Quantum Foods Holdings Ltd (QFH.JO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the results presentation of Quantum Foods for the financial year ending 30 September 2025. The purpose of this engagement is to present the company's results published on the stock exchange news service of the JSE this morning and to address any questions or comments on these results. We, therefore, respectfully request that any questions or comments not related to the financial results or presentation be addressed to the Company Secretary, Ms. Ziyanda Wakashe in writing, and the company will respond accordingly. I will be presenting a brief overview of the salient features of this reporting period, whereafter our CFO, André Muller, will present the financial overview. Once André has completed the financial overview, I will give feedback on the operations and also highlight focus areas of management for the 2026 financial year. The company's revenue increased by 13% to ZAR 7.15 billion. The increase in revenue from the South African operations was mainly driven by an increase in external layer feed volumes, much higher layer livestock volumes and higher egg sales volumes due to the recovery of the layer breeder and commercial layer flock post the 2023 highly pathogenic avian influenza outbreaks. Revenue from the Rest of Africa operations also increased mainly due to the higher feed and egg sales volumes in both Zambia and Uganda with Zambia also reporting higher egg selling prices. The headline earnings per share increased by 67% to ZAR 1.344 per share as the company ended the year with a much improved financial performance. The main reasons for the higher profitability are the higher production and sales volumes in the various segments of Quantum Foods, well-executed margin and volume management from the feed segment and the improved volumes and efficiencies from the farming segment, which contributed to [indiscernible] cost recovery and improved profitability. The impact and cost of highly pathogenic avian influenza was also much lower during this reporting period. Cash generation is usually a strong feature of the company and cash flow from operating activities this year amounted to ZAR 302 million. Then for the 2025 financial year, the Board of Quantum Foods has declared a dividend to shareholders of ZAR 0.34 per share. As stated, the post highly pathogenic avian influenza volume recovery in the feeds, farming and egg segments of the company was a big driver of the revenue increase, but it also had a positive effect on throughput and cost recovery. The recovery in the country's poultry flock since the 2023 highly pathogenic avian influenza outbreaks contributed to an 8.7% growth in feed production volumes, while day-old pullet volumes grew by 28% and day-old broiler chick volumes increased by 6.4%. The egg volumes increased by 79.5%. During the current reporting period, the costs of maize, bran and chop increased, while the cost of soybean meal declined. The local maize crop harvested in 2024 was reported at 12.8 million tonnes and not sufficient for local demand. And SAFEX yellow maize, therefore, traded at import parity for the biggest part of this year. There was even a time when yellow maize traded above import parity as this year's local maize harvest was delayed due to very wet conditions and supply of maize was limited. The average price of SAFEX yellow maize this year increased by 14% against the previous period and the cost of bran and chop increased by 10% and 7%, respectively. The increase in feed prices was fortunately softened by an 18% decline in the average cost of soybean meal, driven by good soybean world stock levels and the rand strengthening with 2% against the U.S. dollar. As expected, the South African layer flock recovered from the 2023 highly pathogenic avian influenza outbreaks. And according to SAPA, the flock recovered to above 30 million hens this year. The recovery and increase in egg supply caused the egg realization to decline by 17%. Fortunately, this decline was partly countered by higher egg volumes available for sale from our commercial layer farms and the margins remained positive within the egg segment and the egg business performed better than expected. The absence of highly pathogenic avian influenza for the greater part of this year contributed towards the solid financial performance of the company, but highly pathogenic avian influenza outbreaks in the country once again occurred from June. The company itself had a H5N1 outbreak on a layer farm in the Western Cape during the first week of October and the risks for further highly pathogenic avian influenza outbreaks in the country remain very high. We reported early in the year on the high demand for layer livestock. But as the layer flock in the country recovered, it led to a muted demand for layer livestock in the second half of the year. The highly pathogenic avian influenza outbreaks also led to uncertainty among producers and some orders for layer livestock were delayed and even canceled. The Rest of Africa operations delivered a satisfactory financial performance despite facing high levels of load shedding and high raw material costs in Zambia and civil unrest and looting in Mozambique, which impacted the flock numbers and flock health on our farm. I now hand over to André Muller, who will do the financial overview.

