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

Good morning, ladies and gentlemen. My name is Hendrik Lourens. I'm the Chief Executive Officer of Quantum Foods, and welcome to the results presentation of Quantum Foods for the financial year ending September 30, 2022. In terms of our agenda, I will give a brief business overview talking to the salient factors that influenced Quantum Foods in the last year, which will be followed by a discussion of our finances by André Muller, who is the Chief Financial Officer. I will then return with the operational review of our various business segments, and I shall end off with what we expect in the first period of 2023 and how we're trying to position ourselves to deal with that environment. As per our communications, 2022 was an exceptionally difficult year for Quantum Foods from a financial perspective. Two business areas that were the worst affected was the layer value chain, that includes layer farming and the egg business, and then also the Ugandan business. We'll look at the salient factors and I will -- when I discuss them, make reference to the impact on -- in the egg industry, in particular. So the record high raw material prices was the first factor that influenced our business and influenced our industry. And the record high raw material cost impacted the whole of our company, and the nonrecovery of the impact cost in the cost of final products was just north of ZAR 60 million. So there was a margin closure of about ZAR 60 million. The vast majority of this occurred in the layer farming and the egg business. We could simply not increase the prices of our day old layer chicks and our point-of-lay hens as well as the egg prices to compensate for the cost increases. So this high raw material prices had a material impact on the company. Then secondly, we had an incident of avian influenza. Again, this impacted the layer and egg business. Our Lemoenkloof farm in February turned AI positive, and we had to cull roughly 400,000 birds in the point in their lifetime when they were highly productive. The Kaalfontein and the avian influenza is just below ZAR 30 million, the impact of that on Quantum Foods. And obviously, by far, the most of that was in the layer and egg value chains. There was a little bit of that in the feed business, in that some of our other feed customers also got the avian influenza and we then couldn't sell feed to them. The Kaalfontein labor unrest, I think we've discussed that at length at the previous results presentation, suffice to say that it's been dealt with. But as we indicated then, the effect of it would remain with us for some time to the future. And the impact of that was just below ZAR 7 million. And then load shedding, something that is not only experienced by us or our industry, it's something that we share in South Africa, but for Quantum Foods particularly, the impact of load shedding was just below ZAR 20 million, which is quite an impact on our finances. Then as with the rest of the industry, we dealt with excessive energy costs, diesel and electricity, in particular, costs that were much higher than inflationary indicators. Two positive things. Our defensive broiler model was successful this year and in the sense that we could pass on the raw material prices through to our customers as per our cost-plus farming model. That is in total contrast with what happened, for example, in the eggs and in the layer livestock business. So that model helped us a lot. And then in general, our operational performance improved throughout Quantum Foods in South Africa. All of this led to revenue being up 11%, as I said, most of that due to prices that followed raw material prices, but HEPS down 73% because prices could not increase enough. And again, pleasing that in these fairly difficult circumstances, we have a positive ZAR 78 million cash inflow. We declared an interim dividend of ZAR 0.08, and the Board resolved that, that would also be the total dividend for the year. So I'll now hand over to André for the financial overview.

