Innscor Africa Limited (INN.vx) 2023 Abridged Report
The Holding Company’s Directors are responsible for the preparation and fair presentation of the Group’s audited annual financial statements, of which this press release represents an extract. These audited, abridged Group annual financial statements are presented in accordance with the disclosure requirements of the Victoria Falls Stock Exchange (“VFEX”) Listing Requirements and, except where stated, in accordance with the measurement and recognition principles of International Financial Reporting Standards (“IFRS”) and the manner required by the Companies and Other Business Entities Act [Chapter 24:31]. The principal accounting policies applied in the preparation of these Group consolidated, audited, annual financial statements are consistent with those applied in the previous year’s financial statements, except for the change in measurement of property, plant and equipment, which was previously measured at historical cost and is now being measured under the revaluation model. There is no impact arising from revised IFRS, which became effective for the reporting period commencing on or after 1 January 2022 on the Group’s consolidated, audited, annual financial statements.
CHANGE IN FUNCTIONAL CURRENCY
Commencing with the financial year ended 30 June 2020, and in line with previous guidance issued by the Public Accountants and Auditors Board (“PAAB”) and the provisions of International Accounting Standard (“IAS”) 29 (Financial Reporting in Hyperinflationary Economies), the Directors have been presenting Group inflation-adjusted financial statements in Zimbabwe Dollars (“ZWL”). Due to the considerable distortions in the economy and the material and pervasive effects that these had in the application of IAS 29, the Directors have always advised users to exercise caution in the interpretation and use of these Group consolidated inflation-adjusted financial statements; in an effort to assist users with their interpretation of the Group’s financial performance in previous years, the Directors also issued consolidated financial statements prepared under the historical cost convention, as supplementary information.
As previously advised in the Group’s Interim Report and following the promulgation of Statutory Instrument (“SI”) 185 of 2020, issued on 24 July 2020, the Group has continued to see a steady increase in the use of foreign currency across its businesses and, in accordance with the requirements of IAS 21 (The Effects of Changes in Foreign Exchange Rates), went through a process of assessing its functional currency. Following the completion of this process, the Group concluded that based on the primary operating environment and the Group’s own operating activities, there had been a change in its functional currency from ZWL to United States Dollars (“USD”) with effect from the beginning of the current financial year under review. The change in the Group’s functional currency is further supported by the Listing Requirements of the VFEX, which require issuers to present financial statements in USD.
IAS 21 directs that entities operating in hyperinflationary economies should translate their last reported inflation-adjusted financial statements using the closing rate of exchange at the reporting date in order to derive and present comparative financial statements under a newly assessed functional currency.
The Directors are of the opinion that using the provisions of IAS 21 to convert the Group’s consolidated inflation-adjusted Financial Statements from previous periods as a basis for presenting comparative and opening Statement of Financial Position information, in terms of the new functional currency, will result in the material misstatement of the Group’s comparative Financial Statements and information.
In an endeavour to present a true and fair view of the comparative financial performance and position of the Group, stakeholders will recall that the Group used alternative procedures and techniques in the translation process in the preparation of its Interim Report, where it reported total closing shareholders’ equity of USD 439.085m in its comparative Statement of Financial Position.
In an effort to move towards full compliance with IFRS, and with the objective of ensuring a return to an unqualified audit opinion on the Group’s Financial Statements for the 2024 financial year, the Group further refined its conversion procedures and techniques in translating its previously reported ZWL financial statements to USD; this resulted in closing shareholders equity in the comparative Statement of Financial Position reducing from the USD 439.085m reported in the Interim Report, to USD 405.464m.
This reduction was largely due to the re-calculation of deferred tax provisions, taking account of the recently revised legislation in income tax provisions (reduction in equity of USD 27.924m), the effects of the changes in the accounting policy on property, plant and equipment, now measured under the revaluation method (increase in equity of USD 10.602m), with other adjustments combining to reduce opening equity by a further USD 16.299m; with these other adjustments relating mainly to the carrying value of associate entities (applying the refined Group translation policies), and adjustments required to bring the conversion of other assets and liabilities in line with the provisions of IAS 21.
The Directors have always exercised reasonable due care and applied judgments that they considered to be appropriate in the preparation and presentation of the Group’s financial statements, and whilst they believe that the alternative procedures and techniques used in the translation process, as described above, provide users with the best possible view of the comparative financial performance and position of the Group, attention is drawn to the inherent subjectivities and technicalities involved in the translation of ZWL financial statements to USD financial statements.
Further detail on the Group’s change in functional currency is contained in Note 3 to these audited, abridged Group annual financial statements.
