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

Good morning, ladies and gentlemen. Welcome to the results presentation of Quantum Foods for the 6 months ended 31 March 2023. My name is Hennie Lourens and I'm the CEO of Quantum Foods. Our agenda is a bit different today than the normal flow. However, I shall start with a business overview and our Chief Financial Officer, Andre Muller, will share some of the financial details. But we've then asked the executive of our new laid business, Adel van der Merwe to give an overview of the egg industry in the past couple of years. As you all know, our own performance was under pressure but that was reflective of what was happening in the egg industry. And I think just to give shareholders a view of what is going on in the broader industry and how that affects us is a good idea. I will then come back with an operational overview, in which I actually would like to give some feedback on some of the activities that we said we were going to undertake. And then I'll end off with a management focus. So in the business overview, as I've reported on a number of occasions, now there's a continuous raw material price increase. And you will see when Adel shows the graph that she has that this increase has been consistent since 2018. There has not been 1 month where the feed prices have not increased against the comparable month in the previous year. In this period, under the review, maize prices increased by 24%. Soybean meal prices, we -- our benchmark is the landed price in the Port of Cape Town that increased by about 36% and those are publicized prices. You can go and look at that price every day. You can look at SAFEX every day. So everyone is quite aware of these price increases. Prices that are not so well publicized or prices of hominy chop and bran, and those are also raw materials that are included in our feed rations. Our hominy chop prices went up by 38% and bran by 42% in the period under review. The effect of this was that our layer feed went up by 30% and our broiler feed increased by 27%. The second important factor in our business is the imbalance in egg supply and demand. The effect of that was that egg selling prices could only increase by 7.5%. Now if your layer feed price increases by 30% and 70% of the cost to produce an egg comes from feed, you can make the calculations and you will see that there's a severe margin pressure, and our egg business has been severely loss-making for the period under review. A third factor that impacted our business is load shedding. Now load shedding is not only impacting us, but the whole of South Africa. We have 2 direct impacts. One is the availability of raw materials. The wheat mills and maize mills that supply the very expensive bran and chop often stop operating in time of load shedding and then at very short notice, they will let us know that they cannot supply these materials. And then we have to reformulate with even more expensive raw materials. So that's a sort of hidden impact of load shedding. And then there's the normal operational cost impact of primarily diesel. Now the load shedding impact, the cash impact on this business for the 6 months has been ZAR 40 million. If you add to that, the impact of the capital that we spent, it's about ZAR 35 million, capital that we've spent and are busy spending, that is just for generators in the business to make sure that we keep going the business. The fourth aspect is something that we've warned about for some time, and that is the consumers that are under pressure, and we have in a couple of these presentations said that we are concerned that the GDP growth per capita is negative. And there's only one thing that increases protein consumption globally, and that is growth in GDP per capita. We've not seen it. In fact, we've seen it negative. And I think we are very close to the point if we are not there already, where consumers are struggling to buy protein. And that is meat, eggs, milk, all the stuff that supplies protein to us. And I think there's a large portion of consumers that are now at the point where they simply can't afford that anymore. In these circumstances, our revenue increased by 22%, Andre will give detail in which segments there were increases and where there were decreases and the reasons for that. But our headline earnings per share declined by 82%. The majority of that is in the egg business. But then there's also a segment in our Africa business, where -- wherein all 3 jurisdictions, we did worse than last year. Uganda in particular, has been a very, very tough situation, given primarily raw material price movements in Uganda. However, our cash flow from operating activities was still a positive ZAR 116 million. And in spite of all the headwinds, our cash profit or EBITDA was around about ZAR 80 million. So Andre will give more detail on the finances, and I hand over to you now.

