South African poultry group Astral Foods has booked a 23% drop in full-year earnings on higher grain prices and greater competition from European and South American poultry importers.
Net income fell to ZAR392m (US$38m) in the year to end September, down from ZAR429m last year.
"The poultry industry was put to the test on many fronts," CEO Chris Schutte said. According to the company, earnings were hit by "record high" poultry imports, escalating grain prices and rising energy costs.
The group has taken a number of measures to reduce costs. In August, Astral laid off 150 people and in October the company put a freeze on pay for its 12,000 employees.
Astral's sales jumped 12.9% in the year to ZAR8.16bn, thanks to higher sales in both the poultry and feed businesses.
Looking to the coming year, Astral said it did not expect the trading environment to improve in the first half, with rising feed costs pushing up costs and a depressed consumer environment that is "exacerbated by high levels of poultry imports and an imbalance in supply and demand".
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ASTRAL FOODS FY RESULTS
FINANCIAL OVERVIEW
Headline earnings for the year decreased by 31% to R300 million from last year's R437 million, as a result of lower profitability from the poultry operations.
Group revenue increased by 12,9% from R7 227 million to R8 160 million, due to higher sales realised by both the poultry and feed segments.
The group's profits were severely affected by lower profitablity in the poultry segment, in spite of improved profits reported from the feed segment. This resulted in the group's operating profit reducing 29,3% to R477 million with the operating profit margin at 5,8% down on the previous year's 9,3%. The profit before tax was down by 24,7% to R495,0 million which includes R35,9 million profit in respect of the sale of the interest in East Balt which was sold for a consideration of R96,0 million.
Net interest paid for the year increased to R18 million from last year's R15 million as a result of increased average borrowings throughout the year.
Cash generated from operations for the year of R478 million was 43% down on last year's R837 million due to lower profits and higher working capital. Increased costs of raw materials resulted in increased values of working capital and there were high finished goods stock levels at year-end. The net debt to equity ratio was however still at a healthy 6,6% (2011: 2,5%).
The group has entered into negotiations whereby half of its 50% interest in Nutec South Africa Pty Limited will be sold. The assets and liabilities of Nutec, which were previously proportionally consolidated, have been disclosed as held for sale.
The board has declared a final dividend of 336 cents, resulting in a total dividend out of the profit for the year of 672 cents (2011: 810 cents). The distribution will be supported by the strong balance sheet and underlying cash flow generation capabilities.
OPERATIONAL OVERVIEW
Reclassification impact
Cognisance should be taken of the re-assessment of the classification of sales to contract growers (see note 13), which has resulted in a restatement of the 2011 revenue. Although the 2011 profits were unaffected, the profit margin for the group increased to 9,3% (previously stated as 7,8%).
Poultry division
Revenue for the division was up by 12,5% to R5 915 million (2011: R5 258 million) on the back of higher volumes (up 4,7%) and pricing levels improving by 5,6%.
The higher volumes were due to an increase in the number of birds processed primarily as a result of the inclusion of the Earlybird Camperdown (Mountain Valley) volumes for the full year, together with an extra trading week included in the 2012 financial calendar (see note 12).
An increase in feed costs for the period (up 22,8%) impacted negatively on margins for the division which reflected a decrease to 2,5% (2011: 6,7%) with operating profit decreasing by 59,0% to R145 million (2011: R353 million).
The year under review was also impacted by high poultry stock levels in the industry, high levels of poultry imports (primarily from South America and more recently Europe) and depressed poultry selling prices. It was evident during the second half of the reporting period that the poultry industry lacked pricing power, as can be intimated from the extensive poultry promotional activity at prices below cost that was witnessed in order to manage stock levels. The increase in feed costs, together with above inflationary increases in energy costs, culminated in a margin squeeze and a significant deterioration in the profitability of Astral's poultry division.
Feed division
Revenue for the division increased by 24,1% to R4 571 million (2011: R3 684 million) as a result of higher feed prices on the back of higher maize and soya pricing levels with stable sales volumes (up 0,1%), derived from an increase in the inter-group requirement for poultry feed offset by a decrease in external feed sales.
The operating profit increased by 11% to R313 million (2011: R282 million) with an operating margin at 6,9% (2011: 7,7%). The increase in the operating profit was mainly due to an increase in net margin realisations. The local feed operations reported an increase in profitability of 9,9%, whilst the division's African operations reported a healthy 21,9% increase in operating profit.
Services and Ventures
Revenue for the division decreased by 13% to R240,0 million (2011: R276,0 million) whilst operating profit decreased by 52% to R18,9 million (2011: R39,4 million). Excluded from the results for 2012 is the second half profit contribution from the East Balt SA operation, which was disposed of during the financial year. The provision for the Competition Commission settlement also impacted negatively on the profits of this division.
COMPETITION COMMISSION
An all-inclusive agreement with the Competition Commission has been negotiated to settle all previous and current matters and investigations, and is in the final stages of conclusion, with the settlement value of R17 million having been fully provided for in the first half of the financial period under review. This agreement remains to be confirmed as an order by the Competition Tribunal.
PROSPECTS
The business environment for the first half of the next reporting period is not expected to improve from prevailing conditions. Maize and soya pricing as key cost drivers in feed and poultry will remain at higher levels with limited ability to recover the increased production costs in a depressed consumer market, exacerbated by high levels of poultry imports and an imbalance in supply and demand. Expected higher grain and oilseed plantings and normal precipitation levels locally, could contribute to a reduction in feed input costs during the second half of the next financial reporting period.