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Dairibord pins hope on rationalisation and recapitalisation after $5.4m loss in F16

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Dairibord pins hope on rationalisation and recapitalisation after $5.4m loss in F16

HARARE – Dairibord Holdings’ full year 2016 performance largely mirrors its interim results where the Group posted close to $2 mln loss in net profit on similar market sentiments and challenges. At the company’s analyst briefing, chief executive officer Antony Mandiwanza concluded that 2016 was a bad year but there is determination to turn around largely on the back of the ongoing rationalisation exercise.

“…this is the story of our results; we accept it was a bad year… It is a wakeup call at Dairibord. We have the commitment, determination to turn around the fortunes of the company and contribute to value creation and we remain hopeful that there are opportunities out there. It’s upon us to deliver value,” he said.

According to Mandiwanza, the company’s performance in the year was constrained by operational and service provisional challenges which resulted in declining sales volumes and average selling prices. “The key challenges include a mismatch between raw milk intake and demand worsened by delays in the commissioning of the UHT carton plant which we had anticipated around April and only commissioned it after August 2017. This resulted in a loss of a potential 2 mln litres sales volume which could have made deference on the topline,” he said.

Revenue decline 10% to $93.42 mln from $103.44 mln in prior year due to price reductions to address affordability and competitiveness. He said the erratic supply and high cost of water procured from third parties for Simon Mazorodze and Chitungwiza factories which was bought at $12 to $17/cubic metre compared to. $1.40/cubic metre from local authorities created challenges. Other operational challenges included impairments of inventories, receivables, plant and equipment and high overhead costs which are not aligned to the level of revenue generated.

According to Mandiwanza, the Group’s turnaround is now premised on a consolidated organisation structure that eliminates duplications across the value chain and roles and responsibilities.  The group now have three structures, DZPL, Lyons and NFB operations. “We now have a consolidated route to market to reduce distribution costs, depots, distribution channels, manning. The structure also involves rationalisation of factories which will see Lyons production of cascades and ice-creams split to Chitungwiza and the main factory plant in Harare.”

Mandiwanza said a minimum annual savings of $2 mln is projected with a rationalisation cost of $1 mln while at the same time the company has excess assets held for disposal or leasing amounting to $3 mln in circa.

During the year under review, raw milk intake for Dairibord was 18% up at 31 mln litres while sales volume at $83 mln was a marginal 1% decline.  Price per litre was $1.13. Consequently, the Group’s operating loss was at $3.89 mln compared to an operating profit $3.97 mln in 2015.  The loss however includes impairments of inventory, receivables and equipment at $2.8 mln.

By volumes, National raw milk production in Zimbabwe increased 14% in 2016 vs. a 20% growth in intake for DZPL. DZPL share of national raw milk collected by processors was at 47% largely driven by the heifer scheme.

“As you remember we initiated the heifer importation scheme and its performance contributed 11% total raw milk intake,” he said. Productivity for the heifer scheme is 15 to 20 litres per day.  Mandiwanza said the scheme which had been suspended due to the drought in the year will be resuscitated this year with a target of 300 heifers to be imported.

In Malawi milk intake went up 4%.  In terms of portfolio performance Liquid milks volumes were flat on last year, Foods went down 4% and Beverages was down a marginal 1%.

Mandiwanza said the Group experienced growth in Pfuko volumes which grew 18% benefiting from increased capacity and additional flavours. On other hand water outages in the second half of the year impacted the beverages portfolio.

Supply constraints on imported UHT and delays on commissioning the UHT carton machine impacted Liquid Milks while foreign currency shortages also contributed to supply challenges for key raw materials.

On the average selling prices, liquid milks decreased 15% to $1.09 from $1.28, Food average selling prices went down 9% to $2.21 from $2.42 and beverages declined 1% at $0.87 from $0.88. The consolidated average was $1.13 down from $1.23.

“We had to respond and adjust our prices to maintain volume and remain competitiveness. We do not expect the prices to go further down,” he said.

On the revenues, Liquid milks were down 15%, Foods down 12% and beverages 3% and revenue performance reflects the impact of price adjustments and static volumes.

The Beverages remain the major contributor to both volume and revenue at 53% volumes, Food 13% and beverages 34%.

According to Mandiwanza, the company’s market share of key brands remain up with long life milks at 50%, yogurts, 60% ice creams 68%. He said Pfuko continues to grow and has a share of 48% of the market while cascade is at 63.

Commenting on the Financials Finance Director Mercy Ndoro said the 10% decline in revenue was a function of decline in sales volume and a decline in average selling price which declined an average of 9%.