CHANGE IN ACCOUNTING POLICY ON PROPERTY, PLANT AND EQUIPMENT
The Group’s property, plant and equipment (“PPE”) has always been measured at historical cost, and as the Group changed its functional currency from ZWL to USD as described in the preceding paragraph, applying the provisions of IAS 21 to convert the Group’s comparative and opening PPE values would have resulted in the material distortion of these values at the date of change in functional currency. Therefore, and in order to ensure future compliance with IFRS, the Directors chose to revalue the Group’s PPE at 30 June 2022 so as to reflect the correct PPE values at this date and further details are provided in Note 4.
Effecting the change in accounting policy for PPE from the historical cost model to the revaluation model in the prior year is contrary to the provisions of IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors), which does not permit the retrospective application of a change in accounting policy to revalue PPE. The Directors are, however, of the view that effecting the change in the PPE accounting policy from the historical cost model to the revaluation model in the comparative year, will more fairly present PPE values, enhance comparability between the Group’s current and comparative Statements of Financial Position, and additionally, will assist users with their interpretation of the Group’s financial position and performance.
EXTERNAL AUDITOR’S STATEMENT
These audited, abridged Group annual financial statements should be read in conjunction with the complete set of the Group audited, annual financial statements for the year ended 30 June 2023. The Group’s annual financial statements have been audited by Messrs BDO Zimbabwe Chartered Accountants, who have issued an “except for” audit opinion as a result of non-compliance with the provisions of IAS 21 which relates to the translation of opening balances and comparative financial information as noted above, and non-compliance with IAS 8 which results from the changing of the Group’s PPE policy from the historical cost model to the revaluation model retrospectively, for the reasons described above. The External Auditor’s Report on the Group’s audited, annual financial statements, from which these Group audited, abridged annual financial statements are extracted, is available for inspection at the Company’s registered office. The Engagement Partner responsible for the audit was Mr Martin Makaya, PAAB Practice Number 0407.
The Group continues to apply the Global Reporting Initiative (“GRI”) protocol linked to the ISO 26000 standard and, over the years, has aligned its sustainability reporting, using ISO 26000, with corresponding Sustainable Development Goals (“SDGs”). This demonstrates the Group’s commitment to sustainable development within the environment in which it operates as well as its contribution to sustainability in its wider sphere of influence. The Group continues to strengthen its sustainability practices and values across its operations, with continuous improvement, to ensure long-term business success.
UNCERTAIN TAX POSITIONS
There have been substantial changes in the currency environment in Zimbabwe in recent years, including the reintroduction of the ZWL as the Country’s functional currency in February 2019 through SI 33 of 2019, followed by the promulgation of SI 185 of 2020, which reintroduced the use of foreign currency for domestic transactions.
These significant changes have created numerous uncertainties in the treatment of taxes due across the economy and have been compounded by a lack of clear statutory and administrative guidance or practical transitional measures from the tax authorities. The wording of existing tax legislation has given rise to varying interpretations of tax law within the Country. Over time, it has become apparent that the Group’s interpretation of the law regarding the currency of settlement for taxes, as well as the methodology for tax computation, has differed from that of the authorities, and this has resulted in a number of uncertainties in the Group’s tax position. The Group continues to seek adjudication by the courts on these matters.
OPERATING ENVIRONMENT AND OVERVIEW
The financial year under review was initially characterised by reduced inflationary pressure and market volatility as authorities sought to moderate money supply growth, instituting a considerable increase in local currency lending rates. This achieved the desired impact of arresting inflation and local currency devaluation, resulting in improved business and trading sentiment, albeit with significantly reduced market liquidity.
The second half of the financial year under review saw a rapid devaluation of the local currency with complex and unpredictable market conditions prevailing before liquidity was controlled, and refinements made to the Reserve Bank of Zimbabwe (“RBZ”) foreign currency auction system. Pricing distortions and resultant arbitrage in the trade persisted for much of the year, negatively impacting consumer demand and confidence in formal retail channels; despite this however, consumer demand across the informal market remained buoyant, supported by increases in mining and agricultural output, diaspora remittances, and Government infrastructure spending during the year.
Notwithstanding the erratic trading environment, especially in the second half of the financial year under review, the Group’s Protein, Stockfeeds, Beverage and Light Manufacturing segments all delivered positive volume growth over the comparative year, whilst the impact of international wheat pricing carried over from the previous financial year, had an adverse impact on the Mill-Bake segment. The Group’s investment drive underpinned the overall volume trajectory, with focus being deployed on expanding plant capacities, enhancing manufacturing capabilities and product extensions; whilst route-to-market initiatives continued to be refined in order to drive volume into new markets.
