World grain prices fuel food inflation

Announcing the company's results for the year to September, MD, André Hanekom said that the international scarcity of grain had caused local import parity prices to soar by an average of 48% for wheat, 42% for white maize, and 60% for yellow maize.

"This has put a tight squeeze on the group's operating profit margins, resulting in a drop from 7,7% to 7,1%," he said.

"The drought in South Africa at the beginning of the year negatively affected the local supply of wheat and maize, resulting in one of the highest levels of imports ever. This, together with declining world grain stocks, could further fuel the already high rate of food inflation," says Hanekom.

For the year under review, revenue increased by 21% to R11,7 billion, while operating profit grew by 11% to R832 million. Headline earnings rose marginally by 2% to R503 million.

"Headline earnings were further eroded by net finance charges of R116 million and increased taxes. The investment in working capital rose by R351 million, while R714 million was spent on fixed assets and new acquisitions as a first phase in repositioning the group's infrastructure and production capacity," says Hanekom.

Net interest bearing debt increased to R1,2 billion at year end, resulting in a debt to equity ratio of 33%.

A final dividend of 66 cents per ordinary share has been declared, bringing the total dividend for the year to 93 cents. A dividend of 19,8 cents per class A ordinary share has been declared - being 30% of the dividend payable to ordinary shareholders in terms of the broad based employee share scheme.

Strong sales volumes

The Sasko division continued to enjoy strong sales volumes. As did the Bokomo Foods division with sustained demand for market-leaders, Weet-Bix, Corn Flakes and ProNutro.

In the Agri division, the chicken and feed businesses performed well on increased sales volumes, but the egg business was negatively affected by a downward trend in the industry.

The S.A.D division achieved good results thanks to higher export volumes accompanied by a weaker average rand exchange rate.

The Ceres Beverage Company achieved excellent volume growth in all categories, and was able to absorb the impact of substantial cost hikes of raw materials and packaging materials. The division continued to increase consumer awareness of Pepsi products through a focused marketing campaign and stepped-up distribution networks.

"Over the past few years, the group has grown exponentially - with revenue trebling from R4,6 billion in 2000 to R11,7 billion this year. At the same time, sustained growth in sales volumes has placed pressure on the production capacity of most divisions," says Hanekom.

A drive to raise R1 billion to fund a capital expansion programme has prompted the group to consider a possible listing on the Johannesburg Stock Exchange during the first half of 2008.

"The group's performance in the new year will be significantly influenced by world grain prices. We constantly strive to maintain a fine balance between affordable food prices on the one hand, whilst ensuring long term business sustainability," says Hanekom.

During February 2007, the group received a complaint referral by the Competition Commission for alleged restrictive practices by the group's Western Cape bakery business in contravention of the Competition Act.

Response within time limits

The relief sought is inter alia for the imposition of an administrative penalty of 10% of revenue. This would be 10% of R384 million which represents the 2006 revenue from the sale of bread in the Western Cape.

Pioneer Foods responded within the set time limits. Independent legal opinion has indicated that the group has reasonable prospects of a successful defence against the charges.

The Commission indicated that further complaint referrals will be made involving the group in alleged restrictive practices in the national bread and wheat and maize milling markets. To date, no such complaint has been received.

National revenue from the group's baking and milling business amounted to R3,4 billion for the year ended 30 September 2006. The maximum cash outflow for the group, if any, in relation to all complaints, could be up to 10% of this amount.

"This liability only arises if such complaint referrals are ultimately proven against the group. Until any complaints are received and investigated, it is imprudent to comment on the prospects of its successful defence to these charges.

"We regard these allegations in an extremely serious light and wish to reassure consumers that the matter is receiving the full attention of the Board and Management.

"Through our legal advisers, we've been in regular contact with the competition authorities in order to move forward in this matter. However, while investigations are ongoing, we are unfortunately not in a position to provide further details," says Hanekom.

To ensure good corporate governance, a committee of non-executive directors is investigating all related matters with the assistance of external consultants.