National Foods Holdings Limited releases its 2022 Annual Report

Chairman’s Statement

Directors’ Responsibility

The Holding Company’s Directors are responsible for the preparation and fair presentation of the Group’s consolidated financial statements.

These Group financial statements are presented in accordance with the measurement and recognition principles of International Financial Reporting Standards (“IFRS”) and in the manner required by the Companies and Other Business Entities Act (Chapter 24:31). The principal accounting policies applied in the preparation of these financial statements are consistent with those applied in the previous annual financial statements. There is no impact arising from revised IFRS, which became effective for the reporting period commencing on or after the 1st of January 2021 on the Group’s financial statements.

Cautionary Statement- Reliance on all Financial Statements Prepared in Zimbabwe from 2019 – 2022

The Directors would like to advise users to exercise caution in their use of these Group financial statements due to the material and pervasive impact of the technicalities brought about by the change in functional currency in February 2019 and its consequent effect on the usefulness of financial statements from 2019 through to 2021, and which have resulted in carry-over effects into the 2022 financial year reporting period.

Whilst the Directors have always exercised reasonable due care and applied judgements that they felt were appropriate in the preparation and presentation of the Group’s annual 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, as well as technicalities regarding the change in functional and reporting currency.

2022 Financial Year Adverse Audit Opinion

As in the prior year, due to the existing foreign exchange market complexities, the inability to source any meaningful amounts of foreign currency from the Reserve Bank of Zimbabwe (“RBZ”) Foreign Exchange Auction System, and in order to provide users with what was considered to be the best possible and practical reflection of the Group’s performance and financial position, the Group utilised a combination of estimated exchange rates in order to translate its foreign currency transactions and balances in its annual inflation adjusted financial statements for the year ended 30 June 2022 prepared under the historical cost convention.

The principles utilised in estimating the exchange rates applied for the current year under review were identical to those applied in the prior year.

In the prior year, Deloitte was in agreement with the Group that there was a long-term lack of exchangeability of the foreign exchange within the Zimbabwean market. Accordingly, Deloitte accepted the use of an estimated exchange rate as an appropriate rate to use for translation of foreign exchange transactions. In the current year, as the RBZ has continued to make foreign exchange available on the auction system and introduced the willing buyer willing seller rate, Deloitte has concluded that there is a temporary lack of exchangeability of foreign exchange and therefore the official published rate (official spot rate) should be used to translate these foreign exchange transactions.

As noted above, the Group believes that the combination of estimated exchange rates utilised in the foreign currency translation process provides users with the best possible and practical reflection of the Group’s performance and financial position for the year ended 30 June 2022 and were it follow the external auditor’s interpretation of IAS 21, then the Group’s performance and financial position would have been materially mistated. The external auditors, Deloitte, have therefore issued an adverse audit opinion due to the fact that the Group did not utilise the RBZ published interbank rate of exchange prevailing at the time the foreign exchange transaction occurred or at the time that the foreign balance was translated. It is worth noting, in this context, the 72%% devaluation in the RBZ interbank rate from USD 1 = ZWL 366.26 at 30 June 2022 to USD 1 = ZWL 629.52 at 21 October 2022.

IAS 29 (Financial Reporting in Hyperinflationary Economies)

IAS 29 provides that inflation-adjusted financial statements are the entity’s primary financial statements, and the Group has complied with this requirement for these financial statements. The Consumer Price Index (“CPI”) was applied in the preparation of the hyperinflation financial statements in accordance with IAS 29, and under the direction of the Public Accountants and Auditors Board (“PAAB”).

Due to the prevailing distortions in the economy, and the material and pervasive effects that these can have in the application of the methodologies inherent in IAS 29, the Directors advise users to exercise caution in the interpretation and use of these inflation-adjusted financial statements. Due to the foregoing, financial statements prepared under the historical cost convention have been presented as supplementary information.

Sustainability Reporting

As part of our commitment to ensuring the sustainability of our business and stakeholders, the Group continues to apply the Global Reporting Initiative (“GRI”) standards.

Over the years, the Group 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 that 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.

Operating Environment and Overview

The economic environment for the period was challenging, largely on account of the rate of inflation which continued to accelerate through the year. Consumer demand slowed in the second half of the financial year as inflation accelerated, particularly in respect of high value products. Following a series of policy interventions which were instituted towards the end of the period, inflation in the post year end period has declined markedly.

Whilst the interventions, particularly in respect of monetary growth and ZW$ interest rates, have achieved their desired objective they have also brought about reductions in consumer demand post year end. The migration out of this necessary readjustment period will require a gradual easing of these policies in order to recover consumer demand without reigniting inflation.

