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

Good morning, ladies and gentlemen. Welcome to the results presentation of Quantum Foods for the year that ended 30 September 2024. The purpose of this engagement is to present the company's results published on the Stock Exchange News Service of the JSE this morning, and address any questions and/or comments in respect thereof. Accordingly, we respectfully request that any questions or comments not related to the presentation and/or the financial results be addressed to the Company's Secretary, Ms. Ziyanda Wakashe, in writing, and the company will respond accordingly. I will be presenting a brief business overview, highlighting some of the salient features of the past year, whereafter our CFO, Andre Muller, will present the financial overview. Thereafter, I will once again give an overview of operations and highlight focus areas of management for the 2025 financial year. I'm going to start by highlighting just a few points from the financial results as Andre will provide more detail in his presentation. The company's revenue declined by 9% compared to the previous year, and the decline is mainly driven by a decrease in volumes and a decrease in feed selling prices. The egg and feed sales volumes were negatively impacted by the H7 AI outbreak of 2023 and 2024, which resulted in the company culling its commercial layer flock in the north. The decline in raw material prices led to a decline in feed selling prices as the decrease in raw material prices was passed on to our feed customers. Headline earnings increased to ZAR 0.804 per share as the company's financial performance improved significantly. Some of the main drivers for the turnaround in the financial performance are the lower impact and cost of AI, lower raw material costs, the lower cost of load shedding and improvements in efficiencies. Cash flow from operating activities amounted to ZAR 264 million for the full financial year. During this year, we saw a decline in raw material costs, even though the South African maize and soybean crops harvested during the year was only 12.7 million tonnes and 1.8 million tonnes, respectively. The reduction in the local crops meant that the company had to increase the volumes of maize and soybean meal imports as the local crops were not sufficient to supply the local demand. Fortunately, the international commodity prices declined during this year as adequate corn and soybean crops were harvested in the U.S. and South America and the stocks-to-use ratios of both these commodities remained at very comfortable levels. The decline in international commodity prices and the weakening of the rand by 2.3% against the U.S. dollar contributed to SAFEX maize prices declining by 5.2% and soybean meal prices declining by 11%. One year ago, the levels of load shedding in South Africa was very high with 289 days of interrupted electricity supply recorded during 2023. And as with all businesses, the company requires consistent and stable electricity supply. It is therefore good to report that the impact of load shedding on the South African business was much lower this year. However, our Zambian business experienced very high levels of load shedding as the drought in that country significantly affected the country's ability to generate hydroelectricity. There were even days when the load shedding was running as high as 21 hours per day. The production units in Zambia have generation capacity, but unfortunately, the high levels of load shedding led to higher energy costs being incurred. With the reduced load shedding in South Africa, the company's net energy cost declined by ZAR 21 million year-on-year. As briefly mentioned earlier, the H7 avian influenza outbreak of 2023 and 2024 impacted the volumes produced and sold by the company. The company culled broiler and layer breeder flocks, hens in rearing and its commercial layer flock in the north, and this impacted the feed, farming and egg businesses. The feed business experienced a significant decline in internal layer volumes and a slight reduction in external volumes as our feed customers in the North were also impacted by AI. Similarly, the layer livestock volumes also declined as very little volumes were produced during the first half of the year. With the culling of the commercial layer flock in the north and the subsequent loss of egg volumes, the egg business had to mothball its Pinetown pack station for the greater part of the year, and it also mothballed 2 of its depots. Unfortunately, the culling of flocks also meant that there were many farms empty during the year, and the company entered into layoff agreements with the affected employees, and where the layoff agreements extended the period of 6 months, it completed retrenchment processes. The company was also not able to recover the operational costs of the empty farms and units while being empty. During the year, the company reviewed the risk of the layer business as the vaccination protocols announced by government are very onerous to adhere to. And as far as we know, no application for vaccination has been approved till date. We, therefore, downscaled the placement of our layer farms and even closed certain farms to reduce the risk of AI on the company. On a positive note, the AI recovery plan executed during the first half of the year in the farming business has culminated in the recovery of the layer and broiler breeder flocks. The importation of layer and broiler hatching eggs by the company, therefore, ended and the hatchery and farm utilization improved. The improved utilization of the farms also meant that the company was able to improve its volumes and recover some operational costs in the second half of the year. It is pleasing to report that there was a substantial improvement in the broiler performance with improvements achieved at both breeder and broiler operational levels. As reported at the interim results presentation, the change over to the Ross breed was completed towards the end of the previous financial year. And during this year, the company achieved breeder results above the breed standards. The broiler management team also focused on all areas of commercial broiler farming and the results are that the efficiencies of commercial broilers improved substantially in both the South and Northern regions. Within the company, the egg business remains cyclical, and this business segment is usually not able to easily increase selling prices to recover rising input costs. The margins and profitability in this business is mostly driven and impacted by the egg supply and demand dynamics of the South African market. The result of the AI outbreak of 2023 and '24 calendar year was that the national layer flock declined to levels just above 19 million hens by June 2024, and this from an average national layer flock of 26.8 million hens over the last 5 years, and that is excluding this year. The significant decline in the national layer flock and national egg production caused prices to increase year-on-year as demand far exceeded supply and the margins and profitability in the egg business improved. The financial performance of the other African operations improved significantly with Uganda and Mozambique contributing to the improved performance. In Uganda, the demand for day-old chicks were higher, while the feed cost declined. And in Mozambique, the supply and demand dynamics were similar to that of South Africa. The contribution from Zambia was slightly lower as the maize prices increased, as the drought also impacted the maize crop. However, the demand for eggs in Zambia increased, and this had a positive impact on egg selling