Chairman's report

Selling prices in the key product categories of bread, pasta, rice and wheaten products are now substantially lower than in 2008. Volume growth slowed considerably in the second half of the year in most categories, with the lower price environment succeeding in protecting rather than growing volume share.

Revenue earned by the Group improved by 9.4% to R16.3 billion. This improvement was largely due to the price and volume growth seen in the first half of the year with price and volume levels remaining static in the second half. Food price inflation in the Pioneer Foods basket of products moderated sharply during the second half of the year from around 16% to a mere 1%.

Shifting production and consumption patterns and the strengthening rand complicated the refinement of procurement strategies and the setting of short- to medium-term price points.

The rand strengthened by 30% to the US dollar since October 2008 which, together with slower capital spend and lower debtor and inventory values, unlocked R357 million from working capital for the year.

As a result, net finance charges declined from R220 million to R198 million. Operating profit before items of a capital nature increased by a pleasing 34% to R1 160 million, with the Group operating profit margin consequently improving from 5.8% to 7.1%. Although positive, this margin is below that of industry peers and equal to the 2007 margin levels.

Headline earnings increased by a pleasing 33% to R621 million or by 22% to 355 cents per share, taking into account the diluting effect of the rights issue in the previous year.

Although relatively strong, earnings growth achieved this year only managed to recover to some extent the largely static or declined performances reported in the previous two reporting periods. The Group is probably now on even keel in terms of longer-term growth trends.

Pioneer Foods continues to invest capital for future growth to facilitate the next level of earnings ability with committed capital expenditure of more than R900 million for the year ahead. The main focus is on expanding and improving production facilities in the white maize meal, biscuit, rice and non-alcoholic beverage categories.

Some capital is also allocated to the egg and broiler businesses to optimally position these businesses for sustained profitability.

The debt to equity ratio of 14% at year-end is a significant improvement from 34% the previous year and is well within the acceptable longer-term goal of 20% - 25%.

Given the board's positive view of the Group's sustainable profit growth and cash generation ability in the longer term, an increase of 35% in the final dividend to 89 cents per ordinary share was declared. This results in a total dividend of 125 cents per ordinary share - up 30% from last year. A total of R251 million will be distributed to shareholders based on the year's improved performance. This represents a 34% increase on the previous year's total payout.

Sasko delivered a sound overall performance for the year, posting an improved profit contribution and margin. The range of trusted brands in the predominantly staple food basket of products proved to be defensive of nature in a trying economic climate.

Demand remained resilient, particularly in maize meal products where historic steady declining trends reversed and pleasing growth in sales volumes was achieved. Increased consumption of super maize meal continued to be the strongest profit growth driver in the Sasko business, with the premium product - White Star super maize meal achieving revenue of more than R1.5 billion, a mere 10 years after being launched.

The Agri Business segment posted improved results and recovered mainly on the back of the positive turnaround in the Nulaid egg business. Although the broiler business still struggled, there were some positive signs of recovery towards the end of the year.

The Bokomo Foods segment of the business disappointed with a decreased contribution to earnings. In the breakfast cereals category, consumers opted for cheaper products and, apart from volume growth in Weet-Bix, increased sales targets were not met. Another reason for the decreased performance was the relatively small raisin crop along the Orange River that limited export sales volumes of raisins.

The non-alcoholic beverage category in which Ceres Beverages competes, was under pressure in the past year and declined consumer spending negatively affected sales volumes. However, the business achieved improved results on the back of a turnaround in the fruit concentrate mixtures category and, more specifically, from an improved export sales volume and export margin performance in the first half of the year.

The carbonated soft drinks category was under pressure due to aggressive competitor activity and challenging economic conditions. Pepsi sales volumes remained satisfactory under these circumstances.

In light of the more challenging trading environment, forecasts for the Pepsi venture were adjusted to reflect a longer establishment phase to position the brand for long-term sustainable growth.

Complaint referrals by Competition Commission

Pioneer Foods appeared before the Competition Tribunal in June 2009 on two complaint referrals initiated by the Competition Commission (Commission). On 9 September 2009 the final legal arguments of the Competition Commission and the Company's wholly owned subsidiary Pioneer Foods (Pty) Ltd were made before the Competition Tribunal with regards to the complaint referrals for:

• alleged prohibited practices in the Western Cape seeking, amongst others, the imposition of an administrative penalty of 10% of the revenue derived by Pioneer Foods (Pty) Ltd from the production and sale of bread in the Western Cape in 2006; and
• allegations of participating in a national bread cartel seeking, amongst others, the imposition of an administrative penalty of 10% of Pioneer Foods (Pty) Ltd's revenue in 2007.

In its answer to the complaint referrals received in 2007, Pioneer Foods (Pty) Ltd admitted to certain facts relating to prohibited practices in the Western Cape, but has continued to defend itself against all other allegations made by the Commission.

On 28 September 2009, the Commission applied to the Competition Tribunal for leave to amend the relief sought by it in the complaint referrals by introducing, amongst others, claims for:

• substitution of the original relief sought in the Western Cape referral by the demand for an administrative penalty of 10% of Pioneer Foods (Pty) Ltd's revenue for 2006; alternatively an administrative penalty of 10% of Pioneer Foods (Pty) Ltd's revenue derived from the production and sale of bread in 2006; and
• substitution of the original relief sought in the national referral by the demand for an administrative penalty of 10% of Pioneer Foods (Pty) Ltd's revenue for 2006; alternatively an administrative penalty of 10% of Pioneer Foods (Pty) Ltd's revenue derived from the production and sale of bread in 2006.

Pioneer Foods (Pty) Ltd has opposed certain of the amendments sought.

The legal entity Pioneer Foods (Pty) Ltd's audited national revenue in 2006 amounted to R7.86 billion, whereas the comparative revenue in 2007 amounted to R9.23 billion. Pioneer Foods (Pty) Ltd's national revenue from the production and sale of bread in 2006 amounted to R1.65 billion. Pioneer Foods (Pty) Ltd's revenue derived from the production and sale of bread in the Western Cape in 2006 amounted to R384 million. This was the maximum potential penalty base (10% being R38.4 million) for the Western Cape case in terms of the initial request for penalty from the Commission.

At the date of approval of the financial statements by the board, the Tribunal has not ruled on the amendment sought by the Commission nor on the two complaint referrals.

No provision for a potential administrative penalty has been made.

Pioneer Foods remains committed to the principles of good corporate governance and further entrenching its Legal Compliance Programme.

Prospects

Operating profit for the next reporting period will be influenced by:

• The volatility in raw material prices
• Cost increases and particularly salaries, wages, electricity and transport costs
• Sales volumes driven by changing consumer spending patterns
• Deflationary pressures on selling prices

Sasko has experienced strong growth in this and previous reporting periods and is well positioned for further growth albeit at a slower rate given the relatively high comparative base.

The other businesses of the Group should further unlock their potential to improve contributions to earnings.

Group earnings should benefit from decreased finance costs given the improved debt position.

HE Blanckenberg
Chairman