Good morning, ladies and gentlemen, and welcome to the financial overview section of the results presentation. Group revenue increased by 11% to ZAR 6 billion, with an increase in revenue from all business segments. Operating profit, that includes items of the capital nature, which are profit and loss on sale of assets, and the impairment of goodwill, however, decreased by 78% to ZAR 32.5 million. Excluding the profit and loss on sale of assets and impairment of ZAR 5 million relating to goodwill originating from the acquisition of the Olifantskop Feeds mill in Paterson, operating profit decreased by ZAR 107 million or 74% to ZAR 36.8 million. The main reasons for the decline in earnings are the decrease of ZAR 49 million in profitability from the layer farming business, the ZAR 37 million decrease in profitability from the egg business and lower earnings from Uganda. The reasons for these declines will be elaborated further later in the presentation. Net finance cost increased to ZAR 12.1 million, resulting in profit before tax of ZAR 20.3 million, a decrease of 86%. The effective tax rate was a credit of 18%, which includes ZAR 9 million credit resulting from the remeasurement of the South African business as deferred tax liability at a 27% corporate tax rate, which will be applicable from the 2023 financial year. Headline earnings per share decreased by 73% to ZAR 0.141, with the number of shares and issue slightly higher following the settlement of long-term incentive benefits that vested in 2022. Moving to the segmental analysis of revenue. Revenue from animal feeds increased by just over 10%, with an increase in average selling prices, which was adjusted in response to the higher feed input costs, offsetting a decrease in volumes sold. Revenue from feeds contributed 45% to group revenue for the reported period. Revenue from eggs increased by just below 10% and contributed 22% to total group revenue. Volumes sold increased by 0.7%, and average selling prices increased by 8.4%. The 12.5% increase in farming revenue primarily came from an increase in the price per kilogram of live broiler sold over to our customers, which was adjusted for the increase in input costs as well as increases in the total tonnes of mature live broilers and day old broiler chicks sold. Revenue from layer livestock sale decreased, despite high selling prices following lower demand for layer livestock from egg customers. The lower demand followed the continuous period of extremely challenging egg industry conditions. Revenue from farming contributed slightly more than 25% of group revenue, similar to the comparative period. Revenue from other African countries was higher by 23%, with increased revenue from all 3 countries. Revenue from Zambia recorded the largest increase, supported by increased selling prices. Rand value of revenue from other African countries was boosted by the devaluation of the value of the South African rand against the local currencies of Mozambique, Uganda and Zambia in this period. The revenue contribution from the other Africa segment was 7% for the reporting period, up by 1% from 2021. Adjusted operating profit, again, that excludes profit and losses on the sale of assets and impairment of goodwill, is reflected on this slide. This was an exceptionally challenging year for Quantum Foods. We faced historic highs in the cost of raw materials, significant increases in logistics and energy costs on top of rising inflation, labor unrest, drought conditions and a serious outbreak of avian Influenza. As mentioned earlier, the key factors that contributed to the ZAR 107 million reduction in adjusted operating profits were a decline of ZAR 49 million in layer farming profit and ZAR 37 million in profit related to egg processing and distribution as well as lower earnings from Uganda. The South African egg industry remained under severe pressure. An increase of 8.4% in egg selling prices significantly lagged the almost 17.8% increase in feed prices, further hurting the already negative margins experienced by the egg segment for the year that ended September 30, 2021. The effect of this egg margin decline on the company's earnings is calculated as approximately ZAR 40 million. Added to this were highly pathogenic avian influenza outbreaks in South Africa with the company experiencing an outbreak at its largest farm, Lemoenkloof, in the Western Cape. The group's insurance cover was limited to direct losses associated with the outbreak and not the consequential losses from lost production, preparing the farm for placement and additional costs incurred to supply with some customers from other regions. The company calculated the negative earnings impact of avian influenza on fiscal year 2022 as approximately ZAR 29 million. The extremely challenging egg industry conditions resulted in the company experiencing reduced orders for point-of-lay birds and day old chicks, which, in addition to a decrease in volumes, contributed to reduced margins as large stock selling prices could not be adjusted sufficiently to recover increased cost. This margin effect was calculated as approximately ZAR 8 million. The company also experienced labor unrest at a large farm, Kaalfontein [ shutting ], which resulted in higher operating costs, especially on manpower and maintenance. Losses attributable to load shedding in South Africa had a negative contribution of approximately ZAR 19 million, particularly in the animal feeds business, which requires continuous power. These negative factors were partly offset by efficiency gains throughout the South African business. Earnings improved in both Zambia and Mozambique, but declined in Uganda, where the closure of borders for extended periods due to COVID-19 restrictions culminated in an imbalance in the local supply and demand for eggs, leading to lower egg selling prices, exacerbated by increased input costs. Turning to the statement of financial position. Noncurrent assets increased by ZAR 56 million from September 2021, with capital expenditure of ZAR 125 million and the ZAR 48 million effect of the South African rand that depreciated against the functional currencies of the other African subsidiaries, partly offset by the depreciation charge of ZAR 107 million and impairment of goodwill of ZAR 5 million. More details on the capital expenditure for 2022 will follow. Net working capital, excluding lease liabilities, increased by ZAR 93 million from September 2021. The value of inventories increased by ZAR 80 million, and biological assets increased by ZAR 31 million driven by increases in input costs. The largest increase of ZAR 188 million came from trade and other receivables primarily due to higher selling prices and, therefore, higher revenue. An increase of ZAR 207 million in trade and other payables partially offset these increases in the investment in working capital and include the benefit of improved payment terms offered by suppliers of maize and soybean meal. Noncurrent liabilities mostly reflect the deferred tax liability of the group and reduced by ZAR 9 million, which includes the ZAR 9 million effect of a lower corporate tax rate applicable to South African business from 2023. Cash decreased from ZAR 73 million to a net bank overdraft of ZAR 11 million at September 30, 2022. Lease liabilities amounted to ZAR 82 million and decreased due to the repayment of lease obligations in this period, with no material new agreements entered into. Total equity increased to ZAR 2.1 billion and amounted to ZAR 10.50 per share at September 30, 2022. Moving to the statement of cash flow. Cash operating profit of ZAR 171 million was recorded for the year, and the cash outflow due to the increase in working capital was ZAR 87 million. Hedging activities resulted in an inflow of ZAR 1 million, and income tax was -- of ZAR 6.9 million was paid, resulting in a cash inflow from operations of ZAR 78 million. Capital expenditure was ZAR 125 million, with ZAR 2 million received following the sale of assets. The capital portion of lease liabilities settled in the period amounted to ZAR 24 million. Finance cost paid amounted to ZAR 11 million, and ZAR 16 million was paid following the declaration of an interim dividend of ZAR 0.08 per share. The rand value of cash out in foreign currencies increased by ZAR 11 million. The net effect of these cash flows was a decrease of ZAR 84 million for this period. Capital expenditure for 2022, as well as future capital expenditure approved by the Board as at September 30, 2022, is indicated on this slide. Of the amount of ZAR 125 million spent in 2022, ZAR 110 million was spent in South Africa and ZAR 15 million was spent in the other African countries. The main items, in addition to maintenance and complying clients CapEx being, expansion of the broiler hatchery in Hartbeespoort amounting to ZAR 47.5 million, with a further ZAR 24.4 million to be spent in 2023 on this project. Implementation of Sage X3 as a new ERP system for the group, with ZAR 10 million spent in 2022 and a further ZAR 4 million to be spent in 2023. Also included in future cash flow, a project of ZAR 15 million for the installation of generator capacity at the Malmesbury feed mill. Expenditure on replacement and compliance items continues to be well below the annual depreciation charge. I thank you for your attention and will now hand back to Hendrik for the operational overview.

