Operational review: South African Poultry (Supreme)

16 Country Bird Holdings Integrated Annual Report 2012 Operational review: South African Poultry (Supreme) Jack Searle Supreme Poultry MD

Country Bird Holdings Integrated Annual Report 2012 17 Vision The people s choice in chicken The vision has a strong marketing emphasis and implicates 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: hhbeing the lowest cost producer; hhbeing a fully integrated poultry operation; and hhfostering the right strategic alliances. Strategic memberships hhsouth African Poultry Supreme Poultry (Supreme) is CBH s poultry operation, and the third-largest poultry producer in South Africa. It provides a broad range of fresh and frozen products to the retail, wholesale and quick service restaurant (QSR) sectors in South Africa and a number of African countries. Supreme also has its own network of retail outlets. Nationally, Supreme employs approximately 3 500 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. The company s abattoirs are located in Bloemfontein, Klerksdorp and Mafikeng; and the hatcheries are located in Bloemfontein and Mafikeng. 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. With a steady hold on approximately 12% of the local poultry market share, Supreme increased its production to 1,5 million birds per week. The company has the potential to increase its production capacity to 1,8 million should demand rise. Poultry industry overview The South African poultry industry has been under severe pressure over the past year. Imported products and commodity prices have been largely responsible. The competition from imported poultry products has grown substantially and is now sitting at its highest level. The numbers reflect the harsh environment imports grew by 39% from the previous year, while the local industry grew by only 1%. The increases in commodity prices also had an adverse effect on costs during 2012. Maize prices increased

18 Country Bird Holdings Integrated Annual Report 2012 South African Poultry (Supreme) continued by 11% in the latter part of the year while there were no increases in the selling prices of chicken products. The increase in the cost of raw materials did not reflect on sales prices in the industry. Sales prices rose by 1% from 2011 and market demand slowed. Strategic overview The relationship with KFC has continued to grow Supreme won its Supplier of the Year award for 2011. A key highlight was the Mafikeng abattoir gaining accreditation to produce poultry for KFC. Supreme now has the ability to produce for KFC from both its Tigane and Mafikeng facilities. The current strategy of opening retail outlets has proven to be profitable. The sales through this channel have grown to 5% over the past year. The outlets serve as a small distribution centre as well as a retail outlet and operate under the Ama Chick Chick brand. The Maputo Distribution Centre also received YUM! Star accreditation for KFC products. Poultry imports into South Africa continue to be a threat to the local industry having grown 39% in comparison to local growth of only 1%. The company is working in partnership with the South African Poultry (SAPA) to ensure local beneficiation continues. Supreme will be engaging with local, provincial and national government over the next few months to plot the way forward. During the second half of 2012 we purchased the distribution company Renidroc. Renidroc is the largest frozen foods distributor in central South Africa. By acquiring our own in-house distributor we will be saving on costs in the form of margins paid to third-party distributors and we will be able to generate additional revenue through the existing distribution channels in the Free State, Northern Cape, North West and Gauteng. Renidroc owns distribution centres in the Free State and in the Northern Cape, making it the ideal distributor to retail customers in these areas. Supreme performance Key areas in Supreme s Agri department showed recovery from the national infectious bronchitis (IB) challenge in 2012. Supreme is supplied entirely by contract growers and this heralded positive results with improvements in key performance areas such as live mass and feed conversion rate. The high levels of imported product flooding the market placed further strain on margins and prices. Sales to export markets decreased with the closing of the Zimbabwean border to South African poultry products. Exports to Namibia remained strong and further expansion into other African markets is planned. During the year, staff at the Botshabelo abattoir in the Free State went on industrial strike action. This strike was not unexpected given the current labour environment within South Africa. After a prolonged strike of nine weeks the parties reached an amicable settlement. Despite all efforts to avoid disruption of product supply to customers and to minimise any inconvenience that they may have suffered, the total cost of the strike action was R23,6 million. Financial performance Despite the challenges presented by increased imports and higher commodities prices, South African poultry volumes increased by 1%. The Botshabelo strike, coupled with the sharp increase in feed prices, further reduced Supreme s margins. Revenue for the period was R1 861 million, an 11,2% increase from the previous year of R1 674 million. Operating profit was down 60% from 2011 to R57 million in 2012 due to the strike and compounded by lower realisation in the market and high raw material costs. The average realisation for the year was R12,06 per kilogram, compared to R11,36 per kilogram in 2011. Cost savings were due to tight controls on capex and working capital. Operating profit margin reduced to 3% from the 8,5% achieved in 2011. Outlook 2013 In 2013 Supreme will focus on expanding into the target markets identified: hhfoodservice hhexports hhama Chick Chick outlets hhvalue-added products In the short term, however, we expect Supreme s operating margins to remain under pressure. We expect to see further growth in our QSR market by adding product lines and equipping our Mafikeng abattoir with the production lines required to further expand our presence in the Foodservice market. Supreme will also be launching our value-added product range in 2013, together with our new company logo and branding. We look forward to 2013 and continuing our drive to become The people s choice in chicken.

