Go­ing from rev­o­lu­tion­ary to evo­lu­tion­ary phase

Financial Mail - Investors Monthly - - Analysis - Stafford Thomas

Af­ter Phil Roux be­came CE of Pi­o­neer Food Group in April 2013, it took him just two years to trans­form it from a stodgy also-ran into a sec­tor cham­pion. Roux’s new chal­lenge is to move Pi­o­neer from what he terms the “rev­o­lu­tion­ary” phase to the “evo­lu­tion­ary” phase.

What was achieved in the rev­o­lu­tion­ary phase en­tailed a complete re-en­gi­neer­ing of Pi­o­neer, in­clud­ing a new busi­ness model.

In the two fi­nan­cial years to Septem­ber 2015, head­line EPS (HEPS) lifted al­most 80% while op­er­at­ing profit mar­gin has jumped from only 7.2% to 12.3%.

But from here on the go­ing

will be tougher. Roux sums up mar­ket con­di­tions aptly. “This is a year from hell,” he says.

The most hellish con­di­tions not unique to Pi­o­neer are in drought-hit essen­tial foods cat­e­gories, which in the past fi­nan­cial year ac­counted for R11.33bn (60%) of Pi­o­neer’s to­tal sales of R18.75bn and R1.28bn (59.5%) of op­er­at­ing profit of R2.15bn. Tiger Brands was not far be­hind, with essen­tial foods ac­count­ing for half its op­er­at­ing profit over the same pe­riod.

Es­pe­cially hard hit are: maize meal where, by value, Pi­o­neer’s White Star brand has a 32.2% mar­ket share; and bread, where its Sasko brand has a 31.6% mar­ket share. Roux sees no respite any time soon.

“We have had to buy maize for­ward to hedge against the 1.2 Mt short­fall in do­mes­tic pro­duc­tion,” says Roux. Price re­lief is ex­pected only in the quar­ter to Septem­ber 2017.

Wheat, a com­mod­ity in which SA has never been self-suf­fi­cient, faces pric­ing pres­sure of another kind: from gov­ern­ment’s im­port duty, which it has per­versely just upped by 34% to R1,224/t. “The duty now makes up 25% of the cost of milled wheat,” says Roux.

Price pres­sure took its toll in the six months to March, Pi­o­neer’s over­all essen­tial foods vol­ume fall­ing 5% and op­er­at­ing profit 8% to R645m.

Sav­ing the day for Pi­o­neer were its gro­ceries and in­ter­na­tional di­vi­sions. Their strong show­ings en­abled Pi­o­neer to turn in a to­tal rise in rev­enue of 9% and a 6% rise in HEPS.

Star per­former was the gro­cery divi­sion, where what Roux terms power brands in­clude Weet-Bix, Bokomo, Ceres, Liqui-Fruit and Sa­fari. Hav­ing shed three marginally prof­itable units, in­clud­ing Pepsi, the divi­sion lev­ered a 5% rise in vol­ume and a 6% rise in rev­enue to R2.5bn into a 35% rise in op­er­at­ing profit to R343m.

It lifted op­er­at­ing mar­gin sharply from 9.6% to 13.7%, a level ahead of Tiger’s gro­cery divi­sion’s 9.1% mar­gin and its bev­er­ages, snacks and treats divi­sion’s 13.5% mar­gin.

The in­ter­na­tional divi­sion lifted rev­enue 20% to R1.45bn and op­er­at­ing profit 16% to R252m, 20.4% of the group to­tal. In profit terms it placed Pi­o­neer just short of Tiger’s non-SA op­er­a­tions which, in the six months to March, recorded a non-SA op­er­at­ing profit of R292m (13.9% of group to­tal) but on far higher rev­enue of R2.64bn.

Roux leaves no doubt that he views in­ter­na­tion­al­is­ing Pi­o­neer as a key longer-term growth driver: “We will push ahead in SA and then go in­ter­na­tional.”

Pi­o­neer has es­tab­lished a solid foun­da­tion to do just that in Africa and the UK. In the lat­est six months Africa ac­counted for around R450m in for­eign rev­enue — pri­mar­ily from fruit juice and dried fruit ex­ports — while the UK was the big­gest con­trib­u­tor at about R1bn.

Pi­o­neer’s ven­ture in the UK is low-pro­file, with two Bokomo fac­to­ries pro­duc­ing pri­vate-la­bel wheat break­fast bis­cuits, muesli and gra­nolas for gro­cery chains. That is about to change.

“I want to take our own branded prod­ucts to 50% of rev­enue,” says Roux. The first step has just been taken with the £7.5m ac­qui­si­tion of Stream­foods, pro­ducer of Fruit Bowl, a fruit snack. “It will add sales of R250m,” says Roux. “We will be do­ing more deals.”

Roux is also looking to ac­qui­si­tions in SA to ex­pand its gro­cery divi­sion. “We have a ro­bust ac­qui­si­tion pipeline and a strong bal­ance sheet,” he says.

The bal­ance sheet is ca­pa­ble of sup­port­ing an ac­qui­si­tion drive. As at March 31 debt stood at R470m, R3bn be­low the up­per limit set by Pi­o­neer.

The scene is set for an in­ter­est­ing tussle be­tween Pi­o­neer and Tiger, now led by highly ex­pe­ri­enced Lawrence MacDougall. The mar­ket is back­ing them equally, rat­ing both shares on a 20 p:e.

Tip­ping the scale in Pi­o­neer’s favour is Roux’s ex­cep­tional track record, some­thing MacDougall has yet to em­u­late at Tiger.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.