Good morning, ladies and gentlemen, and welcome to the financial overview section of the results presentation. Group revenue increased by 22% to ZAR 3.45 billion, with an increase in revenue mainly from the feeds and broiler farming businesses. Operating profit that includes the profit and loss on sale of assets, decreased by 59% to ZAR 14.6 million. The main reasons for the decline in earnings from the comparative period are the severe loss of ZAR 78.5 million reported by the eggs business and lower earnings from businesses outside of South Africa, which were partially offset by much improved performance from the layer farming business. Operating costs were, in general, well managed. However, the increase in the generator fuel expense of ZAR 28 million significantly impacted operating profit for the current period. Net finance costs increased to ZAR 9.5 million, resulting in profit before tax of ZAR 5.5 million, a decrease of 82%. The effective tax rate was a credit of 4.5% and due to losses incurred in countries with higher effective tax rate. Adjusted operating profit, that is operating profit excluding the profit or loss on sale of assets decreased by 57% to ZAR 14.6 million, at a very small, but happy to report positive margin of 0.4%. Headline earnings per share decreased by 82%, to ZAR 0.029 with no change in the effective number of shares in issue. Turning to the segmental analysis of revenue. Revenue from animal feeds increased by almost 38%, which include an external sales volume increase of 7.1% and higher average selling prices, which were adjusted in response to the higher feed input costs. Revenue from feed contributed 49% to group revenue for the reporting period, a significant increase from the comparative period. Revenue from eggs decreased slightly, following a volume decrease of 9%, partially offset by an increase of 7.5% in selling prices and reduced to less than 20% of total group revenue. The 20% increase in farming revenue came mostly from an increase in the price per kilogram of live broilers sold over to our customers, which was adjusted for the increase in input costs. Volumes in kilograms were marginally higher than in 2022 for mature live broilers sold. The revenue from layer livestock sold decreased mainly due to lower volumes produced following the closure of the Tongaat layer rearing farm. Revenue from farming contributed slightly more than 25% to total group revenue, similar to the comparative period. Revenue from other countries was higher -- other African countries was higher with increased revenue from all 3 countries. The revenue from egg sales increased, supported by higher volumes sold, which was partially offset by lower demand for day-old layer and broiler chicks in Uganda and Zambia. The revenue contribution from the other Africa segment was 6% for the reporting period. Adjusted operating profit that excludes profits and losses on the sale of assets is reflected on this slide. Eggs reported a loss of ZAR 78.5 million for the period compared to a loss of ZAR 12.6 million for 2022. The increase in selling prices of 7.5% was not nearly sufficient for this segment to be profitable given the increase in input costs. Feed costs increased by over 30%. Cost and efficiency management was well executed in this business. Farming profits improved by ZAR 66 million with a full improvement attributable to better performance from the layer farming business. In this business, compared to 2022, efficiencies improved substantially with lower feed conversion rates, lower mortality and improved egg production. Costs were lower following the closure of some farms and poultry houses and 2022, including a loss of ZAR 24 million due to the outbreak of avian influenza on the Lemoenkloof layer farm as well as the effect of labor unrest at the Kaalfontein layer farm in Gauteng. Demand for layer livestock was as expected, low in the period due to the financial pressure on egg producers caused by the inability to recover production costs from the market, which negatively impacted the margins on external sales achieved. Animal feeds reported a profit of ZAR 49 million, which was consistent with the previous year. Total volumes produced increased by 1.6%. The feed business was severely impacted by load shedding challenges, which included higher cost of generator fuel and disruption in the availability of key raw materials, mostly chop and bran supplied by maize and wheat mills not equipped with generators. The negative impact of these factors on earnings were offset by a well-executed operational efficiencies, margin and overhead cost management. Earnings from other African countries decreased by ZAR 20.5 million to a loss of ZAR 5.2 million. Earnings were lower in all 3 countries and included the effect of higher feed costs. In Zambia and Uganda, a very low demand for day-old layer and broiler chicks further contributed. And in Mozambique egg selling prices were similar to the South African egg business, not sufficient for this business to be profitable. Looking at the statement of financial position, noncurrent assets remained stable compared to September 2022, with a CapEx investment of ZAR 78 million in the period being offset by the depreciation charge, no near lease agreements entered into and the effect of the devaluation of the Zambian kwacha against South African rand at the reporting date. Net working capital, excluding lease liabilities reduced by ZAR 132 million from September 2022, which was an important contributor to maintaining the net cash position. Noncurrent liabilities mostly reflect the deferred tax liability of the group and reduced by ZAR 17 million, which includes the effect of tax deductions and the cash outflow from SAFEX maize future market movements in this period. Cash amounted to a net overdraft of ZAR 10 million at 31 March 2023, almost identical to the position at 30 September 2022. Lease liabilities amounted to ZAR 68 million and decreased due to repayment of lease obligations in this period and with no material new agreements resulting in increased lease liabilities being entered into. Total equity was just below ZAR 2 billion and amounted to approximately [ ZAR 9.90 ] per share at 31 March 2023. Turning to the statement of cash flows. Cash operating profit of ZAR 82.6 million was recorded for the period, while the cash inflow due to the decrease in working capital was ZAR 94 million. Hedging activities resulted in an outflow of ZAR 59.4 million due to the movements in prices of maize futures in SAFEX and tax of ZAR 1.4 million was paid resulting in a cash inflow from operations of ZAR 115.6 million. Capital expenditure was just short of ZAR 78 million with more detail on the next slide. The capital portion of lease liabilities settled in the period amounted to ZAR 12.5 million. Finance costs paid was 9.4 and the rand value of cash out in foreign currencies reduced by ZAR 15.9 million. The net effect of these cash flows was a small decrease in the net overdraft position from 30 September 2022 to 31 March 2023. Capital expenditure year-to-date 31 March 2023 as well as future cash flow from capital expenditure approved by that date is included on this slide. A fair amount spent in the period, ZAR 58.5 million was spent in South Africa and ZAR 19 million was spent in the rest of Africa. The main items in addition to maintenance and compliance CapEx, being expansion of the broiler hatchery in Hartbeespoort, refurbishment of poultry houses, generators at the Malmesbury and George feed mills, implementation of Sage X3 as a new ERP system for the group, and expanding the feed mill in Lusaka. Future capital expenditure approved by 31 March amounts to ZAR 106 million and consists mainly of the final phase of the project to expand the broiler hatchery, the installation of generators at the Pretoria feed mill, refurbishment of poultry houses, the feed mill project in Lusaka and maintenance and compliance CapEx. I thank you for your attention. And the line over to Adel to provide more information on the state of the egg industry in South Africa.

