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

Good morning, ladies and gentlemen. Welcome to the interim results presentation of Quantum Foods for the 6 months that ended 31 March 2025. The purpose of this engagement is to present the company's results published on the stock exchange news service of the JSE this morning and to address any questions or comments in respect thereof. Accordingly, we respectfully request that any questions or comments not related to the presentation of 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 reported 6 months, whereafter our CFO, André Muller, will present the financial overview. Once Andre's presentation is completed, I will give an overview of the operations and highlight focus areas of management for the balance of this financial year. I will be presenting a brief -- sorry, from the business overview, I first want to highlight a few points about the financial results, and Andre will provide more detail in his presentation. The company's revenue increased by 20% compared to the previous period, and the increase was mainly driven by the recovery and increase in volumes, especially in the feeds, farming and egg segments. Headline earnings per share for the 6 months increased to ZAR 0.748 as the company's financial performance improved significantly versus the comparative period. One of the drivers for the turnaround in the financial performance was the impact and costs of the avian influenza outbreaks in the previous period, while the company experienced no avian influenza outbreaks in the current reporting period. Added to this is the increase in volumes in the current reporting period as the company recovered from the avian influenza outbreaks of 2023 and 2024. The lower cost of load shedding and improvements in efficiencies also contributed to the improved financial performance. Then lastly, cash flow from operating activities amounted to ZAR 231 million for the first half of this financial year. As indicated previously, the volumes of the company increased versus the previous period, and this was mainly driven by the recovery of the broiler and layer breeder flocks after the avian influenza outbreaks in 2023 and 2024 as well as the recovery of the commercial layer flocks. The recovery in the flocks of the broader poultry industry contributed to an 11% growth in the external sales volumes of Nova Feeds with the biggest growth occurring at the Pretoria feed mill. The recovery of the company's layer breeders resulted in higher volumes of layer livestock being sold and the increase in the company's commercial layer flocks resulted in a 78% increase in egg volumes. During the current reporting period, the cost of maize, bran, and chop increased, while the cost of soybean meal declined. The smaller South African maize crop of last year had the effect of higher maize imports being required and SAFEX' yellow maize prices reached Cut-eng import parity towards the latter part of the 2024 maize season. The impact of this was that the average price of SAFEX yellow maize increased by 28% versus the comparative period. And throughout this current reporting period, the company's coastal mills ran on imported maize. The increase in feed prices was fortunately softened by a 17% decline in the average landed cost of imported soybean meal. This decline was mainly driven by the healthy world soybean stock levels and the rand strengthening by just over 3% against the U.S. dollar. The increase in yellow maize prices led to an increase in the cost of both bran and chop and these raw materials increased by 25% and 22%, respectively. The avian influenza outbreaks of 2023 and 2024 resulted in the culling of the layer breeder flocks in the industry, and this disrupted the supply of day-old pullets and point of lays in the market for the greater part of the previous calendar year. We do expect the demand for layer livestock to normalize as the latest SAPA report projected the South African layer flock to increase to just over 29 million ends by July this year. The South African layer flock numbers have been recovering since the middle of last year and with the gradual increase in egg supply comes the increased downward pressure on egg prices. During this reporting period, the egg sales realization of the company declined by 14%, but the significant increase in egg sales volumes ensured that the margins within the egg business remained at very good levels as the business benefited from the improved throughput. It must be noted that the absence of avian influenza during this period contributed towards the recovery and improved financial performance of the company. But that the high risk of avian influenza remains given the number of outbreaks in Europe, North and Western Africa. The costs associated with avian influenza outbreaks are significant. And over the last 2 financial years, the cost for the company exceeded ZAR 200 million and the biological asset write-offs in the comparative period are ZAR 37 million. Unfortunately, there has been very little progress on vaccination in the country. And although producers have biosecurity measures in place, it alone cannot fully safeguard a producer against the risk of avian influenza. Load shedding remains a risk in South Africa and for the company, given the higher costs associated with the running of generators. Fortunately, the lower levels of load shedding in the country resulted in lower generator, diesel and maintenance costs during the reporting period. However, Zambia is still struggling with high levels of load shedding due to the drought that occurred last year, and this also negatively impacted the cost of raw materials. The rainfall in Zambia has improved since the beginning of this year and should lead to lower levels of load shedding as the hydroelectricity generation is expected to improve. The forecast is also for an improved maize crop in Zambia. The business in Mozambique was challenged by the civil unrest and protest in the country during the election period and towards the end of last year. Operations were impacted, but I will provide more detail later on in the presentation. For Uganda, the trading conditions remain favorable with relatively low feed costs and good demand for day-old chicks, contributing to the improved financial performance from Uganda. I will now hand over to André Muller, who will do the financial overview.