The Group recorded revenue of USD 804.040m during the financial year under review, representing a growth of 14.7% over the comparative year. Revenue performance was driven by improved capacity utilisation across the Group’s core manufacturing businesses, and further supported via the introduction of new product categories, category extensions, and route-to-market optimisation strategies undertaken during the financial year under review.
At operating profit before depreciation, amortisation, and fair value adjustments (“EBITDA”) level, the Group saw a mild contraction in margin efficiency terms of 3.7%. This resulted mainly from reduced gross margin yield where the full increase in the core bills of materials could not be fully recovered in the sales price, as our units sought to minimise the impact of price increases on the consumer and maintain volume momentum. Operating expenditure (“Opex”) also saw a significant correction in the financial year under review, as many cost buckets fully dollarised, which, when combined with international cost-push pressure, resulted in Opex growing 16.8% ahead of the comparative year. EBITDA for the year closed at USD 91.061m, 13.5% lower than the comparative year.
Currency losses dominated the financial loss line of USD 15.404m as the Group faced a diminishing ability to adequately hedge against the rapid local currency devaluation experienced during the latter part of the financial year. Depreciation and Amortisation increased by 12% versus the comparative year, driven by the significant investment across the Group in the F2022 to F2023 financial periods. Despite the significant increase in local currency lending rates in the first quarter of the financial year under review, the Group managed to contain the annual interest expense to USD 13.443m, representing a 22% reduction on the comparative year.
Fair value adjustments of USD 7.822m emanate mainly from the Group’s significant biological asset holdings in the Protein Segment and the application of the provisions of IAS 41 (Agriculture), which require cost of sales of agricultural produce to be fair-valued. The Group’s associate businesses delivered positive earnings through the Equity Accounted Earnings line, albeit at considerably lower levels than seen in the comparative year.
Profit Before Tax (“PBT”) amounted to USD 48.315m, representing a decline against the comparative year and driven by the margin dynamics at a gross margin and EBITDA level, and compounded by exchange losses and weaker equity-accounted earnings. Headline Earnings Per Share (“HEPS”) for the financial year under review amounted to 5.63 US cents per share, which was 26% lower than the comparative year.
The Group’s Statement of Financial Position remained robust, with a strong asset base supported by fixed assets, efficient working capital positions, and negligible net gearing levels.
Cash generation was outstanding, and was further supported by improved efficiency across the Group’s working capital positions, combining to deliver exceptional operating cash flows of USD 112.070m for the financial year under review, and representing a 12% increase over the comparative year. e strong operating cash flows enabled the Group’s extensive investment programme to progress at pace, with USD 70.255m deployed toward capital expansion during the year.
This reporting segment consists of the Group’s Bakery division, National Foods, and the Group’s non-controlling interests in Profeeds and Nutrimaster.
Volume growth for the Bakery division was muted versus the comparative year, mainly on account of the pricing dynamics experienced early in quarter one, as inflated international wheat pricing resulted in an adverse effect on bread pricing to the consumer. Loaf volumes from quarter two through to quarter four increased substantially however, as local wheat stocks improved, and international pricing softened.
The operation has recently completed the commissioning of its USD 22m investment into a state-of-the-art, fully automated production line in Bulawayo. This investment has significantly improved loaf quality and is expected to enhance manufacturing efficiencies once all Southern region production is migrated to this new facility.
Further plant automation and capacity upgrades will occur at the Harare manufacturing facility in the year ahead, and this will be complemented by the ongoing delivery fleet recapitalisation programme.
At National Foods, aggregate volumes contracted by 3% versus the comparative period, mainly driven by the performance of the flour division;
- Volumes in the Flour unit contracted by 12.3% versus the comparative year, driven largely by significant increases in the price of wheat. International wheat prices peaked in the first half of the year, resulting in higher flour prices and a consequent volume reduction of 19.6% for the first quarter. The Flour division completed the installation of a new Buhler mill in Bulawayo, which will increase wheat milling capacity and operational efficiency across the division.
- Maize volumes were disappointing, declining by 9.4% versus the prior year. The current year was characterised by various procurement-related distortions which hampered consistent trade. Initially, various distortions arose in purchasing the local maize crop in quarter one, before volumes recovered in the middle of the year as the local crop dried up, until finally, later in the year, volumes were impacted by the re-opening of the country’s borders to finished product.
- Stockfeed volumes were firm, increasing by 10% when compared to the comparative year, with the growth coming across all the major categories, and in particular the poultry, beef and dairy sectors, which all saw firm demand.