Good evening, ladies and gentlemen, thank you for the opportunity to provide information and feedback on factors affecting the egg business as well as the egg industry. A recent article published in the Business Day indicates the relative price movement of different food items in the basket and compares April 2023 to April 2022. As indicated on this graph, the price increase of eggs lags that of many other food items, of which most have had increases of above 20%. As presented earlier, our layer feed prices increased with 30%, and the main component of layer feed is maize, and this we can link to the increase in maize meal of 25%. And SAPA reports on egg and feed price dynamics and as confirmed by the green columns, we have had feed price increases since December 2018. And there's only been 2 short periods where egg prices exceeded that of the feed prices. Since the invasion of Ukraine in February 2022, we've seen extreme increases in raw materials as well as feed prices, and this added further pressure on already struggling egg producers, which culminated in a gradual decline in the commercial layer flock since July 2022. On a monthly basis, SAPA publishes statistics on the average commercial -- on the average day-old pullets hatched per week as well as commercial layer flock. The average day-old pullets hatched for the 2018 period is reported at 485,000 pullets. And this links to the average commercial layers for 2019 of 27.6 million hens. The increase to the 2019 pullets hatched per week correlates to the increase to the 2020 commercial layers in South Africa and the same applies to the 2020 and 2021 pullets hatched per week. If we look at the reported pullets hatched per week for 2022, we see a decline and this links to the projected layer flock for June 2023 of 25.2 million hens. What is important to note is the average day-old pullets hatched for the period October 2022 to March 2023 is reported at 424,000 pullets. And this number is not reflected on the scale of this graph. We believe that we should see a further decline in the commercial layer flock for 2023 and this excludes the culling of commercial layers due to the recent AI outbreaks. Thank you, and I now hand back to Hennie Lourens.

