Supreme Poultry is CBH s poultry operation, and the third largest poultry producer in South Africa. Operational review: Poultry South Africa (Supreme)

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1 Operational review: Poultry South Africa (Supreme) Jack Searle Supreme Poultry MD Supreme Poultry is CBH s poultry operation, and the third largest poultry producer in South Africa. Vision The people s choice in chicken The vision has a strong marketing emphasis and implies a demand for its products by its customer base. It inspires a strong ownership of its brands. Mission Supreme endeavours to provide affordable quality chicken products to consumers throughout southern Africa. The mission will be achieved by: being the lowest-cost producer; being a fully integrated poultry operation; and fostering the right strategic alliances. Strategic memberships South African Poultry Association 20 Country Bird Holdings Integrated Annual Report 2013

2 Supreme s production operations comprise the following: As a breeding operation (at the Belgie, Ramatlabama and custom hatch facilities), Supreme currently produces 1,6 million eggs per week. Its broiler operations (supplied through contract growers and our own Botshabelo broiler farm) produce 1,45 million broilers per week. Its abattoirs (Botshabelo, Tigane and Mafikeng) slaughter up to 1,45 million birds per week. Supreme also has its own network of retail outlets, which now account for 5% of sales. Nationally, Supreme employs approximately people in its breeder farms, hatcheries, abattoirs, cold storage facilities and retail outlets. The company s operations are based mainly in the Free State and North West provinces. Supreme sources broilers from farmers within these regions. Supreme produces a variety of chicken products under various brands including the Supreme, Ama Chick Chick, AgriChicks and Garden Gate ranges. In addition, house brands are supplied to Shoprite and Pick n Pay. KFC is Supreme s largest customer in the QSR sector. Poultry market overview The South African poultry industry continues to suffer from the effects of imported competition and rising input costs. Maize, soya, fuel and power constitute the main input costs for the business. Measured in rand terms, these costs continue to spiral higher, propelled by a weaker rand. This has had a negative impact on margins across the poultry sector, as producers have been unable to pass on these cost increases to consumers. CBH managed to contain the effects of this margin erosion through its maize and soya hedging programme and an aggressive productivity drive. The business reported an operating loss for the year of R24,7 million compared to an operating profit of R56,6 million in the prior year. Supreme s share of the local poultry market remains steady at 12%. The focus going forward is to continue its drive on internal efficiencies, effective procurement and higher value-added market segments such as QSR and factory outlets. The relationship with KFC continues to strengthen, as Supreme now has the ability to produce for KFC from its Tigane, Botshabelo and Mahikeng facilities. It is the strategic intent of Country Bird Holdings Integrated Annual Report

3 Operational review: Poultry South Africa (Supreme) continued CBH to become a key supply-chain partner of KFC as it expands into Africa. By focusing on the higher quality products demanded by organisations such as KFC, Supreme is inviting and managing heightened pressure in difficult times. This, we believe, will be a crucial determinant of success going forward. Imports For several years we have highlighted the disruptive effect of imports on the local poultry industry, yet the issue remains unresolved in the period under review. The glut of products on the market caused by imports which account for roughly 18% of the total market has removed pricing power from local producers to the point where prices do not reflect the actual costs of production. At a superficial level, this appears to benefit consumers, but in the longer term will result in further erosion of food and job security. ITAC to the Minister of Trade and Industry and we are hopeful for a quick and favourable response. Our largely unprotected poultry industry is something the EU and Brazil, among others, have been only too eager to exploit. Nigeria, Kenya and Swaziland do not allow imports at all, while Botswana and Mozambique issue very few import permits. Namibia restricts imports through a tightly controlled quota system. By way of comparison, the European Union apart from its stringent sanitary thresholds applies tariffs of R5 to R12 a kilogram on imported chicken, Canada applies a 249% tariff on most imports, Norway 306%, Mexico 234% and India 100%. At the same time, non-tariff barriers in the form of phytosanitary restrictions prevent South African producers from accessing lucrative export markets. We therefore believe the poultry industry has a strong claim for higher tariffs to control a clearly flawed and unfair competitive playing field. open new market channels in the domestic and export markets; developing new QSR channels through the further development of new value-added product lines. This should lead to improved margins in products under our control. We support the need for fair competition, but the disruption to the market caused by what we contend is a clear case of foreign suppliers using our market as a dumping ground for excess product, cannot be allowed to continue. The threat to the industry in terms of job losses and earnings erosion is potentially catastrophic. At the time of writing, proposals have been submitted by Outlook The strategic focus for the next financial year will be to concentrate on higher margin target markets, by: expanding Supreme s presence in the food service market; benchmarking quality and production to international standards under the guidance of Cargill International in order to improve internal efficiencies and 22 Country Bird Holdings Integrated Annual Report 2013