prices. I will now hand over to Andre, 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 declined by 9% to ZAR 6.332 billion, with decreased revenue mainly from the feeds and egg businesses. In the feeds business, external sales volumes were slightly down, by less than 1%, and external selling prices reduced by an average of 6%, with selling prices adjusted for lower raw material costs for 2024 when compared to 2023. In the eggs business, sales volumes declined by 55% due to less eggs available for sale. From a revenue perspective, the volume decline was partially offset by a 43% increase in average selling prices. Operating profit that includes profit and loss on sale of assets increased from a loss of ZAR 36 million to a profit of ZAR 231 million. The main reasons for the improved earnings from the previous period are the following: lower write-offs due to avian influenza, ZAR 37 million stock write-off in 2024 compared to ZAR 155 million in the previous financial year; lower feed costs year-on-year; reduced impact of load shedding; just looking at the generator fuel cost expense, that line or that expense item declined by ZAR 38 million year-on-year; much improved broiler value chain efficiencies, both at breeder and at commercial broiler level, supported by the company using only Ross genetics during the year; higher margins in the egg business with the higher egg selling prices also experienced by the business in Mozambique; higher demand for layer livestock, some of which the company was able to supply during the second half of the year, when the supply of day-old chicks normalized; improved trading conditions in Uganda, where lower feed raw material costs stimulated regional demand for day-old chicks and improved egg margins; and very good cost management throughout the business. These positive factors were partially offset by increased head office costs, the under-recovery of costs in the layer farming and egg business that resulted from many farms and an egg packing station remaining dormant for most of the year and a provision for short-term incentive bonuses payable to management. Net finance cost was lower at ZAR 11.8 million and profit before tax was ZAR 219.9 million at an improved operating margin of 3.7%. The effective tax rate for the year was 27%, and we are pleased to report headline earnings per share of ZAR 0.804 compared to the loss of ZAR 0.174 per share of the previous financial year. Adjusted operating profit, that excludes profit and losses on the sale of assets, is reflected on this slide. Eggs reported a profit of ZAR 140 million compared to a loss of ZAR 42.4 million for the previous year. The benefit of a 43% increase in sales realization and lower feed costs far outweighed the negatives of lower volumes and costs being incurred on facilities that were temporarily closed. Costs were well controlled in this business and operational efficiencies were at very high levels. Farming reported a loss of ZAR 10.6 million and includes improved earnings from both the broiler and layer farming businesses. The layer farming business was, however, and as expected, significantly loss-making in the reporting period with the main factors being, as mentioned before, the avian influenza bird stock write-off of ZAR 37 million; costs incurred in rebuilding the layer breeder flock in the first half of the year, also at newly contracted facilities with very little hatching egg production during that period; weaker efficiencies throughout the layer value chain resulting from the disruption in the normal placement cycle, which included lower hatchability and increased feed conversion rates; significant cost under-recovery with expenditure on the culling of birds, farms being cleaned and prepared for future placement while producing much lower volumes due to remaining empty for most of the year. Animal Feeds reported a lower profit of ZAR 94.2 million. Total volumes produced decreased by 9%, mainly due to lower internal demand for poultry feed which on the back of lower bird numbers on layer farms reduced by 50% year-on-year. Overhead costs were well managed given the reduced volumes and the business benefited from less load shedding disruption. Earnings from the feed business includes a charge of ZAR 10 million due to additional costs incurred following the explosion at the Malmesbury feed factory in June of 2024. Any insurance recovery will only be accounted for in the future reporting period. Earnings from the other African countries increased substantially. Earnings were lower in Zambia and negatively impacted by the drought, leading to higher feed costs and increased hours of load shedding, both impacting demand. In addition, the further devaluation of the local currency have a negative impact on the rand value of earnings reported. Profits were much higher from Mozambique and from Uganda for the reasons previously mentioned. Head office costs were higher and include increased costs on professional and legal fees pertaining to certain shareholder-related and legal matters. Turning to the statement of financial position. Noncurrent assets increased slightly compared to the previous year-end with a capital investment of ZAR 153 million and an increase in leased assets being offset by the depreciation charge and the effect of the devaluation of the Zambian kwacha against the South African rand at the reporting date. The main capital expenditure items in addition to the ZAR 67 million spent on maintenance and compliance CapEx included capital expenditure of ZAR 52 million to date on the Malmesbury feed mill expansion project and ZAR 21 million spent on the completion of an upgrade project at the Fransrug layering farm in the Western Cape. Net working capital, excluding lease assets, increased by ZAR 28 million to ZAR 839 million and includes lower investment in feed raw materials and higher investment in biological assets following progress on the rebuilding of the layer flock, which was much lower at the end of the previous financial year due to the effect of the 2023 avian influenza outbreak. Noncurrent assets -- sorry, noncurrent liabilities mostly reflect the deferred tax liability of the group and increased to ZAR 276.5 million. The increase is resulting from tax benefits following the increased investment in biological assets and the utilization of tax losses incurred in previous years. Cash at the reporting date increased to ZAR 245.8 million. The 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. Lease liabilities amounted to ZAR 43 million and remained stable when compared to the previous year. Total equity just below ZAR 2.1 billion at 30 September 2024. Looking at the statement of cash flows. Cash operating profit of just short of ZAR 385 million was recorded for the period, while the cash outflow due to the increase in working capital was ZAR 110 million. Hedging activities had a small cash outflow impact in the period, which is going forward included in the working capital movement. Income tax payments of ZAR 10.5 million were made, resulting in a cash inflow from operations of ZAR 264.3 million. Capital expenditure was ZAR 153.4 million and proceeds of ZAR 4.7 million was received from the sale of assets. The capital portion of lease liabilities settled in the period amounted to ZAR 19.9 million, borrowings of ZAR 100 million was raised and finance cost paid was ZAR 11.6 million. The rand value of cash held in foreign currencies reduced by ZAR 10.3 million. The net effect of these cash flows in the reporting period was an increase of ZAR 174.5 million. That brings me to the end of the financial overview, and I will now hand back to Adel for the operational overview.

