Pioneer Foods: announces first half 2015/2016 unaudited consolidated interim financial results

Paarl / ZA. (pf) South African Pioneer Foods delivered positive results for the six months ended 31 March 2016. An improved portfolio mix and margin expansion in Groceries, resilient Power Brands and well managed costs contributed to the overall financial outcome in a particularly challenging period.

The trading environment deteriorated given mounting concerns over the South African consumer amidst rising interest rates and significant inflation resulting from a weaker rand, exacerbated by the severe drought.

Notwithstanding the aforementioned, revenue increased by 9 percent (excluding biscuits, Pepsi and Maitland Vinegar from the comparative period) to 10.01 billion ZAR.

Cost of goods sold increased by 8 percent to 6.91 billion ZAR, given significant raw material price increases, partially offset by manufacturing efficiency improvements. As a result, gross profit increased by 2 percent to 3.10 billion ZAR, with a gross profit margin of 31.0 percent (2015: 32.3 percent).

The adjusted operating profit margin remained constant at the prior year high of 12.3 percent. Adjusted operating profit increased by 6 percent from 1’166 million ZAR to 1’236 million ZAR due to the healthier portfolio mix and stringent cost management. Essential Foods delivered satisfactory results within bakeries and an excellent performance in rice. Overall profitability was negatively impacted by volume and adverse raw material dynamics in both maize and wheat. The honed Groceries portfolio performed exceptionally well generating significant operating leverage resulting in a 35 percent increase in operating profit from 253 million ZAR to 343 million ZAR. The International segment achieved operating profit growth of 16 percent notwithstanding volume and pricing pressure in certain African export destinations, augmented by a pleasing fruit result.

Profit from equity accounted joint venture interests, inclusive of Future Life and Food Concepts Pioneer (Nigeria) investments, increased by 25 percent to 42 million ZAR.

Adjusted headline earnings increased by 7 percent to 887 million ZAR. Adjusted headline earnings per share increased by 6 percent to 479.3 cents.

As at 31 March 2016, a gain of 143 million ZAR was recognised on the cash-settled Phase I (2006) B-BBEE transaction, accounted for in terms of IFRS 2. This resulted from the decrease in the Pioneer Foods share price from 195.76 ZAR at 30 September 2015 to 139.04 ZAR at 31 March 2016. Conversely, a charge of 203 million ZAR was recognised in the comparative six months results due to the increase in the Pioneer Foods share price from 118.00 ZAR at 30 September 2014 to 177.85 ZAR at 31 March 2015. Headline earnings as a consequence increased by 64 percent from 627 million ZAR to 1’030 million ZAR. Headline earnings per share increased by 63 percent from 340.8 cps to 556.4 cps with a 1 percent increase in the weighted average number of shares.

Cash generated from operations increased by 39 percent to 690 million ZAR amidst working capital pressure as a consequence of soft commodity inventories.

Capital expenditure of 349 million ZAR is 53 million ZAR higher than the comparative period. Major capital expansion projects include the Aeroton Bakery expansion, the installation of the additional Weet-Bix line, the Bokomo Foods UK plant relocation and the Duens Bakery upgrade. Total capital expenditure for the year, including replacement capital, is forecasted at 930 million ZAR.

On 01 October 2015, Pioneer disposed of its controlling share in Maitland Vinegar. The investment in Future Life became effective on the 01st of December 2015 and has been accounted for accordingly.

Essential Foods

Revenue increased by 8 percent to 6.054 billion ZAR while operating profit decreased by 8 percent to 645 million ZAR resulting in an operating profit margin of 10.6 percent (2015: 12.4 percent). The performance of Essential Foods was overwhelmingly impacted by maize. Significant raw material price inflation, as a result of the drought and rand weakness, resulted in a decline in maize volumes. The White Star brand however maintained its category leadership position. The bakery business continued to deliver volume growth and operating leverage in a very competitive environment. Planned manufacturing upgrades stifled volume growth in the Western Cape. Pleasing volume and market share growth was achieved in the rice business with the resultant improvement in operating profit and margin. The wheat performance was negatively affected by substantial raw material inflation as a result of the import duty which increased from R156 to R1 224 per tonne. The duty now constitutes c.25 percent of the cost of wheat milled. Marginally lower volumes were sold as a consequence. Pasta and legumes performed satisfactorily. Stringent cost management across all operations contributed to a better than initially anticipated financial performance.

Groceries

Revenue (excluding biscuits, Pepsi and Maitland Vinegar from the comparative period) increased by 7 percent to 2’508 million ZAR, whilst operating profit increased by 35 percent to 343 million ZAR. The operating profit margin expanded by 410 basis points to 13.7 percent as a result of volume growth, the exit of underperforming categories and successful fixed cost reduction initiatives. Core cereal brands were extremely resilient in a competitive environment. The revenue of the cereals portfolio increased by 9 percent. The Bokomo cereals portfolio further entrenched its market leadership position. The growth was stimulated by well positioned product offerings to value conscious consumers. Weet-Bix, Bokomo Corn Flakes and ProNutro delivered pleasing growth. The Spreads category contributed positively by virtue of stringent cost controls throughout the value chain. Baking aids, desserts, meals and salads had mixed results, with baking aids and salads showing positive volume growth. Beverages delivered strong results due to additional brand investment behind core brands. Beverage volumes, excluding Pepsi, increased by 6 percent whilst revenue on the same basis, increased by 9 percent. The Snacks + Treats category delivered strong operating profit growth as a result of Safari activations, operational efficiencies and the divestment from biscuits.

International

Revenue increased by 20 percent to 1’448 million ZAR while operating profit increased by 16 percent to 252 million ZAR with an operating profit margin of 17.4 percent (2015: 18.0 percent). Export volumes increased by 7 percent, with pleasing growth in fruit. Beverage export volumes and pricing came under pressure on the African continent due to softening currencies. A creditable commercial outcome was realised notwithstanding the aforementioned. Bokomo Foods UK delivered excellent growth in volume and revenue. The deliberate relocation of the muesli plant negatively impacted the first half operating profit. The plant improvements will enable further volume growth and the fulfilment of demand. The devaluation of the rand further benefited the consolidated results of Bokomo Foods UK.

Joint Ventures

The conservative investment in Food Concepts Pioneer (Nigeria) continued to show progress with its fix and optimise strategy, inclusive of systems integration, plant improvements and a new management team. Bokomo Namibia, Bokomo Botswana and Bowmans Ingredients continued to deliver strong results. The performance of Heinz was somewhat muted as a result of South African competitor dynamics, however the Africa exports continue to show significant growth, albeit off a low base.

Outlook

The external environment is likely to remain difficult for the near future. That said, Pioneer Foods has a high degree of strategic coherence and the ability to execute and compete effectively. There is sufficient scope to enhance efficiencies and curtail costs across the value chain. These will be deployed as a key enabler of revenue growth in a constrained market. Capital projects geared for growth and a strong balance sheet bode well for a sustainable performance.