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5 Operational review: Animal Nutrition South Africa (Nutri Feeds) Roger Parry Animal Nutrition South Africa (Nutri Feeds) MD Nutri Feeds is the first animal feed producer in South Africa to achieve OHSAS certification Vision To be the leading manufacturer of affordable animal feed solutions for the enduring benefit of our customers. Mission To manufacture, distribute and support superior animal feed to enable our customers to be the lowest-cost producers of animal protein. We strive to be the leading feed manufacturer in South Africa, and a global roleplayer in the animal feed industry. Effectively, to be the preferred supplier of animal feed through reliability, flexibility and responsiveness to customers needs. Strategic vision Mutual success through precision formulation and superior technological customer support. 24 Country Bird Holdings Integrated Annual Report 2013

6 Strategic memberships Agri Laboratory Association of South Africa Association of Animal Feed Manufacturers Botswana Exporters and Manufacturers Association Botswana Poultry Association South African Council for Natural and Scientific Professionals South African Poultry Association South African Society for Animal Scientists This division comprises feed mills at Viljoenskroon (with a monthly capacity of tonnes), Bloemfontein (a capacity of tonnes) and Mahikeng (a capacity of tonnes). Nutri Feeds produces a complete range of animal feed products for poultry, beef, dairy, sheep, swine and animal licks. These products are distributed through outlets in South Africa and exported to Botswana, Lesotho and Namibia. The company also provides high-level expertise in animal nutrition to the industry. It is the first animal feed producer in South Africa to achieve OHSAS certification. This is in addition to Nutri Feeds ISO 9001 and ISO certificates. International linkages with Cargill Animal Nutrition have been strengthened and expanded. Arising from this agreement, new costeffective technologies have been introduced in poultry feed with significant positive results. We expect this trend to continue. A previously decommissioned feed plant has been reopened at minimal capital cost. We expect to fill this capacity with ruminant feed within the next two years. Labour wage demands remain high, despite the challenges facing the animal feed market. The situation is made more complicated by the shortage of suitably qualified artisans. An apprentice practical training programme is under way, which is designed to prepare these employees for their official trade test. With the assistance of international benchmarking and internal capacity comparisons we are making significant progress on cost control and organisational equipment effectiveness. These management tools are expected to yield major benefits during the forthcoming year. Financial performance Nutri Feeds recorded an operating profit for the year under review of R98,1 million against last year s figure of R60,6 million. Efforts were concentrated on cost control and improved efficiencies. These, together with sound procurement practices, enabled our milling operation to remain profitable in a difficult operating environment. Good maize and soya positions, coupled with the advantage of strategically well-situated mills, resulted in Country Bird Holdings Integrated Annual Report

7 Operational review: Animal Nutrition South Africa (Nutri Feeds) continued favourable landed raw material positions and improved margins. Strategic outlook Given the aforementioned challenges faced by Nutri Feeds, the following steps are being taken to improve efficiency and profitability going forward: Assist BEE-compliant suppliers to improve the quality of their product. Increase tonnages to outside customers, through targeted marketing and special opportunities, such as assisting in the drought relief scheme in North West. Recommission an animal feed plant to aggressively target the ruminant feed market within the next two years. Align the nutrient requirement of new genetics with the Cargill matrix in our environment. Verify the contribution of current enzymes used and investigate further potential of this technology. Rank soybean meal suppliers according to their value-add to the business. Monitor the result of skills transferred to our mills in Africa and make the necessary adjustments in order to achieve the required performance. Focus on all disciplines to ensure we are the lowest-cost producer of animal protein on the continent. Continue making improvements to our Management Information Systems. Upgrade production facilities and control systems at mill level to stay competitive in the global market. A strong foundation for growth is now in place and Nutri Feeds expects to achieve volume growth over the next two to three years. Despite expected lower margins, we are prepared for the challenge of operating profitably in an environment of rising raw material inputs and a weaker rand. 26 Country Bird Holdings Integrated Annual Report 2013

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9 Operational review: Africa operations Colin Lindsay Zambia MD Mike Mallet Botswana MD CBH selected the IFC as its preferred strategic partner in the consolidation and growth of its Africa businesses Our African businesses operate mainly in Zambia and Botswana and comprise poultry breeding operations using Ross genetics. Animal Nutrition Other Africa consists of two animal feed mills, one in Gaborone and the other in Lusaka. Strategic memberships Zambia Millers Association of Zambia Poultry Association of Zambia Zambian Federation of Employers Zambian National Farmers Union Botswana Association of Animal Feed Manufacturers Botswana Poultry Association 28 Country Bird Holdings Integrated Annual Report 2013

