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 ending 31 March 2024. My name is Adel van der Merwe and I am the newly appointed CEO of Quantum Foods. The purpose of this engagement is to present the company's interim results published on the Stock Exchange News Service of the JSE this morning and address any questions and/or comments in respect thereof. Accordingly, we respectfully request that any questions or comments not related to the interim results be addressed to the Company Secretary, Ms. Ziyanda Wakashe, in writing and the company will respond accordingly. I will be presenting a brief business overview whereafter our CFO, Andre Muller, will present the financial overview. Thereafter, I will present an operational overview and also highlight the management focus areas for the last 6 months of this financial year. Revenue decreased 13% when compared to 2023 mainly driven by a decline in volumes and a decline in feed selling prices. Our headline earnings per share increased to ZAR 0.217 on the back of the improved financial performance while cash flow from operating activities amounted to ZAR 102 million. The Board of Directors resolved not to declare an interim dividend as the company will have an increased cash flow requirement for the rebuilding of its layer flock and the Malmesbury Feed mill expansion project. The risk of avian influenza was also a consideration for the Board especially as we are entering the winter period. Unfortunately, the High Path Avian Influenza outbreaks of 2023 went into January 2024 for the company and this impacted our financial results. I will provide more detail on the financial effect and the plans that the company has made further on in the presentation. The cost of both yellow maize and soyabean meal was lower than the comparative period and this led to lower feed cost throughout the business. The feed, farming and egg business segments produced lower volumes, which was a result of the avian influenza outbreaks during 2023 and 2024, which affected the company's broiler, breeder and layer flock. However, during this period, the company has been able to gradually rebuild its layer breeder flock and from the end of this reporting period are able to supply our layer hatching egg requirement from local production. During the past 6 months, we weren't able to recover the overhead cost of the empty farms. Once the hens impacted by avian influenza were culled, these farms were empty while the cleaning, washing and disinfecting took place. Most of these farms are still empty and will only be partially placed during the next 6 months. Our broiler business has seen a significant improvement in the operational performance and on some farms, we've even exceeded previous record performances. When looking at the egg business, it has made a good recovery with positive margin as the egg prices increased and our feed cost decreased. In the other African businesses, we've seen improved financial performance and it's mostly due to trading conditions improving in Uganda and Mozambique. As indicated, the company was severely impacted by avian influenza during 2023 and this continued into this reporting period. The biological asset writeoff in the period amounted to ZAR 37 million, but it is important to note that the company has not had another AI outbreak since the beginning of this calendar year. The H7 avian influenza outbreaks of 2023 was so severe that the latest SAPA report projects the South African layer flock at 19.1 million hens for June 2024 and if we compare that to May 2023, it's a decline of 22%. To mitigate the impact caused by the losses on the broiler and layer breeders, the company imported broiler and layer hatching eggs to assist with the supply of broiler day-old chicks and also layer day-old pullets. The company's recovery plan also included the placement of layer breeders on converted farms and contracted farms outside the high risk area. The same applied to the placement of layer hens on contracted farms. Even with these plans, many of the company's layer farms remain mothballed and the company entered into layoff agreements with affected employees. Where facilities have been permanently closed, the company followed retrenchment processes and the company has also completed a voluntary retrenchment process at a mothball facility as the layoff has been longer than expected. SAPA and the industry role players are continuously engaging with [ Elrod ] on the vaccination protocols and the application processes. However, unfortunately till date, no H7 vaccines have been approved as far as we are aware and no application for the vaccination has been approved either. This is a concern for the company as the layer flocks will be exposed once again. I will now hand over to Andre Muller, who will do the financial overview.

