FINANCIAL REVIEW
Statement of comprehensive income
Revenue for the year decreased by 3,4% to R15 731 million. This decline is the result of significant sales price declines due to sustained deflationary pressures, virtually across the Group’s range of products, with beverages the exception. Although the effect differed across the Group’s spectrum of products and categories the decline in sales prices of approximately 10% was, to an extent, absorbed by a 5% to 7% growth in volumes.
Despite the decrease in revenue the gross profit margin improved by 4,0% to 31,9% as a result of a 8,6% decline in cost of goods sold. This confirms a continued improvement in effectively recovering input costs in final product prices. A determined focus on cost savings, efficiencies and streamlining of distribution further contributed to an increased operating profit margin of 8,9%. This is the margin before items of a capital nature and adjusted for the effect of the Competition Commission (CC) penalties, and is much improved compared to the margin of 7,1% for the previous year.
Operating profit, before items of a capital nature and the CC penalties, increased by 21,3% to R1 407 million. The table below summarises the various segmental contributions from a revenue, operating profit and operating profit margin perspective:
| Segmental performance | 2010 | 2009 | Change |
| SASKO | |||
| Revenue (R’m) | 8 314 | 8 877 | (6,3%) |
| Operating profit (R’m) | 982 | 926 | 6,0% |
| Operating profit margin | 11,8% | 10,4% | |
| AGRI BUSINESS | |||
| Revenue (R’m) | 2 453 | 2 599 | (5,6%) |
| Operating profit (R’m) | 137 | 80 | 71,3% |
| Operating profit margin | 5,6% | 3,1% | |
| BOKOMO FOODS | |||
| Revenue (R’m) | 2 683 | 2 625 | 2,2% |
| Operating profit (R’m) | 231 | 195 | 18,5% |
| Operating profit margin | 8,6% | 7,4% | |
| CERES BEVERAGES | |||
| Revenue (R’m) | 2 484 | 2 410 | 3,1% |
| Operating profit (R’m) | 165 | 99 | 66,7% |
| Operating profit margin | 6,6% | 4,1% | |
| LESS | |||
| Across segment revenue | (203) | (227) | |
| Unallocated costs | (108) | (140) | |
| GROUP RESULT | |||
| Revenue (R’m) | 15 731 | 16 284 | (3,4%) |
| Operating profit before items of a capital nature (R’m) | 1 407 | 1 160 | 21,3% |
| Operating profit margin | 8,9% | 7,1% |
The Sasko segment further improved on the good performance of the previous year, specifically during the first six months of the reporting period. Effective pricing strategies and diligent cost management contributed largely thereto. An increased contribution from the pasta and rice businesses further benefited the segment results. During the second six months of the financial year a definite increase in raw material costs, specifically wheat, and related production costs were experienced and pressure on margins started to mount.
The Agri Business segment benefited from initial lower animal feed prices. Further contributors to the improved performance were efficiency gains and improved on-farm performances.
The main contributors to the overall improved performance from the Bokomo Foods segment were improved production efficiencies and sustained volume growth from Weet-Bix.
The much improved performance from the Ceres Beverages segment was largely the result of increased realisations in the local market. The carbonated soft drink category further benefited from increased sales volumes.
Unallocated costs decreased from R140 million to R108 million. The reduction in unallocated costs is mainly due to the initial large spend on enterprise development projects launched in 2009. During the current year the spend on enterprise development normalised. An increased amount of administration cost capitalised against IT capital projects further contributed to the reduction in unallocated costs for the year.
The decrease in net finance charges from R198 million to R125 million reflects the benefits of a lower interest rate environment combined with reduced net debt levels relative to the same period last year. Group net debt decreased from R660 million for the previous year to R406 million. Long-term borrowings are largely fixed through specific interest rate hedge instruments and did not share in the substantially lower interest rates to the same extent as short-term borrowings.
The income tax charge increased with 14,6% to R384 million with an effective income tax rate of 62,0%. The effective income tax rate is higher than the nominal income tax rate mainly due to the non-tax deductible nature of the CC penalties of R654 million and a non-tax deductible share-based payment expense of R48 million relating to the broad-based employee share scheme.
The income tax expense includes an amount of R18 million in respect of secondary income tax on companies resulting from the dividend payment in February 2010.
Earnings, adjusted for the effect of the CC penalties, increased by 58,5% to R889 million with adjusted headline earnings increasing by 43,4% to R891 million. The difference between earnings and adjusted headline earnings for the year is insignificant compared to that of the previous year due to the smaller amount of impairments and profit/(loss) on disposal of assets included as part of items of a capital nature for the current year.
Earnings per share, adjusted for the effect of the CC penalties, and adjusted headline earnings per share increased with 56,5% to 502 cents per share and 41,5% to 503 cents per share respectively.
Dividend
No dividend was declared for the year under review compared with 125 cents per share or R251 million for the comparative period. This is in line with the board’s prudent approach to capital management, given the substantial amounts paid and payable in terms of the CC settlement. In doing so the board also acted responsibly in ensuring that none of the covenants governing dividend payments as imposed by the Group’s syndicated loan facility could potentially be breached.
Statement of financial position
The improved operating profit performance, after adjustment for the CC penalties, and sustained levels of net working capital mainly contributed to improved financial ratios. The return on average net assets improved from 19,7% to 23,9%. The table below illustrates the contribution to this ratio by the various segments due to largely the same reasons as highlighted under the operating profit commentary per segment:
Return on average net assets
| 2010 | 2009 | |
| Sasko | 38,1% | 32,9% |
| Agri Business | 19,4% | 15,4% |
| Bokomo Foods | 16,2% | 13,8% |
| Ceres Beverages | 15,3% | 9,8% |
| Group | 23,9% | 19,7% |
Return on average shareholders’ funds, adjusted for CC penalties, further improved from 14% to 19%. Unadjusted return on average shareholders’ funds is 5%. Cash profit of R1 610 million and a further unlocking of R95 million from net working capital contributed to improved average net debt levels. The debt to equity ratio continued to improve from 14,3% to 8,5%. The improved debt ratio will support the accelerated approach to certain capital projects.
Statement of cash flows
Cash generated by operations for the reporting period decreased by R164 million to R1 724 million. The reason for the decrease is largely due to the comparatively lower amount of cash unlocked from working capital. An amount of R95 million was unlocked in 2010 as opposed to R357 million in the previous year. The cash generation benefited from the improved profit performance resulting in cash flow from operating activities increasing by R100 million, or 6,6% to R1 610 million. This figure reflects the amount after a penalty of R196 million relating to the bread matter was paid to the CC.
Increased fixed capital investments in the form of additions to and maintenance or replacements of existing items of property, plant and equipment as well as a number of business combinations resulted in an increased outflow of cash from investment activities of R805 million for the year, compared with R464 million in the previous year. Significant investment of R751 million in fixed and intangible assets was made during the year and R115 million was paid for fixed and intangible assets obtained through business combinations. This spend is a continuation of the Groups’ overall expansion programme.
Effect of Competition Commission penalties and settlement
Earnings for the year under review were negatively impacted by R654 million as a result of penalties paid and accrued for. This comprises the R196 million paid relating to the bread matter and R458 million accrued relating to other matters settled. The R458 million is the net present value of the R500 million penalty imposed, payable in three tranches. The table below summarises the effect on earnings and cash flow up to 2013:
| 2010 | 2011 | 2012 | 2013 | Total | |
| Earnings effect | (654) | (186) | (15) | (1) | (856) |
| Cash flow effect | (196) | (227) | (217) | (216) | (856) |