Innscor Africa Limited (INN.vx) 2023 Annual Report
Chairman’s Statement and Review of Operations
The Holding Company’s Directors are responsible for the preparation and fair presentation of the Group’s audited annual financial statements. These audited 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 the 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 has 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 requires issuers to present financial statements in USD.
IAS 21 directs that entities operating in hyperinflationary economies should translate their last reported inflationadjusted 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 inflationadjusted 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 2.3 to the audited Group annual financial statements, page 252.
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 2.4.
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 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, is shown on page 242. 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. The 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 re-capitalisation 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 the 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 larg