Good morning, ladies and gentlemen, and welcome to the financial overview section of the results presentation. Group revenue increased by 20% to ZAR 3.6 billion, with increased revenue from all four segments. This is mainly due to volume recovery in the layer farming and eggs business, where the previous period was significantly impacted by earlier avian influenza outbreaks and an increase in volumes sold by the Feeds business. Chick volumes increased by 78%, which was partially offset by a 14% decline in average egg selling prices. Much higher volumes of layer livestock, both day-out chicks and point-of-lay hens were available for sale with strong demand in the reporting period. Feed external sales volumes increased by 11% and average external sales prices increased by 3%, with volume recovery mainly from the Pretoria feed mill, where previous period sales was also affected by the earlier avian influenza outbreaks. Revenue from Zambia and Uganda increased but was lower in Mozambique, where the business had layers eggs available for sale following the looting incident on the 26th of December 2024. Operating profit increased from ZAR 62 million to ZAR 205 million, mainly due to a significant improvement in profits from the layer farming business. Profits also improved for the eggs business, but were lower from other African countries. Net finance income of ZAR 1.1 million was earned, resulting in a profit before tax of ZAR 206.1 million at a very satisfactory operating margin of 5.7%. The effective tax rate was 27.2%, and we are very pleased to report headline earnings per share of ZAR 0.748 compared to ZAR 0.217 per share for the previous period. The Board resolved not to declare an interim dividend. Its consideration included the elevated avian influenza risk in South Africa, the extent of the capital investment program that the company is busy with as well as other opportunities for expansion that the Board is considering. Regarding the avian influenza risk, stakeholders will recall that the company incurred losses of more than ZAR 200 million in the previous outbreak. Adjusted operating profit that excludes profits and losses on the sale of assets is reflected on this slide. Eggs reported a profit of ZAR 72 million compared to a profit of ZAR 57 million in the previous period. The benefit of a 78% increase in sales volumes, excellent efficiencies and well-controlled costs outweighed the negative of a 14% decline in egg selling prices. Farming reported a profit of ZAR 80 million compared to a loss of ZAR 67 million in the previous period. Earnings improved slightly from the broiler farming business, mainly due to increased volumes and margins on day-old chicks sold from the Hartbeespoort hatchery. Hatching egg costs were lower due to the Hartbeespoort breeder farm being in production during the period. In the previous period, this breeder farm was not in production due to an earlier avian influenza outbreak and hatching eggs had to be sourced from other regions or imported at high cost. The main recovery, however, was from the layer farms, where in the previous period, multiple factors resulted in a significant loss. These included avian influenza bird stock write-offs of ZAR 37 million, costs incurred in rebuilding the layer breeder flock, also at newly contracted facilities with very little hatching egg production, weaker efficiencies throughout the layer value chain, resulting from the disruption in the normal placement cycle, a 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. These factors did not reoccur in the current period and profits benefited from much higher volumes, very good efficiencies, good cost management, the strong demand from external customers for layer livestock and no reoccurrence of major disease challenges. Animal Feeds reported a profit of ZAR 54.5 million, the same as for the comparative period. Total volumes produced increased by 15% with external sales volumes increasing by 11% and internal volumes transferred to the farming business increasing by 24%, mainly due to the recovery of the company's own layer flock. The benefit of increased volumes, improved efficiencies and very good cost