Quantum Foods Holdings (JSE:QFH) News - Trading statement and operational update

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”)
                         
TRADING STATEMENT AND OPERATIONAL UPDATE

TRADING STATEMENT

In terms of the JSE Limited Listings Requirements, a listed company is required to publish a trading
statement as soon as it is satisfied that a reasonable degree of certainty exists that the financial results
for the period to be reported on next will differ by at least 20% from the financial results for the previous
corresponding period.

Shareholders of Quantum Foods are hereby advised that for the financial year ended 30 September 2021
(“Current Reporting Period”) a reasonable degree of certainty exists that the headline earnings per
share (“HEPS”) of the Company will be between 27% and 42% lower than reported in the financial year
ended 30 September 2020 (“Previous Corresponding Period”) and that the earnings per share (“EPS”)
of the Company will be between 24% and 39% lower than reported in the Previous Corresponding Period.

The Company expects HEPS to be between 47.0 cents and 59.0 cents compared to HEPS of 80.5 cents
reported in the Previous Corresponding Period and expects EPS to be between 48.8 cents and 60.8 cents
compared to EPS of 80.1 cents reported in the Previous Corresponding Period.

OPERATIONAL UPDATE

The Group experienced challenging trading conditions during the Current Reporting Period. Feed raw
material costs increased substantially when compared to the Previous Corresponding Period, resulting in
reduced earnings and a significant reduction in cash flows from operating activities owing to the increased
investment in working capital. Earnings were further negatively impacted by lower volumes, a decline in
production efficiencies at certain operations and above inflation cost per unit increases in key product
categories. Furthermore, the outbreak of highly pathogenic avian influenza (“HPAI”) in South Africa in
April 2021 affected many businesses in the poultry industry both directly, through the loss of poultry stock
and/or indirectly, through, inter alia, the loss of feed sales volumes and the inability to export livestock
resulting from the customer country borders being closed. The impact of the HPAI outbreak in relation to
the Company during the Current Reporting Period is set out in further detail below.

Feed business

The combination of a sharp increase and continued high level of raw material costs, aggressive competitor
activity and the impact of the HPAI outbreak on customers, resulted in a decline in sales volumes. Internal
volumes transferred to the layer farming business also declined as a result of the lower number of hens
in production, as set out in further detail below. Despite the above factors, the Company has been able
to improve operational efficiencies in the feed business to achieve slightly higher trading margins in this
business segment. The Company therefore expects earnings derived from the feed business for the
Current Reporting Period to be similar to the earnings reported in respect of the Previous Corresponding
Period.

Farming business

Production efficiencies and earnings in both the layer farming and broiler farming businesses are expected
to be lower when compared to the Previous Corresponding Period as further detailed below.

Layer farming business

Livestock volumes sold to external customers decreased, inter alia as a result of HPAI and margins
reduced, with the higher cost of production resulting from higher feed costs not being fully recovered in
the final product selling prices. Following the outbreak of HPAI, the export of livestock to neighbouring
countries was interrupted, resulting in lower day-old pullet production volumes and an under recovery of
costs. The Company experienced an HPAI outbreak at its Fransrug layer rearing farm in the Western
Cape and lost approximately 84 000 hens in May 2021 at a direct cost of R5 million.

Production efficiencies at commercial egg farms were lower when compared to the Previous
Corresponding Period driven by a combination of an increase in the number of older and younger layer
flocks in production, both of which did not produce optimally when compared to the Previous
Corresponding Period. Consequently, fewer birds were in the peak production phase during the Current
Reporting Period. This cycle is a direct consequence of a reduction in external demand that had a knock-
on effect on the production of day-old chicks in the Previous Corresponding Period. This cycle is
temporary in nature and is expected to fully correct itself within the next 6 months.

Broiler farming business

The number of day-old chicks per parent hen produced by the breeder business declined in the Current
Reporting Period when compared to the Previous Corresponding Period as a result of lower production
efficiencies. This resulted in an increase in the cost per unit given the fixed costs element of this business
segment.

In order to supplement its hatching egg production volumes, the Company procured hatching eggs from
third-party producers in order to meet its delivery obligations in respect of hatching eggs. The procurement
of third-party hatching eggs resulted in lower margins. Furthermore, the outbreak of HPAI at various third-
party broiler breeder operations resulted in a reduction in available supply and the Company had to reduce
day-old chick production and sales volumes thereby resulting in lower earnings.

Furthermore, earnings derived from the commercial broiler farming business were negatively impacted
by customers requiring a smaller and lighter product given the continued economic pressures being
experienced by end customers. This resulted in a lower total weight being sold to abattoir customers and
consequently, decreased margins arising from fixed cost production components. Earnings were further
negatively impacted by the closure of an abattoir customer in the Western Cape province (as announced
in the trading statement and operational update published by the Company on 4 March 2021) to which
the Company supplied live birds as well as day-old broiler chicks and feed via third-party contract
producers.

Egg business

The outbreak of HPAI resulted in a substantial reduction of the layer flock in South Africa. The ensuing
reduction in the national egg supply supported higher egg selling prices and improved earnings during
the second half of the Current Reporting Period. Egg sales volumes were lower than the Previous
Corresponding Period, resulting from the lower production volumes at the egg farms for the reasons
detailed above under the farming segment. Following the loss reported for the egg business for the six-
month period ended 31 March 2021, the Company expects to generate a profit from this business for the
six-month period ended 30 September 2021. This profit is, however, not expected to offset the loss
reported for the six-month period ended 31 March 2021 and therefore, the Company expects to report a
loss for the egg business for the Current Reporting Period.

Other African businesses

The increase in demand and selling prices for both day-old chicks and eggs resulted in an increase in the
Zambian business' earnings during the Current Reporting Period. Despite a high degree of volatility in the
value of the Zambian Kwacha, which impacted key cost elements, Rand earnings reported from this
business are expected to increase in respect of the Current Reporting Period when compared to the
Previous Corresponding Period.

Earnings from the Ugandan business are also expected to increase relative to the Previous
Corresponding Period arising from the higher demand for day-old chicks.

The Mozambican business is exposed to similar profit drivers as the South African egg business and is,
accordingly, expected to report a loss in respect of the Current Reporting Period. The Mozambican
business is, however, expected to report positive earnings before interest, taxes, depreciation and
amortisation (EBITDA) over the same period.

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

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.

The results for the financial year ended 30 September 2021 are expected to be published on SENS on or
about Thursday, 25 November 2021.


Wellington
21 October 2021

Corporate advisor and Sponsor
One Capital

Attorneys
Webber Wentzel

Date: 21-10-2021 08:05:00
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