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| Introduction |
| The
strong growth in headline
earnings per share for
the year under review
reflects a relatively
benign trading environment,
nimble management and
a solid platform for growth
established in the previous
financial year. All but
two areas of the Group
– Handling &
Storage and the International
business – reported
excellent results. |
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| JD Wright Managing
Director |
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DM Sewela Deputy
Managing Director |
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| Handling
& Storage |
Handling &
Storage, one of the country’s
largest grain silo businesses, had
a difficult year because of the relatively
small maize crop. Due to the drop
in maize prices farmers were unwilling
to plant, resulting in a far smaller
area being planted to maize last season.
This resulted in lower capacity utilisation
at all silo complexes during the past
financial year.
The reduced supply of maize forced
prices higher, encouraging farmers
to increase maize plantings for the
current season. Initial estimates
for the year put the expected crop
size at 7,75 million tons, but the
lack of rains in the key maize growing
areas of the country has recently
reduced this estimate to 6,9 million
tons, only marginally above last season’s
figure. Conditions are expected to
improve slightly during the coming
year due to a marginally larger maize
crop and pro-active measures taken
by management to win new customers
and gain market share. AFGRI is well
positioned in the market due to its
relentless focus on costs and risk
management. The Handling & Storage
business today operates the lowest
cost and most efficient silos in South
Africa. |
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| International
businesses |
| The businesses
in Zambia and Western Australia had
a difficult trading period, though
for different reasons. Western Australia
suffered the worst drought in its
history, with the result that demand
for equipment was sharply down. The
Australian business nevertheless posted
a profit for the year and is expected
to show a much improved performance
in the coming year as weather conditions
are expected to normalise and commodity
prices have increased. The Zambian
business had to contend with a number
of structural, internal problems and
market impediments – most of
which have been addressed –
and it, too, is expected to return
to profitability in the current financial
year. |
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| Producer
Services |
In the previous
financial year AFGRI embarked on an
aggressive strategy to lower fixed
costs, reduce stock holdings and phase
out non-viable retail stores. The
retail business has posted a healthy
financial improvement, due in part
to strong buying by farmers ahead
of the current growing season and
more efficient stock management. Notwithstanding
the recent drought which has afflicted
many of the maize growing areas of
the country, the increase in plantings
at the start of the current season
and higher maize prices were positive
for tractor sales. John Deere’s
renewed focus and revitalised product
range contributed to market share
gains over competing products. AFGRI
also consolidated its workshop and
spares facilities to improve profitability
during the year. Given the current
high level of grain prices, we expect
another good year for tractor and
equipment sales.
A key strategy, co-ordinated by Producer
Services in liaison with the rest
of the Group over the past two years,
was the creation of farmer advisory
forums, comprising AFGRI managers
and representatives of the farming
communities. These forums establish
a direct line of communication between
AFGRI and its customers. They serve
to keep AFGRI abreast of developments
in local areas and respond promptly
and efficiently to the needs of farming
communities.
The benefits of this type of strategy
are visible in the financial results
under review. A considerable amount
of management attention was devoted
to those parts of the business performing
below par, resulting in a healthy
turnaround of Producer Services. |
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| Broilers |
| A strong performance
from Daybreak Farms, our recently
acquired broiler business, vindicates
the decision to re-enter this market
after exiting it a little over a year
ago. Shareholders will be aware that
the Group disposed of its 50% interest
in Earlybird Farm in 2004 due to restrictions
placed on AFGRI by the partnership
agreement. AFGRI announced its intention
to re-enter the broiler market once
a suitable acquisition presented itself.
Daybreak, assisted by the growing
demand for broilers from the rapidly
expanding middle income market, has
fulfilled and even exceeded expectation. |
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| Cotton |
| The decision to
sell the loss-making Clark Cotton
ginning operations during the financial
year contributed to the improved financial
results. The disposal of Clark Cotton
to Cargill International was concluded
in April 2006 and appears as a discontinued
operation in the financial statements
under review. |
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| 2007/2008
Financial Year |
The higher grain
prices in recent months are a mixed
blessing for AFGRI. They encourage
increased maize plantings by farmers,
which in turn translates into higher
capacity utilisation of silos and
greater demand for equipment, primary
inputs and financial services. The
downside is that higher maize prices
increase the production cost of broilers
and put pressure on margins in the
Animal Feeds business.
