Pioneer Foods: good growth despite high commodity prices

Paarl / ZA. (pf) South African Pioneer Foods posted the Group´s results for the year 2007 ended September 30. Managing Director Andre Hanekom said that the international scarcity of grain had caused local import parity prices to soar by an average of 48 percent for wheat, 42 percent for white maize, and 60 percent for yellow maize.

«This has put a tight squeeze on the Group´s operating profit margins, resulting in a drop from 7,7 percent to 7,1 percent», he said: «The drought in South Africa at the beginning of the year negatively affected the local supply of wheat and maize, resulting in one of the highest levels of imports ever. This, together with declining world grain stocks, could further fuel the already high rate of food inflation».

Results

The results for the reporting period were satisfactory given challenging circumstances, specifically the recovery of abnormal raw material and other cost increases. Revenue increased by 21 percent to 11,7 billion ZAR (South African Rand), with operating profit before items of a capital nature eleven percent higher at 832 million ZAR. Headline earnings increased marginally with two percent to 503 million ZAR or 3,28 ZAR per share.

The well above inflation increase in revenue is mainly the result of increased sales prices following the substantial increase in world grain prices. Worldwide demand exceeded supply across the spectrum of grains and resulted in historic lows in grain stock levels. This phenomenon was caused by a combination of macro factors that limited supply, ranging from severe drought in Eastern Europe and Australia to floods in Western Europe. Demand was further fuelled by the drive to ethanol manufacturing from yellow maize, especially in the USA, to strategically decrease the dependence on oil as a source of energy. The above factors contributed to the local import parity prices of wheat and white maize increasing on average by 48 percent and 42 percent respectively, with yellow maize recording an average increase of 60 percent for the year under review. The raw material and other cost increases were to a large extent recovered in the market, but still insufficient to maintain profit margins. This is reflected in a decline in operating profit margin from 7,7 percent to 7,1 percent.

The marginal increase in headline earnings as opposed to the eleven percent increase in operating profit was the result of the significant increase in net finance charges to 116 million ZAR and an increased income tax charge compared to the previous year. The increase in finance charges is the result of increased debt levels due to the investment in working capital and fixed capital, as well as increased interest rates. The investment in working capital increased by 351 million ZAR, whereas 714 million ZAR was spent on property, plant and equipment and acquisitions as a first phase in repositioning infrastructure and production capacity of the Group. Net interest bearing debt amounted to 1,2 billion ZAR at year end, resulting in a debt to equity ratio of 33 percent.

Complaint Referral by Competition Commission

During February 2007 Pioneer Foods (Pty) Ltd, a subsidiary of the Group, received a complaint referral by the Competition Commission for alleged restrictive practices in contravention of section 4(1)(b)(i) and section 4(1)(b)(ii) of the Competition Act of 1998. The relief sought is inter alia for the imposition of an administrative penalty of ten percent on the 2006 revenue from the production and sale of bread in the Western Cape. Revenue of the Western Cape baking division of the Group amounted to 384 million ZAR for the year ended 30 September 2006.

Pioneer Foods prepared and delivered its answer to the complaint referral within the set time limits. Independent legal advice has indicated that Pioneer Foods has reasonable prospects of a successful defense against all or some of the charges made in the complaint referral. Accordingly, no provision has been made for the payment of any penalties in the year under review.

The Commission indicated that further complaint referrals will be made involving Pioneer Foods for alleged restrictive practices in the national bread, wheat milling and maize milling markets. As at the date of approval of the financial statements, no further complaints have been received.

National revenue from the Group´s baking and milling business amounted to 3,4 billion ZAR for the year ended 30 September 2006. The maximum cash outflow for the Group, if any, in relation to all complaints, could be up to ten percent of this amount. This liability only arises if such complaint referrals are ultimately proven against Pioneer Foods. Until any complaints are received and investigated, it is imprudent to comment on the prospects of its successful defense to these charges.

The Group´s legal advisors have furthermore been in regular contact with the Commission in endeavours to resolve the complaint referral relating to the Western Cape and to establish the ambit of the other charges to be made against it. To ensure proper corporate governance, the Board has appointed a committee of nonexecutive directors, most of whom are independent, to investigate all related matters with the assistance of external consultants.

Operational Review

The Sasko division achieved improved results which was largely due to continuing strong sales volumes from its basket of products. A recovery of the bread business, which had been hampered by industrial action in the last two months of the previous year, along with acceptable recoveries in the market place of high and rising raw material and other costs, further contributed to this solid performance.

The Bokomo Foods division performed well. Continued sales volume growth was achieved in the breakfast cereals business and a pleasing profit performance was posted. Sustained and increasing demand for Bokomo´s market-leading breakfast cereal products, notably Weet-Bix, Corn Flakes and ProNutro, has already absorbed the additional volumes produced by the increased production capacities.

In the Agri division the chicken and feed businesses performed well on the back of largely sustained profit margins and increased sales volumes. The egg business, however, after three years of substantial profit contributions, was negatively affected by a downward trend in the egg cycle and recorded a net loss for the year. The S.A.D division achieved good results in the year under review. Its performance was driven in particular by high export volumes accompanied by a weaker average rand exchange rate than in the previous year.

The Ceres Beverage Company achieved satisfactory financial results with excellent volume growth in all categories. This contributed to absorb the pressure on profit margins caused by substantial increases in the costs of raw materials and packaging materials. The division continued to increase public awareness of Pepsi products through a focused marketing campaign and stepped-up distribution networks. In line with projections and operating plans, the contribution to earnings from this venture for the financial year was still limited, but the Group remains excited about the earnings enhancing potential of this venture.

An analysis of the segmental results highlights the fact that the recovery of increased costs was not yet sufficient, resulting in the staple foods margin decreasing from 8,6 percent to 7,4 percent. Operating profit margins in the branded segment, where most of the newly acquired revenue was added, only marginally increased to 7,3 percent. This trend confirms that the contribution to earnings from the new ventures is not yet in relation to their revenue contribution, but hints to the improvement potential once sales volumes from these ventures reach levels of economies of scale.

Read more: A detailed description of the results for the year 2007 ended September 30th Pioneer Foods has printed as PDF file (one poster | 87KB).