Thank you, André. Start off with Nova Feeds, this business again had a very good performance. Although there was a slight decline in volumes, we have informed the market previously that 2 of our larger customers invested in their own facilities. And if one takes that out of the equation, our external volumes actually grew, which I thought was quite a good performance in a fairly difficult market. Our margins remained stable to slightly up. And costs, you will see this bullet every time in the last couple of years in this business, cost well managed. Efficiencies at the feed mills increased, and our distribution efficiencies also improved. This business is particularly hard hit with load shedding, as I said, just under ZAR 20 million for Quantum. André mentioned a more specific number, ZAR 19 million. The majority of that lies with Nova Feeds and, in particular, Malmesbury mill, which is running close to full capacity, struggled to supply all the customers. And generators for Malmesbury mill, and this project is ongoing and will be complete before the end of this calendar year. So in general, a very good performance from Nova Feeds. Our broiler business also generally performed well. We've been consistently saying we want to grow this business, and that was one of the reasons why we repurposed our grandparent farm. Our last grandparents have been culled August 2022. We've already started placing parents on some of the sites on that farm. And in fact, we are getting hatching eggs from that farm, and we're utilizing the hatchery on the farm for those hatching eggs. So this process, although it costs us some money this year,because the farm was out of production for some time, we are really now looking forward to some benefits coming through the system. Our day old chick sales increased by 4.2%. And then there was an improvement in our hatchability. And this was particularly pleasing for 2 reasons at Hartbeespoort hatchery. We are building the new hatchery on the same premises as the current hatchery, and they are going to be linked to each other. So it's a production site and a building site. And those of you that in these kind of businesses will understand that managing that is very difficult and complex. And in spite of that, the hatchability improved. Then we also had a challenge with one of our suppliers of hatching eggs, which supplied substandard eggs. And we're busy dealing with that, but that had a very negative impact on hatchability. But even with those 2 factors in consideration, hatchability improved. Our broiler performance, the commercial broilers were slightly down from the very high levels where they were. During load shedding at a certain point in time, to ensure that all different customers and species got feed, we only made meal and not pellets. Because the pelleting process slows down the feed mill, and so our broilers were fed with meal just to keep them going. Now that had a very negative impact on the average daily growth rates of the birds and consequently had a bad impact on the feed conversions. It was for a limited time periods, but it did influence the broiler productivity. Then the Hartbeespoort hatchery, I've referred to it earlier, that's on track, and we're really looking forward to seeing that in operation from the middle of next year. I've already alluded to the defensive broiler model that worked well in the rising raw material cost conditions. I believe, and we'll talk about it later, that these raw material costs are going to continue rising, so I think this model will stand us in good stead. If we now move to the layer farm business, and after that, the egg business, which were clearly the two problem -- two of the problem areas in our business. Let's start on the positive. Our breeder performance remains above breed standard for many years now. And I think in the Lohmann group, we must be one of the top performers. Our operational indicators improved, but it's not at our targeted level, and there is still room for improvement. Maybe just to pause here. If you look at the annexes, you will see that the LPI is actually down, that's the layer productivity index, and that might seem to be in contrast with what I'm saying here. But I would just like to explain that the LPI is a completed flock indicator, and the flocks are completed when the birds are 74 weeks old. So all the flocks that were completed during year 2022 is in that LPI, but many of those flocks spend the majority of their lives in the previous financial year. So if we look at something like feed conversion rate, the feed conversion rate this year was much improved compared to last year. And the eggs spend in-house -- sorry, the [ in-day ] production of this year was much better than that of last year. So we're very happy that we're seeing an improvement, and that should flow through the completed flocks going forward. We've spoken about avian influenza that affected our cost base and also the number of eggs produced. Kaalfontein labor unrest, we've spoken about that, had a significant impact on operations and costs. The cancellation of point-of-lay hens impacted the cost of production. André alluded to that, but perhaps just some more guidance on what happened there. We rear the birds up to 18 weeks, and then they are sold to customers. And it has now happened on more than 2 in the last 3 years that the customers come to us when the birds are 15 or 16 weeks old and then say, "Well, either we can't take the bids because of the industry conditions and we're not going to make money," or they say to us, "We can only take the birds later." The effect of that is twofold. One is the bird stay on the rearing farms longer, and they consume more feed, which is obviously the cost issue. The second one is we've got to find a place for those birds, and we often have to place them on a new load farm, which then has a negative impact on the cycle of the new laid birds. So we've reviewed this business and the egg business, and I'll talk to that in the next couple of bullet points, but we cannot have this continuously happening. It's something that has never happened in the industry. People have always honored their orders. But I think the severity of what has happened in the last year in the egg industry has really forced farmers to cancel at a very late notice. What we've done is we've changed the operational structure of the layer and egg business, and we've created a focused layer livestock business where we will have a business that will sell parents, Lohmann parents. It will sell day old layer chicks, and it will have dedicated farms from which it would sell point-of-lay hens. The commercial layers will now fall under new laid. Because the commercial layers produce exclusively for new laid, so they will fall under new laid management. And the farms that rear the birds for new laid will also fall under the new laid management. So some of the people that are on the current layer livestock business has moved to the new laid egg business, and others remain here. We've also scaled down the layer livestock business in that we've closed the Tongaat rearing farm. And we've also downscaled the Bronco parent farm to cater for the less point of lays and, obviously, less chicks. In the egg business, we've also reviewed the number of eggs that we should be selling. And we are downscaling the Kaalfontein farm. That is also a consequence of the labor action, where we're now looking at those facilities on the farm that we trust can be used to farm properly. And then we've closed the Hekpoort farm, which was very old, also the farm that was subject last year to the investigations and complaints of our neighbors. But it's 40 years old, and we did not have a good cycle on that farm. So we've closed Hekpoort, downscaled Kaalfontein to position the layer livestock business better. If we move to the egg business, just to latch on the review, and maybe I'll talk to the second bullet point first. As part of the review of the egg business, we've closed the East London packing facility. It was simply a matter of, in that area of our country, we cannot get our customer base to pay us for the higher cost of production and the higher distribution cost in the East London area and the rural areas surrounding that. We've tried now for a number of years, it's not only this year, but a number of years, and we cannot convince our customer base to pay more, so we've had to close that facility. Again, the story of the egg business is really material cost increases that could not be recovered in egg prices. Prices, as André said, increased by 8.4%. Feed prices in this business increased by 17.8%. You don't have to be a genius to realize that, that just cannot hold. Egg volumes increased by 0.7%, and that's in spite of the Lemoenkloof farm that was empty for the majority of the year, so not a bad performance there. And then in this business, as in the feed business, you've always seen now for the last number of years, cost well managed. Operational targets remain on -- operational indicators remain on target, and it's not easy targets. These are