A key focus will be supply chain logistics
and procurement efficiencies across
AFGRI’s various activities.
We now appear to be entering a period
of higher grain and food prices, which
demand greater efficiency in supply
chain logistics. We have not fully
realised the potential benefits of
streamlining procurement across AFGRI,
which will have the benefit of widening
margins in the medium to long term. |
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| AFGRI
Producer Services reported a R127
million turnaround to post a profit
after interest of R36 million during
the year under review. This was due
largely to the closure of loss-making
stores in the Retail division, a reduction
in fixed overheads and improved working
capital management. |
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| Strategy |
| AFGRI’s business strategy
is to achieve real economic growth by maximising
returns on shareholder capital and to fix or exit
those businesses that destroy value. AFGRI also
seeks to capture a larger share of the agricultural
value chain and, by so doing, reduce its exposure
to the vagaries of individual agricultural commodities.
Since embarking on a major restructuring five
years ago, value-destroying businesses that could
not be fixed have been sold and new business opportunities
with solid potential for value creation have been
pursued both in South Africa and beyond. Today,
AFGRI is a diverse agricultural services group
offering the full spectrum of agricultural, logistics
and financial services to its clients. |
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| Operational review |
| Agricultural Services:
Financial |
| It was an excellent year for
AFGRI Advances, with a 69,3% increase in turnover
and a 11,7% increase in operating profit before
internal interest. Highlights for the year include: |
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11% growth in the farmer
debtors’ book; |
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57% growth in the corporate
debtors’ book; |
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74% increase in the hire
purchase book; |
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201% increase in income
from structuring, administration fees and
other non-interest earning activities. |
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| Operating conditions remained
buoyant for most of the year, though the changing
interest rate environment required a more conservative
approach to credit assessments. Farmers generally
received much better prices for their crops than
in previous years, which contributed to the improved
financial results. |
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| Key
drivers for 2007: |
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| To
generate profitable growth through: |
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Focused service
to customers |
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Provision
of leading-edge technology |
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Market creation
in Southern Africa |
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AFGRI Insurance increased turnover
by 15,8% compared to 2006, through improved income
from its short-term, hail, input cost and credit
life products. Crop insurance benefited from the
increase in maize hectares planted during the
year. Administration processes were upgraded and
streamlined to improve efficiencies and reduce
costs.
Treasury yielded a 7,8% improvement in operating
income and a 4,7% increase in profit before interest
and tax. It obtained competitive funding rates
for AFGRI and performed well in a difficult environment,
while maintaining strong relationships with AFGRI’s
funders.
The Trading business performed well in a difficult
year, posting an increase of 21% in revenue despite
the lower maize plantings. Profit before tax,
interest and exchange rate advantages increased
by 5%, which must be seen in the context of the
smaller maize crop and the reduction by 50% in
carry-over stocks during the last growing season.
Margins were under pressure during the year, though
this was partially compensated for by the strong
growth in sales. Grain imports are expected to
increase substantially during the current year,
which will positively affect volumes. From a risk
management perspective, the focus for the year
was on managing prices, spread and basis risk.
Compliance management, given the nature of the
Trading business, constantly strives for better
controls and processes. |
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| Agricultural Services:
Logistics |
| This business comprises: |
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Handling & Storage,
with 64 silo complexes and four million
tons of capacity countrywide |
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AFGRI Logistics, a fourth
party supplier of logistic services and
a supplier of management and owner-driver
solutions. |
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| Turnover in the Logistics business
was down 21% to R233 million (2006: R294 million)
and headline earnings from continuing operations
dropped 44% to R114 million (2006: R202 million). |
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| Handling & Storage |
This is one of the country’s
largest suppliers of grainhandling and storage
services and represents nearly 30% of South Africa’s
total silo capacity of 14 million tons.
