Financial review

Income statement

Revenue for the year increased by 9% to R16 284 million. A 20% revenue growth for the first half of the year was followed by no revenue growth for the second six months. This clearly demonstrated the deflationary effect in the basket of products. Much improved world grain stock levels, largely on the back of normalised weather patterns, led to substantially reduced world and local grain prices for the duration of the reporting period. A mixture of increased and largely sustained sales volumes across the various categories buffered the decrease in selling prices, especially in the second half of the year.

The improvement in the gross profit margin by 1.9% to 27.9% confirms an improved alignment of cost recovery in final product prices. This is further illustrated by the recovery in operating profit margin from 5.8% to 7.1%, back to the margin level of 2007.

Operating profit, before items of a capital nature, increased by 34% to R1 160 million. The table below summarises the various segmental contributions from a revenue, operating profit and operating profit margin perspective:

Segment performance	2009	2008	Change
SASKO
Revenue (R’m)	8 877	8 143	+9%
Operating profit before items of a capital nature (R’m)	926	622	+49%
Operating profit margin	10.4%	7.6%
AGRI BUSINESS
Revenue (R’m)	2 599	2 493	+4%
Operating profit before items of a capital nature (R’m)	80	4	+1900%
Operating profit margin	3.1%	0.1%
BOKOMO FOODS
Revenue (R’m)	2 625	2 539	+3%
Operating profit before items of a capital nature (R’m)	195	239	-18%
Operating profit margin	7.4%	9.4%
CERES BEVERAGES
Revenue (R’m)	2 410	2 083	+16%
Operating profit before items of a capital nature (R’m)	99	78	+27%
Operating profit margin	4.1%	3.7%
OTHER
Across segment revenue (R’m)	(227)	(374)
Unallocated costs (R’m)	(140)	(78)
GROUP RESULT
Revenue (R’m)	16 284	14 884	+9%
Operating profit before items of a capital nature (R’m)	1 160	865	+34%
Operating profit margin	7.1%	5.8%

The star performer in the much improved performance from the Sasko segment was the sustained profit margins at increased sales volumes from White Star super maize meal. Effective cost management and cost recovery supported increased contributions from wheaten flour products and bread. The pasta business leveraged on the increased sales volumes in the previous year and sustained margins increased its contribution.

The Agri Business segment largely benefited from the return to profitability by the egg business.

The Bokomo Foods segment posted a weaker performance as a result of sales volume pressure and abnormal costs associated with retrenchments and the relocation of the muesli business. Export sales and profitability suffered in the second half of the year as a result of a much smaller raisin crop and a stronger rand.

The non-alcoholic beverages category where Ceres Beverages competes, suffered due to a decline in consumer spending. The improved performance was largely the result of improved export sales in the first half of the reporting period at a weaker rand and a return to profitability in the fruit concentrate mixtures category.

Unallocated costs increased substantially from R78 million to R140 million. Major contributors to this increased cost were an increased spend on enterprise development and a net increase in the mark-to-market cost of certain interest rate hedge contracts. Further contributors were increased staff cost as well as performance bonuses on the back of the improved performance of the Group not allocated to the various segments.

Net finance charges benefited from the much improved debt position and lower interest rates, and decreased from R220 million to R198 million. Long-term borrowings are largely fixed through specific interest rate hedge instruments and did not share to the same extent as short-term borrowings in the substantially decreased interest rates.

The income tax charge almost doubled to R335 million, with an effective income tax rate of 37.4%. This substantially increased tax rate is the result of a combination of the following:

• A material increase in the non-tax deductible charge to R41 million for the broad-based employee share scheme as a result of the improvement of the share price from R25 to R34.
• Non-tax deductible impairment of goodwill of R45 million.
• Derecognising a deferred tax asset of R34 million, due to a revised view of the time horizon to utilise an assessed loss initially obtained with the acquisition of a subsidiary in 2003, and subsequently a marginal yearly increase.

Earnings increased by 24% to R561 million, with headline earnings increasing by 33% to R621 million. The main difference between earnings and headline earnings being the impairment of the goodwill initially paid for the Moir’s brand of R45 million. These impairment calculations are based on the view of future profitability of these ventures in relation to the current value of the investment.

Earnings per share and headline earnings per share increased at lower rates of 14% to 321 cents per share and 22% to 355 cents per share respectively. These lower rates of increase per share compared to the total increase is the effect of the increase in the weighted number of ordinary shares in issue following the rights issue of 20 million ordinary shares in the previous year.

Dividend

A final dividend of 89 cents per ordinary share was declared in 2009. This is an increase of 35% on the final dividend of 66 cents per ordinary share in 2008. In addition to the interim dividend of 36 cents, the total dividend declared for the year is 125 cents per ordinary share, an increase of 30%. Total dividend payout based on the year’s performance adds up to R251 million, an increase of 34%. Dividend cover based on headline earnings per share slightly improved from 3.0 times to 2.8 times.

A final dividend of 26.7 cents per class A ordinary share is also payable to employees as members of the broad-based employee share scheme. The total dividend declared per class A ordinary share amounts to 37.5 cents per share for the reporting period.

Balance sheet

The improved profit performance, a decreased net current asset base and a scaled-back capital expenditure programme resulted in improved balance sheet ratios. The return on average net assets improved from 15% to 20%.

The table below illustrates the contribution to this ratio by the various segments largely due to the same reasons as highlighted under the operating profit commentary per segment:

Return on average net assets

	2009	2008
	%	%
Sasko	33	23
Agri Business	15	1
Bokomo Foods	14	16
Ceres Beverages	10	8
Group	20	15

Return on average shareholders’ funds recovered from 12% to 14%. Net interest-bearing debt substantially benefited from the decreased investment in working capital, as well as contained capital expenditure and improved profit performance, and decreased by R795 million to R660 million. The debt to equity ratio improved from 34% to 14%. The improved debt to equity ratio will enable an accelerated approach to capital spend to support future growth.

Cash flow statement

Cash generated by operations improved substantially by R1 398 million to R1 888 million. This is the result of the improved profit performance resulting in cash profit from operating activities increasing by R368 million, or 32%, to R1 510 million. A further major contributor to the improved cash generation was a turnaround in the working capital investment. An investment in working capital in 2008 of R511 million was followed by an unlocking of working capital of R357 million in 2009. This is largely the result of the substantially decreased raw material cost, especially wheat, and decreased investment in debtors resulting from decreasing final product prices. A positive cash flow effect on hedging activities further contributed to the turnaround.

After a payment of R234 million in income tax and net cash invested in long-term activities of R465 million, a net cash surplus of R1 189 million for the year was recorded. This cash surplus compares very favourably with a cash deficit of R337 million recorded in the previous year. The cash was largely utilised to repay long-term loans of R124 million, interest payments of R225 million and dividend payments of R179 million. The positive balance of cash and cash equivalents amounted to R592 million at year-end, a healthy position from a working capital liquidity requirement perspective.