stress -- stretch targets. So we're very happy with the performance of this business and our route to market. If we then move to the rest of Africa. Very high maize prices in all jurisdictions. I'll give an example. In Uganda, we've been there for a very long time, but in our minds, good maize prices -- or an average maize price is about UGX 800 per kilogram of maize. This year, it went above UGX 2,200. As we sit here currently, it's about between UGX 1,800 and UGX 1,900. So that -- it's really massive increases with devastating impacts on small farmers. So farmers simply stop buying day old layer chicks or day old broilers. You can imagine the impact of this on our egg business there. You cannot increase prices to the extent that this increase. So a very, very tough year in Uganda. But the higher maize prices was also applicable in Mozambique and Zambia. Operating costs in all 3 countries, well controlled. Disappointing for us was that our operational efficiencies were weak in Uganda. Some of it, one can say, is still an overhang of the COVID, where we couldn't get breeder stock in, and we had to import eggs out of Turkey, hatching eggs. And we kept the flocks longer, so they were older and less efficient. But there's also been efficiencies that were within our control, which we could have managed better. Whatever we've done, and we've strengthened the management team there, I think we perhaps unexpected the quality of staff that's needed in some of the more remote operations. So that has been addressed, but it will take time to get the efficiencies back on track. The opposite happened in Mozambique, where, actually, we invested in a good manager on farm during the beginning of the previous financial year, and we're really seeing excellent improvement in efficiencies there. Then if I turn to Zambia, what was interesting is that in the Copperbelt in the layer businesses, there was disease challenges throughout the whole Copperbelt. So there were less eggs going into the market, and the impact of that was that egg prices increased very nicely. So profitability also increased. These disease challenges were not limited to Quantum. It was all over the industry. And our market intelligence is that we actually -- our drop in volumes was less than that of the other major players. So we really had the benefit of having a bit more eggs pro rata to the others and at higher prices. Also our farm in Lusaka, our breeder farm, had an excellent financial year. Our feed mill did very well. So all in all, solid financial performance from Zambia. We're very proud of this performance, and we know it's something that many people look at and say, "Well, that's the kind of business that we would like to operate." I will then turn to 2023. Heading there says focus areas, and it's really -- the first part of it is really what we see happening in 2023, particularly in the first 6 months. The first important point, I think, for stakeholders in Quantum Food to note is that the high raw material costs will flow through our income statement in the first 6 months of this year. It has not passed. This relentless increase in raw material prices continues. The costs going through our income statement is significantly below the cost of the market price of maize. So we've done well, but that often happens in a rising market, where, if you have a bit of a position, your increases go through slower than the market increase, but somewhere you catch up. And we believe that the catch-up will probably take place in the first 6 months of this year. So cost pressure on raw materials will continue through the income statement, even if the price of maize start coming down. And I think that's a positive to note. If we look at the July contract for next year, it is much lower than the March contract, so there is an inverse. Second factor that's -- that might bring some relief is the down placement of the South African layer flock. And you can see in the annexure, day old layer chicks is now on the decrease continuously since June this year. And in September, there was actually a very, very low demand for day old layer chicks. Now if this trend continues, the layer flock is going to drop significantly in the next year. But we'll have to see whether the trend does continue, but we're looking at what's happening in the point-of-lay market, looking at what's happened in the day old chick market. We believe that the industry is under severe pressure. I mean, we have had people actually phoning us wanting to know whether we want to buy their egg businesses. All right. Investment in working capital will continue to impact the cash flow. It's been the largest impact on cash flow. And as I said in the first statement, it will continue. Avian influenza remains a significant risk factor. I think Europe has had its worst avian influenza incidence in the last 9 months, so we do expect a rough ride as far as that's concerned. And then from a feeds perspective, all livestock industries we think are under pressure. We know the eggs and layer livestock businesses are under pressure because we're in them. Our customers in the dairy side is also sharing with us their pressure. And I understand, the layer businesses, the broiler businesses also under pressure. You've seen the largest listed company report good numbers, but they've look to the future and it was pretty nasty. Just on the egg side, and I can say this, the pressure in the egg business is not over. In fact, October was probably our worst month ever in the egg business. Prices actually decreased from September to October. And if you look at this FX graph, you see what's happening with raw materials, and you then add the decrease in egg prices, then you know pressure is extremely severe. And the only thing that will balance that is if there are less eggs in the market, and then I think we're on our way to do that. So what do we do? Firstly, preservation of cash. We've done -- we've ran a number of models, and we've stress test our ability to deal with, let's call it, disastrous conditions, extremely high prices, severe pressure in the egg business, and we are satisfied and we've shared that with the Board. We are satisfied that our access to cash is sufficient to carry us through difficult circumstances. In cases like this, prudent supply chain management is important, specifically with inverses trading. We now have to make sure that we capitalize on that without leaving our feed business out of the money in the marketplace where they compete. Cost control, always important in our business and will remain important. I don't think we did too bad this year, but there's always room for improvement. Maybe on the biosecurity measures, what we say there, if we want to maintain strict biosecurity measures. I think the -- to give context, if you look at the broiler industry, for example, you would see that the most AI outbreaks that we hear about in broiler breeders, because that's a life -- long life birds, but a broiler breeder farm typically has very stringent biosecurity measures, whereas -- more stringent than a commercial farm. But even breeder farms are affected by biosecurity by AI. So I think my view on biosecurity is if you have very strict biosecurity measures, you have a chance of not getting AI. If you don't have strict biosecurity measures, you will probably get AI. But in spite of having strict biosecurity measures, you can still get AI. If you have a farm close to the ocean, you're going to have ocean birds or penguins or seagulls that are carriers of AI. You can't do anything about that. If you have an open dam close to your farm, you're going to have more wild birds. And you can protect your a** as good as possible, but you always have a bigger risk than someone that's far out in areas where there's little water or open dams. Last point, I cannot move away by saying we are going to focus on efficiency improvement, and we're squeezing it out. There are areas where there is ample room for efficiency improvement, then there are other areas where there are less room for improvement. But we're going to go [indiscernible] at both those areas to make sure that we can get the maximum efficiency. So if I summarize, if I look at the numbers, it's obviously disappointing for us as a management. But what we can do, we've got to do as good as we can. There's a lot of good things that happened in Quantum Foods in the last year. There are certain things we cannot control. We've got to build a business to be more robust, and I think we're doing that. And we need to make sure that we deliver. When the tide turns, we are in the market to capitalize on that. And I think we are well placed, vis-a-vis, our competitors, particularly in the egg industry, to get through the next period. I don't foresee that there's going to be a lot of relief in the short to medium term, but the relief will come. And when it comes, we will be there to capitalize on that. So thank you. And if there are questions now, you can post them in the chat box. And André Muller will ask the question, and I will answer as good as I can.

