National Foods flag high cost of doing business

Business Writer

The cost of doing business in Zimbabwe was elevated for the 12 months to June 30, 2023 forcing National Foods to report flat margins despite recording double-digit growth in revenue.

According to the Group’s Independent, non-executive chairman Todd Moyo, revenue for the period under review increased by 21,7 percent to US$ 343 million while average selling prices increased from $ 495 per tonne to $621 per tonne year on year.

However, the Group did not enjoy higher margins after deciding to minimise price increases and maintain demand.

As a result, “the full extent of raw material inflation was not passed on to the consumer, resulting in gross margin dollars being flat year on year, in spite of the much higher revenue”.

In addition to raw materials price increases, operating costs increased by US$3,8 million compared to last year, driven in the main by salary increases at factory floor level, power costs and IMTT, reads part of Moyo’s statement accompanying financials.

Further, according to Moyo, reduced power availability forced the consumer staples giant to resort to expensive standby generators to maintain product supply.

At the same time ZESA costs also increased significantly in real terms.

Moyo added that IMTT has become a significant cost to the business and the recent reduction in the percentages applied to calculate IMTT will bring some welcome relief in terms of this expense line.

The Group also had to contend with financial losses largely on account of translating the Group’s various Zimbabwe Dollar monetary positions, “as once again consistency of product supply was prioritised to certain market channels, even when it resulted in financial losses”.

Elevated costs on Zimbabwe dollar debt following an increase in interest rates per annum to 200 percent also weighed on performance with net interest costs amounting to US$4,7 million. These costs were, however, reduced materially for the rest of the year as the Group’s borrowings were converted to USD.

With such high costs of doing business, operating profit before interest, equity accounted earnings and tax for the year was US$23,4 million, 16,5 percent below last year, “in summary due to our strategy to moderate price increases and the higher operating costs”.

Profit after tax for the year at US$7,53 million was 39 percent below last year.

However, despite the significantly reduced profits, Moyo said the Group’s statement of financial position remains in a “healthy state”.

“In a financially challenging year there were notable improvements in the management of working capital, and the release of US$ 13,1 million of working capital was the main contributor to excellent free cash flow generation of US$ 20,9 million.

“The free cash was largely used to fund our expansion projects, where US$17,9 million was deployed.”

The Group’s net debt position closed the year at US$11,0 million, and Moyo described this as “a very moderate level of gearing and particularly so considering the extent of the capital investment deployed during the year”.

With the financial position in such a “healthy state” the Board declared a final dividend of US1,15 cents per share (2022: US5,95 cents per share) payable in respect of all ordinary shares of the Company bringing the total dividend to US$4,05 cents per share.

Moyo said while the financial results for the year were disappointing from a profitability standpoint, there was “significant and exciting progress in terms of our new product portfolio”.

“The year ahead will see the commissioning of the new biscuit and pasta lines, and landing these products in the hearts and minds of the consumer will be a key priority in the year ahead.

“The second phase of the breakfast cereal facility was commissioned during the year, and so far the new products have been well received by consumers.

“The core commodity business units are showing signs of steady recovery with the normalisation in commodity prices, and our management teams will continue to focus on operating efficiencies and product quality in these units.”