Quantum Foods Holdings (JSE:QFH) News - Voluntary trading update for the 4 months ended 31 January 2022

QUANTUM FOODS HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 2013/208598/06)
Share code: QFH
ISIN: ZAE000193686
(“Quantum Foods” or the “Company” or the “Group”)

VOLUNTARY TRADING UPDATE FOR THE 4 MONTHS ENDED 31 JANUARY 2022

The Group experienced challenging trading conditions during the 4-month period ended
31 January 2022 (“Current Period”). Company performance during the Current Period was principally
impacted by a number of industry level factors including, inter alia, (i) a significant increase in feed raw
material costs, (ii) higher egg supply from increased flock numbers which led to curtailed egg selling
prices in a weak consumer environment (iii) the continued risks associated with the highly pathogenic
avian influenza (“HPAI”) and (iv) extreme climatic conditions in the Western Cape.

In addition to these factors, the Group was negatively impacted by labour unrest at a large egg farm in
Gauteng and prolonged COVID-19 restrictions in Uganda, as further detailed below.

Feed business

The combination of a substantial increase in raw material costs, pressure on customers and certain
customers investing in own feed milling capacity resulted in a 6.2% decrease in external sales volumes
compared to the 4-month period ended 31 January 2021 (“Previous Corresponding Period”).
However, the negative financial effect of lower sales volumes was partially offset by well-executed
operational efficiencies, margin and cost management, as well as the increase in volumes transferred
to the internal poultry business.

Farming business

Layer farming business

Livestock volumes sold to external customers were, as planned, much lower in the Current Period
compared to the Previous Corresponding Period, with a higher percentage of point of lay hens produced
being transferred to the Company’s own commercial egg farms which resulted in lower earnings from
the layer livestock business. This placement of layer livestock on own farms was in accordance with
the programme to correct the layer placement cycle of the Company which was implemented during
the 2021 financial year. The correction of the layer placement cycle is expected to result in improved
operational efficiencies on commercial egg farms going forward.

Production efficiencies on commercial egg farms were similar to the Previous Corresponding Period,
and costs were well managed, with the exception of the Kaalfontein layer farm in Gauteng (“Kaalfontein
Farm”) as a result of the labour unrest, as further detailed below.

The Kaalfontein Farm provides approximately 15% of the Company’s South African egg production.
Towards the end of the 2021 financial year, employees at the Kaalfontein Farm began to actively
disregard standard operating procedures, restricting the Company’s ability to manage efficiencies on
the farm. The employees subsequently embarked on an unprotected strike following the institution of
disciplinary action against an employee who was suspected of sabotage. Following this labour action,
the majority of the staff employed at the Kaalfontein Farm were dismissed and the Company had to
employ temporary labour at short notice. This change of staff together with a maintenance backlog
resulting from the labour action resulted in much higher operational cost and weaker production
efficiencies at the farm. The negative financial effect of this event is estimated to be approximately R10
million for the Current Period. The production efficiency of flocks on the farm has started to recover,
however, the production lost during the Current Period will not be recovered in the current laying cycle.

In addition to the abovementioned labour unrest and the impact thereof, an HPAI outbreak occurred at
the Lemoenkloof layer farm in the Western Cape in January 2022, which resulted in approximately
110 000 hens being culled. The Company’s insurance in this regard is limited to the risk associated with
direct losses resulting from the culling of infected flocks but not the further effect of lost production and
lower sales volumes.

Layer birds from additional layer houses at the Lemoenkloof farm tested positive for HPAI on 22
February 2022. The Company expects that this further HPAI outbreak will result in the culling of all the
remaining (approximately 295 000) layer hens on the Lemoenkloof farm. The Lemoenkloof farm
provides approximately 13% of the Company’s total production of eggs and ensuring the timely
repopulation of the farm, to reduce the impact of lost volumes, will be a key area of focus.

Broiler farming business

Operational efficiencies in the hatcheries and at commercial broiler farms improved in the Current
Period. However, despite the solid growth in day old chick sales from the Hartbeespoort hatchery, day
old chick volumes declined by 5.3%, compared to the Previous Corresponding Period, as a result of the
closure of a major Western Cape abattoir customer subsequent to the Previous Corresponding Period.

The Company benefited, to a limited extent, from improved trading conditions in the broiler industry,
where supply was lower and consumer demand remained adequate. The benefit to the Company was
a higher demand for day old broiler chicks. However, the majority of revenue from this business is
generated in terms of long-term supply agreements where the Company is compensated for production
risk and does not participate in higher margins from improved broiler meat market conditions. Live bird
sales volumes for the Current Period increased by 4.1% compared to the Previous Corresponding
Period primarily as a result of a slight increase in the average weight of birds sold.

Egg business

Higher production costs, arising from the increase in feed raw material costs, could not be fully
recovered in the final product selling prices in the Current Period. Volumes increased by 4.7% with
higher production of eggs from own farms. Packing station efficiencies improved from the Previous
Corresponding Period and cost management was well executed.

The relatively large, and still increasing, South African layer flock together with the current depressed
consumer environment has created an imbalance in the supply and demand of eggs. The resultant
pressure on egg selling prices together with higher production costs resulted in significant margin
pressure.

Other African businesses

Trading conditions remained favourable for egg businesses in Zambia. The continued strong demand
for the Company’s products combined with satisfactory farm production efficiencies resulted in higher
earnings in the Current Period when compared to the Previous Corresponding Period.

The business in Uganda remains affected by the consequences of the COVID-19 restrictions imposed
by the Ugandan government which negatively affected efficiencies on the import of parent stock leading
to lower hatching egg supply and the movement of people which resulted in reduced management
supervision. The closure of borders for extended periods culminated in an imbalance in local supply
and demand of eggs, which resulted in lower selling prices and reduced demand for day old chicks.

Production efficiencies improved in the Mozambican business. The business is however exposed to
similar profit drivers to the South African egg business and margins remained under pressure.

There was no outbreak of HPAI within the other African businesses.

Outlook

Feed raw material costs are expected to remain high for the remainder of the 2022 financial year.
International prices of raw materials remain high primarily due to ongoing concerns in relation to the
South America crop growing conditions and the potential impact of geopolitical issues in the Ukraine.
Moreover, local prices of raw materials are expected to remain high as a result of concerns regarding
the impact of excessive rainfall on summer crops. Other factors such as the higher cost of logistics and
the volatility of the Rand, primarily against the US dollar, remain. Whilst the Rand has remained
relatively strong in the Current Period, any weakening will negatively impact the Group.

The high feed raw material costs mostly affect earnings derived from the egg business of the Group.
This business is expected to remain under severe pressure until the market supply and demand
dynamics stabilise and feed costs decrease.

Earnings from the feeds and farming businesses are more resilient to changes in feed raw material
costs and more dependent on volumes, operational efficiencies and costs management.

The financial information contained in this announcement is the responsibility of the directors of
Quantum Foods, and such information has not been reviewed or reported on by the Company’s external
auditors.


Wellington
24 February 2022

Corporate advisor and Sponsor
One Capital

Attorneys
Webber Wentzel

Date: 24-02-2022 12:50:00
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