Thank you, Hendrik. Yes, we have received some questions. We've received 5 questions from Mr. [ Emi Rutland of Braemar ]. I will ask them one by one or read them out one by one. First one, profit is significantly down from last year, and the outlook is conservative. If the trend is expected to be similar to 2022, this will result in a loss for the company. So the question is, how will this be funded? And what level of debt is the company expecting to take?

Yes. Thanks for that question. We -- when we did the -- when we ran the models, we looked at that possibility. And in terms of funding, we have sufficient funding to deal with that. So we don't foresee that we have to go to shareholders to fund that. It should be funded through borrowings. I realize that the outlook is conservative. I sincerely hope that we do not come into a position where we're loss making, but we don't know. This business is a cyclical business. The egg business plays a massive role. If you sell 6 million dozen eggs per month and the egg price moves with ZAR 1 a dozen, which is sort of 6% or 7%, that makes a ZAR 6 million a month difference. So the egg price could easily move with ZAR 1 or ZAR 2. If it goes down further, I think there will be such a distraction in the layer industry, and the availability of eggs will be so short that prices will recover very, very quickly. So we've prepared for the worst case, but we hope it doesn't happen. If it happens, we should have sufficient capability with our lenders to get through it. I think I can mention that our balance sheet, our fixed assets are completely unencumbered, so we have sufficient ability to get through a storm.

