https://www.engineeringnews.co.za

Poultry industry challenges, drought negatively impact on RCL Foods’ FY17 profit

Bloomberg

Bloomberg

30th August 2017

By: Mia Breytenbach

Creamer Media Deputy Editor: Features

     

Font size: - +

The widely reported challenges facing the local poultry industry and the performance of JSE-listed RCL Foods’ chicken business unit decimated the company’s profits in the financial year ended June 30, with the company reporting a 0.8% decrease in earnings before interest, taxes, depreciation and amortisation (Ebitda) to R1.7-billion.

Further, severe drought conditions in the previous financial year, coupled with a lack of economic growth over the past two years, have intersected to create a tough environment for consumers and businesses, and negatively affected the company’s results across most categories.

Revenue for the year ended June 30 remained flat, decreasing by 0.3% to R25-billion.

During a webcast to discuss the company’s results, on Wednesday, CEO Miles Dally noted that the company had done well in a constrained market.

Headline earnings decreased by 34.1% to R548.5-million. Normalised headline earnings, however, increased by 7.7% to R593.1-million. 

Further, cash generated from operations increased by 56.8% to R2.3-billion, Dally pointed out.

Poultry imports, and more recently, rapidly rising sugar imports, have been adding pressure to domestic supplies.

CHICKEN
“[RCL’s chicken business] shows early recovery based on our new model, while the industry is still in crisis,” Dally said.

The local poultry retail market remains significantly oversupplied as a result of substantial increases in dumped imports, which occurred in recent years and continued to grow during the financial year under review.

The chicken business unit’s Ebitda decreased by 63.9%, or R101-million, in the financial year under review.

Input costs escalated substantially in the financial year as a result of the drought, with limited capacity to pass the cost increases on, given the oversupplied market.

However, during the period under review, the chicken business unit implemented a new and more resilient business model designed to permanently reduce the reliance on commodity-driven categories.

Further, the Hammarsdale operation, in KwaZulu-Natal, was reduced to a single shift, while the Tzaneen operation, in Limpopo, is being sold, thereby eliminating a significant portion of loss-making individually quick frozen product.

The total cost of implementing these strategic actions amounted to R223.9-million.

The new business model has shown positive early results with the chicken business unit posting a second-half Ebitda of R94.9-million, relative to the normalised Ebitda profit of R14.1-million for the first six months of the year, said RCL CFO Rob Field.

He highlighted, however, that the downsizing of the chicken business unit resulted in a R172-million impairment of assets, a R42.9-million provision for restructuring costs and R9-million in biological assets writedowns.

While the quick service restaurant category suffered the same consumer pressure as general grocery categories, this negatively affected the chicken unit’s results in the period, as more of the mix had to be sold in the retail sector.

Nevertheless, the Rainbow Freezer to Fryer category was a highlight this year, with growing volumes – market share was up by 10.4% to 34.1%.

RCL Foods consumer division MD Scott Pitman noted that, despite engagements with government around an additional tariff, the dumping of leg quarters remains a concern, with levels still high, in spite of reduced European imports, owing to an outbreak of avian influenza.

However, the strategies implemented to ensure that the chicken business unit will be more profitable and sustainable going forward, will ultimately benefit RCL Foods as a group, he pointed out. This, nevertheless, has had a notable impact on the performance of the logistics and animal feed business units, which act as suppliers to the chicken business unit.

Similarly, the increased engagement and understanding among industry players and government in response to the poultry crisis will hopefully create a platform for a healthier industry going forward, Pitman suggested.

CONSUMER DIVISION
RCL’s consumer division achieved a 1.3% year-on-year increase in revenue to R13.5-billion, while Ebitda declined by 25.8% to R520.8-million.

Most grocery categories performed well, yet a voluntary product withdrawal in beverages, and operational issues in the speciality division, caused Ebitda, excluding chicken, to decline by 14.7% to R463.7-million.

RCL has, however, grown its market share to dominate the peanut butter and mayonnaise categories with Yum Yum and Nola respectively assuming market leadership in most months, Pitman highlighted.

Despite declining market volumes across most food categories, the consumer division has shown pleasing volume growth in key grocery brands and good market share gains in a very competitive market environment, he noted. 

Good progress was also made in terms of the integration of teams, the setting up of a dedicated sales force and the bedding down of one company-customer interface, along with successful efforts to reduce costs.

MILLBAKE
The Millbake business unit's results improved owing to the operational turnaround in Baking, with Ebitda up 2.4% to R278.9-million, with the company’s efforts “bearing fruit”, according to Dally.

While lower volumes and a steep increase in raw material costs negatively affected the Milling operation, commodity prices have started to ease as a result of better rainfall and crops.

Dally suggested that this would improve operating conditions for milling, but excess capacity in the industry remains a significant challenge.

The baking business unit’s profitability improved after the company resolved most of the operational issues experienced at the Gauteng bakeries in the prior year. The resolution has resulted in increased service levels and a pleasing reduction in damages and returns.

SUGAR
A higher sugar price, which has compensated for the drought-related decline in production volumes, has been a highlight for the financial year under review.