Due to the significantly smaller maize crop, turnover
was down 22% and profit before interest and tax
was down 43%. The carryover stock at the beginning
of the financial year was higher than normal as
a result of excess grain in South Africa, following
the maize crop of 11,45 million tons in 2005.
The subsequent drop in maize prices to an average
of R745 a ton in 2006 resulted in much lower plantings
last year, with a smaller carry-over crop expected
for the current year. The current crop is expected
to be harvested earlier than normal which might
positively influence the demand and duration period
for storage.
The introduction of electronic silo certificates
as a service enhancement to customers is beginning
to yield positive results, and a new tariff structure
has been launched to strengthen AFGRI’s
competitive position in the market. The benefits
of this new flexible tariff structure should become
evident in the current financial year. The Handling
& Storage business has invested in state-of-the-art
IT and stock management systems to further improve
its competitive position. Another focus for the
year ahead is geographical diversification, a
process which has already started. |
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| Logistics |
| This business is a supplier
of fourth-party logistics within the AFGRI footprint.
Logistics reported a 7% increase in revenue and
a 83% reduction in profit before interest and
tax for the year, due to difficult market conditions
and competitive pricing. Logistics will pursue
a diversification strategy in the year ahead. |
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| Agricultural Services:
Producer |
| This business comprises: |
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Retail and Equipment,
with over 80 retail outlets supplying requisites
and equipment to farming communities across
the country; |
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Primary Inputs, supplying
fertiliser, chemicals, fuel and seed to
farmers; |
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Tsunami Crop Protection,
which sources and formulates cost-effective
agro-chemicals for distribution by agents; |
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Partmaster, a national
supplier of agricultural equipment spare
parts; |
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Tobacco, a buyer and
primary processor of tobacco for both local
and international markets; and |
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Seed, which sources genetic
material to breed and grow maize and wheat
seed for the southern African market. |
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It was an excellent year for
Producer Services, with turnover up 22% to R3,8
billion, a 1% improvement in gross margins and
a turnaround from a loss of R59 million the previous
year to a profit of R55 million before interest.
Retail and Equipment has a network of some 80
AFGRI branded retail stores servicing farming
communities across the country, many of which
were upgraded during the past year. This includes
a new retail concept, FarmCity, which caters to
the peri-urban consumer with a range of outdoor
and sporting goods, alongside traditional farming
requisites. This business also services the mechanical
equipment needs (John Deere and other major brands)
of farmers through its retail stores, while a
network of workshops and mobile units offer equipment
repair and maintenance services.
The network was rationalised during the year to
reduce fixed overheads and deliver a more cost-effective
service. The focus during the coming year is to
consolidate the equipment workshops into a network
of 13 world class John Deere workshops and mobile
units. This is in addition to the network of workshops
already existing in KwaZulu-Natal. The mobile
units are proving particularly successful, as
they deliver repair and maintenance services to
farmers on their premises and can be operated
at lower costs and higher utilisation rates than
traditional fixed location workshops.
The highlight of the year was the sharp turnaround
in business profitability, achieved through the
1% improvement in gross margin, a major rationalisation
of infrastructure and a R60 million reduction
in inventory.
Operating conditions were favourable over the
last year due to the 50% increase in maize planting,
which resulted in increased activity throughout
the retail network. The existing two FarmCity
stores – in Pretoria and Pietermaritzburg
– have been augmented by a third in Ruimsig,
Roodepoort, with several more planned over the
medium term.
Primary Inputs, Tsunami, Seed and Partmaster had
a good year, with sales of fertiliser, chemicals,
seed, fuel and parts increasing due to improved
maize plantings.
AFGRI Tobacco, a new business within the Group,
is a buyer and primary processor of tobacco for
local and international markets. AFGRI has long
been involved in financing tobacco farmers, but
recently extended its involvement to the primary
processing of tobacco for sale to the local and
international markets. AFGRI has acquired an interest
in a modern processing plant at Rustenburg, which
gives it a strong foothold in the tobacco market.