Okay. Hendrik, the second question is about the funding of the dividend. He is still asking how the dividend was funded.

Yes. I'm actually glad for that question. Thanks. It was funded out of Zambia. The Zambia operations did particularly well, and there is a tax efficient structure to bring those -- that cash back into the business. And in the middle of the year, we thought, well, it's possible to pay out a dividend. And we repatriated the money from Zambia to South Africa and paid out the dividend.

The third question starts with the statement, the egg business is a perennial loss maker year-on-year. Why is this? And what is the turnaround plan for this business?

Yes. I think I tried to address some of the issues. If you look over time, and the egg business is a cyclical one, and that's a global phenomenon, except in Zambia, it seems. But when we talk to the Lohmann people and when we meet some of the other Lohmann customers globally, they all have a similar experience that we have in South Africa. Zambia seems not to have that. There's not cyclicality in there. But in general, egg prices are determined by supply and demand. And the moment that egg prices look attractive, we get entrants because it's not difficult to enter the egg market. It's pretty simple. And at the moment, there are more entrants, there are more eggs and prices go down. That, coupled with the raw materials, the raw materials are such a dominating impact on the cost of egg production. The moment raw materials go up or down, it impacts the margin of eggs tremendously. So that's the reason why egg businesses, let's say, are cyclical. And in the last couple of years, there's just been more and more layers in the country. I think last year, we reported there was something like 29 million layers. Now the average layers for the last 10 years is 24. So after AI, people just climbed into the layer business, and so we're struggling. There's a overhang. So I think just in -- on industry, the question of what we are doing, we certainly relooked at our layer and egg business. I think an important thing for us is the, let's call it, shrinkage of the layer livestock business to make sure that we run that business efficiently and with the customer base that we can work moving forward. And the egg business itself, I believe it will be important for the layer, the commercial layer farms to form part of the egg business because that's where they supply. And we've now also shrunk the number of eggs with the downscaling of Kaalfontein farm, the closure of Hekpoort, and then there are 1 or 2 other farms that we are placing less birds on, the closure of the East London pack station. So there has been a complete rethink about the egg business. It is however a business where you've got to think on your feet. And when the opportunities are there, one needs to be able to utilize them. Yes, [ Mr. Rutland ], I don't -- I really don't know when it will happen, but I'm very sure it will happen, where we have the cycle turn.

Thank you, Hendrik. I think the fourth question you have addressed, but I'm just going to read it in case there's something you want to add. Farming has been the greatest loss maker. Why does this happen? What is the turnaround plan for the farming business?

Maybe just to emphasize, the layer -- the broiler farming business is actually performing quite well, but the layer farming business has been a problem, and that's where we deal with the point-of-lay hens and the commercial layers. So I trust that, that's been answered.

Okay, Hendrik. The fifth question is about the feed business. Are you planning to expand the feed business as it seems to be a money maker? And what about expanding into the region?

Yes. It certainly is our strategic intention to expand the feed business. We -- there are two ways of doing it. The one is increasing our output at our current factories, and we've done some of that in the last 2 or 3 years and upgrading the factory. We spend a lot of money at our Paterson factory upgrading that. And the other option is to really acquire another feed mill in South Africa, and that's something that we keep a very active eye on how we can acquire another feed mill in an area where we are not. In terms of outside of South Africa, yes, at our last strategic meeting, management was instructed to, in particular, look at 2 of our current countries, Zambia and Uganda, and to consider investments in those areas in the feed mill. I can just say that in Zambia, we actually -- André, it was about 4 years ago, we built a complete new feed mill to replace a very old one, and that new feed mill stood us in good stead. So that's definitely part of our plans going forward.

