Abridged consolidated annual financial statements for the year ended 30 September 2012

Pioneer Foods salient features

  • Revenue – R18.6 billion (up 10%)
  • Gross final dividend per listed ordinary share (2011: 40 cents) - 70 cents (up 75%)

After the figures for the year were adjusted by R160.7 million for a once-off share-based payment charge on the B-BBEE equity transaction:

  • Adjusted headline earnings – R767 million (up 6%)
  • Adjusted headline earnings per share – 426 cents (up 5%)

Group Managing Director André Hanekom commented:

The year under review continued to be challenged by muted consumer spend in bread, maize, wheaten products and fruit juices in particular, as price adjustments affected affordability. Breakfast cereals consolidated its market leading position with Weet-Bix achieving strong volume growth at attractive price points. Raw material pricing remains volatile and indications are that prices could weaken in the months ahead that should bring some relief to the consumer. Volume growth at acceptable price points will be key together with judicious cost management and dedicated efficiency drives to grow and protect operating margins, as new production capacity comes on stream.

Group Overview

Group revenue increased by 10% to R18.6 billion with volumes declining by some 5% and selling prices increasing by some 15% on average over the comparative period.

Results for the reporting period have been substantially impacted by the once-off non-cash flow share-based payment charge of R161 million in terms of IFRS 2, relating to the implementation of the Phase Two B-BBEE transaction concluded in the reporting period. Consequently headline earnings declined by 17% to R606 million.

Adjusted headline earnings, excluding the impact of the R161 million,increased by 6% to R767 million or 5% to 426 cents per share.

Comparisons between the operational performance of the current and previous reporting period have been impacted by the volatility of the IFRS 2 share-based payment charge for the cash-settled Phase One B-BBEE transaction of 2006, due to the Pioneer Foods share price increasing by 24% in 2011, but declining by 10% in 2012. Operating profit before items of a capital nature, adjusted for the impact of the Phase One and Phase Two B-BBEE transactions, declined by 6% to R1 162 million. The Group’s operating profit margin, after these adjustments, consequently declined from 7.3% to 6.2%.

The investment in working capital increased by R266 million, largely the result of increased raw material prices, countered somewhat by lower inventory volumes, and increased debtor values from higher selling prices. Net cash from operations amounted to R1 000 million (2011: R1 064 million), impacted by the payment of R217 million in terms of the settlement agreement with the Competition Commission. A final payment of R217 million will be made in December 2012.

Net cash applied in investment activities amounted to R753 million (2011: R933 million), inclusive of R585 million spent on new additions and business combinations and R174 million spent on replacement capital. Net interest-bearing debt at year-end is R994 million (2011: R757 million), representing a debt to equity ratio of 16%. This amount includes R464 million due to the third-party funding provided to the B-BBEE participants and consolidated as such in terms of IFRS.

Two important milestones were achieved in the 2012 financial year:

  • Successful completion of the Phase Two B-BBEE transaction for 13.5% shareholding in the Group. This transaction brought in new black shareholders and injected cash of R546 million received from the third-party financier and participants as partial payment for the ordinary shares issued on implementation of the transaction. An important outcome of the transaction has been the establishment of an education and community trust that will focus and integrate the Group’s corporate social investment spend.
  • Progress made towards completion of the South African capital expansion programme of the past number of years. The Bokomo Foods and Ceres Beverages businesses have completed their capital expansion programmes. Two major projects have been approved for Sasko, namely a greenfields bakery in KwaZulu-Natal and the consolidation of the Malmesbury and Paarl flour mills on the existing Malmesbury mill site. The South African capital expansion programme should, therefore, be completed in 2013, with limited transfers of outstanding capital spend to 2014.

Sasko

Sasko’s performance improved compared to the previous year, but fell short of financial targets in the challenging trading environment. Revenue increased by 10% to R10 002 million and operating profit by 8% to R948 million. The operating profit margin contracted from 9.7% to 9.5%.

Sales volumes for the year declined in the wheat, maize and bread product categories. Significant commodity price inflation during the first half of 2012 contributed to weaker demand with consumers remaining price sensitive. Sales volumes of these products, however, improved in the last quarter of 2012 on judicious selling price management in a volatile raw material pricing environment. Results were further impacted by increased promotional spend and higher operating costs.

In the rice category demand continued to benefit from comparatively expensive maize meal pricing as well as the re-introduction of cheaper Indian rice imports. Volumes remained flat in this environment with Spekko being a premium branded product.

Pasta sales volumes are improving in a lower price point environment driven by lower priced imported products.

The building of the bakery at Shakaskraal, north of Durban, is progressing well and is expected to be fully operational at theend of 2013. This bakery will replace a 40 year old bakery in Stanger which currently operates at capacity. It will create additional capacity and improved efficiencies to enable increased market participation in the growing urban and semi-urban KZN markets. The budgeted cost for the project is R500 million.

