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Weaker local currency, higher raw material costs, cause drop in Astral Foods’ profit

‘Our market was impacted by a complete closure of the hospitality and…restaurant sectors under the hard lockdown,’ explains agriculture division MD Gary Arnold.

NOMPU SIZIBA: JSE-listed poultry producer Astral Foods released annual results today, November 16, 2020]. For the 12 months ended September 2020, the company reported group revenue of R14.1 billion. That’s an increase of 4.6% on the year prior. However, their operating profit declined by 5% to R838 million. Headline earnings per share declined by 14% to R14.41 per share. The company’s first half of the year was better than the second, during which the Covid crisis struck. Despite the difficulties, though, shareholders are set to get a final dividend of R7.75/share.

Well, to take us through the company’s performance I’m joined on the line by Gary Arnold, the managing director of agriculture at Astral Foods. Thanks very much, Gary, for joining us. Now, both your poultry and feed divisions recorded increases in revenue for the year. To what do you attribute that?

GARY ARNOLD: Nompu, firstly, in the feed division an improvement in revenue there, driven by an increase in raw material costs. The selling price of feed increased.

And then in the poultry division, although volumes were flat or stable, we did have a small increase in boiler selling prices. So they were up in the poultry division, and that supported a revenue increase in the poultry division.

NOMPU SIZIBA: The generally weaker rand in the period upped your raw material costs, and therefore saw your profit margin squeezed somewhat.

GARY ARNOLD: It did, Nompu. Our markets are largely driven by Chicago. So, you know, any movement on international coarse-grain markets of course does impact us. With some global weather concerns we’ve seen higher demand on the international markets, particularly from China, for course grains, and premiums on corn out of Brazil and the US. This all supported higher prices on Chicago. And of course the weaker rand translates into higher local prices for us – and this notwithstanding the good to above-average maize crop that we had for the 2020/21 season.

NOMPU SIZIBA: Now, it also appears that you haven’t been able to run away from the usual problems of load shedding, and then you have a longstanding water-access problem at your plant in Standerton. Just tell us what the issues are there, and it does sound like it’s setting you back quite a bit in terms of costs.

GARY ARNOLD: Yes, Nompu. Unfortunately this year, again, we experienced nationwide load shedding and, together with the water-supply constraints in Standerton, that did impact us to the tune of R62 million. Maybe to put that into some perspective, last year the costs were R126 million. So, although not as high as last year, R62 million still is a significant number in additional costs to the group.

In Standerton, on the back of the water-supply constraints, we did manage to commission in June of this year the reverse-osmosis plant. So we are taking water that has gone through our processing plant and the whole process there, and we are cleaning it back to potable water standards and reusing it. Last year, and at the beginning of this year, we were trucking water – 120 truckloads a day – to the plant. Fortunately, we’ve been able to cut back on that. But of course this all comes at a high cost, both in terms of ongoing running costs and capital expenditure, for us.

NOMPU SIZIBA: The second half of the year obviously was quite a tough one, as you mentioned in your statement, with the whole Coronavirus-related lockdown. How did that practically impact on your business?

GARY ARNOLD: In two ways. Nompu. Obviously we had direct costs associated with the pandemic. We had to provide conditions where social distancing was adhered to, a lot of PPE for our staff – we’ve got 12 500 employees – providing PPE for them.

Also, at a point where we were transporting staff into our operations, we had to double up on the transport, because we had to provide for social distancing in the buses. So a lot of additional costs that we experienced directly as a result of the pandemic.

And then, of course, there’s the indirect costs where our market was impacted by a complete closure of the hospitality and the quick-service restaurant sectors under the hard lockdown. Of course, that had an impact on our product mix. The industry was no longer supplying in the QSR – quick-service restaurant – sector. And with all that has to go somewhere. It all ended up in frozen chicken.