Thank you, Adel. I think we obviously see an industry where there's great strife and things came to a head in the last 6 months of the last calendar year, where we've seen significant decline in pullets placed. And we also saw -- well, we know of at least 2 egg farmers that went into business [indiscernible] and we know many others that either down placed or simply kept their hens as long as they could and then bought much less hens to restock. So it's an industry in big -- severe trouble. All right. If I look at the operational overview, and this is for Quantum in totality, costs were well managed. The one outlier in our cost base is that of energy, and that is due to the additional costs we're spending to keep the business going during times of load shedding. It's very pleasing to report a significant improvement in the layer farming operations. As Andre said, all 3 of the short-term measurements are feed conversion, hen day production and mortalities have all improved in this period compared to the previous period. And there's also good progress with the broiler breeder productivity, our hatching eggs produced is much better and our hatchability keeps on increasing. So those 2 had a significant impact on the improvement in the segmental results. I just need to again emphasize that in last year's results, there was a ZAR 24 million debit for AI, which is not in this comparable period. Then the efficiencies at our egg pack stations remained at a high level. And again, I want to emphasize that it's not only in the pack station, but from the pack station right to delivery at the customer base. I think this business is world-class in the distribution ability, getting eggs on shelf right through merchandising. And then our feed business, continue to operate at a very high efficiency level. So in general, from an operational perspective, we're happy that the 2 of our problem areas are improving and the 2 businesses where we already have high levels of efficiency, it's remaining there. Of course, there's still a lot to be done. There's a lot to be improved. And I'll talk about 1 particular area on the next slide. If I look at some of the actions we planned and we shared with you last year, I would like to give feedback on those. The first one is the closure of nonperforming farms. That's been completed. The Tongaat and Hekpoort farms were closed and we downscaled some of our sites at Kaalfontein, which is a problem farm, but that downscaling is done to invest in the capability and the technology on those farms. So we will be bringing that Kaalfontein downscaling. A lot of that will come back into production. Some of that will even come into production right at the end of this financial year. And you could also see in the results that these closures had a positive effect on the flock in totality. Secondly, the conversion to the Ross breed, and that's progressing according to plan. At 31 March, all the birds in rearing, the breeders were all Ross, everything that is now put on a layer farm, a breeder layer farm is a Ross bird and about 1/3 of our hatching eggs that we received from these farms were Ross. Then, Hartbeespoort, we're actually -- we actually had the opening of the hatchery yesterday. It was really in a fairly difficult industry environment. It was an extremely pleasant day, and Lacton and his team did very well to get that hatchery -- the project on time and within budget. We had many of our customers and suppliers there yesterday before we start operating the hatchery, we could -- so that we could take them through. And it was good to see how many of our customers enjoyed it and enjoyed the day with us and actually we are looking forward to product from that hatchery. So we're very positive about this project. Then the Malmesbury and George backup generators were successfully installed, and we also bought generators for back up on some of our farms. We are now in a situation or we will be by the end of June when the Pretoria generators are fully operational, at all our feed mills have backup generators, all our hatcheries have backup generators and our farms or adequately covered. I must say the Malmesbury one, I think if we did not do that, we would have had severe financial and operational challenges. And in fact, I think in the Western Cape, there would have been a serious biosecurity challenge, not only on our farmers, but also on that -- of our customers. So it really came just in time. If I can move forward to the focus areas for the remainder of this year. These focus areas are very similar every time we speak, and it is because that is the nature of the business, something like accurate raw material procurement is always important. Why we're highlighting it this time is due to the fact that globally, the 2 main raw materials that we use, soybean meal and corn have turned. It's becoming cheaper, and you need to be accurate to now buy the right amount at the right price with the right quantity at the right price. What is masking this decline is really the excessive movements in the rand. I think what people often don't realize is that rand weakness leads to higher food prices, not because we necessarily have to import food, but because our raw materials trade at import-to-export parity and that makes it simply more expensive. So the rand that blew out in the last 2 or 3 weeks, maize meal is going to be more expensive due to that, although we produce enough maize. Then we need to continue our improvement throughout our farming operations. And then the feed and egg business, judicious price, volume management is going to be very important. Normally, we associate this with feed, but this year with Lemoenkloof, which you are all aware, had AI again, we're losing nearly 12% of our layer flock. So we're going to have 12% less eggs to supply to the market, and we will really have to look very well who are the customers that we serve in what geographical areas do we serve them and what is the distribution channels that we use and look at the volumes and the price to make those decisions. Then our Uganda business has been of a concern for us. Uganda in the last number of years have had very, very difficult agricultural, economical circumstances and then also the COVID lockdown was extremely severe with some restrictions that, for example, did not apply in South Africa. So it's been a tough time, and it did influence our performance. So there are areas where our performance have improved, but there are a lot of areas where we still have a lot to do that. And we will be going hammer and tongs at this performance. While I'm at Uganda, I think it would be remiss of me not to thank the outgoing Managing Director there, [ Hein du Plessis ], him and his wife Margaret, has been there for 5 years. And I think if you picked any 5 years of difficulty. This was the worst that [ Hein ] -- the time that he was there. We had raw material prices being in the last 12 months, double the long-term average. We had a day-old chick mark disappearing, the egg market shrunk, we believe -- our sources say with about 50% in Uganda, and we had severe COVID restrictions. Many of our opposition is strong tremendously. And we are still going. And I think it's a testimony to the resilience of [ Hein ] and his team. So thank you very much for that. And we wish his successor, Jeremy Watson, much better luck in the business, and we have full confidence that Jeremy will do well. The other area we need to focus on is the preservation of cash. We did not declare a dividend. And on our CapEx program, we went slower. We didn't stop anything of significance, but we did slow down the CapEx spend, and we will continue to assess that and only spend where necessary and as our cash position improve, which we think should start improving as long as the rand doesn't hurt us too much. And then we will have to remain on high alert for avian influenza outbreaks. We had this outbreak now at Lemoenkloof. It was -- happened in around about the 20, 21st of April. So it's not included in these numbers, but the debit for that is about ZAR 34 million. And it's not just the Lemoenkloof literally all the egg farms around it was also affected. So we're looking at about 1.2 million birds that had to be culled due to avian influenza. So the Western Cape again, very high prevalence of this disease, and we really hope that it doesn't spread to the rest of the country. But we will remain on high alert and we will have to rethink what we do at Lemoenkloof because that area is really a problem area in terms of avian influenza. All in all, We, as a management, are much more positive for the next 6 months than we were 6 months ago. We've been through an extremely tough time in terms of pressure on cash flow in terms of pressure on margins. All of those have improved, and I think it will improve even further for the year, so thank you very much. And if there are questions, we will try and answer them between Andre, Adel and myself.