Thank you, Adel. Good morning, ladies and gentlemen, and welcome to the financial overview section of the results presentation. Group revenue decreased by 13% to ZAR 3 billion with decreased revenue mainly from the feeds and egg businesses following a reduction in sales volumes. Operating profit, that includes the profit and loss on sale of assets, increased by ZAR 48 million to ZAR 62.4 million. The main reasons for the improved earnings compared to the previous period are improved performance from the Western Cape broiler farming business due to much improved farming efficiencies, improved performance from the other African operations especially in Uganda where lower raw material prices stimulated demand for chicks and improved margins and from Mozambique where egg prices increased significantly on the back of reduced supply from South Africa. While the egg business in South Africa benefited substantially from improved margins, increased selling prices and a reduction in feed cost; this was offset by losses from further avian influenza outbreaks in the layer farming operations and the continued effect of the avian influenza outbreaks of 2023, which resulted in cost under recovery with farms not in the normal production cycle. Net finance cost was lower at ZAR 7.7 million and profit before tax was ZAR 55.4 million at an improved, but still low operating margin of 2%. The effective tax rate was 20.4% benefiting from favorable tax rates for farming earnings in Zambia and Mozambique. Headline earnings per share increased from ZAR 0.029 to ZAR 0.217 per share. Turning to the segmental analysis of revenue. Revenue from animal feeds decreased by 11%, which include an external sales volume decrease of 3.3% following lower demand for poultry feed and lower average selling prices, which were adjusted in response to the lower feed input cost. Revenue from feeds contributed 50% to group revenue for the reporting period, similar to the 49% of the previous period. Farming revenue was flat with a decrease in layer farming revenue due to having less livestock available for sale being offset by increased revenue from the broiler farming business where volumes of both live birds and the day-old chicks increased from the previous period. Revenue from farming contributed 29% to group revenue, up from 26% in the previous period. Revenue from eggs decreased by 40% with a volume decrease of over 60% partially offset by an increase in selling prices of 57%. Following the 2023 AI outbreaks, the egg business had limited access to product, which also resulted in the Pinetown egg packing station and 2 sales depots not in operation during the reporting period. This contributed 13% to total review in the reporting period. Revenue from other African countries were slightly higher with increased revenue from Uganda and Mozambique offset by lower revenue from Zambia. External feed sales in Zambia reduced with demand impacted by increased feed, raw material costs and the rand value of revenue from Zambia reduced following a further devaluation of the Zambian kwacha. The revenue contribution from the other African segment are slightly above 7% for the reporting period, a marginal increase from the 6% of the previous period. Adjusted operating profit, that excludes profits and losses on the sale of assets, is reflected on this slide. Eggs reported a profit of ZAR 57 million compared to a loss of over ZAR 78 million for the same period in 2023. The benefit of increased selling prices and a 5% reduction in feed cost far outweighed the negatives of lower volumes and costs being incurred on facilities that are temporarily closed. Farming reported a loss of ZAR 67 million despite improved earnings from the broiler farming business. The layer farming business was, as expected, significantly loss-making in the reporting period with the main factors being further avian influenza writeoffs of ZAR 37 million, cost incurred in rebuilding the breeder flock also at newly contracted facilities with very little hatching egg production during the period. Weaker efficiencies throughout the value chain resulting from the disruption in the normal placement cycle, which included lower ratability and increased feed conversion rates. And lastly, significant cost under recovery with expenditure on the culling of birds, farms being cleaned and prepared for future placement, again with very little egg production in the period. Animal feed reported an improved profit of ZAR 54.5 million. Total volumes produced decreased by 12% mainly due to lower external and internal demand for poultry feed. Overhead costs were well managed given the reduced volumes and the business benefited from less load shedding disruption. In the previous period, challenges we experienced with feed mills not all being equipped with generators and having to replace previously planned raw materials with more expensive product due to disruptions in production activities at suppliers caused by load shedding. Earnings from other African countries increased by more than ZAR 29 million with improved earnings from all 3 countries, improvements mostly from Uganda and Mozambique due to the factors mentioned earlier. Turning to the statement of financial position. Noncurrent assets remained stable compared to September 2023 with a capital investment of ZAR 65 million and an increase in leased assets being offset by the ZAR 53 million depreciation charge and the effect of the devaluation of the Zambian kwacha against the South African rand at the reporting date. Net working capital, excluding lease liabilities, was stable at ZAR 808 million with a decrease in trade and other receivables offset by a decrease in trade and other payables. The investment in biological assets of ZAR 343 million was still low when compared to pre-avian influenza outrage levels due to reduced layer flock, which is in the process of being rebuilt. Noncurrent liabilities mostly reflect the deferred tax liability of the group and increased slightly to ZAR 247 million. ZAR 100 million term loan was drawn in the period. The loan was entered into to provide the South African businesses with improved liquidity for working capital and capital expenditure. The most significant capital expenditure being the ZAR 193 million project to expand the Malmesbury Feed mill capacity that commenced in the reporting period. At reporting date, cash increased to ZAR 185.9 million. Lease liabilities amounted to ZAR 48 million, an increase of ZAR 4 million from the balance at 30 September 2023. And total equity was just above ZAR 2 billion at 31 March 2024. Cash operating profit of ZAR 165.6 million was recorded for the period while the cash outflow due to the increase in working capital was ZAR 61.5 million. The ZAR 37 million AI writeoff being a noncash flow item. Hedging activities had a very small cash flow impact in the period and some income tax payments were made in other African countries resulting in a cash inflow from operations of ZAR 102 million. Capital expenditure was ZAR 65.3 million with more detail on the next slide and proceeds of ZAR 4.6 million was received from the sale of assets. The capital portion of lease liabilities settled in the period amounted to ZAR 11.8 million. Borrowings of ZAR 100 million was raised. Finance cost paid was ZAR 8.4 million. And the rand value of cash held in foreign currencies reduced by ZAR 6.8 million. The net effect of these cash flows in the reporting period was an increase of ZAR 114.6 million. Capital expenditure year-to-date 31 March 2024 as well as future cash flow from capital expenditure approved by that date is indicated on this slide. Of the amount spent in the period, ZAR 53.3 million was spent in South Africa and ZAR 12 million in the other African operations. The main items in addition to maintenance and compliance capital being the Malmesbury Feed mill expansion project and expanding the feed mill in Lusaka. Further capital expenditure approved by 31 March amounts to ZAR 255.2 million with the main project being expansion of the Malmesbury feed mill. I thank you for your attention and will now hand over to Adel for the operational review.

