QUANTUM FOODS HOLDINGS LIMITED - Trading statement and operational update

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 six-month period ending 31 March 2021 (“Current
Reporting Period”) a reasonable degree of certainty exists that both the headline earnings per share (“HEPS”) and
earnings per share (“EPS”) of the Company will be at least 20% lower than reported in the six-month period ended 31
March 2020 (“Previous Corresponding Period”).

In this regard, both the HEPS and EPS for the Current Reporting Period are expected to be lower than 27.6 cents per
share, compared to the HEPS and EPS of 34.5 cents per share reported in the Previous Corresponding Period.

A further trading statement will be issued as soon as there is a reasonable degree of certainty as to the likely ranges
within which the Company’s HEPS and EPS are expected to decrease.

OPERATIONAL UPDATE

The Group experienced challenging trading conditions during the Current Reporting Period. Feed raw material costs
increased significantly, resulting in reduced earnings and a significant reduction in cash flows owing to the increased
investment in working capital. Earnings were further impacted by lower production efficiencies and above inflation cost
per unit increases in key product categories.

Feed business

The combination of a steep increase in raw material costs and aggressive competitor activity 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. 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 at a similar level compared to the
Previous Corresponding Period.

Farming business

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

Layer farming business

Livestock volumes sold to external customers increased but at lower margins, with the higher cost of production resulting
from higher feed costs not being fully recovered in the final product selling prices.

Production efficiencies at commercial egg farms have been lower compared to the Previous Corresponding Period,
following an increase in layer mortality and decrease in egg production from the levels achieved in the Previous
Corresponding Period. The increase in layer mortality and decrease in egg production were driven by a combination of
an increase in the number of older layer flocks in production and younger layer flocks in production, both of which are
not producing optimally compared to the Previous Corresponding Period. As a consequence, fewer birds have been 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,
and the averaging out of bird performance. This cycle is temporary in nature and is expected to correct itself within the
next 12 months.

Broiler farming business

The number of day-old chicks per parent hen produced by the breeder business declined in the Current Reporting Period
compared to the Previous Corresponding Period. This resulted in an increase in the overhead cost per unit given the
fixed costs element of this business segment. As a result of the growth strategy embarked on by the Company, a decision
was made to discontinue importing grandparent stock. The grandparent farm, Bulhoek in the North West province, will
in future be repurposed for the rearing of parent stock which will create the ability to produce additional day-old chick
volumes, which the Company believes could unlock additional earnings in the broiler farming business, subject to
general market conditions.

Furthermore, earnings derived from the commercial broiler farming business were negatively impacted by customers
requiring a smaller and lighter product given the current 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 impacted by the closure of an abattoir customer in the Western Cape
province to which the Company supplied live birds as well as day-old broiler chicks and feed via third party contract
producers.

Egg business

Higher production costs, arising from the increase in feed raw material costs, could not be fully recovered in final product
selling prices. As a consequence of a disproportionate increase in input costs against the increase in egg selling prices,
margins in the egg business have contracted significantly and this business is expected to report a loss in respect of the
Current Reporting Period. The relatively large South African layer flock and the currently depressed consumer
environment has created an imbalance in the supply and demand of eggs. Egg sales volumes are expected to be lower
than the Previous Corresponding Period, given the lower production volumes on the egg farms, for the reasons detailed
above under the farming segment.

Other African businesses

The expected improvement in trading conditions and earnings from the Zambian business have materialised during the
Current Reporting Period. Lower feed costs coupled with an 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
the further devaluation of the Zambian Kwacha, Rand earnings reported from this business are expected to increase in
respect of the Current Reporting Period compared to the Previous Corresponding Period.

Earnings from the Ugandan business are also expected to increase relative to the Previous Corresponding Period arising
from 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.

Outlook

Feed raw material costs are expected to reach a peak in the first quarter of the 2021 calendar year and are expected to
reduce over the remainder of the financial year as South Africa is expecting an improved summer crop harvest.
International grain prices are, however, significantly higher than in the past few years and this, together with the volatility
of the Rand to US Dollar exchange rate, could offset the positive impact of the expected improvement in the local crop
harvest on the cost of key raw materials. The risk of an outbreak of Avian Influenza (“AI”) in South Africa remains given
the increased number of AI cases in Europe as well as the existence of AI in Senegal.

The egg business is expected to remain under severe pressure until the market supply and demand dynamics stabilise
and feed costs decrease.

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 six-month period ending 31 March 2021 are expected to be published on SENS on or about Thursday,
20 May 2021.


Wellington
4 March 2021

Corporate advisor and Sponsor
One Capital


Attorneys
Webber Wentzel




                                                                                                                  

Date: 04-03-2021 01:55:00
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