We have extracted the financial summary from the interim half year report of Innscor Africa Limited listed on the Zimbabwe Stock Exchange under the share code INN.zw. Innscor is a manufacturer and distributor of fast-moving and durable consumer products in Zimbabwe and exporter to international markets.

The following is an excerpt from the interim half year report;

FINANCIAL PERFORMANCE

The Group recorded revenue of $489.893m for the period under review, a 61% growth on the comparative period, and driven largely by double-digit volume growth across all categories. The consolidation of both Prodairy and Probottlers, following re-structures, also added to the growth in revenue, as did the improvement in the Irvine’s business as it continued its recovery from the Avian Influenza (AI) epidemic encountered in 2017.

The Group’s well-priced raw materials pipeline, distortions in margins arising from stock replacement policies, an improved sales mix, continually improving factory efficiencies, volume-driven conversion and distribution efficiencies, and the lag in inflation on operating expenditure, translated to improved margins and a satisfactory growth in operating profit over the comparative period.

Current period financial income relates mainly to the profit arising from the disposal of non-core assets and the Group’s dilution in its interests in Capri, whilst the comparative period financial loss includes the final impairment charge arising from AI. The increase in fair value charges relates mostly to the decrease in the market value of listed investments, while the growth in interest charges is accounted for through increased borrowings to fund raw material positions and the settlement of foreign creditors.

The increase in the Group’s equity accounted income arose from strong performances by the Group’s associate operations, with Profeeds and Probrands both recording particularly good growth.

The Group’s overall headline earnings per share grew by 161% on the comparative period to 7.58 cents.

The Group’s statement of financial position remained solid, and net gearing increased to 18.51%; this was in support of the strategy to invest into funding well-priced raw material positions and extinguishing foreign creditors, resulting in the Group utilising most of its opening cash holding. Capital expenditure at $27.801 million, was largely driven by significant increases in costs of imported items and deployed towards improving efficiencies, innovations and new capacity at National Foods, Natpak and Irvine’s. Availability of foreign currency will continue to dictate the pace at which the Group executes its capital expenditure projects.

As previously reported, the Group still has an amount outstanding of $2.550m relating to the payment it has made into a trust as a result of its case with the Competitions and Tariff ’s Commission (CTC). This amount is included in working capital. The High Court has ruled in

favour of the Group, and the Group awaits repayment of this amount, although the CTC has taken the matter on appeal to the Supreme Court where judgement has been pending since May 2016.

OPERATIONS REVIEW
MILL-BAKE

This reporting segment contains the results from the Group’s Bakery division, National Foods, and the Group’s non-controlling interest in Profeeds.

The Bakery division reported an 11% growth in loaves over the comparative period. As noted earlier in the report, the business remains under effective price control, and in this regard two small price increases were awarded during the period.

The business took delivery of an additional 45 bread delivery vehicles and this will enhance future service delivery and lower cost to serve. The operation’s efficiency and capacity improvement strategy continued with work on the automation of the Harare plant underway.

Given current flour supply constraints, the operation is currently operating at 50% of its capacity; adjustments to the business model have been made to ensure that viability is maintained. Ongoing discussions are continuing to be held with all relevant authorities, this will hopefully lead to an increase in flour supply and a move to a more economic pricing mechanism or a practical level of foreign currency support.

National Foods reported a solid 18% growth in overall volumes over the same period last year. A well-priced raw material position, efficiency improvements in factories and controlled operating expenditure delivered reasonable profit growth.

The maize business witnessed a 60% volume growth, whilst the recovery of the chicken industry from AI boosted volume growth in stockfeeds to 39%; good volume growth was also recorded in the Snacks and Treats division. Wheat supply challenges restricted the growth of the flour business to major plant bakeries at the expense of pre-packed flour.

During the period under review, an agreement was reached between the Reserve Bank of Zimbabwe (RBZ) and the operation’s major wheat supplier wherein the RBZ assumed National Foods’ legacy foreign currency debt for wheat amounting to US$54.900m. As part of this agreement, National Foods settled the full amount owing to the supplier with the RBZ and the RBZ retained the obligation to service the foreign amount owing to the wheat supplier.  is settlement by National Foods is reflected in the period’s working capital movement. The timely settlement of the legacy wheat position by RBZ in accordance with the agreement is critical to enable the continued and consistent supply of imported wheat into the country and to National Foods. The RBZ is currently two months behind its repayment obligations to the supplier, which in turn has resulted in a disruption of imported wheat supply into the market. Management continue to work closely with the RBZ to resolve the matter and the business remains fully capacitated to produce adequate volumes of flour provided the necessary foreign currency to import wheat is availed timeously. In the interim, limited supplies of local wheat have been released by the Grain Marketing Board (GMB), and this product is currently being milled for use by plant bakers.

Profeeds, an associate company of the Group, recorded a 42% increase in feed volumes over the prior period, largely driven by an increase in day old chick supplies following the recovery of the chicken industry from the outbreak of AI experienced in 2017.

The business invested in additional fish feed and extruded feed manufacturing capacity, which should o er growth and export potential for the business in the second half

of the financial year.

