CHAIRMAN’S STATEMENT
OPERATING ENVIRONMENT
Overall, the first half of the year was a period of economic strain. Macroeconomic instability persisted in Q1, characterized by high inflation, exchange rate volatility and depreciation of the local currency. The introduction of the Zimbabwe Gold (ZWG) currency in April resulted in stabilization of both the exchange rate and inflation, thereby creating a more predictable and conducive market environment.
According to the Zimbabwe National Statistics Agency (ZIMSTAT), United States Dollar (US$) prices declined by a modest 0.3% and ZWG prices increased by a negligible 0.04% in June 2024. Since its introduction, average ZWG prices declined by a cumulative 2.38%. The blended inflation rate for June 2024 registered a deflationary figure of -0.24% as utilization of the ZWG increased . However, liquidity was constrained due to the implementation of a rigorous monetary policy framework aimed at mitigating inflationary pressures. This approach involved the deliberate contraction of money supply, coupled with heightened enforcement of related regulations.
The intermittent availability of essential utilities, namely water and electricity, also escalated production costs and impeded consistent output, while disruptions within the supply chain continued to affect consistent availability of essential inputs. The El Niño-induced drought severely impacted agriculture, leading to reduced output and heightened food insecurity.
FUNCTIONAL CURRENCY
The financial results are presented in US$ following the change of the Group’s functional and reporting currency on 1 March 2024. After careful consideration of the prevailing operating environment and the applicable requirements of the International Financial Reporting Standards (IFRS), the Board of Directors determined that the Group’s functional currency had transitioned from the Zimbabwe Dollar to the United States Dollar. To comply with the IFRS, the inflation adjusted numbers reported in the prior year have been converted using the official exchange rates that were prevailing at the respective reporting dates. Current year reported US$ values include January to February inflation adjusted numbers that were converted using the exchange rate that was prevailing on the date of change. While the conversion processes were performed in accordance with IFRS, due caution must be exercised by users of these financial statements when relying on the converted balances as their determination was subject to exchange rate distortions and estimation uncertainties on computing inflation indices.
PERFOMANCE
Raw Milk
According to the Dairy Services Unit within the Ministry of Lands, Agriculture, Fisheries, Water, and Rural Development, national raw milk production surged by 22% year-on-year, reaching a total of 55.1 million litres during the period under review. The Group significantly enhanced its position by utilizing 19.97 million litres of raw milk, representing a substantial 40% increase compared to the previous year. This robust performance solidified the Group’s dominance in the market, with its market share expanding from 28% in 2023 to a commanding 36% in the current period.
Sales Volume and Revenue
Overall, the Group achieved a volume growth of 2%. While the Liquid Milks and Foods categories demonstrated strong performances, this positive trajectory was partially offset by a decline in the Beverages category.
Liquid Milks exhibited substantial growth, increasing by 21% year-on-year due to augmented raw milk supply. Chimombe, Steri, Lacto and Supermilk all recorded gains in market share compared to the same period in the previous year. Foods experienced a 25% increase in sales volume, largely driven by exceptional performance of Yummy yoghurt and ice creams, along with a recovery in Lyons peanut butter which benefited from improved product availability.
Conversely, the Beverages category contracted by 8%, primarily attributable to challenges encountered by the Pfuko brand. These difficulties arose from price adjustments necessitated by the introduction of the sugar tax and Value Added Tax modifications, compounded by the prevailing scarcity of small denomination coins for change. Performance of the other brands was similarly subdued as a result of depressed aggregate demand subsequent to the price increases.
As the Group maintains its strategic emphasis on exports, a substantial growth of 59% in export volume was recorded compared to the corresponding period last year. This commendable performance resulted in a contribution of 9% to overall sales, an increase from the preceding period’s 6% share.
The half year revenue, at US$54.71 million, was 13% ahead of prior year comparative period, due to the 2% increase in sales volume and strategic pricing adjustments implemented to mitigate margin compression. Volume sold in US$ constituted 76% of the total volume, representing an increase from the 64% recorded in the corresponding period last year.
Profitability
The Group experienced significant cost increments on account of imported inflation, changes in the tax regime and price distortions arising from exchange rate movements. The imposition of a special surtax on added sugar in beverages at a rate of US$0.001 per gram effective 9 February, coupled with standard rating of maheu and VAT on milk powders, and reclassification of liquid milks from zero rated to exempt, resulted in a substantial increase in the cost of production. This immersed significant pressure on working capital and exacerbated the financial burden on operations.
However, cost containment measures employed on manufacturing overheads were successful in reducing cost of sales by 1% from prior year, notwithstanding the volume and revenue growth.
The rapid depreciation of the local currency prior to the introduction of the ZWG resulted in significant net foreign exchange losses of US$3.3 million [2023: US$3.84 million] arising from foreign currency denominated obligations. Included in the finance costs figure of US$2.48 million, are foreign exchange losses on foreign currency denominated loans and borrowings amounting to US$1.46 million. However, amidst volatile and challenging economic headwinds, the business managed to achieve a profit for the period of US$3.06 million, a notable recovery from the US$0.74 million loss incurred in the comparative period last year.
Working capital
The Group’s operational cash flows were constrained by substantial investments in inventory, advance payments to suppliers, and delayed customer settlements. Shortfalls in working capital were funded from short term borrowings. The Group is employing measures to accelerate its inventory turnover and shorten its cash operating cycle.
Outlook
The economic outlook remains intricate. Slow global economic growth, particularly subdued mineral prices, pose a potential risk to Zimbabwe’s export revenues. While the introduction of the ZWG aimed to stabilize the economy, its long-term impact remains to be seen. The nation continues to grapple with foreign currency shortages, which affects imports and economic activity. Maintaining currency stability and curbing inflation are imperative for safeguarding purchasing power and fostering a conducive business environment.
The prevailing drought conditions exerted a substantial negative impact on agricultural yields, which is anticipated to impede overall economic growth and contribute to food price inflation. This adverse condition is also projected to curtail raw milk production. Nevertheless, the Group’s substantial raw milk supply growth realized during the first half of the year is expected to partially offset some of these potential adverse consequences.
Given the persisting constraints within the operating environment, cost reduction has emerged as a paramount imperative. Accordingly, concentrated effort will be directed towards minimizing expenditures by targeting the major cost drivers.
The Group will continue to prioritize the expansion of export activities. This focus aims to bolster foreign currency inflows, optimize production capacity, and elevate brand recognition within the region. A pivotal component of this strategy involves the full commercialization of our toll manufacturing operations in South Africa. By capitalizing on this cost-effective production model, we anticipate broadening our export reach and mitigating risks associated with domestic market fluctuations.
DIVIDEND
The Board has resolved to withhold the dividend payment for the six-month period ending June 30 2024, in order to conserve financial resources that will be allocated towards advancing the Group’s strategic objective of increasing volume growth.
APPRECIATION
I extend my heartfelt gratitude to fellow board members, management and staff and all stakeholders for your unwavering support and dedication to our shared vision. Your contributions, commitment, and resilience have been instrumental in driving our growth and success. Together, we have navigated challenges and celebrated achievements, and I am confident that with your continued partnership, we will reach even greater heights.
J Sachikonye
Chairman
12 September 2024