Thank you, Andre. If we look at the operational overview, the efficiencies in the Nova Feeds business remained at satisfactory levels despite of loss of volumes and the change in the product mix caused by the loss of the layer feed. As always, the volume and margin management were well executed by Thinus and his team and the performance was also assisted in this period by lower levels of load shedding. The migration to the Ross breed is complete and Lacton and his team can now focus on managing 1 breed. And as reported, we've already seen an improvement in the broiler breeder and our commercial broiler farming efficiencies especially in the Western Cape. As stated previously, the recovery of our layer breeder flock has been well executed and completed and will now enable us to rebuild our layer flock and increase our livestock sales to customers. The egg business unfortunately has cut back its operations due to the loss in egg volumes and we've even permanently closed 1 pack station, but the price increases countered the negative effect of the loss of volumes. Then throughout the company, cost management was well executed and our operating expenses decreased versus the comparative period, but it must be noted that the decrease in load shedding hours also contributed to this. In our other African businesses, they've shown margin improvement in the reporting period with feed conversion ratios improving on the layer farms and our breeder efficiencies improving in Uganda. Our focus areas for the remainder of the 2022 financial year. Our raw material procurement will always remain a focus area as it is a substantial component of the input costs into and throughout the business and we believe that this assisted with the improved financial performance in the first half of the year. Construction activities at our Malmesbury Feed mill is expected to commence and the key execution of this project within the planned time frame is important for Nova Feeds' future plan growth. We will continue to focus on improving the farming efficiencies throughout the business and capitalize on the current performance especially in the broiler business. The rebuilding of our broiler, breeder and commercial layer flock has commenced and given that vaccination and the subsequent protocols are not favorable for the poultry industry to implement, the repopulation plans and biosecurity protocols need to be well considered and adapted when necessary. The management of our dormant facilities and the cost involved will be very important during this period as it will take time for the volumes to increase and enable the business to recover the operating costs. The company remains on high alert AI outbreaks and the situation is being monitored very closely as we might have to adapt our recovery plans if needed. In the other African businesses, we will continue to focus on improving the efficiencies not only on the layer farms, but on the breeder farms as well. I thank you for attending this results presentation. And Andre and I will now take any questions on the financial and operational performance.

We have a question from Mr. Nick Wilson. The question is for us to give an indication of how many farms or facilities have been mothballed or permanently closed because of avian influenza.

In South Africa in the layer value chain, we've got 22 farms in total and in the broiler value chain, we've got 18 farms. If I look at the closure and the mothballed facilities: on the pack stations, we had 5 pack stations. We've now only got 3 that are operational currently. One has been permanently closed and the other one is mothballed and we intend reopening that later during the year. If I look at the farms that have been closed, we've got 3 farms that we've now closed and mothballed. The other farms I must state are still empty. Some of them have been repopulated especially on our rearing farms and we expect to gradually repopulate the laying farms during the next 6 months.

We do not seem to have any other questions posted.

Thank you. Then we will call this results presentation closed and I thank you for your attendance.