In the front-end of the business, the Profeeds City concept, which o ers customers a wider base of

agricultural and ancillary products, has been well received by our customers, and further innovations and focus will be placed on this important route to market.

PROTEIN

This reporting segment comprises the results of the Colcom Division, Associated Meat Packers (AMP), Texas Chicken and Irvine’s.

The Colcom division, comprising, Triple C Pigs and Colcom Foods delivered a 27% growth in volumes over the comparative period. The development of the additional piggery was completed and deliveries to the abattoir commenced in September as planned, resulting in a 25% growth in raw material available. Pie volumes increased by 63% on the back of the inclusion of the pie

manufacturing line previously managed under the Bakery division.

At AMP, despite the outbreak of foot and mouth disease in some Mashonaland Provinces and drought-induced supply challenges, beef volumes increased by 7% on the comparative period as Zimnyama made significant progress in the Division’s backward integration strategy into cattle procurement and slaughter.

AMP’s Texas Chicken retail operation delivered a 16% volume growth, and opened new outlets in Kwekwe and Bulawayo during the period, with additional country-wide sites under review.

Irvine’s Zimbabwe recorded high double-digit growth in volumes as the recovery from the AI outbreak continued. The restocking of the layer and broiler breeder flocks is now complete, with imports now restricted to routine breeding stock replenishments.

Table egg production is now fully restored whilst full local production of day old chicks should be fully re-established by the end of March 2019.

The business has further enhanced its biosecurity safeguards to reduce the risk of future outbreaks of AI and other biological diseases. A modern molecular biology unit, which is the only one of its kind in the country and which is able to rapidly detect the presence of AI, has now been installed. In addition, an AI response plan has been developed in conjunction with the Department of Veterinary Services, and awaits formal approval.

OTHER LIGHT MANUFACTURING AND SERVICES

This reporting segment comprises the results of Natpak, Prodairy, Probottlers, and the Group’s non-controlling interests in Probrands and Capri.

At Natpak, volumes grew by 27% over the comparative period, driven largely by increased utilisation of the newly commissioned corrugated plant and strong volume contribution from the sacks division which completed the commissioning of a new tapeline and additional looms following its migration to a new dedicated operating site.

The commissioning of a rigids packaging platform was also completed, and this, along with continued growth of the corrugated capabilities, is expected to contribute additional volumes in the second half of the financial year.

Prodairy increased its volumes by 70% over the comparative period and this was driven largely by

improved raw milk intake resulting from the company’s successful backward integration strategy into milk production, through Mafuro Farming.

The introduction of new products and innovations such as UHT dairy blend, and the launch of the “Revive” UHT maheu o ering, resulted in good market share penetration during the period, and continued volume growth is expected in the second half of the financial year.

Probottlers grew volumes by 66%, with strong growth in both the carbonated and cordial categories. The achievement of critical mass in the operation translated to good margin growth and lower operating cost per litre of output. Additional capacity and capability improvements are currently being investigated.

At Probrands, an associate company of the Group, volumes were 38% ahead of the comparative period with strong performances in both the down-packing and light manufacturing sections.  e company’s balance sheet has now been restructured providing the business a much more solid platform to grow.

The Group reduced its shareholding in Capri to 25.05% with effect from 1 July 2018, and accordingly the business is now equity accounted.

PROSPECTS

The Group has posted a solid performance in extremely turbulent market conditions.

Going forward, the wheat-flour-bread value chain remains a key part of our business and therefore a critical focus area. Zimbabwe does not produce enough local wheat for its increasing consumption and hence it is vital that a long-term, sustainable solution that attends to the extinguishing of the foreign wheat legacy debt, and which allows for the importation of new wheat, is achieved urgently.

The recent period of high-inflation has resulted in higher historic-costed margins and a slight lag in overhead growth; this has resulted in further improvements in the operating cost to margin ratios across all units. As margins normalise, however, it will be imperative for management to control overhead costs and to ensure that our business models built over the past 10 years remain efficient and operate to lowest cost.

By its very nature, the Group is a large user of foreign currency, and we therefore welcome the recent Monetary Policy Statement which has sought to provide a transparent mechanism for importers to access currency from the market, whilst providing exporters value for their foreign currency earnings. We are hopeful that the system articulated will allow our businesses to adequately plan working capital cycles and to execute on the numerous capital projects we have in terms of our long-term strategic targets. The new policy announced will also allow our businesses to quickly evaluate export competiveness, and we fully expect to commence exports in a number of our business units.

In addition to the above, and following Government’s mantra of being “open for business”, we call on other relevant authorities to ensure that amongst other things, processes to implement business combinations are simplified hence enabling our business units to better compete in the region, that export facilitation is made more efficient in order to encourage export flows and that policies and procedures to encourage increased production of key crops locally are quickly implemented in order to reduce the country’s reliance on imported raw materials. Policy consistency in this, and other economic areas, and less reliance on subsidies, will rapidly accelerate the recovery of our economy on a more sustainable basis.

As always, the Group stands ready to play its part in supporting the authorities in achieving a sustainable economic recovery for the Country.

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