NOMPU SIZIBA: Poultry and poultry-feed producer, Astral Foods released half-year results today, May 17, 2021. For the six months ended March, 2021 the company reported revenue at R7.5 billion, up 7% on the same period in 2020. But the company’s profit line took a hit. It reported that operating profit declined by 37% to R345 million. Headline earnings per share were down by the same margin – that is by 37%, coming in at R5.97 a share. Shareholders are set to get an interim dividend of R3 or 300 cents a share.
Well, to take us behind the numbers, I’m joined on the line by Gary Arnold. He’s the managing director for agriculture at Astral Foods. Thanks very much, Gary, for joining us. You’ve reported a positive performance in your poultry division. That saw revenue up 8.3% at R6.1 billion. What were the main drivers of that performance?
GARY ARNOLD: Nompu, the drivers of the performance were an increase in poultry volumes. They were up 3.5% percent for the period under review; selling prices up modestly at 3.1%. And of course in our feed division selling prices were up on the back of higher raw material input costs, which also helped to drive up revenue in the group.
NOMPU SIZIBA: Indeed. One of the difficulties that you faced in terms of the poultry division were your high feed costs. You indicate that those rose by 17% in the period; that’s quite staggering. What are the factors behind that? I suppose that’s what eroded your profitability in the period.
GARY ARNOLD: Yes, Nompu, despite expectations of a good maize crop for 2021 this harvest season, local Safex maize prices have rallied on the back of global coarse-grain markets. They’ve been affected by a hyped-up US balance sheet, so lower US closing stocks for corn, a high demand from China, and obviously we also see that the weather in South America at present has had some impact on global grain prices.
Our market is not trading local fundamentals at all. Local Safex prices were really rising on the back of international markets, which we are not immune to, and that has supported higher feed prices for the period.
NOMPU SIZIBA: That seems quite unfair, given that the local dynamics are quite positive. You do indicate that the local maize market is expected to produce a very strong harvest, some 16.6 million tonnes and yet, because of international prices, we have to just go with the flow.
GARY ARNOLD: Correct. We are sitting with maize prices on the back of a very good crop that we are expecting to harvest, or are currently harvesting. But these maize prices equal those that we last saw 2016 on the back of two below-average crops in 2015 and 2016 that were not what we expected. But, as I said earlier on, unfortunately we’re not immune to what happens on a global market, so our local bourse is trading obviously against those markets. And maize has rallied up to a level where we are trading at export parity, and in fact the country will be exploding maize this year.
NOMPU SIZIBA: It was worrying to see in your report that despite the restaurant industry being pretty much back up and running, following the Covid-19-related restrictions being eased somewhat, you’re still seeing relatively low demand for poultry. What does this broadly tell you about the consumer?
GARY ARNOLD: It tells us the consumer is under pressure. We’ve seen beef, lamb and pork prices also coming off in recent times. I think that tells you something about the affordability of protein. Consumers are under pressure on the back of a record high unemployment rate. So disposable income is one of the concerns. People generally feel that money will buy into protein, and chicken being the lowest priced protein they generally buy into chicken. But I think people’s purses are constrained at the moment, and they certainly aren’t eating as much meat as they would have. It’s all on the back of the economic woes of a hard lockdown and on the back of Covid.
NOMPU SIZIBA: For years now you’ve complained and grappled with excess chicken being dumped into the south African market, and of course the government introduced import tariffs to deal with aspects of the problem. What has the impact been on the local market since that time?
GARY ARNOLD: I would like to say “something, but not very much,” Nompu. In fact, when the industry signed the UltraTech Master Plan in November, 2019, imports made up 30% of local chicken consumption. For the past six months – and that’s Astral’s reporting period – chicken made up approximately 26% of local consumption. That’s imported chicken making up 26%. So not a lot has changed. We are still seeing high levels of imports averaging around 40 000 tonnes a month, peaking in March to 48 000 tonnes. So we are cautious in our approach to the impact of the tariff. Was it the tariff that we’ve seen on the six-month period a slight reduction of around 7% in total imports for the comparable period? Was it the tariff, was it the weak exchange, the weaker rand, or was it the impact of the lockdown which saw … retail volumes exit the market for a while. So we believe a couple of factors played a role here, and you can’t pin it all on the tariff at this stage.
NOMPU SIZIBA: How have you been managing the constant bouts of electricity outages that take place in the country these days? I presume you now rely on alternative sources of energy. And have you now sorted out your water problems or challenges that you were experiencing at Standerton?
GARY ARNOLD: Nompu, the load shedding I think affects everyone. We don’t escape it at all. We are large consumers of electricity. Our processing plants have large refrigeration units which obviously use a lot of electricity. I think the one benefit we have had with the completion of our expansion of our processing capacity at our plant in Olifantsfontein is that we’ve been able to move some volumes out of Standerton into that expanded capacity in Olifantsfontein, which has provided us with an opportunity to piggyback on the back of the efficiencies and the volumes that that plant brings us now.
So we’re having a look at the load shedding, but fortunately we’ve been able to work around it to some degree with the increased capacity in Olifantsfontein. On the water side, you might recall there were some large investments we made, one of them being in a reverse-osmosis system that’s allowed us to be somewhat sustainable in terms of our water supply. It’s really just supplementing that supply that we get from the municipality. But we are looking at longer-term plans there of actually putting in our own pipeline and water-treatment plants, so that we are completely independent of the municipal services keeping on the water they supply in Standerton.
NOMPU SIZIBA: We did speak not that long ago, and it was in connection with the whole avian flu outbreak. How has that sort of settled or does it remain a concern for you guys?
GARY ARNOLD: Nompu, it remains a concern. Unfortunately at this stage there are now 11 confirmed cases in South Africa across four provinces – so it is a concern. Since the last time we spoke, at that point I think there was one or two; it has now increased. We watch it carefully. The highly pathogenic avian influenza is a very contagious avian viral disease – certainly something you don’t want to get into your flocks at all, and we work very hard to keep it out, Our security protocols and measures in place we believe are satisfactory to a degree to keep it out. We learned a lot from the 2017 outbreak, but a virus remains a virus. It can be airborne, it can be spread by wild birds, and we’ve just got to keep our guard up.
NOMPU SIZIBA: It does look like there are quite a lot of challenges, Gary. But, despite those what’s the outlook for the balance of the year?
GARY ARNOLD: Well, we still face the challenge of very high raw material input costs, and are not escaping that in our second half. The challenge there is going to be for us to recover those higher feed prices, and the selling price for chicken. For the past good 12 months – and I use the word cautiously – we’ve almost been subsidising the price of chicken, posting negligible and negative margins in our poultry division, and it’s simply not sustainable. So we will have to go to the consumer, unfortunately, and recover the higher feed prices, even the price of chicken. We are vulnerable to what’s happening on the external markets, as we’ve already discussed, particularly the global course-grain market. And unfortunately we can’t keep on taking the knock for that. So the next six months is a challenge on that front and we will have to then watch out in the medium term for avian influenza.
NOMPU SIZIBA: That was Gary Arnold. He’s the managing director for agriculture at Astral Foods.