Notwithstanding the challenging economic conditions during the period, the Group remains optimistic on the overall medium-term trajectory of the economy, as we anticipate continued growth driven largely by the mining and agricultural sectors. Based on this, the Group has embarked on an exciting growth phase with entry into a number of new categories as well as significant investments into existing categories. This investment pipeline is valued at around US$ 30 million, with the major projects including a new Flour mill for Bulawayo, a second breakfast cereal plant for Harare, new biscuit and pasta plants as well as substantial reinvestment into the Harare Stockfeeds plant.

Financial Performance

In terms of local regulatory directives, the Group is required to provide financial commentary on inflation-adjusted financial statements; users are once again advised to exercise caution in the interpretation and use of these inflation-adjusted financial statements as noted earlier in this Statement.

Volume for the period increased by 8% to 569,000 tons when compared to prior year. Revenue for the year increased by 33% to ZWL128.4 billion, driven by both volume growth and inflation driven price increases. Gross profit grew by 84% in absolute terms, mainly due to inflationary gains on raw material positions. Operational expenditure grew by 37% year on year, with correction of some major cost lines occurring in real terms during the year.

Operating profit increased by 301% compared to prior year to ZWL 14.74 billion, whilst PBT increased by 1 390% to ZWL 20.4 billion. This was driven by significantly increased interest costs in line with higher interest rates; as well as a decline in equity accounted earnings of 41%, which was largely attributed to the disposal of Pure Oil during the period. Included in the reported PBT is a profit on disposal of Pure Oil amounting ZWL5.93 billion.

The inflationary environment meant that intense focus was required to ensure that the key aspects of the Statement of Financial Position were appropriately managed. As a result, the Statement of Financial Position remains in a healthy position, with adequate resource to fund the expansion phase which the Group has embarked on.

Operations Review

Flour Milling

Volumes for the Flour unit decreased by 1.9% compared to the same period last year, with a slow-down in the last quarter, as price increases driven by higher international wheat prices and the reduced availability of local wheat dampened demand.

The installation of the new mill at our Bulawayo site has commenced and the mill remains on track for commissioning early in 2023. The new mill will increase wheat milling capacity by around 2,000 tons per month.

The prospects for the current winter wheat crop look encouraging which is a most welcome development as it will reduce import dependency. National Foods continues to play a major role in supporting the local contracted wheat crop.

Maize Milling

Whilst there was improved volume momentum in the Maize unit in the second half of the year, volumes still closed 2.3% below last year, largely due to last year’s excellent harvest. Turning to the most recent season, the rainfall was erratic and the harvest has been further disturbed by unseasonal winter rains.

Operating profit increased by 301% compared to prior year to ZWL 14.74 billion, whilst PBT increased by 1 390% to ZWL 20.4 billion.

It is anticipated that imports will be needed to fill the gap before the 2022-2023 harvest and the Group has already started on a maize importation program. Ordinarily, our expectation would have been for improved volumes in the year ahead following the lower harvest but the opening of the borders to imports of finished product will likely see volumes remaining flat in the year ahead.

Stockfeeds

Stockfeed volumes increased by 12% when compared to prior year. Volume growth continued to be driven by the poultry sector. Beef volumes declined following the better summer season and consequent improved pastures.

The phased 3-year upgrade of the Aspindale plant is now underway and has commenced with the installation of a PLC system which will enhance and optimise operational controls. Further investment targeted at improving the efficiency of the Aspindale plant is planned for the year ahead.

Downpacked

Volumes in the Downpacked unit which primarily packs rice and salt saw encouraging growth of 31% versus last year. Rice volume growth was driven by the informal sector, whilst Red Seal salt remained the brand of choice for consumers.

The Rice category continues to see significant volume growth and as a consequence, initiatives to further improve volume growth are on-going.

Traded Goods

The Traded Goods unit saw volume growth of 34% versus prior year, largely as a result of growth in the pasta category.

The Board has approved the purchase of a new pasta line in response to the growing demand for pasta in the country. This investment will also see the localisation of pasta production, which traditionally has been imported as a finished product. It is expected that this project will commission late in 2023.

Snacks

Volumes in this Division increased by 24% against the prior period, as the increased production capacity came on stream. Additional production capacity will be commissioned early in the new financial year with a view to fulfilling demand, especially in the informal sector. In addition, work to broaden the portfolio continues, with the recent launch of a new range of premium sesame snacks.

Biscuits

Biscuit volumes declined by 3% compared to last year, with a marked reduction in volumes towards the end of the year. The decline was largely brought about by higher flour prices which impacted affordability of the product. Volumes have recovered early in the new financial year with the adjustment in pricing of competing “on the go” food products.

