Rising costs squeeze Dairibord’s profit margins

DAIRIBORD Holdings Limited chief executive officer Anthony Mandiwanza, says cost reduction will remain a fundamental issue to protect the company’s margins for the 2021 financial year.

The first five months of the year, saw the Zimbabwe Stock Exchange listed entity grapple with increasing cost of doing business.

Overall, costs for the five months to May 31, 2021 increased by 452 percent, leaving the group with an operating profit margin of just 7 percent, Mandiwanza said in a trading update at the company’s Annual General Meeting held on Wednesday.

Mandiwanza told shareholders that costs increases were across the board, from imported raw materials to the cost of borrowing.

“The price of fuel and milk powders increased on the global market and this resulted in an increase in imported inflation,” he said.

International Brent crude went up by an average 40 percent this year. Locally the price of diesel went up by an average 9,9 percent, in US dollar terms, while petrol prices went up by 5,6 percent since the beginning of the year.

“The cost of fuel is becoming a major cost variable driven mainly by the need to procure that fuel in foreign currency, while labour also contributed as a key cost driver,” said Mandiwanza.

He said the rainfall pattern which was significant at beginning of the year had a negative impact on milk production and it brought with it associated problems such as increased cost of raw milk.

Raw and packaging materials were affected by both domestic and imported inflation, Mandiwanza added.

On the financing of the business, the Dairibord chief said the cost of financing was higher than prior year as a result of borrowing to support imports of raw and packaging materials.

He said the Group had to take a strategic position to hedge against commodity price increases.

“The interest rates were high, upwards of 50 percent and of course longer working capital cycles. All this contributed to a high cost of financing.”

Going forward, Mandiwanza said he does not foresee an immediate reprieve on interest rates which means the financing costs will remain a headwind.

Away from cost issues, demand for the Group’s products remained firm during the period under review.

However, the business was unable to meet the demand, particularly for milk and milk-based products due to raw milk constraints.

Nationally, the demand for milk products exceeds supply in excess of 50 million litres per annum.

“Against that background of performance from January to end of May, the performance to date is better than the same period last year.

“Our sales volumes for the period recorded a growth of 49 percent compared to the same period last year. This was driven mainly by an 18 percent growth in milk products notwithstanding the supply constraints.”

Food sales volumes grew by 45 percent, beverages by 78 percent compared to the prior year comparative. Revenue recorded a growth of 463 percent in historical terms.

The revenue generated on the export market was stronger than last year and the combined, exports and domestic nostro forex now constitute 15 percent of turnover.

Mandiwanza said foreign currency availability improved over prior year, thus improving the availability of imported key materials.

The Group was able to secure 46 percent of foreign currency requirements from the RBZ’s auction system, 46 percent from domestic proceeds, and the balance from exports as well as from the interbank market.

In the outlook, Mandiwanza expects growth projections for the country to contribute to aggregate demand firming up in the near term.

However, the lockdown measures will result in the disruption of that momentum particularly on the supply side both locally and in imports.

“There are certain key issues which must underpin the performance in the near term, that is consistent availability of foreign currency both on the auction, local sales, and export growth,” said Mandiwanza.