The Board approved R300 million for the expansion of the Malmesbury flour mill. This project will result in the closure of the Paarl flour mill and create capacity for future volume growth in this category. The project is expected to be completed in 2014.

The Group’s milling, poultry and distribution businesses in the other African countries performed satisfactorily in a difficult trading environment. Various expansion activities were initiated. In Namibia additional wheat milling and pasta manufacturing capacity was commissioned. In Botswana approval from regulatory authorities was received for the integration and expansion into broiler chicken and rearing production. The distribution warehousing capacity in Botswana was furthermore expanded.

Agri Business

The Agri Business underperformed in the face of challenging trading conditions. Although revenue increased by 12% to R3 036 million, a net operating loss of R49 million was recorded. Both the broiler and egg industries were negatively impacted by the inability to recover record high raw material prices in a market characterised by oversupply in final product. Feeds volumes were stable with price increases largely recovering the higher raw material cost. The broiler industry specifically is experiencing unprecedented price and volume pressure aggravated by imported frozen products. Measures to contain operating cost increases and improve efficiencies could not protect margins in this constrained environment. In the egg business, good on-farm performance resulted in increased production. Sales prices, however, remained flat given the current oversupply.

The Board mandated management to consider appropriate actions to realise optimal shareholder value.

Bokomo Foods

Bokomo Foods delivered a good overall performance. Revenue increased by 11% to R3 072 million with operating profit improving by 18% to R264 million. The operating profit margin improved from 8.1% to 8.6%. The strong improvement in operating profit is primarily driven by strong growth in retail sales with improved price realisation. This was further boosted with increased export sales into Africa.

Breakfast cereals performed well with good volume growth at constant selling prices. Volumes in the Moir’s biscuits business responded well to lower price points in a competitive environment. The dried fruit business also performed well given the lower raisin crop. The resultant lower sales volumes were more than buffered by increased price realisation in the export markets at more favourable exchange rates.

The new corn flakes plant is completed and commenced production in November 2012.

The business of Heinz Foods SA performed well. The basket of branded products continued to deliver good growth, although at as lower growth rate during the second half of 2012. Margins came under pressure specifically on the imported product ranges such as John West.

Ceres Beverages

Financial results for 2012 were disappointing. Revenue increased by 9% to R2 798 million, but operating profit declined by 35% to R88 million, an operating profit margin contraction from 5.3% to 3.2%.

The inability in a constrained consumer market to recover exceptional increases in raw material input costs was the major cause. Fruit juice concentrate prices increased by more than 40% due to a global shift in consumption towards fresh fruit. Volumes of ready-to-drink fruit juices were slightly down during a colder than average winter season exerting further pressure on margins. International sales volumes, however, increased by double digits. Fierce competition in carbonated soft drinks negatively affected overall margins with sales volumes largely being maintained.

As consumers turned to more affordable alternatives, volumes in the fruit concentrate mixtures category continued to grow and this category of the business managed a positive turnaround following the depressed performance in 2011. The iced tea category continues to show growth and the Lipton brand is well established as the market leader.

Ceres Beverages’ new production plant at Wadeville in Gauteng is now fully operational.

Integrated report

The notice and proxy of the annual general meeting and abridged annual financial statements for the year ended 30 September2012 will be posted during December 2012 to certificated shareholders and those shareholders with dematerialised shares who have requested a copy of this report through their Central Securities Depository Participants. The integrated report will be available on the Companys website (www.pioneerfoods.co.za) towards the end of December 2012.

Prospects

The Group remains affected by the constrained consumer environment and pressure on disposable income. Raw material pricing is volatile and indications are that prices could weaken in the months ahead as supply picks up. Volume growth at acceptable price points will be key together with judicious cost management and dedicated efficiency drives to grow and protect operating margins as new production capacity comes on stream.

Final dividend

A gross final dividend of 70 cents (2011: 40 cents) per share has been approved by the Board. The applicable dates are as follows:

  • Last date of trading cum dividend – Friday, 25 January 2013
  • Trading ex dividend commences – Monday, 28 January 2013
  • Record date – Friday, 1 February 2013
  • Dividend payable – Monday, 4 February 2013

A gross final dividend of 21 cents (2011: 12 cents) per class A ordinary share, being 30% of the gross final dividend payable to the other class ordinary shareholders in terms of the rules of the relevant employee scheme, will be paid during February 2013.

Share certificates may not be dematerialised or materialised between Monday, 28 January 2013, and Friday, 1 February 2013, both days inclusive.

By order of the Board

ZL Combi (Chairman) and WA Hanekom (Managing Director)

Paarl, 22 November 2012

Media Contact

Deborah-Ann Sharwood
Manager, Group Communication

Glacier Place
1 Sportica Crescent
Tygervalley
7530
South Africa

Tel: +27 21 974 4156

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