The Sugar and Milling division’s revenue declined by 3% to R14.5-billion; however, Ebitda increased by 27.6% to R1.05-billion at a margin of 7.3%. The results are attributed to good increases in sugar prices and the operational turnaround of the Gauteng bakeries within the Millbake business unit.

The division also benefited from the R154.8-million payment of an insurance claim for the buckled sugar silo in Pongola, which occurred in July 2015.

Favourable sugar prices and an improved channel mix culminated in the sugar division’s Ebitda increasing by 119.2% to R507-million.

While the late onset of summer rain last year delayed replanting and will consequently impact production recovery, dam levels are now at acceptable levels to irrigate throughout winter.

Sugar production decreased by 14.1%, or 77 284 t, in the financial year under review and is expected to gradually recover over the next two financial years. Restoration to pre-drought sugar volumes is expected in the 2019 financial year.

The pending sugar tax remains a risk to volumes in the local market, Sugar and Milling division MD John du Plessis noted.

Further, globally, sugar stocks are rising, driven by higher production, mainly out of Pakistan and an embargo on sugar imports in China. This is putting pressure on the market and bringing global sugar prices down, said Du Plessis.

Domestically, a stronger rand is resulting in cheaper imports, placing a strain on sugar export margins.

Imports have increased rapidly from the first quarter of the 2017 calendar year, with Du Plessis noting that the current sugar tariff structure had provided inadequate protection against imports, which traded up to 30% below the cost of domestic sugar, thereby not sufficiently protecting local farms from imports.

AFRICA EXPANSION
Despite challenges in the rest of Africa, RCL Foods continued its low-risk strategy to grow its footprint on the continent, which has served it well in the past, and under the current more volatile political and economic circumstances, Dally said.

The strategy entails RCL following established customers into selected locations, entering into joint ventures (JVs) with other established food and route-to-market players and acquiring new businesses where appropriate to broaden ownership of the company’s value chain.

“In the current financial year, RCL disposed of its investment in Zambia, with Zambeef electing to settle the shareholding in cash,” Dally said.

Further, investments were made within the company’s JVs and associates.  Botswana-based Senn Foods Logistics acquired land to expand their ambient distribution capacity and Uganda-based Hudani Manji Holdings made further investments in its infrastructure. Swaziland-based sugar producer RSSC continues to position itself as a leading low-cost sugar producer.

“While we continue to pursue opportunities in Africa, we remain cautious in our approach,” Dally noted.

PROSPECTS
Economic growth will continue to be lacklustre in the coming year, which implies that demand will remain constrained, with flat to declining volumes, Dally noted.

However, the record maize crop, as well as improved supply of other crops should assist in restoring margins and contribute to welcome price relief for consumers.

The chicken business unit is expected to achieve significant improvements in profitability relative to the past financial year, owing to the revised business model and lower input costs.

Further, production volumes in sugar should improve on the back of renewed irrigation, although the increasing trend in sugar imports and its impact on local sugar prices remains a major concern and places the sugar division’s performance in the 2018 financial year at risk.

As the groceries unit has a good pipeline of innovations, a strong focus will be placed on capitalising on opportunities that will become available as a result of the new plant and equipment coming into operation at the ultrahigh temperature and pet food plants, Dally said, noting that the petfood plant will benefit from innovation and technology currently not available in South Africa.

Logistics, meanwhile, will focus on operationalising recent contract wins, and pursue further opportunities to replace the business lost through the chicken unit’s restructuring, and the implementation of cost containment initiatives.

The division will also look to capitalise on its new brand positioning, which was launched in June.

“We remain confident in our strategy and are making steady progress towards our goal of a diversified food portfolio, focused on adding higher-margin, value-added products and categories,” Dally said.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

Comments

Showroom

Booyco Electronics
Booyco Electronics

Booyco Electronics, South African pioneer of Proximity Detection Systems, offers safety solutions for underground and surface mining, quarrying,...

VISIT SHOWROOM 
Environmental Assurance (Pty) Ltd.
Environmental Assurance (Pty) Ltd.

ENVASS is a customer and solutions-driven environmental consultancy with established divisions, serviced by highly qualified and experienced...

VISIT SHOWROOM 

Latest Multimedia

sponsored by

Option 1 (equivalent of R125 a month):

Receive a weekly copy of Creamer Media's Engineering News & Mining Weekly magazine
(print copy for those in South Africa and e-magazine for those outside of South Africa)
Receive daily email newsletters
Access to full search results
Access archive of magazine back copies
Access to Projects in Progress
Access to ONE Research Report of your choice in PDF format

Option 2 (equivalent of R375 a month):

All benefits from Option 1
PLUS
Access to Creamer Media's Research Channel Africa for ALL Research Reports, in PDF format, on various industrial and mining sectors including Electricity; Water; Energy Transition; Hydrogen; Roads, Rail and Ports; Coal; Gold; Platinum; Battery Metals; etc.

Already a subscriber?

Forgotten your password?

MAGAZINE & ONLINE

SUBSCRIBE

RESEARCH CHANNEL AFRICA

SUBSCRIBE

CORPORATE PACKAGES

CLICK FOR A QUOTATION







sq:0.05 0.102s - 174pq - 2rq
Subscribe Now