Innscor Africa – Reviewed Abridged Group Financial Results for HYE 31 December 2022

Salient Features

DIRECTORS’ RESPONSIBILITY

The Holding Company’s Directors are responsible for the preparation and fair presentation of the Group’s consolidated interim financial statements, of which this press release represents an extract. These abridged Group consolidated interim financial statements are presented in accordance with the disclosure requirements of the Victoria Falls Stock Exchange (“VFEX”) Listing Requirements for interim financial reporting (Preliminary Reports) 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 consolidated interim financial statements are consistent with those applied in the previous period’s financial statements. 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 interim financial statements.

CHANGE IN FUNCTIONAL CURRENCY AND CAUTIONARY ADVISORY ON RELIANCE ON FINANCIAL STATEMENTS

Commencing with the financial year ended 30 June 2020, and in line with both 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 consolidated, 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 those Group consolidated, inflation-adjusted financial statements; in addition the Directors also issued financial statements prepared under the historical cost convention, as supplementary information, in an effort to assist users with their interpretation of the Group’s financial performance.

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), has been through a process of assessing its functional currency. Following the completion of this process, the Group has 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. 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 inflation-adjusted financial statements from previous periods, as a basis for presenting comparative and opening balance sheet information in terms of the new functional currency, will result in the material misstatement of the Group’s comparative financial statements.

In an endeavour to present the best possible view of the comparative financial performance and position of the Group in terms of the newly assessed functional currency, alternative procedures and techniques have been utilised in the translation of ZWL financial statements to USD financial statements. This has resulted in the external auditors issuing an adverse review conclusion on the Group’s consolidated interim financial statements for the current period under review.

The alternative procedures and techniques utilised for the translation of ZWL financial statements to USD financial statements have been summarised in Note 3 of the Supplementary Information section of the accompanying abridged financial statements.

While the Directors have exercised reasonable due care and applied judgments that they considered to be appropriate in the preparation and presentation of these interim financial statements, certain distortions may arise due to various specific economic factors that may affect the relevance and reliability of the information that is presented in economies that are experiencing hyperinflation, and in view of the fact that there are certain subjectivities and technicalities involved in the translation of ZWL financial statements to USD financial statements as highlighted above; accordingly, the Directors would like to advise users to exercise caution in their use of these interim financial statements.

EXTERNAL AUDITOR’S REVIEW CONCLUSION

These abridged Group consolidated interim financial statements have been reviewed by Messrs. BDO Zimbabwe Chartered Accountants, who have issued an adverse review conclusion due to the view that the Group has not complied with the requirements of IAS 21 on translation of opening balances and comparative financial information. The External Auditor’s Report on the Group’s consolidated interim financial statements, from which these Group abridged consolidated interim financial statements are extracted, is available for inspection at the Company’s registered office.

SUSTAINABILITY REPORTING

The Group continues to apply the Global Reporting Initiative (“GRI”) standards and, over the years, has aligned its sustainability reporting using GRI standards with corresponding Sustainable Development Goals (“SDGs”), demonstrating the Group’s commitment and contribution to sustainable development within the environments in which the Group operates. The Group continues to strengthen its sustainability practices and values across its operations to ensure that long-term business success is achieved sustainably.

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 a number of uncertain tax positions.

OPERATING ENVIRONMENT AND OVERVIEW

The operating environment experienced both reduced inflationary pressure and currency volatility during the six months under review, brought about mainly by the Government’s efforts to control excess liquidity via contractionary monetary policy measures, with most notably a significant increase in interest rates to 200% per annum for ZWL debt which was instituted in July 2022. The market also experienced increased USD transactional flow, particularly within the informal market, where consumer demand remained firm, supported by increased mining output, a positive winter cropping wheat season, growth in diaspora remittances, and Government infrastructure spending.

Notwithstanding the general improvement across the Country’s macroeconomic indicators, the trading environment remains complex and relatively uncertain, as pricing distortions and resultant arbitrage opportunities remain across the market, exacerbated by an impractical and ambiguous taxation framework. These underlying complexities negatively impact business sentiment and consumer demand, especially across formal trade. The local environment also continues to grapple with the passthrough effects of the global economy, which is experiencing sluggish economic growth, elevated levels of inflation, increasing interest rates, and energy and commodity pricing shocks during the period, combining to result in imported pricing pressure on key raw materials and volatility across international financial markets.

