By Simbarashe Zishiri, HARARE, April 4 (The Source) – You can write or think whatever you like, Dairibord chief executive Anthony Mandiwanza somberly told assembled analysts and the media at the group’s presentation of its financial results for 2016 last Wednesday.
He had just announced a net loss of $5,4 million for the period, from a $2,3 million profit recorded in the preceding year, and an operating loss of $3,99 million from a $3,97 million operating profit previously and the stunned audience wanted answers.
“We know that our performance last year was very bad due to a number of issues and we know you have a negative impression about it, but we promise to improve this year going forward,” he added.
Zimbabwe’s largest milk processor, Dairibord reported a rather disappointing set of results for the full-year to December as the company failed to align production costs to the level of revenue generated citing a number of challenges — a decline in average prices, supply constraints and high production costs among others.
The theory of expansion
When an analyst suggested that in the current environment, the company should focus more on managing costs of the existing operations rather than continue with expansion initiatives which were not bearing economies of scale, Mandiwanza retorted that the company will not held back from expanding because the results were not immediate.
“We are not going to shrink ourselves to get outside of the pit but we do believe that we should grow out of it,” he said.
The group invested a total of $5,4 million in 2016.
It splashed on the UHT carton processing and filling plant to localize production of cartonised ultra-high temperature (UHT) milk which will result in import substitution and some savings. Mandiwanza said the plant has capacity to process and pack cartonised juices.
It expanded the capacity of the Pfuko/Udiwo maheu plant to meet demand and increased the number of flavours.
Additionally, the company invested in peanut butter processing to enhance capacity and product quality.
This, according to Mandiwanza, means that the business has sufficient capacity to meet current and future demand.
Dairibord should be one of the companies to benefit from the import restrictions but dairy products continue to be smuggled into the market so foreign competition remains a challenge and will continue to put pressure on the topline.
Additionally, the company is facing the threat of new entrants in the market with relatively cheaper products.
In the period, revenue declined by 10 percent from $103,4 million recorded in the preceding year to $93,4 million chiefly as a result of price reductions to address affordability and competitiveness.
The company revised prices downwards in the period resulting in a significant 9 percent decline in consolidated average price from $1,23 per litre in the previous year to $1,13 per litre.
Sales volume declined by one percent to 83 million units as a result of lost production although this was partially offsetted by a surge in raw milk intake which was up 18 percent to 31 million litres.
The company experienced supply constraints emanating from the mismatch between raw milk and demand, worsened by delays in the commissioning of the UHT plant.
As a result the company said it lost 2 million litres of liquid milk, a disruption which had a very significant impact on revenue.
Foreign currency shortages also led to supply challenges for raw materials, putting further pressure on volumes.
Nevertheless, Dairibord’s raw milk intake increased 20 percent and was above the 14 percent increase in national raw milk production for 2016 because of better supplies from contracted farmers benefitting from its heifer importation scheme initiated two years ago.
The company’s market share of the national raw milk stood at 47 percent. Additionally the company’s Pfuko/Udiwo product line continues to thrive, with volumes rising 18 percent on increased capacity and additional flavours.
The twin challenges, lower prices and volume decline had a material impact on revenue which declined by 10 percent. In terms of revenue contribution by portfolio, liquid milk and food portfolios contributed 33 percent and 26 percent respectively while beverages accounts for 41 percent with the logistic portfolio contributing less than a percent in 2016.
Liquid milk prices per litre fell 15 percent to $1,09 while food and beverages declined by 9 percent and one percent to $2,21 and $0,87 per litre respectively.
However, Mandiwanza hopes that prices will hold steady after inflation moved into positive territory for the first time in February and looks likely to spiral amid currency challenges.
“The trend of price reduction for the entire portfolio is not expected to continue going forward given the positive shift in inflation from January 2017,” Mandiwanza told analysts.
Production costs remained flat at $20,9 million but gross profit fell 23 percent to $18,9 million on lower revenues.
Overheads increased by 10 percent from $20,7 million in the previous year to $22,8 million partly on the back of a $2,8 million once off impairment of inventories, receivables and equipment.
However, even if the impact of these impairments is excluded, the business still remained unprofitable due to misalignment of the cost structure to the level of production.
The company incurred significant costs to get alternative sources of water as outages in the second half of the year impacted the beverages portfolio as the company was forced to buy in water at $12 to $17 per cubic metre from third parties versus $1,4 per cubic metre from local authorities..
Mandiwanza told analysts that erratic supply and high cost of water procured from third parties for Simon Mazorodze and Chitungwiza factories significantly add to costs incurred during the period
Such exorbitant prices led to very high production costs, thereby stifling the company’s operational efficiency.
Exports will remain subdued as the average cost of raw milk in Zimbabwe at 57 cents/litre, remained high relative to regional competitors, making Zimbabwe’s milk and milk related products uncompetitive on the regional markets.
Dairibord Malawi which contributed three percent of group revenue, posted an operating loss of $200,000 in the year and has been an albatross for a while now.
Mandiwanza said it Dairibord will hold on to the loss-making operation and explore other options to extract value from the business.
Not all gloom and doom
On the downside, foreign currency constraints are most likely to continue with negative effect on supply materials.
Milk powder prices are also projected to be lower than in 2016, thereby continuing to put pressure on revenue.
Additionally, competition will increase as new entrants invest in processing capacity and this might as well force the company to further revise prices downwards to protect its market share.
However the company has taken significant steps to counter the downside risks.
This include the realignment of its business model to reduce costs which saw the company consolidating Dairibord, Lyons and NFB logistics operations in a bid to eliminate duplication across the value chain, roles and responsibilities as well as reducing distribution costs.
Subsequently, the company projected a minimum savings of $2 million with a rationalisation cost of $1 million from retrenchments, head office relocations and relocation of plant and equipment.
Additionally, investment in 1,5 million litres water storage capacity with one week cover at the Chitungwiza factory will minimise water supply disruptions, thereby curbing exorbitant costs experienced in the previous period owing to water outages.
Mandiwanza said Dairibord would invest $2,5 million for the year towards water reservoirs, cold chain equipment and distribution vehicles in a bid to improve its operational efficiency.
The company also targets to import 300 heifers this year to increase milk production.
Given the investments in the preceding year and the ones on the books for 2017, the management is optimistic that the business has sufficient production capacity to support growth in demand going forward.
However, success will be depend on how far the measures instituted to reduce costs and expand capacity will yield positive results in an operating environment that is worsening by the day. Or more dark days lie ahead.