CFO Daan Ferreira says that while selling prices increased, it wasn’t enough to cover operating costs.
Astral Foods has reported a revenue increase of five percent to R14.1 billion for the year ended 30 September. Operating profit also increased by 8.5 percent at the interim reporting period, while the second half echoed the impact of Covid-19 and the lockdown.
Being a food producer, the company was classified as an essential service provider and, as a result, continued with production and trading activities throughout all the stages of the lockdown period.
However, the lockdown caused the complete shutdown of the hospitality, restaurant and Quick Service Restaurant sectors for more than three months. As a result, poultry producers that supply these markets were found with surplus chicken overnight and had to channel this excess into various frozen categories. This oversupply led to a stock build-up in the industry and later culminated in aggressive price cutting in the market to clear these stock levels.
The company said in a statement that, at the same time, substantially higher raw material costs driven by a weaker local currency, weather concerns on the international grain markets, higher global coarse grain prices and increased demand from China led to higher feed prices in the second half of the financial year.
The company’s two main drivers of profitability are feed costs and selling prices of poultry products, neither of which is controlled by the group. “Changes in feed costs are weather related and selling prices of poultry products depends on the financial strength of the consumer, which is related to the extent of economic growth in the country,” Astral Foods CFO Daan Ferreira says. “Selling prices have to increase in order for us to remain profitable, even during tough trading conditions. That is the only way to secure a long-term sustainable supply of South African produced food to the South African consumer.”
Increase in operating expenses
Daan says that although there was an increase in the selling prices, it wasn’t sufficient to cover the increase in feed costs as well as the normal inflationary increases in operating expenses.
In addition, he says that the group had to absorb additional costs relating to load shedding and water supply issues as a result of poor service delivery from the local government. The company also incurred additional costs around the safety protocols put in place to curb the spread of the virus, which amounted to R41 million.
Daan says that, despite the negative impact of Covid-19, he is proud of the way in which the cash resources of the company were managed during the year. “At no point in time did Astral experience a liquidity crisis during the year.”
He adds that the group’s liquidity is well positioned to fund the declared dividend of R7.75 per share.
Expanding its Festive processing plant
Astral also completed its largest capital project to date, with the expansion of its Festive poultry processing plant, increasing its capacity in Olifantsfontein by 16 percent or 800,000 birds per week. This expansion forms part of Astral’s Poultry Sector Master Plan to support volume growth in the industry, as well as ensure that local production makes up a higher component of chicken consumption in future.
“The expansion of the Festive processing plant was completed in time and within budget. The cost of the project amounted to R710 million, contributing to an increase in the total assets employed by the group,” Daan says. “Future major capital expenditure will be carefully assessed on a project-by-project basis.”