Good morning, ladies and gentlemen, and welcome to the financial overview section of the results presentation. Group revenue increased by 13% to ZAR 7.15 billion with increased revenue from all 4 segments. This is mainly due to volume recovery in the layer farming and eggs business where the previous period was significantly impacted by earlier avian influenza outbreaks and an increase in volumes sold by the feeds business. Egg volumes increased by 79%, which was partially offset by a 17% decline in average egg selling prices. Much higher volumes of layer livestock, both day-old chicks and point-of-lay hens were available for sale during the financial year. Revenue from broiler farming increased marginally, mainly due to increased volumes of day-old chicks sold from the Hartbeespoort hatchery. Feed external sales volumes increased by 3% and average selling prices of feed also increased by 3%, with volume recovery mainly from the Pretoria feed mill, where previous period sales were affected by the earlier avian influenza outbreaks. Revenue from Zambia and Uganda increased with higher egg and feed sales volumes, but was lower in Mozambique, where egg selling prices were lower and the business had less eggs available for sale following the looting incident in December of 2024. Operating profit that includes the profit and loss on sale of assets increased from ZAR 231 million to ZAR 369 million, mainly due to a significant improvement in profits from the layer farming business, where volumes were higher and excellent operational and cost efficiencies were achieved. Net finance income of ZAR 5.5 million was earned, resulting in profit before tax of ZAR 375 million at a satisfactory operating margin of 5%. The effective tax rate was 25.7%, and we are pleased to report headline earnings per share of ZAR 1.344 compared to ZAR 0.804 per share for the previous year. Adjusted operating profit that excludes profits and losses on the sale of assets improved from ZAR 232 million to ZAR 361 million in 2025. Eggs reported a profit of ZAR 111 million compared to a profit of ZAR 140 million in the previous period. The benefits of a 79% increase in sales volumes, excellent efficiencies and well-controlled costs were offset by a 17% decline in egg selling prices. Despite the lower profits in 2025, the egg business performed better than expected with egg selling prices achieved by selling lower volumes than prior to the 2023 and 2024 avian influenza outbreaks in a market where the national layer flock increased significantly, producing less than expected. Farming reported a profit of ZAR 127 million compared to a loss of ZAR 11 million. Earnings improved from the broiler farming business, mainly due to increased volumes and margins on the day-old chick sold from the Hartbeespoort hatchery. Hatching egg costs were lower due to more hatching eggs produced in the vicinity of the Hartbeespoort hatchery with the Hartbeespoort breeder farm being in production throughout the period and following conversion of 2 farms to broiler breeder farms. In the previous period, the Hartbeespoort breeder farm was not in production during the first half of the financial year because of an earlier avian influenza outbreak and hatching eggs had to be sourced from other regions or imported at higher cost. The main recovery, however, was from the layer farming business, where in the previous period, multiple factors resulted in a significant loss. These included avian influenza bird stock write-offs of ZAR 37 million, costs incurred in rebuilding the layer breeder flock also at newly contracted facilities, weaker efficiencies throughout the layer value chain resulting from the disruption in the normal placement cycle, significant cost under recovery with expenditure on the culling of birds, farms being cleaned and prepared for future placement while producing much lower volumes due to the remaining -- due to remaining empty until point-of-lay hens were available for placement. Most of these factors did not occur in the current period and profits benefited from the much higher volumes, very good egg farm efficiencies, good cost management and strong demand from external customers for layer livestock in the first half of the year. In the second half of the year, demand for layer livestock decreased, affected by lower egg margins and sporadic outbreaks of avian influenza, which resulted in an oversupply of hatching eggs and point-of-lay hens earmarked for external sale remaining on farms beyond the planned transfer age. Costs were incurred to resize the layer breeder flock to balance hatching egg production with demand. In addition to the cost of culling layer breeders early, selling surplus hatching eggs and having to feed point-of-lay hens for longer was an avian influenza outbreak detected at the Rondevlei layer farm in the Western Cape, resulting in just over 153,000 birds with a value of ZAR 8.2 million having to be destroyed. The company also provided ZAR 10 million for administrative penalties levied in terms of 2 Section 24G electrification applications lodged by the company in terms of environmental