and margin management was offset by ZAR 7 million of additional costs incurred on the intake of maize at the Malmesbury feed mill and on repairs to the area affected by the explosion in June 2024, which was completed by December 2024. Earnings from the other African countries decreased by ZAR 10 million to ZAR 14 million with higher profits from Uganda, not only due to favorable market conditions, but also due to improved farming efficiencies. Earnings were lower in Zambia and negatively impacted by the continued effect of drought leading to higher feed costs and increased hours of load shedding. Further weakening of the currency also played its role. Earnings were also lower from Mozambique, mostly due to having layers eggs available for sale following the loss of birds in the looting incident and thereafter due to a disrupted vaccination program. Head office costs increased on corporate and legal matters that include the ongoing legal proceedings with Ms. T. Golden and various other shareholder-related matters. Turning to the statement of financial position. Non-current assets increased by ZAR 108 million from September 2024. This movement includes CapEx investment of ZAR 152 million and the depreciation charge of ZAR 53 million. Net working capital, excluding lease liabilities, was stable at ZAR 833 million with higher investment in the raw material stock due to price and volume increases offset by increased accounts payable and lower accounts receivable balances. Non-current liabilities increased by ZAR 29 million. This change includes an increase in the liability for deferred tax with previous assessed losses and capital development expenditure allowances being utilized by higher taxable income. The provision for long-term incentives, where measurement is based on the achievement of targets for growth, in headline earnings per share over a 4-year measurement period also increased due to the higher profits. Cash increased by ZAR 66 million to ZAR 311 million at the reporting date. Borrowings decreased by ZAR 10 million following the first 6 monthly repayment on the ZAR 100 million term facility that was drawn in the previous period. Lease liabilities declined with repayments and no major new IFRS 16 lease agreements being entered into. Total equity was at ZAR 2.253 billion at the reporting date of 31 March 2025. Cash operating profit of ZAR 298 million was recorded for the period, while the cash outflow from working capital was ZAR 53 million. This working capital outflow includes cash outflow of ZAR 27 million due to market movements on SAFEX Futures previously acquired. Income tax payments of ZAR 14.4 million were made, resulting in a cash inflow from operating activities of ZAR 231 million. Capital expenditure of ZAR 152 million was incurred with more details on the next slide. The capital portion of lease liabilities settled in the period amounted to ZAR 8 million and ZAR 10 million was repaid on the term loan. The rand value of cash held in foreign currencies increased by ZAR 3 million due to exchange rate changes. The net effect of these cash flows in the reporting period was an increase of ZAR 66 million. More details of capital expenditure in the reporting period and future capital expenditure on items approved by the Board at reporting date is reflected on this slide. Of the ZAR 152 million in the period, ZAR 58 million was spent on the project to build a third feed mill on the Malmesbury premises and ZAR 36 million was spent on the conversion of a previous broiler farm and a previous layer rearing farm to broiler breeder farms that will supply hatching eggs to the Hartbeespoort hatchery. Future capital expenditure on these three projects is expected to amount to ZAR 112 million and will mostly be spent by the end of this calendar year. Expansion CapEx in other African countries was relatively small in this period and included expenditure on projects to increase hatchery capacity in Uganda and the conversion of some open-sided layer houses in Mozambique to environmentally controlled poultry houses. That brings me to the end of the financial overview, and I will now hand back to Adel for the operational review.

