COMMENTARY

OVERVIEW

The Group’s overall performance reflects the difficult trading environment and the challenges faced, particularly within Grains, Groceries, Value Added Meat Products (VAMP) and Exports.

As previously reported, operations at Deli Foods in Nigeria were terminated in October 2019. As such, Deli Foods has been treated as a discontinued operation in these results, with the comparative information restated accordingly.

With regards to the VAMP business, it is noted that the Company has received offers from two parties for the acquisition of separate parts of the business as going concerns. Each of the two agreements is subject to an inter‑conditionality clause, such that each agreement is subject to the other becoming unconditional in all respects. As a number of key terms and conditions remain to be negotiated, it is appropriate to treat VAMP as a continuing operation in the current period. On conclusion of the respective Sale and Purchase Agreements, the Company will provide an update incorporating the financial impact of the disposals as well as the key conditions precedent to the successful conclusion of the overall transaction.

Group revenue from continuing operations increased by 2% to R15,7 billion, with price inflation of 4% offset by an overall volume decline of 2%. Gross profit margins were impacted by lower volumes as well as raw material and conversion costs rising ahead of inflation, with the consolidated gross profit margin declining from 31,4% to 29,4%. In addition, marketing expenses increased by 9% over the period to R528 million, in line with the strategy to enhance brand health and drive consumption. The continuing losses incurred by VAMP, although showing a 14% improvement on the prior year, further impacted profitability. Group operating income before IFRS 2 charges, impairments and abnormal items decreased by 29% to R1,1 billion, whilst the operating profit margin decreased from 10,2% to 7,0%. Excluding VAMP, operating income before IFRS 2 charges, impairments and abnormal items declined by 27% to R1,4 billion, whilst the operating profit margin decreased to 8,9% from 12,3%.

Domestic revenue was 3% higher at R14,2 billion, driven by price inflation of 4% and offset by an overall volume decline of 1%. Excluding VAMP, all categories recorded selling price inflation, which resulted in volume declines across the portfolio, except in Flour, Bakeries, Beverages and Home Care. However, the price inflation was not sufficient to fully recover cost increases. This, coupled with the resultant decline in volumes, led to negative operating leverage.

Revenue from Exports and International declined by 4% to R1,6 billion primarily due to the trademark dispute with a former distributor in Nigeria, as well as slightly lower sales in the Deciduous Fruit business.

Based on the fact that an agreement in principle has been reached with the former distributor in Nigeria, a settlement amount of R71 million has been provided for in abnormal items. This was partially offset by a capital profit of R43 million arising from the disposal of a property, which is also reflected as an abnormal item.

During the current period, impairments amounting to R557 million (2019: R106 million) relating to intangible assets, plant and equipment, as well as the investment in associates, were recorded. The impairments in respect of intangible assets relate to certain Personal Care brands and Davita (powdered soft drinks and seasoning), and amount to R36 million and R250 million respectively, whilst plant and equipment to the value of R197 million has been impaired in the Deciduous Fruit business. In addition, an impairment of R75 million has been taken against the carrying value of the investment in Nigerian associate, UAC Foods. These impairments arose as a result of the continual assessment of risks associated with these businesses amid ongoing trading difficulties in key markets including deteriorating macro‑economic prospects, which have been exacerbated by Covid‑19 led economic challenges as well as adverse category dynamics.

Net interest paid of R80 million (2019: R12 million) includes an amount of R21 million relating to the adoption of IFRS 16 Leases, the impairment of dividends and interest receivable from associate company, National Foods Holdings in Zimbabwe, of R11 million and interest on higher average debt levels during the period, driven by the funding of higher stock levels in the first quarter. The increase in interest paid is offset by net foreign exchange gains of R84 million (2019: R8 million loss), resulting from USD‑denominated cash balances benefiting significantly from the recent depreciation of the rand.

Income from associates decreased by 21% to R158 million. The decline in income from associates reflects no contribution from Oceana in the current period, whereas, the previous period included two months of earnings amounting to R31 million. In respect of Carozzi, an improved underlying performance was more than offset by the effect of the depreciation of the Chilean peso against the rand.

The Group has adopted IFRS 16 Leases on a modified retrospective basis. The adoption of this standard has had a minimal impact on the results for the current period. The main impact on the statement of comprehensive income has been an increase of R17 million in operating income offset by higher finance costs of R21 million resulting in a net decline of R4 million in profit before tax.

Profit before tax from continuing operations declined by 65% to R673 million.

Earnings per share (EPS) from continuing operations decreased by 75% to 221 cents (2019: 875 cents), whilst EPS from total operations decreased by 76% to 210 cents (2019: 864 cents). EPS was impacted by a significantly higher impairment charge in the current period, whilst earnings in the previous period benefited from the abnormal after‑tax capital profit of R282 million arising from the sale of Oceana shares to Brimstone.

Headline earnings per share (HEPS) from continuing operations was down 35% to 501 cents (2019: 773 cents), driven primarily by the lower level of operating income. Excluding VAMP, HEPS from continuing operations declined by 30% to 611 cents (2019: 872 cents). HEPS from total operations decreased by 36% to 489 cents (2019: 762 cents).