The Group’s trading performance for the six months was generally pleasing, with strong volume growth contributions across the protein, stockfeed, beverage, and light manufacturing segments. Wheat pricing shocks in the first quarter had an adverse impact across the Mill-Bake value chain, resulting in declining consumer demand as bread became less affordable. Volumes, however, recovered in the second quarter as local wheat availability improved. The Group’s overall volume trajectory remains strong, underpinned by diversification and expansion of product ranges, supported by continued focus on affordable pricing and efficient route-to-market strategies, and all augmented by ongoing investment into modern manufacturing processes and technologies.

The Group’s contract farming initiatives continue to receive considerable focus through the PHI and Agrowth organisations, with 13,000 hectares funded toward the current summer cropping season to support maize and soya bean hectarage. The Group intends to replicate the successes of the 2022 wheat crop, where it produced 78,000 tonnes of wheat, representing the largest private contribution to the national wheat harvest. Prospects for the current summer season remain positive on the back of above-average summer rainfall.

FINANCIAL REVIEW

The Group posted revenue of USD 399.685 million for the six-month period under review, representing a 12% increase on the comparative period, driven by pricing optimisation and volume growth across the Group’s core categories as capacity utilisation continued to improve, whilst the introduction of new products and expansion of the overall product portfolio also combined to drive revenue.

Firm growth in dollar terms was realised in the operating profit before depreciation, amortisation, and fair value adjustments (“EBITDA”) line, which came in at USD 60.321 million for the six-month period under review. This was on the back of firm gross margin dollar growth, which was consistent with revenue growth, whilst gross margin percentages were maintained at the same level as the comparative period. Overall, efforts to contain operating expenditures were pleasing, however cost-push pressures were evident, most notably across the human capital, distribution, fuel, and electricity cost buckets, which all saw significant increases to the comparative period.

Foreign currency exchange gains dominated the financial income line of USD 4.200 million. Interest charges for the six months amounted to USD 9.091 million, with the majority of this incurred in the first quarter of the current financial year following the sharp increase in interest rates on ZWL denominated borrowings. The Group restructured its ZWL denominated borrowings during the course of the second quarter, significantly reducing the interest charges. The contribution from the Group’s associate businesses came in at USD 1.027 million, lagging behind the levels delivered in the comparative period.

Profit Before Tax (“PBT”) amounted to USD 45.162 million, representing favourable growth over the comparative period, and notwithstanding the high interest charges incurred in the opening quarter of the period under review. Headline Earnings Per Share (“HEPS”) performance was pleasing and showed an improvement to 4.52 US cents in the current period under review, a 27% growth over the comparative period and generally attributable to consistently good performances across the Group’s overall business portfolio.

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.

From a cash flow perspective, earnings quality was solid, and was further supported by improved efficiency across the Group’s working capital positions, combining to deliver operating cash flow of USD 74.884 million for the period under review, and representing a 72% increase over the comparative period. The strong operating cash flows delivered enabled the Group’s extensive investment programme to progress at pace, with USD 41.891 million deployed to investing activities in the period under review.

OPERATIONS REVIEW

MILL-BAKE

This reporting segment consists of the Group’s Bakery division, National Foods, and the Group’s non-controlling interest in Profeeds and Nutrimaster.

The Bakery division saw volumes recover in the second quarter as the substantial local wheat crop allowed for more affordable loaf pricing; as a result, six-month loaf volumes closed at consistent levels to the comparative period. The division is currently closing out its USD 22 million investment into a new world-class, fully automated bakery operation in Bulawayo; this will be complemented by further investment into extending the automation of the Harare bakery operation as well as an investment to recapitalise the entire bread delivery fleet. We are confident that these initiatives will enhance production efficiencies, further improve loaf quality and allow for significantly improved nationwide market reach.

At National Foods, aggregate volumes contracted 9% versus the comparative period. The wheat pricing shocks largely characterised the performance for the period, which negatively impacted flour and related products’ volumes.

The performance of the Flour Milling Division was disappointing, with volumes contracting 20% versus the comparative period. This was largely driven by the significant increases in the price of wheat as the conflict in Eastern Europe continued to influence market dynamics, especially in the first quarter. This had a material impact on wheat pricing, flour demand, and consequently bread affordability. During the second quarter, a partial recovery in volumes was realised as wheat pricing declined. Focus in the division remains directed at the commissioning of the new Bulawayo flour mill, which is scheduled for April 2023.