Thank you, Andre. I will now provide feedback on the operational overview, but first I want to give recognition to the different management teams within the business for the operational improvements achieved. The good financial performance of the reporting period was assisted by favorable industry conditions, but it was also supported by a solid operational performance. For the Nova Feeds business, we've reported on the increase in total feed volumes achieved, and this increase was not solely driven by the recovery in broiler and layer volumes, but there was also growth in dairy volumes. The utilizations of the factories was at very high levels, and the team also improved production efficiencies to excellent levels. The raw materials intake facility at Malmesbury, which was damaged by an incident in June of last year, challenged the operations on site and slowed down the rate of production. Fortunately, this intake facility was fully repaired by the end of December last year. The Malmesbury expansion project commenced a few weeks after the raw materials intake facility was damaged and this on a site that was already congested and challenged, but it is good to report that the project is progressing well and still within budget and on time. The broiler breeder efficiencies in the farming business again improved with reported performance above the breed standard, and this performance just validates the company's decision to move over to the Ross 308 broiler breed. It was not only the broiler breeder efficiencies that improved, but the efficiencies of the broiler live bird production in the Western Cape also improved on the previous year with specific improvement achieved on this feed conversion ratio. The continued focus by management on the broiler live bird production efficiencies in the Western Cape enables the company to recover the full production costs as a contract broiler producer. The two previous points mainly focused on the broiler farming business in the Western Cape, but it is pleasing to report that we've seen an increase in day-old chick volumes from our Hartbeespoort hatchery as it benefited from the full production activities at the Hartbeespoort breeder farm. Last year, we reported on the broiler conversion and expansion projects in the north, which were approved by the Board. The first project was the conversion of a layer rearing farm to a broiler breeder farm in the North, and this project was completed and the first site placed towards the end of March. These projects are expected to have a positive effect on hatchery efficiencies and reduce costs as layers hatching eggs will be transported from the Western Cape. In the layer business, the management team completed the rollout of the post-avian influenza recovery plans, which increased the company's availability of day-old pullets and point-of-lays and the company capitalized on the strong demand for layer livestock. The increase in day-old pullet production also meant that we could place pullets on the internal rearing farms to roll out the post-avian influenza recovery plans for the commercial layer farms. The recovery plans included the reduced placement of layer hinge in the north and the review of layer farms in the northern region of the country. During the review, management took into consideration the condition of farm assets and infrastructure, farm location and also refurbished some of the commercial layer houses on farms. All these factors, together with the directed management efforts, improved the performance of the internal rearing and commercial layer farms during the period. And for the first time in many years, the performance was at satisfactory levels. The avian influenza outbreaks of 2023 and 2024 led to the temporary closure of the Pinetown pack station for nearly 11 months, but the increased egg volumes from the commercial layer farms in the north ensured that the Pinetown egg pack station could be reopened during August of last year and the partial recovery of the company's market share in the KwaZulu-Natal egg market was very pleasing. We've been reporting on the efficiency improvements in the egg pack stations over the last few years. But the operational efficiencies were at excellent levels during this period despite the added pressure caused by higher volumes on processes within the pack stations. In a business where double-digit margins are seldom achieved, the focus on cost management will always be critical and the cost management initiatives throughout the South African business was effective and well executed by all involved. In the Rest of Africa business, the farming efficiencies improved, especially in the layer hinge production and Ross 308 breeding efficiencies in both Zambia and Uganda. As stated earlier, the unrest and protest in Mozambique impacted operations as point-of-lay supply, customer deliveries and employee attendance were interrupted due to transport and safety concerns. Towards the end of December last year, protesters also entered the company's layer farm and looted layer hens, eggs and some movable assets. Fortunately, no injuries to staff members occurred during the incident, but it was a disturbing experience for everyone involved. Except for the direct cost to the Mozambique business caused by the loss of hens, eggs and small assets, the egg volumes available for sale were less and the vaccination program of the Mozambiquan layer flock was interrupted. Despite all these challenges, the management and staff on site remained in control of the farm and attended to the farm husbandry practices and animal welfare. When reporting on the focus areas for the remainder of the financial year, I would like to highlight on the following points. The Malmesbury FEED expansion project will remain a focus area for the Nova Feeds team as the focus shifts to the inside of the factory and the positioning and installation of all major machinery. This project is a major part of the FEEDs growth plan for next year, and therefore, the on-time completion is critical. The broiler management team need to focus on the completion of Phase 2 of the broiler breeder conversion and expansion projects as these projects are expected to enhance profitability and deliver efficiency improvements in the next financial year. Staying with the broiler business will be the focus on live broiler production in the Western Cape to ensure we continue to build on the improved efficiencies and remain competitive as a live broiler contract producer. The priority for the layer farming management team will be to build on the very good farm performance, while remaining vigilant on all farm biosecurity measures. The improvements and positive momentum in this business could be instantly wiped out, should an avian influenza outbreak occur on one of our farms. In the Rest of Africa, the management teams will continue to build on the improved efficiencies to ensure that we capitalize on the improved trading conditions expected in Zambia and maintain the momentum in Uganda. The management team of Mozambique will focus on not only restoring the layer flock, but also on completing the vaccination program that has already commenced. The South African egg supply and demand dynamics is expected to impact Mozambique as well, and the management team will focus on selling eggs in the correct market segments. 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 have some questions in the chat. The first one from Nompilo Goba from the Business Day. You reported volume recovery and a strong demand for layer livestock. Can you elaborate on the key factors driving this demand? Are you seeing shifts in consumption patterns? Or was this more of a cyclical rebound?

