above, and inclusive of the performance from the discontinued business of Quantum Foods, increased by 13 percent to 826 million ZAR or 456 cents per share.
Net cash generated from operations, including Quantum Foods, increased by 48 percent to 1’482 million ZAR for the reporting period, largely as a result of unlocking net working capital of 53 million ZAR as opposed to an investment in net working capital of 266 million ZAR in the comparative period.
Inventory increased by 276 million ZAR mainly due to an increased raisin crop. The increased investment in wheat stock volumes was countered by decreased volumes of maize stock at year-end. Debtors remained flat while creditors increased by 370 million ZAR mainly due to payments after year-end.
Net cash profit increased by seven percent to 1’623 million ZAR, but cash resources were negatively impacted by the final payment of the Competition Commission penalty of 217 million ZAR.
The capital expansion programme is now almost complete with an amount of 1’085 million ZAR invested this year of which 843 million ZAR was attributable to expansion capital and 242 million ZAR to replacement capital. The Shakaskraal bakery, Malmesbury/Paarl mill consolidation and the Quantum Foods abattoir consolidation in Gauteng were the principal beneficiaries. A further amount of 315 million ZAR was invested on acquiring businesses to complete the repositioning of the Quantum Foods business. Included in this amount is the 144 million ZAR for the investment in Mega Eggs in Zambia.
Net interest-bearing debt increased by 468 million ZAR to 1’462 million ZAR, a debt to equity ratio of 22 percent (2012: 16 percent). Debt includes 482 million ZAR of funding from third-party financiers for the 2012 Phase II B-BBEE transaction being consolidated in terms of IFRS. The debt to equity ratio improves to 15 percent should this consolidated third-party debt be excluded.
Sasko
Overall volume growth remained muted and price recovery continued to be challenging, most notably in the wheat and rice product categories. Total industry demand for the wheat and maize categories declined for the year and the decline accelerated in the fourth quarter. Maize profitability in the first half of the reporting period was compromised despite strong volume growth due to insufficient price recovery in a rising commodity cycle. This was corrected in the second half of the reporting period. The wheat and bread categories experienced volume declines due to weaker demand. Price inflation ran ahead of overall inflation. Acceptable volume growth was achieved in the rice category, but profitability remained negatively impacted by the price spread between Thai and Indian origin rice. The pasta category performed well in volume and profitability. Sasko maintained market shares in key categories and distribution channels during this challenging trading period. The new Shakaskraal bakery commenced bread production at the end of September and will provide improved access to the KwaZulu-Natal market. The consolidation of the Malmesbury and Paarl wheat mills is progressing as planned and will provide additional capacity for medium-term growth in the Western Cape.
Bokomo Foods
Bokomo delivered a solid performance during 2013, with pleasing revenue growth and an increased profit performance notwithstanding challenging trading conditions. Most categories achieved volume growth with the raisin crop being exceptional. The latter bolstered exports aided by a weaker rand. Biscuit volumes increased by high double-digits, significantly ahead of category growth. Volume and value growth were achieved within breakfast cereals with both Weet-Bix and Corn Flakes performing well.
Ceres Beverages
This division delivered exceptional financial results on the back of strong export volume growth, cost synergies and manufacturing and distribution efficiencies. Domestic volumes came under pressure due to cost push, recovered in price. Carbonated soft drinks as a category performed significantly below expectation due to aggressive competitor pricing.
Quantum Foods
Quantum Foods´ financial performance was negatively impacted by industry challenges associated with imports of chicken and limited pricing power as a consequence. An abattoir and hatchery, as well as several farms in the Western Cape were closed as a consequence to ensure that the business prospers albeit it on a smaller scale. Efficiencies in all manufacturing units continued to improve. The consolidation of the abattoirs in Gauteng and the freezer completion in the Western Cape will generate further efficiencies. The acquisition of Mega Eggs in Zambia in March 2013 is already earnings enhancing and performing in line with expectations.
Prospects
The macro-economic outlook remains bearish in South Africa and, as a consequence, food and beverage categories will remain under pressure and are likely to yield limited growth in real terms. That said, Pioneer Foods is undergoing significant internal change in order to adapt its strategy and business model to compete more effectively.
