BUSINESS DAY TV: Poultry brands don’t play a big role when there is oversupply
Astral CEO Chris Schutte speaks to Business Day TV about interim results from the poultry group and challenges facing the industry.
Chris Schutte is Astral CEO.
BUSINESS DAY TV: Astral Foods has reported a significant decrease in profitability for the six months ended March. A decrease in both feed and poultry sales volumes under extremely difficult market conditions saw revenue dip 1% while high feed prices resulted in operating profit falling 51% and headline earnings per share coming in 54% weaker.
CEO Chris Schutte joins me now in the News Leader studio. Chris … so as highlighted, headline earnings per share down 54% over the interim period. It’s less of a loss than had been anticipated in February where you cautioned against a 75% decrease. So what do we read into this? Is this reflective of an improving economic environment, or more so a case of Astral getting a better handle on things?
CHRIS SCHUTTE: Yes … probably a bit of both. When we look at the market or the consumer I don’t believe that’s going to change for the better any time soon. With the unemployment rate of 27% and I don’t see any long-term foreign investment coming into the country, so that part of the market doesn’t see anything positive.
However, the swing in the input costs from a maize perspective, going from the smallest crop on record, now to the prediction of the largest crop on record will obviously assist our input costs through the feed into the poultry. What happened over the past period with the high imports put a lid on our ability to recover the feed costs — we obviously had to go back to the ranch to make sure that we managed the things that were within our control.
A lot of the improved results from the previous warning of 75% comes from efficiencies on-farm so our livestock management has improved significantly. We had our backs against the wall and we had to do a couple of trials and tests to see where we can improve.
BDTV: We’ll get into some of the detail on that in just a bit but before we do though, you alluded to a lid being put on what you could recover. How much of higher feed prices have you been able to pass on via your own pricing or selling price adjustments?
SJ: It was half compared to the previous year with a couple of things that distort and difficult to measure like-for-like or to benchmark because during this period we also had to change the brining regulations. So in an effort to recover the inflationary costs, the higher feed costs and trying to manage the transfer of the higher costs, lower brine product was a bit of a distortion. So on average the realisation is up 15% but it’s not selling price that’s up. We changed the basket. In the basket the product mix changed and then of course we also struggled with selling less meat. So there are a couple of components that distort the year-on-year comparison.
BDTV: Okay, so you haven’t been able to fully recover record high feed prices. The group’s operating profit margin dropping to 3.7% from 7.4% but you have implemented, as you mentioned, poultry production cutbacks and efficiencies on-farms. So how is that working out right now and how soon before you start to see some improvement in your profit margins?
SJ: Yes, we had a hard look at the company and obviously when times are hard you have to do that. We’ve split the company into more focused groups where agriculture or the on-farm part is now a focused speciality group. There we looked at our feeding regime or feeding programme, and we’re actually feeding a more expensive ration or denser diet to the birds now, but you see it come through in the live weight getting you to the target weight a lot earlier. So that has contributed quite largely to the past six months, and if we can follow up over the next six months to a year with extracting the optimum genetic potential out of the birds, that’s one way of offsetting higher input costs.
BDTV: How cognisant is the consumer market of this, the kind of product offering you’re putting on the table especially where you’ve still got the threat of cheaper imports flooding the market?
SJ: Unfortunately in SA, chicken is regarded as a commodity so brands don’t play a massive role when there’s oversupply. When there’s a shortage in supply one can obviously charge a premium for your top brands. But we’re still under pressure from dumping. Again over the past six months we’ve seen a massive number of chicken portions coming into the country, equivalent to 45% of local production. So even with the protection or interim protection from [Trade and Industry] Minister Rob Davies with a general safeguard of 13.9%, it’s not really significant. We’ve still seen imports or dumping of quite a high level.
BDTV: How much of a threat is that still posing to the business, and are you anticipating a resizing of your operations and closures down the line?
SJ: Unfortunately the international agreements we have with the EU, with the US and other countries are not going to change overnight. They’re political agreements which cut both ways, so we don’t expect that to change overnight. However, we have a constant battle to get the best deal for SA and that’s where we’ve probably fallen short a bit, by not looking after the interests in the long-term of local producers.
Just a quick summary: the unemployment in the US is at 4.4%, here its 27% and of the 28 participating countries in the EU, it’s below 9% so you’re actually importing a job loss. You create a job somewhere else around the globe and you destroy jobs here, so we have to be cognisant of that. Are we going to cut back, if nothing happens or assistance from government with regard to the dumping, we will have to reconsider our position, like some of our opposition have done lately? At this point in time, we’re working short time, we had some cutbacks but no permanent closures.
BDTV: How is what you’re experiencing in SA comparing to your performance in other African territories right now?
SJ: Unfortunately, our other African businesses are not a good story at this point in time. We are in three other African countries, Swaziland is a donor state with very limited possibility for growth there. Mozambique is a sad state of affairs, they’re technically bankrupt. We had some good intentions to re-invest there and it’s not coming off so we’re just treading water. Zambia is now heading for a bit of political instability, so unfortunately the Africa story is not where we want it to be. However, an improvement in the results but still not where we wanted it to be, a very low part of our group turnover.