Okay, Hendrik. The sixth question is about the Board composition. The Board composition is not reflective of the shareholding of the company. The question is, when is this going to change as based on the results, it is clearly needed?

Yes, I -- it's -- I can't comment on the Board composition. That's a matter for shareholders to elect Board members. So if shareholders are unhappy with the performance of the business given the circumstances and the explanations we've given, it's really a matter that they need to address that with the other shareholders. And that's the only way we can change the Board. Management can't change the board.

Thank you, Hendrik. Then we've received also 5 questions from Mr. Brendon De Boer from Country Bird Holdings. First question, Astral has recently presented a set of very decent results, which were well received by the market. Astral is a major customer of Quantum Foods. Why is Quantum Foods only able to achieve a marginal improvement in the same market? The claim of the defensive value of the contract growing model is exposed by the results presented today. And when will these contract growing agreements be reconsidered?

The contract -- let me start with the last one, the contract growing agreements are long-term contracts. We cannot have an exposure to the consumer market on eggs and on broilers. We've been there, and we know it's cyclical. And I think if 6 months from now, if the broiler industry does not get another 12% to 14% increase in prices, the market model will be exposed. So we're very, very comfortable with the defensive model. If you compare that with what happened on the egg side, clearly, we could push through all our cost increases on the egg side. We couldn't. Yes, I think the comparison between us and Astral is difficult because of the eggs. And another, to the best of your knowledge, Astral does not have egg. So difficult to compare the 2 companies. Different models in total, or in total, but to a large extent.

Okay, Hendrik. The second question, another point noted in the Astral results was the improved results in parent stock sales to the external market. Quantum Foods has relatedly moved from [indiscernible] breed and are now taking parent stock from Astral, which would be reflected in the improved efficiencies experienced by Astral. You are also approached by another large supplier of parent stock and declined to discuss the possibility of them supplying you. Why with a company with poor results, as those being presented today, not at least get an indication of competing suppliers' pricing?

I think we've looked at the business opportunities presented by Country Bird, and I know you're referring to Arbor Acres, which supplies you and share the main shareholders that you have, so I assume you're asking on their behalf. But our view is that Ross 308 is the best breed. We also know that, that is the product that Astral is using. And there are various, let's call it, nonfinancial reasons such as the number of farms that they have and the level of integration that they have. That was important for us to stay or to consider the Ross 308.

Thank you, Hendrik. The third question, the current business model is not working. The results are evidence of this. Are management considering reopening the Tydstroom Abattoir and moving away from being a contract grower for Astral and Sovereign?

I think the current business model is working very well. The egg business is not -- has not done well, but we're definitely not considering opening that Abattoir.

The fourth question, from 2015 to date, the Executive Directors have received a total of ZAR 88 million, whilst Quantum Foods has been returning a 6% negative compound growth. This effectively means that the executives have been paid for destroying the value of the business. The current remuneration policy needs to be changed. Is that something the Board is considering?

I think the remuneration of the Executive Directors is obviously part of the plans that's in place that shareholders approved. I think if you look at our short-term incentives, it's very well aligned with company performance. And in the last 2 years, there's been no short-term incentives paid to Executive Directors. Long-term incentives are based on tenure and performance. The performance benefits did not occur to the Executive Directors. The tenured ones did, but that's also contingent on moves in share prices. So I think if Mr. De Boer, if you're concerned about our remuneration, I think it's something that you will have to address with the shareholders. But as you are a competitor, I find it odd that you want to comment on the remuneration of people that compete with you.

And then the fifth question, the return on equity calculation for the year is 1.1%. Anyone invested in Quantum Foods and, in particular, any fund managed investments are investing for a reasonable return. The question is when does the Board take responsibility and bring in the requisite skill set in the poultry to turn this business around?

I think we've discussed the cyclicality of the business. And I think the egg business, in particular, has been negative. And it is a cyclical business. It will remain cyclical. The year ahead is also still going to be a tough year. As far as the necessary skills, that's for the Board to decide, and I'm pretty sure the shareholders can exercise all their rights as shareholders. If they don't believe that they're getting value for their money in this business, they -- no one is forcing anybody to be a shareholder. If they believe that the Board should change, nobody is limiting any shareholder to propose a new Board member or Board members or vote out the current Board. Those are all rights that, in terms of our memorandum incorporation, there are ways to do it. You just need to follow the right process. But that is really what should be done. You've made reference to the performance of this year now a couple of times. I think it is true, we all are disappointed to the performance. But I think we have given adequate reasons for what happened and what we plan to do. But I can assure you if in the next year egg prices continue to go down and raw material prices continue to increase, there will be a repeat of what we see here. And I don't foresee that, that will happen. But it will be a repeat, and we can -- it doesn't matter who is here. That is outside of the control of the management.