Thank you, Andre. It is pleasing to report that along with the improvement in the financial results, the company also achieved improvements in its operational performance across different sectors of the business. The Nova Feeds business faced many challenges during the year, but the efficiencies remained at high levels despite the loss of internal volumes, the change in product mix due to the loss of layer volumes and the efficiencies of the Malmesbury operations affected by the unfortunate explosion at the Malmesbury feed mill during June, which led to the tragic death of 1 contractor employee and seriously injuring 2 other contractor employees. The explosion also caused physical damage to the offloading equipment at the raw materials intake area and weighbridge, but operating activities outside the affected area continued, albeit at a slower production rate. As one might imagine, navigating through the challenges that followed the explosion was extremely difficult, but the management team did extremely well under the circumstances. The Nova Feeds management team also supported the affected contractors and families, where possible, while hazing and engaging with the authorities where necessary. During the 2023 calendar year, the Board approved the Malmesbury feed mill expansion project as the 2 existing feed mills on the site were running at full capacity and there were further growth opportunities which the feeds business could not capture. The project commenced during July of this year, and currently, the project is progressing well and is on schedule and within budget. As stated previously, there is an improvement in both the broiler breeder and commercial broiler production efficiencies. The successful change over to the Ross breed has allowed the management team to focus on really driving efficiencies and the performance of the past year is the result thereof. The substantial improvement in the efficiencies contributed to higher day-old chicks and slaughter volumes. The broiler business struggled during the breed transition, but the turnaround is very pleasing and the performance of this business during the year was certainly satisfactory. The disruption in the layer cycle has been widely reported, but the Lohmann grandparent flock of the company was not affected and achieved results above breed standards and also improved on the previous year. The performance of the parent breeder flock was lower than the previous year, but above the breed standard on 2 of the 3 measurements, despite the disruption caused by the relocation of parent breeders. The layer breeder AI recovery plan executed by Amos and his team has attributed to the turnaround in layer livestock volumes and profitability during the second half of the year. Amos and his team imported hatching eggs during the first half of the year and also relocated parent breeders to outside the high-risk AI areas. The very high egg prices in the market meant that there was strong demand for layer livestock, which included day-old layer chicks and point-of-lay hens. And although the business struggled with volumes during the first half of the year as there was very little production, the Bergvlei business was well positioned to capitalize on the opportunity during the latter part of the year. The commercial layer farming business has not recovered fully from the disruption in the cycle. During the first half of the year, point-of-lay hens coming out of rearing were placed earlier or later than preferred on contracted laying farms as the farms were being prepared at short notice and the point-of-lay hens were moved outside the high-risk areas. On the positive side, it is pleasing to report that the operational efficiencies of the completed flocks of layer farms outside the AI affected area have improved. But disruption in the placement of the current flocks will affect the performance with regards to feed conversion and eggs produced as layer hens were also kept longer on farms to ensure higher eggs availability. The gradual placement on the layer farms in the north has commenced and will only be completed in the new financial year. As reported by Andre, the profitability of the egg business improved significantly year-on-year for the reasons as previously stated. But what the management of the egg business did really well was to utilize the layer farms available egg supply in such a manner that profitability was optimized while continuing to serve our customers and ensuring that they had eggs to sell to the consumers. The management of the egg business also continued to focus on the operational efficiencies in the pack stations, and it not only improved on the previous year, but were at very high levels. The operational efficiencies in the Rest of Africa businesses also improved with Zambia and Mozambique reporting improvements in the layer flock efficiencies and Uganda achieving improved efficiencies in its breeder flock. As stated earlier in the presentation, the drought in Zambia had a negative impact on the business, but the business performed satisfactory under the challenging circumstances. Cost management within the business remained a focus point. And throughout the year, costs were well managed as management executed on their plans to limit the cost increases on the back of the reduced volumes. I would now like to give brief feedback on a few management focus areas for the coming financial year. The focus for the management team of the feed mills will be to repair the raw materials intake area at the Malmesbury feed mill, as additional storage and handling costs are being incurred because the raw materials intake that is running at a slower rate, which in turn is affecting the efficiencies of the feed mills on site. Then remaining at Malmesbury, the expansion project will be a big focus area during the coming year given the size of the project and the importance of remaining within the planned completion time. The broiler management team need to focus on the regional supply of broiler hatching eggs, as there is currently an imbalance in supply of eggs between the regions. The Board has approved 2 conversion projects for the coming year. And if executed within the planned time, the business should be well positioned with balanced regional broiler hatching egg supply. The focus on the commercial broiler efficiencies will remain, as we believe there is still room for improvement, which will also ensure that we remain competitive as a live broiler producer. In the layer farming business, the Bergvlei management team plan on focusing on the Lohmann layer breed performance and capitalizing on this breed's performance with new customers. The Bergvlei team gained new customers as they were able to supply point-of-lay hens to the market when the overall availability was very low. And we believe that the Lohmann layer breed will show that it should be the preferred layer breed in South Africa. The egg business will continue with placement of point-of-lay hens on the internal layer farms as per the revised plan, while managing the risk of AI. The company has placed all its farms on high alert as SAPA has issued a cautionary letter to all producers regarding the AI outbreak on Marion Island and the increase in AI outbreaks in Europe. Despite this, the national layer flock is projected to increase into the 2025 calendar year and the progress thereof will be monitored as it will lead to an increase in egg supply going forward. In the Rest of Africa, management will continue to build on the improved efficiencies, as we also believe that there's also still room for improvement. And as mentioned earlier, the management teams throughout the business will also focus on the management of the high-path AI risk in the absence of AI vaccination in South Africa. I thank you for attending the results presentation, and Andre and I will now take any questions on the financial and operational performance.

