Pioneer Foods warns of more food price pain

Pioneer Foods would be forced to raise food prices again in the next six months as the company's gross margin came under pressure, the group said at its maiden results presentation yesterday.

MD André Hanekom said SA's third-largest food manufacturer would be putting up the flour price 15% in the next six months, maize would go up 10%-12%, fruit juices 10%-20% and breakfast cereals up to 15%, depending on the category. Rice prices were expected to double in the “next month or two”.

Pioneer reported revenue up 25% to R7bn for the six months to March, while headline earnings rose 10% to R222m.

If a once-off deferred tax effect as a result of the lower income tax rate was reversed, headline earnings grew 3%.

The group, which listed on the JSE last month, produces products such as Sasko bread, Weetbix cereals, Pepsi carbonated soft drink and Ceres fruit juice. It said that 20% of the improvement in revenue was a result of inflation, with volume growth accounting for the rest.

Margin falls

Financial director Leon Cronjé said operating profit margin dropped from 6,3% to 5,7% as a result of delayed price increase recoveries. The gross margin fell from 29,7% to 26,7%.

Hanekom said the food company's margin and cash flow were affected by “very high input costs”, which were expected to continue in the second half of the year.

The company would try to pass these costs to consumers, although resistance was expected to hamper volume growth. He said the group was already seeing volumes slowing on higher value products.

Higher input prices also put working capital under pressure and the group was unable to fund this from cash profit generated by operations.

Cronjé said an abnormal increase in the price of wheat and increased debtors as a result of increased selling prices had pushed up working capital charges to R604m from R327,6m.

Margin pressure was expected to cause growth to slow in this financial year.

Hanekom said the group would “do well to achieve growth in earnings for the year”. However, additional capacity coming on stream in the next 18 months and the group's “defensive” basket were expected to aid future earnings growth.

No provision yet for possible fine

Pioneer would also drive efficiencies and aim for capacity growth from a planned R1,2bn capital expansion over the next few years. It would also seek to strengthen its position in the market place.

Pioneer has not yet provided for a possible fine by the Competition Tribunal for its alleged role in a bread price-fixing cartel.

The company faces a penalty of up to 10% of group turnover, which could be as much as R1,1bn, if it is found guilty of price fixing. However, should the tribunal only apply the fine to the affected division, the fine could be as little as R340m.

Cronjé said that the group was forming a view on the matter after having recently been informed of the specific charges against it.

Depending on the view of its legal team and auditors, the group may raise a provision later, he said.

Source: Business Day

Published courtesy of