Thank you, Hennie. Yes, we have a number of questions in the chatroom and thank you for those. The first one from Mr. [ Emi ] Rutland from [ Braemar ]. Load-shedding will continue to subsist what contingency plans have management put in place to mitigate the impact.

Okay. Yes, thank you for that. Well, there are basically 3 components to it. The first is we now have generators on all our operations to deal with load shedding. But as you would know, generators are actually built for standby and not for permanent running or 12-hour a day running. So that is a concern of us. To mitigate that, we have a solar program, which we -- again, this year, we've added 2 of our hatcheries. We've put solar on the roof of these hatcheries, but the hatcheries can -- solar can only work during day. And we've also entered into an agreement with an international company that is looking at utilizing empty land for solar and then we would also be able to get solar from them. The other component is what do we do if there's a complete grid failure? I know that very imminent people have said that there won't be a grid failure, and we really hope that they are correct, but we need to plan for that. And we've started putting certain contingencies in place to survive something like that. Because I think if there's a total grid failure, it's not going to be a matter of who's going to make money. It's going to be a matter of who will survive.

Okay. The second question also from Mr. Rutland from [ Braemar ]. The egg market seems to be oversupplied. With current economic downturn in consumer spending, what timeline do you give for recovery? And do you believe that there will be casualties in this industry?

Yes. Thank you. There has certainly already been casualties. And if you look at the slide that Adel showed, I think the -- for me, the indicator is really the day-old pullets hatched per week. And it's really on a steep downturn. And for the last 6 months, the period that we are reporting now that 424,000 is really the lowest, I have seen at -- on SAPA statistics. So there's really been a down placement of birds. What we also see is there was less demand for day old -- for [ point ] of layer hens, which means people just couldn't buy it. So I definitely see less eggs are coming to the market, but I'm -- why I'm uncertain about this is I'm not sure. Less eggs will certainly mean prices go up. And you've seen on that price comparison egg prices in that particular study for that period went up by 6%. But it sort of talks to our own experience of 7.5%. And if you look at the other food stuffs went up much more than that, but my concern is, I don't know up to where egg prices can go up where the consumer simply cannot afford the protein anymore. And if you need ZAR 30 a dozen for eggs to have a sustainable egg industry and only 20 million people can buy that, then the industry will have to cut back so that we have only enough hens for the 20 million people. So it's really -- I think on the supply side, regrettably, the right thing is happening because we're seeing people going out of business. But on the demand side, it's a question that we don't know because we are in uncharted territory, the egg prices will -- for a sustainable egg industry, egg prices will have to go up a lot from where they've been, not just 6% or 7% or 8% or 10%. It will have to go up much more than that to cover for the cost base that's been increasing tremendously in the last 3 years. So I can't give a timeline. What I can say is that it is going better in our egg business now than it's been going 3 or 4 months ago. And of that 7.5% price increase that we reported, I would say most of that came in the last 2 months of the reporting period. So there's definitely movement in egg prices. And we do see feed prices coming down, not going up slower, but coming down. So Mr. Rutland, I think we are through the deepest part of it, but I don't think we're out of the river yet.