Country Bird Holdings Integrated Annual Report 2012 19 Operational review: Animal Nutrition (Nutri Feeds) Gert van Heerden Nutri Feeds MD

20 Country Bird Holdings Integrated Annual Report 2012 Animal Nutrition (Nutri Feeds) continued 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 role-player in the animal feed industry. Effectively, to be the preferred supplier of animal feed through reliability, flexibility and responsiveness to customers needs. Strategy Mutual success through precision formulation and superior technological customer support. Strategic memberships hhagri Laboratory of South Africa hh of Animal Feed Manufacturers hhbotswana Exporters and Manufacturers hhbotswana Poultry hhsouth African Council for Natural and Scientific Professionals hhsouth African Poultry hhsouth African Society for Animal Scientists Nutri Feeds is one of the first animal feed manufacturers in the world to achieve both ISO 9001 and ISO 22000 certification from two independent certification bodies QMI and DQS. Overview This division comprises feed mills at Viljoenskroon (with a monthly capacity of 24 000 tons), Bloemfontein (with a capacity of 6 000 tpm) and Mafikeng (a capacity of 8 000 tpm). Nutri Feeds produces a complete range of animal feed products for broiler, beef, dairy, sheep, swine and animal licks. These products are distributed through 280 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 18001 certification. Nutri Feeds reported an improvement of 3% in volumes sold for the period under review. This was enhanced by a 27% increase in selling prices, giving a net 31% increase in revenue. Operating profit for the year under review was R60,6 million, compared to R48,9 million in 2011 and R27,2 million in 2010. Disciplined cost control and improved capacity usage were insufficient to offset the increase in raw material prices, with the result that margins declined by 0,3% for the year. Nutri Feeds continues to enjoy strong volume growth to key customer groups, particularly non-broiler producers. This is the result of a conscious effort to diversify the customer base: several new customers were signed up during the year, and several more are in the pipeline. Total feed production in South Africa is estimated at slightly less than 10 million tons per annum, growing at less than 5% a year. Nutri Feeds is well positioned, both geographically and in terms of product quality and range, to continue to expand its share of this market. Of significance is the further improvement in the growing feed conversion ratio (FCR) from 1,68 for outside clients at the end of the previous year to 1,66 at the end of this year.

Country Bird Holdings Integrated Annual Report 2012 21 The group procurement policy of hedging against rising maize price increases and buying at spot in times of falling prices contributed to the financial performance. The average price paid for maize during the year was under R2 100 a ton, which is below the Safex market average for the year, demonstrating the efficiency of the procurement policies in place. Other highlights for the year include the ongoing improvement in quality standards which, among others, resulted in a further improvement of two basis points in FCR during the year for Nutri Feeds broiler feed customers as a group and aboveaverage client service levels, energy management and the reduction of non-manufacturing costs. The Pragma Management system resulted in a promising reduction in downtime and noticeable increased productivity with substantially higher efficiency levels. The benefits derived from the implementation of the Pennent Model Mill resulted in effective benchmarking with international role-players. As mentioned earlier, the Safex price of maize has doubled in the last two years. While we have been able to mitigate this cost increase to some extent through our hedging programme, the extent of the price rises over the last year meant we were forced to absorb some of the increases, resulting in lower margins compared to 2011. Maize prices were driven up as a result of hot, dry weather conditions in key US producing states, and the local export drive though the outlook going forward is for a record 354 million tons from US, higher than the previous record set in 2009/10. The US is the principal price-setter in the global market, and South African prices tend to follow. Another factor influencing Safex prices is the rand/us dollar exchange rate, which weakened in the first half of 2012, causing the local maize prices to rise above R2 600 a ton, before retreating to around R2 100. The volatility of these price moves hinders our ability to set stable prices, but is unfortunately a recurring feature of life given the turbulence affecting world commodity markets. The strategy for the coming year is to continue to develop new market opportunities, diversify the customer base (particularly in the non-broiler market), further optimise plant performance and achieve ongoing savings in non-manufacturing costs. Strong focus is placed on: hhthe maximisation of customer satisfaction through the provision of world-class products and services; hhoverall planning and management thereof; hhthe integration of the existing MIS system throughout the division; hhthe continuation of the existing direct procurement of maize from source; hhcost savings through management of more effective capacity and time utilisation; hhfurther reduction in overtime; hhtransport savings through better planning and vehicle capacity utilisation; and hhenergy savings. Prospects Volatility in the financial markets with the concomitant drought in the USA had a depressing effect on commodity pricing in the year under review. The increased energy cost and the shortage of quality coal products, together with excessive imports of chicken, present a challenge to the poultry industry in South Africa not often previously experienced. The recent worldwide reduction of poultry products, together with the reduction of imports during August of this year, presents an opportunity for the local producer to combat the situation by managing its input costs more efficiently. Nutri Feeds will continue to maximise customer satisfaction through the provision of world-class products and services. Management of non-manufacturing costs will thus, more than ever before, receive close attention. Our primary objective will thus be to provide a sound platform for meaningful profit growth on an annual basis. Focus areas for the coming year are: hhworld-class management and technical expertise; hhapplied information systems; and hheffective raw material procurement and risk management.