The Maize Milling Division delivered volumes marginally behind the comparative period, owing largely to the impacts of local maize procurement in the first quarter; this subsequently recovered in the second quarter as local Grain Marketing Board (“GMB”) allotments became available. Work continues in the business on diversifying the product range by launching traditional grain products to support the base maize meal proposition, serving an increasingly health conscious market.

Volumes within the Stockfeed Division closed at similar levels to the comparative period; volumes were depressed in the first quarter but partially recovered during quarter two. Distortions negatively impacted the division within the formal sales channel despite market demand remaining firm for the period. The division has recently commissioned a series of automation enhancements to its core factory operations which are expected to improve product quality and plant efficiencies going forward.

The Down-Packed Division continued to experience firm informal market demand, particularly across the rice and salt categories, and delivered volumes 12% ahead of the comparative period. The division is currently executing on an investment programme which will result in an upgrading of its rice handling and storage facilities, and an elevation of its general process efficiency across the business.

The Snacks Division continues to deliver pleasing growth; volumes increased by 18% against the comparative period, as both the Hard Snacks (operating mainly under the “Zapnax” brand) and Soft Snacks (the “King” and “Popticorn” ranges) categories saw continued growth. Investment to increase capacity in the hard snacks category has been approved and is expected to enhance production efficiency and extend the category’s product range.

The Biscuit Division was affected by the flour pricing dynamics and challenges in the formal trade, and volumes declined by 15% from the comparative period levels as a result. As previously advised, the purchase of a new biscuit line has been approved and this will allow for the extension of the biscuit portfolio beyond the current basic loose biscuit proposition to a more specialised biscuit portfolio. Work on the project has commenced, and the new line is expected to be commissioned late in 2023.

Volumes in the Cereals Division grew by 42% over the comparative period. The second phase of the breakfast cereal investment was commissioned towards the end of the period, resulting in the launch of a new range of breakfast cereals, including corn flakes, bran flakes, wholegrain, and instant cereals. The market uptake has been exceptionally encouraging, and efforts to expand and diversify the product offerings are a priority going forward.

At Profeeds, demand for stockfeeds and day-old chicks remained firm as the local poultry market continued to experience pleasing growth. The stockfeeds category delivered volume growth of 15% over the comparative period, while day-old-chick volumes increased by 21%. In order to better service the Country’s southern markets, an investment into a new stockfeed plant in Bulawayo has commenced and is scheduled to be commissioned in the next financial year; this new plant will add much needed volume capacity, as well as enhance the business’ overall production efficiencies and product quality.

The “Profarmer” retail network recorded firm volume growth across all product categories and continues to expand its retail footprint to improve the serviceability of the rapidly growing small to medium-scale farming market.

Nutrimaster, a subsidiary of Profeeds, saw volumes close marginally ahead of the comparative period, bolstered by a strong order book for the summer row-cropping and tobacco seasons. The business is also working on the diversification of its product range through an investment into a crop chemical offering which will position the business as a locally focused, all-encompassing fertiliser and crop chemical producer.

PROTEIN

This reporting segment comprises Colcom, Irvine’s, and Associated Meat Packers (“AMP”), which includes the “Texas Meats,” “Texas Chicken,” and “Texas Dairy” branded store networks.

The Colcom Division, comprising Triple C Pigs and Colcom Foods, continued its positive growth trajectory and recorded a pleasing volume growth of 6% over the comparative period, with solid contributions from both the fresh and processed pork categories. Triple C’s performance was exceptional, following the continued focus and investment to secure improved genetics, dietary optimisation, and efficient animal housing infrastructure.

The business has commenced an extensive investment programme which will initially focus on further expansion in pig production, and this will be augmented in parallel with investment in a factory upgrade programme which will significantly enhance volume, production efficiencies and overall product quality.

At Irvine’s, volume growth was realised across all three categories; most notably, the table egg category recorded volume growth of 24% over the comparative period, while the day-old-chick category volumes increased by 10% over the same period. The firm demand across the poultry value chain is being supported by investment targeted at increasing poultry production capacity, coupled with technology upgrades combined to enhance production efficiencies and output capabilities at the operation.

The AMP Group delivered good volume growth of 5% over the comparative period. Growth was realised on the back of firm demand across the chicken and beef markets, despite the beef category facing continued supply chain challenges. The “Texas” retail network opened four stores during the period under review, with the network increasing to 50 stores under management.