The Board has approved the purchase of a new biscuit line, which will allow National Foods to extend its biscuit portfolio beyond the current basic loose biscuit proposition to more specialised biscuits such as creams. Work on the project is underway and the new line is expected to be commissioned late in 2023.

Cereals

Volumes in the cereals unit grew by 35% year on year. “Pearlenta NutriActive” instant maize porridge is the key product in the cereal range which also includes “Better Buy Soya Delights” as well as a “Smart Carbs” range of instant breakfast cereals. The “Smart Carbs” cereal range is derived from traditional grains such as sorghum and millet and has been developed with the health conscious consumer in mind.

A second breakfast cereal line will be commissioned in October 2022. This line will enable the broadening of the breakfast cereals range, starting with Corn Flakes and an Instant Breakfast cereal.

Pure Oil

As previously advised, during the year the Board approved the disposal of National Foods’ 40% stake in Pure Oil. The necessary regulatory approval for the disposal has now been received and the implementation of the transaction is underway.

Contract Farming

National Foods continues to keenly support contract farming of maize, soya beans, wheat, sugar beans, sorghum and popcorn. During the current winter season around 12,000 hectares of wheat has been planted, representing a significant portion of the contracted crop. In addition to this, 40,000 tons of maize and soya beans were delivered on this year’s summer cropping program. The various products grown under this program now constitute a significant portion of the Group’s raw material requirements.

Corporate Social Responsibility (CSR)

National Foods continues to support a wide range of causes through its comprehensive CSR program. The company supports 45 registered institutions spread across the country’s 10 provinces with regular food supplies and assists with a number of wildlife conservation initiatives. A wide range of organisations are assisted including orphanages, special needs groups, vulnerable women and children, schools, hospitals and churches as well as animal welfare and conservation programs.

During the financial year the Group managed to win 3 awards for its CSR work Top Charitable Organisation of the Year the CSR Network Zimbabwe, Best Campaign – Corporate Social Responsibility (Winner) and Public Relations & Communication Campaign of the Year from the Institute of Public Relations & Communication Zimbabwe.

Impact of COVID 19 On Business Continuity and Statement of Solvency

National Foods continues to implement and observe WHO-approved COVID-19 guidelines throughout its operations to safeguard the health and welfare of staff, customers, suppliers and all stakeholders. In addition to this, financing, capital investment and working capital models are regularly reviewed as part of business continuity plans.

Given the ongoing uncertainty around the impact and conclusion of COVID-19, it is not possible to assess, with absolute certainty, the full impact the pandemic will have on the company’s financial performance for the forthcoming financial period. At present, the financial status of the company remains healthy, and the impact of the COVID-19 pandemic has not created any issues from a solvency or liquidity perspective.

Future Prospects

The Group is embarking on an exciting period of expansion with entry into a number of new categories as it seeks to value add its portfolio of basic products. Many of these products will see the localised manufacture of products which had previously been imported, reducing foreign currency requirements and increasing demand for locally grown produce. Our team remains intensely focused on delivering a range of quality, healthy and affordable products which ultimately will offer improved choice to local consumers.

From an economic policy perspective, the Group welcomes and supports the recent interventions which have greatly improved economic stability. With the improved stability, we would support a progressive easing of some of the measures, such that consumer spending can recover, albeit in a more stable inflationary environment.

As well as implementation of the projects spoken to above, our management teams will continue to focus on ensuring their business models are robust and fit for purpose. Particular focus will be placed on volume growth, cost optimisation as well as ensuring that working capital deployed in each unit is appropriate for the economic circumstances.

Final Dividend

The Board declared a final dividend of US$5.95 cents per share (2021: ZW$296.49 cents per share) in respect of all ordinary shares of the company bringing the total dividend to US$5.95 cents per share and ZW$1 103 cents per share (2021: ZW$1 099.76 cents per share). This dividend is in respect of the financial year ended 30th June 2022 and will be payable to all the shareholders of the Company registered at the close of business on the 11th of November 2022.

The payment of the final dividend will take place on or around the 25th of November 2022. The shares of the Company will be traded cum-dividend on the Zimbabwe Stock Exchange up to the market day of the 8th of November 2022 and ex-dividend from the 9th of November 2022.

Acknowledgement and Appreciation

I would like to express my sincere appreciation to the employees of National Foods who have continued to ensure the market is consistently supplied with a wide range of quality basic food products at affordable prices, often under very challenging circumstances. The Zimbabwean consumer continues to show loyal support for our brands, and it is our hope that we can continue to serve you all with the range of new products that are being launched in the near future.

Finally, the Board members have provided astute guidance both in assisting to navigate a challenging year as well as in the development of the new projects. I thank them for their valued input.

Todd Moyo
Independent, Non-Executive Chairman
26 October 2022

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National Foods Holdings Limited 2022 Annual Report