legislation. These Section 24G applications were submitted to regulate environmental approval for poultry houses built by previous owners of 2 farms. In both cases, the poultry houses were constructed some 5 years prior to Pioneer Foods, which is the predecessor company of Quantum Foods acquiring the farms. Animal Feeds reported a profit of ZAR 103 million, an increase of ZAR 9 million from the comparative period. Total volumes produced increased by 9% with external sales volumes increasing by 3% and internal volumes transferred to the farming business increasing by 23%, mainly due to the recovery of the company's own layer flock was partially offset by additional costs incurred on the intake area of raw materials at the Malmesbury feed mill, where repairs to the area affected by the explosion in June 2024 was completed by December 2024. Earnings from the other African countries decreased by ZAR 3 million to ZAR 42 million with higher profits from Uganda, not only due to supportive market conditions, but also due to improved farming efficiencies and increased volumes of feed and eggs sold. Earnings increased in Zambia despite the negative impact of higher feed costs and increased hours of load shedding for most of the year. Improved rainfall, a much better 2025 grain harvest and a stronger currency resulted in improved trading conditions during the second half of the year. During this period, the improved conditions supported higher demand for day-old chicks and feed and increased egg margins. A disappointment was the discovery of a maize shortage when moving over to consuming maize from the 2025 harvest. Earnings were lower from Mozambique, mostly due to having less eggs available for sale following the loss of birds in the looting incident and thereafter due to a disrupted vaccination program, which was compounded by lower egg selling prices in especially the second half of the year when more eggs were available from South Africa. Head office costs decreased mostly the expenditure on corporate and legal matters. Turning to the statement of financial position. Noncurrent assets increased by ZAR 185 million from September 2024. This included CapEx investment of ZAR 262 million and a depreciation charge of ZAR 91 million. Right-of-use assets increased by ZAR 12 million and includes the lease of a layer hatchery in the Western Cape. A breeder farm in Kampala was classified as an asset held for sale with operations previously conducted on the farm relocated. Net working capital, excluding lease liabilities, increased by ZAR 120 million, mainly due to a 4% increase in trade and other receivables and differences year-on-year in the timing of vendor payments for feed raw materials. Noncurrent liabilities increased by ZAR 51 million. The change includes an increase of ZAR 29 million in the liability for deferred tax mainly due to the higher capital project expenditure allowances and an increase in the provision for long-term incentives, where measurement is based on the achievement of targets for growth in headline earnings per share over a 4-year measurement period. Cash increased by ZAR 30 million to ZAR 276 million at the reporting date. Borrowings decreased by ZAR 20 million following the first 2 6 monthly repayments on the ZAR 100 million term facility drawn in the previous period. Lease liabilities increased in line with the increase in right-of-use assets previously mentioned. Total equity was ZAR 2.395 billion at the reporting date of 30 September 2025. Turning to the statement of cash flows. Cash operating profit of ZAR 530 million was recorded for the period, while the cash outflow from higher working capital investment was ZAR 174 million. In addition to the factors mentioned earlier, the working capital outflow includes cash outflow of ZAR 23 million due to market movements of SAFEX futures previously acquired. Income tax payments of ZAR 54 million were made, resulting in a cash inflow from operations of ZAR 302 million. Capital expenditure of ZAR 262 million was incurred with more details on the next slide. The capital portion of lease liabilities settled amounted to ZAR 16 million and ZAR 20 million was repaid on the term loan. Interest income of ZAR 7.5 million was received and the rand value of cash held in foreign currencies increased by ZAR 4 million. The net effect of these cash flows in the reporting period was an increase of ZAR 30 million in the value of cash and cash equivalents. This slide provides more details of capital expenditure in the reporting period and future capital expenditure on items approved by the Board at the reporting date. Of the ZAR 262 million in the period, ZAR 90 million was spent on the project to build a third feed mill on the Malmesbury premises and ZAR 56 million was spent on the conversion of a previous broiler farm and a previous layer rearing farm to broiler breeder farms that are now supplying hatching egg to Hartbeespoort hatchery. Expansion CapEx in other African countries was relatively small and included expenditure on projects to increase breeder and hatchery capacity in Uganda and the conversion of 2 