10 Poultry Other Africa Our Zambian business comprises a grandparent/parent breeding operation and stock feed mill. Ross Zambia is a wholly owned subsidiary of CBH, employing more than 800 people with an estimated 40% market share in the Zambian day-old chick market. Our operation supplies parent stock to the local market as well as exports to neighbouring countries including Botswana, the DRC, Malawi, Mozambique, Angola and Zimbabwe. We produce broiler day-old chicks per week, mainly for the local market. The Zambian poultry industry has remained resilient throughout the year and we were able to increase volumes in both the broiler day-old chick and parent market. This, together with good parent flock utilisation, has enabled Zambia to achieve excellent operating profits. In Zambia, we achieved volume growth of 12% while maintaining margin through the ability to pass on (large) raw material input increases. Growth was achieved by establishing additional exports into neighbouring countries while maintaining market share in the local economy. Focus remains centred around continual efficiency improvements, cost control and full utilisation. Sales of parent day-old chicks has remained firm during the year and with the economies of the neighbouring countries showing continual signs of improvement, we believe there will be increased demand in the region. With the Zambian economy also strengthening the demand for day-old chicks continue to grow and we are planning to open new depots and agencies in anticipation of this increased demand in the coming year. Ross Botswana consists of a parent breeding operation, broiler farm, abattoir and a stock feed mill and we are the leading supplier of day-old broiler chicks to the local market, producing chicks per week. CBH holds a 60% share in the Botswana operation with the remaining 40% being held by a local partner who also owns an abattoir in Gaborone. Significant volume increases were recorded in our dressed operations in Botswana, from a relatively low base, and we achieved a 20% increase in day-old chick volumes, mainly due to the Francistown hatchery coming on stream for a full year. Prices in the poultry industry in general have not kept pace with input costs resulting in margin reduction but we are well placed with a strong customer base and quality product to take advantage of an upturn when it comes. In overall terms, this poultry sector recorded an operating profit of R33,9 million for the year which was an increase of 61% over the previous year s figure of R21 million. We are optimistic of further improvements in volume sales and profitability in 2014, particularly in Country Bird Holdings Integrated Annual Report

11 Operational review: Africa operations continued light of the substantial improvements being achieved in internal efficiencies. It is pleasing to note the improvement in key performance indicators over the period in terms of higher yields obtained at the Botswana abattoir, along with better feed conversion and mortality rates from the broiler operation with much improved live weights. Animal Nutrition Other Africa The Zambian feed mill currently produces tonnes of stock feeds per month and the Botswana operation tonnes per month. Both mills supply feed to the local market and the Zambian mill has been successful in creating export markets in the DRC and Zimbabwe. The Botswana operation has recently received export approval status and will be looking at the Zimbabwe market. Both operations supply broiler and breeder feed with Botswana looking to expand into the ruminant sector. The Zambian operation continues to show signs of improvement and greater emphasis will be placed on a marketing model which takes advantage of the solid reputation of the Ross broiler chick. Retail outlets are in place and will be expanded to offer a comprehensive range of products together with technical assistance. In Botswana, management s focus was on rationalisation of product lines, efficiency improvement and streamlined procurement policies. These efforts, together with solid foreign exchange management, ensured significant margin improvement. Other highlights for the year include the completion of our ruminant feed formulations, the installation of a new hammer mill, upgrades to the testing laboratory as part of an ongoing focus on maintaining world-class quality standards, and the development of new markets across all business areas. In both countries we have been successful with our customer model whereby we look to build on customer focus and provide exceptional service delivery. Coupled with the provision of on farm and in the field technical assistance we are able to provide a service to the local poultry industry which in turn will create further growth and empowerment of local citizens. In Botswana it is linked with the Buy Botswana initiative ensuring food security for the nation. Various community projects are undertaken and supported in both countries, particularly in the rural areas. Following on from the many initiatives undertaken during the year, and growing strong economies, this sector produced an operating profit of R35,5 million compared with R7,7 million for the comparative year, an excellent result. IFC investment to boost Africa growth CBH selected the IFC as its preferred strategic partner in the consolidation and growth of its African businesses. The IFC convertible loan to CBH will have a material effect on the growth and efficiency of our African operations going forward. Funds will be used to expand chick production in Botswana and Zambia, to grow the feed mill capacity in Zambia and to raise broiler meat processing capacity. CBH will also benefit from the IFC s considerable global expertise in the poultry and feed sectors, specifically: The IFC s technical expertise, global knowledge of the industry and markets, as well as lessons learned from other integrated poultry projects. The IFC will further support CBH s long-term regional project scope with tailor-made financing. It will also assist CBH with its resource efficiency management programme. Retail and distribution This new segment was formed by combining Supreme Distributors, Long Iron Meats and Ama Chick Chick factory retail outlets. The operation will focus on optimising distribution and logistics for the group. The difficult trading conditions previously referred to resulted in the segment realising an operating loss of R10,2 million compared with an operating profit of R3,6 million in the prior year. 30 Country Bird Holdings Integrated Annual Report 2013

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