This is an exciting development, which, in the
long term benefits tobacco farmers and buyers.
Drought towards the year-end dampened the positive
mood among farmers. However, due to the higher
maize prices, prospects for the coming season
remain positive. |
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| Agricultural Services:
International |
This business comprises T&H
Waltons Stores, the largest distributor of John
Deere farming equipment in Western Australia,
and Zambia.
T&H Waltons posted a creditable performance
in the midst of the worst drought in Australia’s
history. A normal rainfall year is forecast for
2007 which, together with the current high prices
for wheat on the international commodity market,
should result in high acreage plantings by farmers
and a return to normal profitability by T&H
Waltons Stores.
The Zambian business is a replica of AFGRI’s
South African operations and is involved in the
handling, grading, storage, marketing and trading
of grain. It was a difficult year for the Zambian
operations, which had to contend with a range
of structural and internal problems, as well as
large currency fluctuations. Most of the structural
and internal issues have been addressed and at
the time of writing this report the operation
is trading profitably. We are confident of a much
improved performance from the Zambian business
in the current financial year. |
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| Products |
| This business comprises the
following activities: |
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Animal Protein |
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Animal Feeds |
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Daybreak |
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Industrial Oil and Protein
(formerly Foods) |
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It was an excellent year for
Products with a 24% increase in turnover and a
91% increase in operating profit before interest.
The 24% growth in turnover to R1,8 billion for
the year was boosted by the inclusion of Daybreak.
If Daybreak is excluded, turnover is on the same
level as the prior year. Operating profit before
interest grew 91% to R144 million. If Daybreak
is excluded, operating profit before interest
increased by 36%.
The main highlights of the year were the exceptional
performance of the Animal Feeds business, and
the successful integration into Products of Daybreak.
The Animal Feeds business comprises six manufacturing
facilities with a total production capacity of
1,2 million tons a year, making it one of the
three largest animal feed operations in South
Africa. The newly commissioned Eastern and Western
Cape facilities are performing to expectation.
The acquisition of the Daybreak business provides
a vital new outlet for Animal Feeds. The red meat
and broiler markets are enjoying strong growth
due to the increase in spending power of South
Africans, a robust economy and a steadily growing
middle class. The demand for animal feeds from
these markets grows steadily.
Daybreak was an excellent and well-timed acquisition.
It is a well-managed operation comprising abattoir
facilities near Springs, east of Johannesburg,
and hatching facilities near Bela Bela, north
of Johannesburg. The company has capacity to produce
500 000 broilers a week, and the focus of attention
in the coming year will be to expand production
to meet growing market demand. One of the country’s
top poultry managers, with many years experience
as managing director of Earlybird, has joined
AFGRI to head up Daybreak and will aggressively
drive the expansion process.
During the year Industrial Oil and Protein recorded
a R5 million turnaround in performance compared
to 2006, following a restructuring and a more
critical focus on stock management and margins.
The main challenge in this market is to be competitive
through managing raw material procurement. The
business utilises the expertise of AFGRI Trading
to ensure competitive procurement.
In the coming year Products will focus on the
expansion of Daybreak, either organically or by
acquisition, as well as consolidation of the Oil
and Protein business. |
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| Prospects |
Despite the higher maize planting
over the past year, the recent drought has reduced
the optimism of farmers. There were signs of some
respite in the drought later in the maize planting
season, though it is still unclear what impact
this will have on the final crop estimates. We
are nevertheless optimistic of an improved year
for agriculture in 2007.
The emphasis in the coming financial year will
be on more efficient procurement across the Group
and on maximising efficiencies across the logistics
supply chain.
The benefits of our strategy to reduce fixed overheads
and improve working capital management over the
past year are evident in these results. AFGRI
has put in place a solid foundation for growth
going forward and we are confident that we will
again turn in a creditable set of results. |
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Jeff D Wright
Managing Director |
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Dominic M Sewela
Deputy Managing Director |
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15
May 2007 |
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