Thank you for the question. The -- as stated earlier, the avian influenza outbreaks of 2023 and 2024 had a severe impact on availability of poultry livestock during -- just after that period. So the high demand that we're seeing is from the industry rebuilding their commercial layer flocks, and we expect this to normalize as the layer flocks are gradually increasing, and we could see the demand tapering off a bit.

Thank you, Adel. And then a further question from Nompilo. Given the significant impact of improved operating conditions such as low load shedding and the absence of avian influenza outbreaks, how resilient is your operating model if these factors reverse in the second half?

The cost of load shedding, as stated earlier, it can be very high if the levels increase significantly. The cost to the business with regards to generated diesel and maintenance can increase. If we look at the different business segments of the business, the only segment that is actually exposed to the cyclicality of the layer industry, and that is the egg business. And we have reviewed our placement in the North, and we've downplaced our layers by approximately 50%. So we don't expect the negative impact of a down cycle on egg prices to impact the business as previously.

Thank you, Adel. Then, we've got a question from Kieron from Country Bird Holdings. Firstly, a statement, congratulating the company on the improved results. And then, asking -- we're noting that the debt levels are very low and asking at what point Quantum Foods will use debt to fund CapEx expansion, which will help improve shareholder returns and free up cash flow to be able to declare a dividend. I think, as I said, I gave the reasons what the company considered and the Board considered in not declaring a dividend. Just to reiterate that the company applies a conservative approach to cash management and gearing, considering the cyclical nature of the industry and the continued risk of further HPAI outbreaks as well as the company's working capital and capital expenditure requirements. The Board will, however, continue to consider whether the company is in a position to declare a dividend, having regard to the prevailing and anticipated circumstances at the time. We have a question from Mr. Andrew Perk, a private investor. Could you talk about the competitive environment? And could there be acquisition opportunities?

Thank you, Mr. Perk, for the question. In the agricultural space, we are the only producer, large producer listed on the JSE that also has the egg segment as part of the business. With regards to acquisition opportunities that the company are looking at, if you're referring possibly to Daybreak, the company has exited our exposure to the live broiler meat market, and I don't foresee us entering -- reentering that market. But the company will always be looking for any acquisition opportunities. And for now, we are just focusing on our capital, capital expenditure and at the projects that we have identified for now.

Thank you, Adel. And we got some question from [ Magleni Meduna. ] What are the measures that were taken into consideration in order for the company not to have AI outbreaks?

Okay. Thank you. The company continues to implement extensive monitoring of flock health and biosecurity measures, and these would typically include the higher usage of lime on farms, efforts to prevent contact of poultry and the water supply with wild bird activity. We typically do additional washing of trucks and even reroute trucks to avoid areas of concern and even the procurement of additional protective clothing. The cost with these precautionary measures have by now been embedded into the business.

Thank you, Adel. We've got a question from Karim [indiscernible] about whether the company has applied for vaccination or specific flocks against AI at the Department of Agriculture or if not yet, is the company planning to apply?

Thank you for the question, Karim. When the applications originally opened, the company submitted applications. But at that point in time, we could not adhere to all the requirements. As far as the company is aware, no applications for vaccination has been approved till date. But we have seen a list of information that is requirement by the Department of Agriculture, I think, which they might use in looking at the approval of vaccination. So that's where we are currently.

We have a question from Ambalele from All Weather Capital. The question, whether the company currently has any plans to buyback shares.

Thank you for the question. At this point in time, there are no plans to buyback any shares in the market.

Thank you, Adel. We don't seem to have any additional questions in the chat room.

Thank you. Then we can now close this results presentation. Thank you for your attendance.