open-sided layer houses in Mozambique to environmentally controlled poultry houses. Future capital expenditure include the balance of expenditure on the Malmesbury feed mill project of ZAR 52.5 million, the first phase of a project to convert a dormant broiler breeder farm in the Western Cape to a broiler farm that will supply more broiler live bird volumes to the [indiscernible], a project to expand the egg business in Zambia. This project comprises the greenfield development of a new farm in the Copperbelt region and will include the construction of new layer rearing and commercial layer houses as well as an upgrade of the existing feed mill supplying the mega eggs farm in Chingola. This will be a multiyear project with the pace of development to be determined by, amongst other regulatory approvals. The company in accordance with its cautious approach to gearing is considering an increase of its existing term facilities to assist with the funding of future CapEx cash flows. That brings me to the end of the financial overview, and I will now hand back to Adel for the operational overview.

Thank you, André. This year's financial performance was assisted by favorable industry conditions for the biggest part of the year, but a very good operational performance from most of the businesses within the company underpinned the financial performance. The feed production volumes of Nova Feeds increased by 8.7% and external sales volumes grew by 3%, with the Pretoria feed mill reporting the biggest growth in external volumes. Over the last few years, the external sales volumes have grown year-on-year, and we believe that this was not only a function of price, but that the consistent quality of feed supplied and service offered to customers supported this growth. Production efficiencies in the feed business improved on the previous year and the utilization of the factories remained at very high levels. In the farming segment, the broiler breeder efficiencies with regards to chicks per henhoused were at very high levels and ended the year above breed standard. Since the move to the Ross breed, we've recorded yearly improvements, and this year's results has been an excellent achievement. The full year production at Hartbeespoort breeders, completion of the regional breeder rebalancing projects and improved hatchability in both regions have supported the 6.4% increase in day-old chick volumes. The broiler business also continued with the improvement of broiler efficiencies in the South with record results achieved on the back of improved feed conversions and daily growth rates. The improved feed conversions once again confirm the quality of the feed formulations and the feed itself. The focus of management on the broiler production efficiencies in the Western Cape enables the company to maintain its margin as a contract broiler producer. As alluded to previously, the Bergvlei business had a year of 2 halves. The first half of the year was characterized by high demand for day-old pullets and point-of-lays as producers in the north were repopulating their farms after the 2023 highly pathogenic avian influenza outbreaks. As Bergvlei had executed on their post-Avian influenza recovery plan, the company was able to supply livestock to the market and day-old pullet volumes increased by 28% for the full year. However, during the second half of the year, as the layer flock recovered to above pre-2023 avian influenza levels, demand for day-old pullets and point-of-lays became muted. The muted demand led to a buildup of Bergvlei's egg bank and hatching eggs were sold as reject eggs. To limit these losses and rebalance supply, Bergvlei had to cull some of its breeder flocks earlier than normal. While the rightsizing of the breeder flock was in process, the first H5N1 highly pathogenic avian influenza outbreak for 2025 was reported in June. On the back of this, producers delayed and even canceled their point-of-lay orders, which meant that the point-of-lay hens were kept on the rearing farms past the normal depopulation age as the Bergvlei team had to find alternative customers for these hens. This came at a huge cost to the Bergvlei business as feed intake increased, which could not be recovered through the point-of-lay price. Internally, the company continued with its reduced placement of layer hens in the north, taking the condition of farm assets, infrastructure and location of the farm into account when deciding where to place. We believe that the placement of hens on well-maintained and sanitized farms after a lengthy open period, along with the management efforts of the layer farming team resulted in the improved layer flock performance. This year's layer performance was the second best since the company's listing on the JSE. The higher year-on-year hen numbers of the company and improved efficiencies resulted in an increase of 79.5% in egg sales volumes and Nulaid was able to regain some of its retail customers in the North and in KwaZulu-Na with the reopening of the Pinetown packing station. The Nulaid management team continued to focus on the operational efficiencies of