She said materials costs declined 7% to $53.57 mln compared to $57.73 mln on account of 1% decrease in volumes and cost reduction initiatives.

She said the impact of reduction initiatives on materials was militated by static costs of raw milk which contributed 31% of the cost of materials.

Ndoro said the biggest problem to costs were overhead costs which went up driven by once off impairments of inventories of $1.9 mln and receivables of $500 000 and equipment of $400 000. She said operating loss excluding once offs was $1.1 mln adding that there is still need to align revenues and costs.

During the year under review, inventories increased by $4 mln due to milk powders which were carried over from prior year.

Ndoro said a total of $5.40 mln was invested during the year on major items which include the UHT carton processing and filling plant to localize production of cartonised UHT milk.  The plant has capacity to process and pack cartonised Juices.

Dairibord Malawi contributed 3% of Group revenue and posted an operating loss of $200 000. Mandiwanza said performance of the subsidiary was impacted by subdued macroeconomic performance characterised by low disposable incomes, a depreciating currency and reduced donor support.

Meanwhile, looking ahead, Mandiwanza said the 2016 investments in new UHT plant and additional capacity for Pfuko will have full year impact in 2017.

The group will launch cartonised juices in May 2017and the benefits of SI 64 will be felt in Maheu, Tomato sauce, Salad cream and Mayonnaise.

The company will also invest in a 1.5 million litres water storage capacity with one week cover at Chitungwiza factory to minimise water supply disruptions.

The cost at $2.5 mln will also include investments towards the cold chain equipment and distribution vehicles.

DZL

Our thoughts on Dairibord

Over the course of time, more importantly since dollarisation, most companies have undergone through restructurings and rationalisation. If you were Tony ‘tight pants’ Fourie, you would obviously come up with different terms for this; re-engineering or cultural change. But in almost every case, the goal has been to change the business in order to cope with a challenging environment. A few of these businesses have been very successful. The majority have been largely in between, celebrating changes as if they have done very well, yet in fact (in Masimba’s case) they should be turning over +$50 mln. Also falling in the majority are those like Dairibord who only react when they feel cornered.

These F16 results partly reflect the long term effects of bad decisions that have been made by the group over the course of time. The only plus is the frank discussion by Anthony on the unpleasant facts of the business; new competition, shrinking margins, market share erosion, flat earnings, a lack of revenue growth. At its briefing last year, Dairibord said that the key pillars for 2016 would be on volume growth; cost reduction; milk supply and improving the performance of Dairibord Malawi. The group expected volumes to increase by 10% while the price per litre will further decrease by a similar percentage, culminating in stagnant revenue growth. The operating profit margin was expected at 5%. However a very different story was shown in these results as revenue was pulled down by price decreases earmarked at staying in touch with affordability. There were also supply hiccups in liquid milk, which contributes 33 percent to total revenue, because the group could not toll milk from South Africa anymore, with the coming in of S164 of 2016, resulting in it losing sales of 2 million litres. (And still no one was fired for this lack of foresight and when the group resorted to toll manufacturing in 2013, already, existing policies were unequivocally calling for import substitution and it was most clear that companies in this sector need to have been fully prepared and ready. The idea of wanting to react when cornered therefore cost the business in sales and margins have shrunk. However, with the UHT plant now fully installed, it is hoped that the group will increase its uptake of the liquid milk market share.

The group also needs to rework its cost model that is rigid and inelastic to falling production. The levels of costs must reflect the level of production, and should not be static when production is falling. Inflation will pose as one of the threats this year, as the general price level is likely to continue rising, which will impact on input costs. But the projected decline in milk powder prices, which is an input to the group, will see it accruing savings.

However we really need to ask: at what point then did Dairibord arrive at this new vision to consolidate ops? Was it hurriedly thought of during the course of the year? Since dollarisation, the group has failed to grow its cash generating ability, even at times when revenues peeked at $106.9 million from $43.4 million in 2009 with the quality of earnings being near flat from 2009 to 2012 and volatile from then on through to present explaining why the group has not rewarded investors. The decision to consolidate could therefore should have been sooner, and judging by what Anthony was saying at the briefing we are still far off from a dividend. What’s the future of Lyons under this consolidate structure with milk-based products. Without a sensible vision, a consolidation and restructuring effort can easily dissolve into a confusing model that can take the organization in the wrong direction or nowhere at all. Lyons has very uncompetitive and tired brands which only require two simple things; total quality management and good marketing effort. Not to be too pessimistic, we hope from this consolidated structure, management will be able to pay attention to this.

And just as an aside: There are investors who put in money in May 2013 when the share price hit its all-time high of 30 cents.

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