BEVERAGE AND OTHER LIGHT MANUFACTURING

This reporting segment consists of Prodairy, Mafuro Farming, Probottlers, The Buffalo Brewing Company (“TBBC”), Natpak, and the Group’s non-controlling interest in Probrands.

Prodairy continued to register strong volume growth, closing 32% ahead of the comparative period, with pleasing growth realised across the full product portfolio. The “Revive” dairy blend category posted volume growth of 56% over the comparative period on the back of significant production investment as well as the extension of the product formats
targeting wider market segments. The popular “Life” branded butter and cream also delivered pleasing growth of 21% over the comparative period.

At Mafuro Farming, raw milk production and supply grew by 18% over the comparative period on the back of initiatives to increase the milking herd, coupled with a focus on improving production efficiencies. The business is currently commissioning a new state-of-the-art dairy operation in the Midlands, which is expected to become fully operational during the final quarter of the financial year under review.

Probottlers delivered overall volumes which were 14% ahead of the comparative period, mainly driven by the investment undertaken to increase the CSD production capacity of the 500ml “Fizzi” line during the previous financial year. Sugar supply remains a critical factor for the business, as local supplies remain on untenable terms, exacerbated by increased grey-market import pressure of finished products noted in the trade during the period.

TBBC launched its sorghum beer product under the “Nyathi” brand in December 2022. Market uptake has been encouraging, and volume performance to date has met expectation.

At Natpak, overall volumes closed in line with the comparative period. Volumes within the Rigids division increased 9% on the back of increased production capacity and the extension of the product range. The Flexibles division delivered pleasing growth of 8% over the comparative period, and investment to expand its printing capacity is currently underway. The Corrugated and Sacks divisions continued to register positive volume growth, with both divisions having recently invested in additional production capacity and manufacturing capabilities.

At Probrands, volume performance lagged the comparative period, although this was largely a result of a deliberate refocusing to lower-volume, higher-margin specialised categories. The business continues its focus on creating innovative household and adjacent condiment products.

PROSPECTS

Despite a relatively challenging local and international economic environment, the Group has delivered a solid financial performance for the six months. Looking ahead, the Country’s current economic challenges will likely persist for the foreseeable future as the market continues to navigate local inflationary pressures exacerbated by an uncertain outlook across international commodity and financial markets. In this regard, our individual business strategies remain dynamic to adjust to the prevailing market conditions, driven by agile management teams with a continued focus on developing the tools and techniques necessary to operate in an ever-changing environment. Critically, attention will be directed to ensuring that both our operating expenditure and bill of materials cost is managed carefully considering prevailing cost-push pressures, and this must be balanced with a view to achieving appropriate pricing and volume levels while ensuring that the Group continues to maximise capacity utilisation across its business units.

The Group remains occupied with an exciting USD 56 million investment pipeline for the current financial year, with a number of significant projects now in the very final stages of development; all these investments will bring with them world-class technologies and processes and will introduce significant volume capacity, exceptional product quality and considerable manufacturing cost efficiency.

As previously reported, the Company’s shareholders recently approved for the Company to be de-listed from the Zimbabwe Stock Exchange (“ZSE”), followed immediately by its re-listing on the VFEX, which took place on 24 February 2023. The Group is confident that the VFEX listing will unlock shareholder value by enhancing and extending its presence across international capital markets. The VFEX listing also compliments the strategic thrust of the Group as it embarks on its future growth initiatives and strives to position itself as a prominent regional manufacturing player.

INTERIM DIVIDEND

The Board is pleased to declare an interim dividend of 1.60 US cents per share payable in respect of all ordinary shares of the Company. The interim dividend is in respect of the financial year ending 30 June 2023 and will be payable to all shareholders of the Company registered at the close of business on 14 April 2023.

The payment of this interim dividend will take place on or around 28 April 2023. The shares of the Company will be traded cum-dividend on the VFEX up to the market day of 11 April 2023 and ex-dividend from 12 April 2023.

The Board has also declared an interim dividend totaling USD 460,000 to Innscor Africa Employee Share Trust (Private) Limited. Innscor Africa Employee Share Trust supports all qualifying beneficiaries with both dividend flow and various loan schemes.

APPRECIATION

I wish to record my sincere appreciation to the Executive Directors, Management, and Staff for their effort during the period 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 March 2023