- Volumes in the Down-Packed unit, which primarily packs rice and salt, saw encouraging growth of 14% versus last year. Rice volume growth was largely driven by the informal sector and likely benefited from the elevated prices in the wheat-to-bread value chain. Planning for the construction of the new rice packing facility is progressing, and we will be looking to construct this facility in 2024.
- Volumes in the Snacks division increased by 25% against the prior period, as capacity enhancements came on stream and the “King” and “Zapnax” brands continued to show volume growth.
- Biscuit volumes declined marginally compared to last year. The category was under pressure due to flour price increases and the challenges faced by the formal retail market. As previously advised, the National Foods Board has approved the purchase of a new biscuit line, allowing the operation to extend its biscuit portfolio into more specialised products. The new line is expected to be operational in early 2024.
- The installation of the new pasta line in Harare is on track, and the line is expected to be commissioned toward the end of 2023. The line will be the only large-scale pasta line in the Country, and our objective is to meet the growing local demand for pasta. This represents, in our view, the exciting localisation of a key value chain, from the growing of wheat locally to the local production of pasta, which until now has mostly been imported.
- Volumes in the cereals unit grew by 47% over the comparative year. The second phase of National Foods’ breakfast cereal investment was commissioned towards the end of the first half of the financial year under review, resulting in the launch of a new range of breakfast cereals, including corn flakes, bran flakes, wholegrain flakes and instant cereals.
Profeeds operated at full capacity for the year under review, delivering stockfeed volumes 9.5% ahead of the comparative year on the back of sustained demand in the poultry category. This was complemented by a 17% increase in day-old-chick volumes over the same period.
Looking ahead, the business will increase its capacity and improve service delivery to the Southern markets via a USD7m investment into a new Stockfeed facility in Bulawayo; this facility is expected to be operational by the end of F2024.
In the “Profarmer” retail chain, sales of stockfeeds through the channel increased by 23% over the comparative year, driven by strong demand in the small to medium-scale farming segment. The division continued to grow its ancillary farming input offering with pleasing growth realised across the fertiliser, seed, and chemical categories. The division had expanded its nationwide footprint to 50 stores by the end of the financial year under review and has recently undertaken investment into a distribution centre to further unlock efficiencies across the platform.
At Nutrimaster, a subsidiary of Profeeds, sales volumes increased 35% over the comparative year, underpinned by a strong order book across the row-cropping, horticulture and tobacco segments. Diversification into a chemical offering under the “Optichem” brand is also underway and scheduled to be availed to the market in early F2024.
This reporting segment comprises Colcom, Irvine’s, and Associated Meat Packers Group (“AMP”), which includes the “Texas Meats,” “Texas Chicken,” and “Texas Dairy” branded store networks.
The Colcom division, comprising Triple C Pigs and Colcom Foods, delivered excellent results for the year under review.
At Colcom Foods, demand for fresh pork remained firm, resulting in volume growth of 8%, supported by double-digit growth across the Sausage and Polony categories over the comparative year. Volume growth for the bacon and ham category was muted on the comparative year, reflective of the category’s reliance on the formal retail channel.
Pig production at Triple C continued to be excellent with world-class performance benchmarks continuing to be achieved; volumes increased 3% against the comparative year, as prior investment into enhanced genetics and improved rearing sites continue to deliver positive results.
Considerable investment will be deployed into the Colcom operation in the period ahead, and will be focused on upstream capacity extensions of the Triple C production and breeding facilities, whilst at Colcom Foods, the focus remains on modernising and upgrading factory operations at Coventry Road, coupled with an expansionary drive of its branded retail outlets.
At Irvine’s, volume growth was concentrated in the Table Egg and Day-old Chick categories, growing 14% and 7%, respectively, over the comparative year, whilst the Frozen chicken category continued to operate at capacity, and volumes closed at the same level as the comparative year. Investments targeted at increasing breeder and laying capacity and hatchery extensions have been primary growth drivers, and the business looks ahead to initiating capacity enhancement investment for the Frozen chicken category.
The AMP Group recorded a pleasing volume recovery of 13% over the comparative year, with both the chicken and beef categories contributing positively. The business continued to experience supply constraints in the beef category due to local disease controls and restrictions on the movement of cattle during the year. Chicken demand remained firm throughout. The “Texas” retail network continued to expand and open stores in new locations across the Country, growing to 50 stores by the end of the financial year under review.
BEVERAGE AND OTHER LIGHT MANUFACTURING
This reporting segment comprises Prodairy, Mafuro Farming, Probottlers, the Buffalo Brewing Company (“TBBC”), Natpak, and the Group’s non-controlling interests in Probrands.
