Two manufacturing plants process 95 000 tons of tomato crop per year to produce All Gold tomato sauce.
Turnover in the Grains division increased 13% to R12,8 billion while operating income declined marginally. In a challenging and high inflation environment, volumes were maintained despite lower volumes in maize and sorghum.
- High raw material inflation driven by drought
- Operating income marginally down at R2 billion
- Market leadership maintained in bread category
This division houses the group’s milling and baking and other grains businesses, and includes brands such as Albany (bread), Tastic (rice), Ace (maize), Jungle (breakfast) and Fatti’s & Moni’s (pasta).
The review period was characterised by significant inflation in raw material input costs. Turnover, driven entirely by inflation, increased 13% to R12,8 billion while operating income declined marginally to R2 billion. The decline of operating margins by 2,5 percentage points to 15,6% was adversely affected by high levels of input cost inflation. Despite growth in all other categories, overall volumes were flat due to significant declines in maize. The marketing investment increased by 13%, after a 16% increase in the prior year, to support sustainable performance in this division.
The performance of our Grains division is driven by raw material costs and price/volume management. Equally, it is sensitive to exchange rate volatility, wheat tariffs, Safex maize prices (shown below) and, of course, increased competition.
|US wheat price (USD)||194||250||(22)|
|Exchange rate (R/USD)||13,56||12,07||12|
|US wheat price (R)||2 631||3 018||(13)|
|Safex maize||4 202||3 479||21|
Milling and Baking
Overall volumes in these categories were unchanged despite a significant decline in maize volumes. Fuelled by inflation, turnover increased by 13% to R9,2 billion (2015: R8,2 billion). A disappointing performance from maize and sorghum resulted in operating income declining 5% to R1,6 billion from R1,7 billion in the prior year. This contributed to a lower operating margin of 17,3% compared with the prior year of 20,6%. The wheat-to-bread value chain performed credibly in an increasingly competitive environment in both baking and wheat milling.
Except in the Western Cape, where volumes declined significantly in bread, positive volume growth reflected a measured response to increased competition, focused on the attributes of the Albany brand, supported by tactical pricing initiatives.
During the review period, a capex programme was initiated to improve the Western Cape bakery, which will come online in the latter part of FY17.
While international wheat prices declined during the year, this was offset by the increase in the local wheat tariff. This tariff has increased eightfold between 2014 and 2016, from R157 per ton to R1 591 per ton. This has meant a significant increase in local wheat prices. The wheat tariff formula is being reviewed by the International Trade Administration Commission of South Africa and an outcome is expected in due course. Despite these developments, the wheat milling business delivered a satisfactory performance.
The maize price peaked at R5 280 per ton in January 2016 due to widespread and severe drought. As a result, maize milling reported significantly lower operating income as volumes were impacted by exceptional levels of inflation. Margins were affected by the inability to fully recover costs amid aggressive competition.
The performance of the sorghum and maize breakfast and beverage business was constrained by high raw material costs, new entrants and aggressive pricing by regional competitors.
The rice business reported strong turnover growth and good volume growth. Lower international prices were offset by rand weakness.
The pasta business recorded another strong operating performance, with strong volume growth as increased marketing investment continues to benefit the brand. During the year, the division expanded the Fatti’s & Moni’s brand into the fast-growing convenience segment with instant noodles. Early indications show encouraging growth.
The oats business delivered good results, driven by the resilience of the core Jungle range and boosted by innovation, such as the single-serve Jungle cups that leverage on the trend of convenience and breakfast-on-the-go.
Although improved weather conditions are forecast, the business may benefit from lower raw material costs in the final quarter of the new financial year. Competition in bread is likely to intensify as additional capacity comes on stream, while the benefits of the new bread plant in the Western Cape are only likely to be felt at the end of FY17. The focus will remain on protecting market share through increased brand investment and in manufacturing efficiency and flexibility.