22 Country Bird Holdings Integrated Annual Report 2012 Operational review: Africa and Beef Colin Lindsay Zambia MD Mike Mallet Botswana MD

Country Bird Holdings Integrated Annual Report 2012 23 Africa operates mainly in Zambia and Botswana where it has interests in poultry breeding operations using Ross genetics. Animal Nutrition Other Africa consists of two animal feed mills, one in Gaborone and the other in Lusaka. The beef business is located in Klerksdorp and consists of a beef trading enterprise. Strategic memberships Botswana hh of Animal Feed Manufacturers hhbotswana Poultry Zambia hhmillers of Zambia hhpoultry of Zambia hhzambian Federation of Employers hhzambian National Farmers Union Beef hhred Meat Abattoir Zambia This division comprises a grandparent/parent breeding operation and stock feed mill in Zambia. Ross Zambia is a wholly owned subsidiary of CBH, employing more than 800 people and has a 40% broiler day-old chick market share in Zambia. Zambia supplies parent stock to customers in Botswana, the DRC, Malawi, Mozambique, Angola and Zimbabwe. The parent division of 160 000 breeders supplies 250 000 broiler day-old chicks per week. 2012 was another exceptional year regarding the sale of broiler day-old chicks in the Zambian operation. Market demand for broiler day-old chicks was 20% higher than the previous year, which had also been an exceptional year. Strategically, additional capacity needs to be implemented to ensure that our customers and national demands are catered for and in order to retain market share and protect local investment. Parent sales in the region have remained firm with Mozambique, Zimbabwe and Malawi indicating expansion plans for their operations in the coming year. Should these materialise, expansion of the grandparent facilities will be required. The feed mill currently produces 4 000 tons of stock feeds per month and supplies 20% of the local market as well as exporting to Zimbabwe and the DRC. A 20% increase in sales volumes was realised at the feed mill, which maximised the present capacity. These volumes were achieved by streamlining the product ranges and focusing on poultry feed to enable consistent supply. Export sales increased substantially over the previous year (150% increase from 3 000 tons to 7 400 tons). Expansion plans are in place to increase the mill capacity by 40% with the installation of automated bagging, bulk bin storage for raw and finished products, a dedicated hammer mill and an automated maize intake system. All materials are on site and in the final stages of installation. Commissioning was completed during June 2012. Low margins were realised in the feed division due to high raw material costs, particularly soya cake (largely imported) and brans. Bumper soya crops are expected locally which should stabilise, if not reduce, stock feed prices going forward. Increased in-house soya cake production will also assist in improving margins. The Zambian economy, in particular the poultry and feed markets, remains buoyant, with positive prospects for market growth in 2012 to 2013, provided capacities are increased to satisfy these demands. Botswana Ross Botswana consists of a parent breeding operation, broiler farm and abattoir and a stock feed operation in Botswana. Ross Botswana is now

24 Country Bird Holdings Integrated Annual Report 2012 Africa and Beef continued the leading supplier of day-old chicks to the Botswana market. The Botswana poultry market was affected by the increase in competition of processed chicken, higher input costs and a general oversupply for a period which was fuelled by a concurrent oversupply of beef into the local market when exports by the Botswana Meat Commission were temporarily suspended. In spite of these challenging market conditions, volumes of processed chicken sold increased by 6% out of the Francistown operation and dayold chick (DOC) sales from the two hatcheries increased by 14%. The processed chick price increased by 6% and the DOC price by 11% year-on-year. The increased volume throughput was able to absorb the increased cost of production resulting in commendable earnings growth in the abattoir. The hatcheries and breeder farms also experienced a sharp rise in input costs which resulted in earnings remaining constant. The outlook for 2013 remains cautious with the focus on commodity price movements which directly impact production costs and poultry viability. The industry will have to work hard on improving efficiencies, reducing production costs and servicing the market effectively. Management is fully aware of these challenges and will continue to improve processes and seek the most optimum marketing channels. Nutri Feeds Botswana experienced a volume drop in the year of 8% resulting from rationalising product lines, increased competitor activity and a reduction in exports. Commodity prices soared in the year resulting in a 34% cost increase offset by a 27% increase in revenue per ton. Critical plant and machinery was replaced in the year and the mill management changed. This upgrade and change translated into improved efficiencies, service delivery and quality of the finished product. The mill achieved commendable results in spite of these challenges and the outlook for 2013 is very encouraging. Beef This division comprises an abattoir in Klerksdorp and a trading operation. This business continued to face industry-wide challenges, including scarcity of supply. The abattoir was closed during the second half of the year and currently carcasses are bought and deboned based on demand and pricing. Fixed costs in this business were significantly reduced.