Pioneer Foods faces intense cost pressure and is managing a balancing act between raising prices, but not to the extent that it will stifle demand.
André Hanekom, the managing director of Pioneer Foods, said yesterday that there was huge pressure on the cost side of the business with prices of soft commodities up 50 percent in rand terms in the past year along with fuel, electricity and employment cost increases.
International grain commodity prices have nearly doubled in dollar terms on a year-on-year basis, placing further upward pressure on prices despite the relatively strong rand.
In March, Pioneer lifted prices in most categories by 10 percent, which was where they would “stay for now”, Hanekom said.
He added: “We believe there is room for further growth in our range of essential foods and we are investing in additional capacity in all business units.”
In the six months to March, JSE-listed Pioneer reported a 4 percent rise in group revenue to R8.3 billion with volumes improving 6 percent and prices decreasing 2 percent compared with a year earlier.
Measured against the six month period from April to September last year, revenue increased by 7 percent, volumes grew by 3 percent and prices gained 4 percent.
Abri du Plessis, the chief investment officer at Gryphon Asset Management, said the results were in line with expectations. “We knew margins were under pressure due to costs.”
He added that it was a difficult time of the cycle because of inflationary pressures, especially if turnover was not picking up enough to counter the impact of rising input prices.
Headline earnings rose 193 percent to R422 million, but reflected a decline of 15 percent if the penalty provision of R350m was excluded from the previous comparative period.
In November last year, Pioneer paid R67m of the penalty, a further R220m is due in November this year and the balance in November 2012.
The price of bread has also increased after it was cut in terms of Pioneer’s settlement with the competition authorities over price fixing.
Sasko posted a 5 percent gain in revenue to R4.3bn, but operating profit declined 24 percent to R395m. The performance of this division felt the effects of a R171m reduction in revenue as a result of delayed sales price increases, which was R11m more than the R160m agreed on with the Competition Commission in order to meet customer demands.
Hanekom said the rise in prices in March had not resulted in a drop in volumes, although it was early days.
“South African consumers are very loyal. I trust they will stick with our brands.”
The group’s agri-business lifted operating profit 13 percent to R82m largely due to increased productivity at its egg and broiler sites.
At Bokomo, operating profit declined by 2 percent to R119m due to cost pressures and lower sales volumes.
The exception was breakfast cereals with production in corn flakes reaching capacity.
Ceres beverages lifted operating profit 12 percent to R122m with sales volumes in all categories helped by careful pricing and the strength of the brand.
The group spent R1bn on new capacity in the year under review and will spend a further R1bn in the current year.
Syd Vianello, an analyst at Nedbank Capital, said the business was running out of capacity, but this was a wonderful situation to be in where there was demand for its products.
Pioneer shares fell 2.08 percent to close at R56.60 yesterday. - Business Report