Thank you, Adel. We've received a number of questions in the chat room, and we will try and address them. Firstly, a question from Mr. Brendon De Boer from Country Bird Holdings. And the question relates to the short time between the publication of the financial results and the results presentation. I can respond to that. It's market practice for companies to publish their financial results and then have a presentation on the same day to give an overview and some insight into the details contained in the financial results. Shareholders are welcome to address any additional questions to the company and we will respond appropriately. Secondly -- the second question is from Mr. Nick Wilson. My name is Nick Wilson. I'm a journalist at News24. And the question relates -- it's a number of questions relating to the Tanya Golden matter, and also referring to the news articles about the matter, and also questioning why no SENS announcement has been published by the company. Adel, I can respond to that. I think just briefly, the company has applied to the High Court for leave to appeal the judgment. As a result, the court order is stayed pending the outcome of the appeal. Accordingly, we have been advised that at this stage, there's no requirement under the JSE listing requirements for the company to publish an announcement on SENS. The matter is currently subject to a court process and is therefore subjudicate and cannot be discussed further. And furthermore, at this stage, the matter is not expected to have a material impact on the financial statements, and therefore, no additional disclosure was required. The third question is also from Mr. Nick Wilson. It is understood that Country Bird Holdings and Braemar are very unhappy with the way the company is being run. Are you meeting with these shareholders at all to resolve these issues? Adel, if I can ask you to respond to that one?