Thank you, Hendrik. The next question from Mr. Niall Brown from Flagship Asset Management. The question is, is there a stalemate between your last strategic shareholders? And how do you see the situation playing out?

Yes. I cannot comment on shareholder matters. The -- we run the business for everybody to the -- for the benefit of Quantum Foods. There are shareholders who really -- I don't want to use -- that continuously write to us and complain and engage. But that's part of being a listed company. So in the beginning, it bothered us, but it doesn't bother us anymore. We just keep on doing what we should be doing. But in essence now, we've got to run the business for Quantum Foods, for our shareholders, primarily, but also for other stakeholders, people that work here, our suppliers, our customers and everybody involved. And we try to do that. If shareholders have a difference with each other, it's really for the shareholders to sort that out and not for us.

Thank you, Hendrik. Then we've got a question from Mr. Karl Gernetzky from Fin24. Could you please comment on prospects and timing of passing on costs in 2023 in terms of egg prices? Did I understand correctly that you hope to catch up in the first half?

Yes. The short answer is I really don't know, but what I can say is that if we look at the day old pullet placements, there's a dramatic decline. Now it takes a day old pullet since it's been placed 18 weeks before it goes to a commercial layer farm and then probably another week or 2 before it starts laying eggs. And here, from 23, 24 weeks, it starts really in peak production. And then there are still 3 weeks in the hatchery before the pullet is produced. So we saw very low numbers in September. And if we assume -- and those numbers are public. You can look at the SAPA website. If we assume that the low numbers of pullets produced in South Africa continues, we sort of -- from March, April, May, we should see egg prices increasing if there is less supply. What one needs to take into consideration, however, is it's one thing to put up egg prices, but we must be very careful not to get the prices to the level where nobody can buy eggs. And then there will be another down placement. So it's a long answer, but I actually don't know. I hope it will happen in next year. I foresee that it will happen in next year. But sometimes, the egg farmers have proven more resilient, and they keep on producing eggs. But it will all depend on supply and demand.

Okay. We've got a second question from Mr. Gernetzky, and this is about the job losses -- or potential job losses and actual job losses now at East London and Tongaat after the closing of those units. And the question is, please, can you confirm the job losses -- the number of job losses at these units?

Yes. I think the net job losses was about 60. For example, the Hekpoort jobs, none were lost there. We placed all those people on alternative farms. In East London pack station, there were a couple of people that were prepared to go to Durban and Cape Town and Johannesburg. So we placed some of that there. also -- so in all the places, there were job losses, but there were also placements. But I would -- I don't have the specific number, but I would say it's at least about 60 people.

Then we've got another question from Mr. Niall Brown, Flagship Asset Management. After the last major AI outbreak in South Africa a few years ago, I recall there was a national egg shortage. Prices went up sharply, and you made record profits. Do you see the same cycle repeating? Or is the AI situation much less severe this time?

I think the -- one has to look at the fundamental reason the prices went up. It went up because there was a shortage of eggs. Whether that shortage is caused by AI or something else is really not so important. It's whether there's a shortage of eggs. Now if we look at AI, the AI in the last year has been completely different with the 2018 AI. In 2018, if AI occurred in an area, it wiped out that whole area's farms. The strain we had this year was much less severe in the -- in its movement or its impact. So the -- we got AI at the farm. We got it on the month. We for a long period thought it's going to be contained to one site, but then it moved to another site. But it didn't spread to other farms. Whereas in the 2018 one, you could actually see it coming from one farm to the next, to the next, to the next. So it depends on what AI strain occurs to -- whether that can influence the supply of eggs. I think the supply of eggs, as I answered in the previous question, should decline due to economic reasons. The other thing now that was very prevalent in 2018 is we had low raw material prices. So we really had the double benefit of high egg price and low raw material price. And I don't know to what extent the raw material prices will give us that gap this year. But I foresee less eggs somewhere in the next period coming to pass, not necessarily due to AI, but due to lower placements. If AI then also occurs, it will compound the less eggs in the market, and that will certainly have an impact on egg prices going up.

Thank you, Hendrik. We've got another question from Mr. Brendon De Boer from Country Bird Holdings. Is the company still incurring unnecessary costs from corporate advisers, especially given these turbulent times? And if so, please confirm the amount.

No, we are not incurring any unnecessary costs.

Hendrik, we do not have any further questions in the chat room.

Thank you. And then I thank all the shareholders for your continued support and the Board for their support, the executive team and all staff members. I know these are difficult times. We are also -- we would like to see better performances. But thank you. And then particularly for those that are really interested in asking the constructive questions, we appreciate it. We have 3 opportunities in the year where we engage with shareholders, this one, our interim results and our AGM. And our plan is to try and answer the questions as good as we can and to give you as much detail as we can without sharing information that's proprietary or sensitive for market competition. So thank you very much. And I'm not sure that the next 6 months will be better, but let's hope the next year is significantly better. Thank you.