Prodairy continued to register solid volume growth, with overall volumes closing 44% ahead of the comparative year. The Dairy Blend category operating under the “Revive” brand benefited from prior capacity expansion investment, and volumes closed 83% ahead of the comparative year. A similar growth of 73% over the comparative year was registered in the Steri-milk category, whilst the “Life” UHT milk, butter and cream categories also delivered strong volume growth of 5% and 23%, respectively. Further investment into capacity enhancements across the operation’s product portfolio will continue in the forthcoming financial year, complemented by product format extensions and innovative route-to-market initiatives.
At Mafuro Farming, raw milk production grew by 8% over the comparative year. The business has completed the initial investment phase to establish a modern dairy operation in the Midlands Province, and the herd is expected to enter full production early in the new financial year.
Probottlers’ aggregate volumes increased 14% ahead of the comparative year, mainly driven by increased production capacity through the new “Fizzi” 500ml line. Volumes within the Cordial category under the “Tree Tips” and “Bally House” brands saw some contraction versus the comparative year, primarily due to grey-market imports evident in the trade, and challenging trading dynamics in the formal retail sector.
TBBC launched its sorghum beer product under the “Nyathi” brand in December 2022; market uptake has been positive, and initial overall volume performance has been aligned with target.
At Natpak, overall volumes closed 10% ahead of the comparative year, driven by capacity enhancements and product extensions with the Rigids and Corrugated divisions, which registered volume growth of 14% and 19%, respectively, ahead of the comparative year. The Flexibles and Sacks divisions also delivered growth over the comparative year, and both business units will see additional investment to expand operations in the forthcoming financial year.
At Probrands, overall volumes lagged the comparative year following a deliberate refocus of the business strategy away from commoditised categories. Focus continues on creating innovative household and adjacent condiment products for the Zimbabwean consumer, and both categories delivered positive growth in this regard.
The operating environment proved complex and challenging for much of the year under review, and the Group’s trading performance from a profitability and return on equity perspective largely reflected this. Notwithstanding the trading performance, the Group continued to produce exceptional levels of free cash flow which drove the numerous ongoing capital expansion projects across the entire business portfolio, and enabled strong levels of cash returns to shareholders.
From a trading perspective, our business models continue to undergo constant refinement to ensure we remain agile and relevant in a dynamic and complex operating environment.
It is vital that our expansion programmes yield world-class quality products, and that our increasing manufacturing capacities across our business units translate into economies of scale, resulting in excellent pricing for our customers; we will continue to strive to make the lives of our customers better.
Over the past two financial years, the Group has deployed almost USD 125m in expansion capital investment across its numerous business units. This investment programme has allowed for the establishment of new business units and products, enabled the expansion and modernising of existing manufacturing lines, extended existing product categories, and will ultimately enhance the overall manufacturing efficiencies and capabilities of the Group as critical mass is reached. Much of this investment has recently been commissioned, or is in the final stages of commissioning, and in the period ahead we will deploy considerable focus and energy on ensuring these exciting new investments operate according to the necessary operating models, driving positive returns to shareholders.
Finally, the Group understands its responsibilities to the nation in providing world-class quality products at affordable prices, and we will continue to pursue our expansion programmes with this objective in mind. Additionally, in the period ahead, we will work to identify and support, key initiatives and programmes that reflect our passion for empowering and supporting our communities.
The Board is pleased to declare a final dividend of 1.05 US cents per share payable in respect of all ordinary shares of the Company. This final dividend will be payable to all shareholders of the Company registered at the close of business on 13 October 2023. This brings the total dividend to shareholders for the current year under review to 2.65 US cents per share which is a 12% increase on the 2.37 US cents per share paid in respect of F2022.
The payment of this final dividend will take place on or around 8 November 2023. The shares of the Company will be traded cum-dividend on the VFEX up to the market day of 10 October 2023 and ex-dividend from 11 October 2023.
The Board has also declared a final dividend totalling USD 305,000 to Innscor Africa Employee Share Trust (Private) Limited. Innscor Africa Employee Share Trust (Private) Limited supports all qualifying beneficiaries with both dividend flow and various loan schemes.
I wish to record my sincere appreciation to the Executive Directors, Management, and Staff for their effort during the year under review. I also wish to thank the Non-Executive Directors for their wise counsel and the Group’s customers, suppliers, and other stakeholders for their continued support and loyalty.
A B C CHINAKE
Independent, Non-Executive Chairman
28 September 2023