Mr. Wilson, as previously mentioned, the purpose of this engagement is to present the company's annual results and address any questions and/or comments in respect thereof. Kindly address any unrelated questions in writing to the Company Secretary.

Thank you, Adel. The next question, again, from Mr. Brendon De Boer. Why is feed profitability so low at 2.9%, where Astral was at 6.5% for the same period? Why have you lost market share? And what is your plan to gain profitability on the feed business?

Thank you for that question, Mr. De Boer. As stated during the results presentation, the feeds business was impacted by the AI outbreak as there was a decline in volumes as a result of the muted demand caused by the outbreak and foot-and-mouth disease, which resulted in a loss of market share. Due to the AI, our focus was on margins rather than volumes with astute procurement assisting in protecting profitability. Notwithstanding this, the business performed well in a difficult environment.

Thank you, Adel. The next question, also from Mr. De Boer stating that in the financial statements, Ms. Tanya Golden is indicated as having resigned from the Board, which is not the finding of the judge, and whether we will be publishing a correction? Mr. De Boer, I think we've already responded to that question. So I don't think any further clarity is required. Next question from Mr. De Boer. Can you expand more on head office cost increase? It is up 150% from the last year. You mentioned it was relating to a shareholder matter.

Mr. De Boer, thank you. The corporate office costs increased during the current period due to an increase in the incurrence of professional fees pertaining to certain shareholder related and legal matters. The Board appoints advisers when deemed necessary to assist the Board in fulfilling its obligations and governance mandate.

Thank you, Adel. Next question, also from Mr. De Boer, about capital investment, asking why the capital investment is so low at only 2.4% of revenue and 2.1% in the previous financial year. And then given the low CapEx investment, why no dividend was declared?

Thank you for that question, Mr. De Boer. At this point, our capital projects for the coming year are significant. As I've clearly indicated during the presentation, there's an ongoing expansion project at the feed mill. And the Board has also approved 2 conversion projects for the broiler business. The reason on why no dividend was declared is exactly because of the capital outlay, which we foresee to flow out in the coming year as well as the risk of AI. If I can refer you to the previous financial year with the impact of the ZAR 155 million loss, which the company incurred caused by that AI outbreak, the Board did not approve a dividend as we felt that we needed to retain the reserves due to the heightened risk of AI.

Thank you, Adel. The next question from Mr. De Boer. Please can you update shareholders on a pasta factory investment. I can confirm that we have no such project in our planning. Then the next question also from Mr. De Boer. What is the company's policy regarding AI infected flocks? Do you immediately cull as per government regulations?

Thank you for that question, Mr. De Boer. During the previous calendar year, the Department of Agriculture, Land Reform and Rural Development published protocols whereby layer producers were allowed to apply for dispensation in culling their flocks. The company originally intended in following that protocol. But when it became clear that it was a very onerous process to follow, the company immediately started culling its flocks. So the company has culled its complete layer flock in the north as previously stated in the presentation, as well as broiler and layer breeder flocks.

Thank you, Adel. I think that brings us to the end of the questions in the chat room. And so we have -- so there's no further questions at this stage.

Then ladies and gentlemen, we thank you for your attendance, and this results presentation is now closed.