So the industry built quite significant stock levels in the second half, and these had to be worked away towards our year end. And that came at a price, as retailers were discounting and producers were discounting chicken into the market quite considerably in the high stock levels.

NOMPU SIZIBA: You’ve noted that, despite higher import tariffs being imposed on frozen bone in portions earlier this year, poultry imports continue to flood in. So I suppose it’s a case where you just have to live with it and be ever more competitive. I expect that’s quite difficult when your costs – some of which you have no control over – keep on going up.

GARY ARNOLD: There are costs that are outside of our control and in the macro environment. So we focus on what we need to do to manage our in-house expenses. The group’s overhead expenses only increased year on year by 2.5%, which is below inflation. So I think that was all-round good management of costs by the group for the year.

But of course, the tariff that was implemented in March of this year increased the duty on frozen bone in portions, and frozen bonus cuts, from 37% to 62%. The industry actually asked for 82%, and we did caution government that if we got anything less than that, it probably would have little to no impact on imports.

So, over our financial year, comparing that to the prior year, we have seen a slight decrease in imports, down about 10%, to around an average of 40 000 tons a month. There were three months in the year – June, July, and August – where we saw imports up to around 30 to 32 000 tonnes/month. We believe that had a lot to do with the exchange rate at the time. As you know, our local currency weakened quite considerably under Covid. And we [saw a] spike in September, back to 47 000 tons. So still a lot of chicken coming into the country, predominantly from Brazil and the US.

NOMPU SIZIBA: In your statement you announced the completion of your Festive processing plant in Olifantsfontein. That cost you R710 million, which you indicate was done within budget and within time. What capacity does this now add to your system?

GARY ARNOLD: That adds a further 800 000 birds a week. And, putting that into some context, Astral slaughtered on average 5.2 million birds a week over the past financial year. So we’ve added 16% processing capacity to our volumes.

NOMPU SIZIBA: Hmm, we eat a lot of chicken!

GARY ARNOLD: Again, part of our commitment to the Poultry Sector Master Plan, which we signed with a number of stakeholders towards the end of last year, was that the industry would invest in additional processing capacity. So that locally produced chicken made up a larger proportion of consumption.

We are looking forward to seeing imports – or rather dumping – tapering off, and more locally produced chicken in the total consumption figures.

NOMPU SIZIBA: Yes. Now, of course, the economy is not looking great, and many South Africans have lost jobs, and we just don’t know what the future holds, and so on. So, from your perspective as a business that feeds South Africans, what’s the outlook?

GARY ARNOLD: Nompu, we are obviously concerned about the outlook. I think everyone is. The job losses – Stats SA published a couple of days ago the third-quarter unemployment figures and see unemployment now at around 30.8%. If you add in those jobs or those unemployed that have given up any hope of finding a job, that takes the unemployment rate to well over 40%. And of course that does put a constraint on the discretionary disposable income that a consumer has at the end of the day to spend on food.

Although chicken as the cheapest protein source among all the meats for a consumer, financial pressure does impact on the basket that he purchases at the end of the day, for meats in particular, and chicken is affected as well.

NOMPU SIZIBA: So Gary, from Astral’s perspective, I guess it’s a case of trying to remain as competitive as you can, and managing those factors that you can control.

GARY ARNOLD: Yes. Astral’s strategy is to be the best cross-producer of chicken. That sounds a simple strategy, but it’s resilient and it has stood us in good stead over the years. We continue to produce chicken at best cost possible. We often benchmark the South African poultry producer cost to that of other countries around the world. We still produce chicken at a cheaper cost than Europe, and we’ll continue to strive to put affordable protein on the shelves.

The government and the president called for all essential services to continue their operations during Covid. We did, and we believe we’ve weathered the storm fairly well, and we’ve continued. We had no production cutbacks during that time, and we continue to put chicken on the shelves.

NOMPU SIZIBA: That was Gary Arnold. He’s the managing director for agriculture at Astral Foods.

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