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FOOD: Difficult Balancing Act At Pioneer


Recent Western Cape Business News

PIONEER Foods, the Paarl-based food brands conglomerate, looks set to per-form a difficult juggling act in 2009.

The one hand needs to juggle sizeable financial charges stemming from capital expenditure on relieving capacity constraints; while the other hand needs to juggle operations to ensure consumers feel they are still getting value for money.

Still, the R15 billion a year company can probably regard itself as fortunate in spite of the tough times looming for consumer industries.

The group probably squeaked in its listing ahead of the onset of truly rotten sentiment on the JSE, managing to raise a not insubstantial R500 million in the process.

Pioneer also managed to restructure its debt to support its extensive capital programme as well as ensure liquidity for working capital needs.

This process saw the group clinching a syndicated facility of R3.6 billion from no less than six financial institutions. Given the state of the corporate lending market these days, Pioneer might have battled to raise such a level of funding if it had delayed the exercise to 2009.

In any event, Pioneer is earmarking these funds for fixed capital spending aimed at easing capacity constraints in its core staple foods businesses - the milling, the baking and the Weet-Bix businesses.

Interestingly, the fledgling Pepsi business will also be a recipient of capital expenditure – which suggests Pioneer is finally seeing flickers of sustainable viability in the softdrinks business.

While it’s great that Pioneer has the funds to expand production at key operations, the downside of the equation is that the increased investment in working capital and the fixed capital spend meant Pioneer forked out some R220 million in finance charges at the close of the last financial year.

Effectively this shaved the fat off bottom line, leaving Pioneer’s earnings down 7% to R468 million for the year to end September 2008.

The interest bill does not really seem to bother Pioneer’s directors too much. The board – at an AGM last month – expressed confidence around the group’s ability to “sustain and grow its cash generation from operations over time.”

To underline their confidence, an increased payout to shareholders of 96c/share was approved – an exercise that included R132 million paid out in a final dividend last month.

But at Pioneer’s AGM last month chairman ‘Boy’ Blanckenberg did note: “We are sensitive to the level of debt we incurred to fund the capital expansion programme and will continue to manage fixed and working capital with strict approval and deployment principles.”

Blanckenberg also highlighted significant shifts in the business environment over the last year – mentioning, in particular, the marked drop in the oil price from $140 per barrell to around $40 per barrel.

Obviously oil - mainly through transporting and harvesting food products – is a major input cost for food producers.

While expressing gratitude for these ‘turnarounds’, he stressed that the magnitude of change in these economic drivers and indicators poses an interesting challenge to the management of any business.

Blanckenberg said Pioneer – which has been implicated in a bread price fixing scandal - was concerned about the plight of the consumer. “As such we won’t hesitate to adjust prices lower when we’re in a position to do so.” He conceded, however, that it was a balancing act with upward and downward cost pressure at any given time and a minimum price required to ensure Pioneer’s sustainability.

Blanckenberg reckoned Pioneer is well positioned.

“Our revenue is not dependent on one single industry or category of products where credit approval or postponement of spend is under threat in these difficult economic circumstances.”

“This and our defensive basket of products and well known brands should sustain and grow our revenue and profit stream in future.”

The issue for Pioneer Foods – or at least the way CBN sees it – is that the core staple food businesses continue to prop up operating profits. Of the R865 million earned in operating profits financial 2008, R622 million came from baking business Sasko and almost R240 million from cereals business Bokomo.

Ceres Beverages (which includes Pepsi) chipped in R78 million, while the agribusinesses could only muster R3.5 million (after contributing over R100 million in financial 2007).

Basically this means efforts – mainly by acquisition – to diversify Pioneer away from its staple foods core have not really been terribly successful.

It’s no wonder Blanckenberg told shareholders at the recent AGM that Pioneer’s growth hinged on a turnaround in the egg and broiler businesses and gaining critical mass in the Pepsi venture.

But efforts to spare consumers from sizeable price increases will surely restrict Pioneer’s ability to fatten its trading margins in the agri-businesses – particularly since some of these businesses are facing up against larger competitors.

Trade to date at Pioneer (ie the first five months of the new financial year), according to Blanckenberg, saw “satisfactory volume growth in the three months to December with a softening in volume growth in January and February as expected at this time of year.”

He indicated that Pioneer’s earnings for the first half of the 2009 financial year should be broadly in line with the same period last year.

Blanckenberg believed Pioneer still capable of improving its operating as operating costs stabilised and inflation subsided.

CBN wonders, though, if Pioneer would embark on a serious restructuring exercise if margins – especially in the brand strong agri and Ceres divisions – don’t come up to spec.

Surely it would make sense to stick to the areas where the company already enjoys dominance (bread and cereals), and not extend the costly runs in smaller and less profitable niches at a time when finance charges are eating into bottom line?

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