the pack stations and the efficiencies were at excellent levels throughout the year despite the egg packing stations handling substantially higher volumes. Throughout the South African business, the cost management was effective and well executed by the different segments and costs came in below budget for the full year. In the Rest of Africa business, the farming efficiencies improved, especially for the commercial egg production farms in both Zambia and Uganda, which contributed significantly to the profitability in those countries and led to higher egg sales volumes. These countries also reported good growth in feed sales volumes as maize prices in Zambia declined during the second half of the year on the back of an improved harvest and maize prices in Uganda remained fairly stable for the greater part of the year. As reported at the half year results presentation, the protest and looting in Mozambique impacted operations as the egg volumes available for sale were less and the vaccination program of the layer flock was interrupted during the first half of the year. Then unfortunately, in Zambia, the Lusaka operations accounted for a sizable maize stock variance, but the company has responded with management changes, restructuring and also implemented improved controls. The management teams of the various businesses and the supporting functions of Quantum Foods have performed well this past year, but we are also aware that industry conditions can change very quickly and therefore, need to remain focused on the key drivers for success in each business. I now would like to highlight some of the strategic points, which management will focus on in the next financial year. The Malmesbury feed mill expansion project has been ongoing since the middle of last year, but it is expected to become operational early next year. This project is a major part of the feeds growth plan as the Malmesbury feed factories have been running at high capacity utilization for the last few years. The focus will be to continue growing the external feed sales and with the diligent execution of volume and margin management throughout the year to also grow the external contributions in the feed segment. The regional broiler breeder conversion and expansion projects in the north have been completed. But as part of the regional rebalancing, the broiler management team need to secure a broiler breeder rearing facility in the North. This will ensure alignment with the strategic plan to grow as an independent day-old chick producer and increase day-old chick sales volumes in the North. As part of the company's strategy to grow in the less cyclical segments of the business, the Board has approved a project to convert an empty broiler breeder farm in the South to commercial broilers and thereby increase supply of broilers in the region. As the Bergvlei team have secured layer breeder production sites in different provinces to mitigate the risk of highly pathogenic avian influenza outbreaks, the focus of the team will shift to increase the sales of day-old Lohmann pullets. Part of the growth strategy is also to grow day-old pullet exports into Africa, but highly pathogenic avian influenza outbreaks in the country do make it challenging. The priorities for the layer farming management teams will be to maintain the very good layer farm performance while remaining vigilant on all farm biosecurity measures and controlling access to the layer farms to limit the risk of further avian influenza outbreaks. In the rest of Africa, the management teams will not only continue to build on the improved farm efficiencies but also focus on increasing day-old chick and external feed sales. It is pleasing to report that the Board has approved a greenfield egg expansion project in Zambia as the egg business in Zambia has been able to deliver very good margins over time, and this project aligns with the strategic growth ambition to position Zambia as the growth hub for the rest of Africa. Thank you for attending the results presentation, and we will now take questions on the financial and operational performance.

Thank you, Adel. We've got a question from Mr. Nick Wilson from News24. Adel, you mentioned that the risk of further outbreaks of bird flu remain high with your own group already having been affected. Which variant is? This is the first question. And then the next question is, are you concerned that we could see outbreaks in the coming year like we did in 2023?

Thank you, Mr. Wilson, for the question. The variant that we've experienced is the H5N1 variant. That's typically the highly pathogenic avian influenza that is transmitted through wild bird on our farms. We were fortunate that we were able to contain that outbreak to only on one side of our farms. And we will continue to monitor our farms very carefully for any further exposure. I think with regards to outbreaks going forward, I think we can expect further outbreaks, although it's very difficult to determine. But as it's transmitted by wild birds, I think that's going to be the problem to manage, but we're monitoring our farms and the flock health.