Thank you. The next question again from Mr. Rutland. The swing to a loss in the African operations is concerning. What is the forecast recovery to year-end and if this continues, what do you plan to do with this segment?

Yes. I think, Andre, you spent some time on it, but maybe add to that. I think the Mozambican one is easy. The Mozambican one is very much tied to the South African egg situation. and we've seen improvement there. So I think we will see a better 6 months there than the previous one, but it's small in a context. In Uganda, we've come off a very, very high raw material price, but maize is still extremely expensive. And the demand for day-old chicks is very low due to the high maize prices. If maize prices are high, the smaller farmers just don't -- they don't buy day-old broilers or day-old pullets. What we do there is we cut back our flocks. And we have cut back some and we're going to cut back more to make that a bit more streamlined. I do think Uganda will also improve simply because our opposition has taken even more knocks than we have on the breeder side. The egg side has recovered and for the last couple of months have actually been positive in Uganda. In Zambia, Zambia over time has been a very good investment for us, particularly the egg business. What we have seen is, again, very high raw material prices. And I think Zambia is a matter of really staying the course, we certainly don't intend to take a step backward there, but I do think we actually have to look at investing more in eggs. I'm very positive about Zambia also from a political perspective. It's a very stable country it has far better supply of electricity and energy than many other countries. So the questions on what we're going to do is really, I think, boils down to Uganda as do we believe in the investment case and we do. It's a matter of we've had really, really very difficult times, but as it goes in agriculture, the very difficult times is often followed by very good times. So I think we -- there are things that we can do in Uganda, improving our efficiencies. But the rest of it, we'll have to wait for the environment -- the agricultural environment to get back to normality.

Thank you, Hennie. We've got a further question from Mr. Rutland on the egg business. Regarding egg distribution, what percentage is going into formal retail? And have we looked at alternative distribution channels into the informal sector?

I think Adel should answer that.

Thank you for the question. Our informal sales at this point in time for the period under reporting is -- informal sales is 30%. 70% is focused on formal retail, but not only on retail, we've got formal customers that we service through our pack stations as well. So currently, it's a 70%, 30% split.

Thank you, Adel. We have a question from Mr. Brendon De Boer of CBH. It's multiple questions. But the first one, is the Quantum Foods Holding Board acting on behalf of all shareholders? The reason is we are struggling to get a face-to-face meeting with the lead independent director as management and Chairman refuse to talk to us.

I think the -- I'm 100% sure that the Board is, in fact, acting on behalf of all shareholders and to the benefit of all shareholders. We've had CBH attempted discussions now for a long time and the lead independent director has not been unwilling or refused to engage with CBH. The lead independent director invited CBH to address its concern to him in writing, so he may appropriately consider and address these concerns. And they have not taken up his invitation to put their concerns and writing to him. We do not in the ordinary course of business, meet separately with individual shareholders.

Thank you, Hennie. And the second question. We have operations in Zambia and are struggling to keep up with the market demand for day-old broiler chicks. You referenced, however, that the market is soft. Could it not be an in-country management issue?

No, I don't think so. I'm pretty sure it's not. These demand and supplies go in cycles. And I think Mr. De Boer should know by now is that they have grand appearance in Uganda also -- in Zambia, and they also supply to an abattoir. We supply to the smaller farmers in the informal market. So we're really serving different market spaces.

Thank you, Hennie. Third question. Can you comment on your egg selling price? As the rumors in the market suggests that your price is ZAR 2 to ZAR 3 per dozen cheaper than the competition.

Yes. I don't want to enter the realm of competitive prices. But all I can say is that our biggest client is always accusing us of being far more expensive than our position. And in fact, at 1 or 2 places, we've lost their business because our prices are higher. So I would take those rumors with more than just a pinch of salt.

