Pioneer Food profit slumps as drought takes its toll

Cape Town – Pioneer Food Group’s six-month profit (adjusted headline earnings per share) decreased by 47% as costs increased by 10% due to the need to import maize as a result of South Africa’s drought.

The drought meant a massive decrease in maize output in South Africa and pushed companies to import the crop, spiking costs.

“A confluence of various inhibitors contributed to a material decline in profitability for the first half of the financial year ended 31 March 2017,” Pioneer [JSE:PFG] said in a statement on Monday. It was reporting on its unaudited consolidated interim financial results.

“The most significant detractor was maize due to the unfavourable procurement position taken in 2016 in order to protect supply for South Africa's leading maize brand,” it said. “This decision was predicated on careful consideration of the available information at the time.”

Additionally, it said its international division was “severely impacted by a raisin crop shortfall, African exports and a stronger rand”.

“Cost of goods sold increased by 10% due to significant raw material cost push, resulting in gross profit decreasing by 16% to R2.6bn and the gross profit margin compressed from 31% to 26%.”

The decline in profit – or headline earnings per share – was adjusted from -56%, due to a broad-based black economic empowerment transaction and once off merger and acquisition costs.

Group turnover increased by 2%, with the South African business increasing turnover by 4% and its international unit declining by 11%.

Pioneer sees maize costs reducing in the next six months.

“The performance of essential foods was overwhelmingly impacted by maize,” the company said. “The margin drag on maize will cease from June as lower cost raw material comes into effect.”

“We anticipate an improvement in performance in the second half of the financial year notwithstanding a constrained trading environment in South Africa,” they said.

And increased raisin supply, lower maize input costs from June and lower beverage input costs should see conditions improve, they said.

While maize hit the company, it said “stringent cost management was enforced to partially mitigate the aforementioned”.

“The bakery business continued to deliver volume growth and operating leverage,” the  company said. “The Aeroton bakery upgrade and expansion was commissioned in April. Pasta, flour and legumes contributed positively, whilst rice regressed amidst aggressive competition.”

Pioneer's share price closed 1.3% higher on Friday, trading at R160 a share.

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