Thank you, Hennie. We have the next question again from Mr. Rutland, [ Braemar ]. With a devaluing rand, would it not be wise to gear the balance sheet to offset some of this value loss? I think if I can respond to that. And firstly, just in terms of gearing the balance sheet, the Board and management's got an extremely conservative approach to gearing the business especially due to the cyclical nature of earnings. And then secondly, it's important for us that we operate and plan our cash flow management and liquidity in terms of the functional currencies. So we actually have very few foreign currency transactions in the various subsidiaries. It's all in the functional currencies of the group entities. Next question we have..

Sorry, if I could just add to that Andre. I think gearing is something that Andre mentioned in the beginning, but we take a very conservative approach to that. And we have been accused of having a so-called lazy balance sheet, but due to the nature of our business and often the investment that you have to make in working capital at the very short term, we are very careful to gear. And the rand weakness is also something that is so uncertain, it might change on a very short notice. And if you're at the wrong side of a hedge there, you really have problems other than operational problems. So we're conservative in that approach.

Hennie, we've got a question from Mr. Cornelius Makari from Metabridge Capital. And the question is, would you consider closing the Zambia or Uganda operations?

I think the short answer is no. We have to look at performance of these businesses over time. And they -- particularly Zambia has been a very, very good performance. If you just look at our results last year, I mean, our dividend that we paid, the interim dividend coming out of Zambia. So definitely not. We are worried about Uganda. There has been a lot of challenges of late. And some of it is internal. But as I said, the majority of it lies in the broader agricultural economy. But it is something, we assess regularly, I mean, in February this year, we had -- 3 executives actually went there to really, really do a deep dive and look at the business case and look whether -- can we win. And we are still positive that we can. But obviously, one cannot continue for years and years and continue making losses. So the review of the portfolio is always done and we do it at our strategy session. But at this stage, we remain positive about Uganda, and we simply have to improve what we can improve and then when the environment gets better, capitalize on that.

The next question from Mr. Brendon De Boer from CBH. Have you done any joint ventures with SilverStreet in Uganda?

We haven't done joint ventures with Silver Street in Uganda. What has happened is that for a short period of time, Silverlands Tanzania rented a chicken house from us in Uganda.

Thank you, Hennie. We've got a question from Mr. Andrew Wilkins of CBH. Please, can you explain the significant increase in trade creditors versus the prior year? I can respond to that. 2 reasons for that. The first is just the cost of the underlying products that are procured that are significantly increased. And then secondly, we have renegotiated some of the trading terms with some of our -- some of the -- actually just one of our trade creditors to actually allow for a slight extension in the trading terms of that particular creditor. Then we've got a question from Mr. Niall Brown from Flagship Asset Management. Please clarify the ZAR 59 million rent outflow from hedging activities. Is that an actual loss? I think if I can respond to that. it is not an actual loss. It's a cash outflow in terms of the mark-to-market movements on SAFEX -- on SAFEX Futures actually. So that's also why it's accounted for in equity. It's not -- it's not a loss item for the particular reporting period. Then we have a question from Mr. Andrew Wilkins, CBH, on the same theme. Please could you elaborate on the hedging cash outflow of ZAR 59 million? And secondly, the second part of the question, please, could you confirm if this is an accounting loss and where in the segmental profit analysis it is reflected? As I've explained, it's not an accounting loss for the period. So therefore, it's an item accounted for in equity, other reserves, and it's not included in the segmental profit analysis.

I think just to add on to that, that is a cash outflow and the benefit of that will come in the cash in the next period because it's a market. When SAFEX prices drop, and you have a position, there's a cash outflow, but that means the forward prices are going down, so although it looks as a debit, it's not an debit. It is a debit, but it's not a debit on the income statement and the credit of that cash flow is that we will pay less for the maize in the period going forward.

Thank you, Hennie for that. At this point in time, we have no further questions in the chatroom.

Okay. Well, thank you very much, and thank you for the questions. I think it just shows that the questions gives us the opportunity to highlight some of the matters that otherwise might seem a bit opaque. And so thank you for all those questions. It's appreciated from our side. And hopefully, we will, by November, be in a position to give better news to our shareholders. Thank you very much.