To view the PDF file, sign up for a MySharenet subscription.

RCL FOODS LIMITED - Abridged consolidated unaudited results for the six months ended 31 December 2013

Release Date: 19/02/2014 17:15
Code(s): RCL     PDF:  
Wrap Text
Abridged consolidated unaudited results for the six months ended 31 December 2013

RCL FOODS LIMITED ("RCL Foods" or "Group")
(Formerly known as Rainbow Chicken Limited)
Registration number: 1966/004972/06
JSE share code: RCL
ISIN: ZAE000179438

ABRIDGED CONSOLIDATED UNAUDITED RESULTS
for the six months ended 31 December 2013

Revenue
up 95,1%

Headline EBITDA
up 251,2%

Headline earnings per share from
continuing operations down 72,3%

Cash generated by operations
up 448,2%

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
                                                    Restated     Restated
                                          31 Dec      31 Dec      30 June
R'000                                       2013        2012         2013
ASSETS 
Non-current assets
Property, plant and equipment          3 629 671   1 983 892    3 647 206
Intangible assets                      2 820 353      36 919    2 871 804
Deferred income tax asset                  4 327                    4 327
Investment in joint venture              131 446                  128 955
Goodwill                               2 905 304     287 444    2 905 304
                                       9 491 101   2 308 255    9 557 596
Current assets
Inventories                            1 597 015   1 035 661    1 322 055
Biological assets                        496 026     496 887      537 059
Trade and other receivables            2 423 410   1 900 167    2 111 849
Derivative financial instruments         622 721                  361 505
Preference shares receivable                                      130 275
Cash and cash equivalents              2 207 738     150 387    2 313 191
Investment in money market fund          150 000                  450 000
Tax receivable                            31 710      35 167       32 325
Assets of disposal group classified
  as held for sale                       434 243                  536 605
                                       7 962 863   3 618 269    7 794 864
Total assets                          17 453 964   5 926 524   17 352 460
EQUITY
Capital and reserves                   6 580 026   2 863 102    7 045 420
LIABILITIES
Non-current liabilities
Interest bearing liabilities           5 561 682      95 103    5 588 248
Trade and other payables                  24 398                   24 398
Deferred income tax liabilities        1 393 028     428 036    1 405 077
Retirement benefit obligations           173 929     127 153      170 335
                                       7 153 037     650 292    7 188 058
Current liabilities
Trade and other payables               3 343 342   1 891 498    2 630 899
Interest bearing liabilities             251 778      52 372      302 318
Derivative financial instruments                      16 331        5 766
Current income tax liabilities               148       1 955        1 343
Bank overdraft                                       450 974
Liabilities of disposal group
  classified as held for sale            125 633                  178 656
                                       3 720 901   2 413 130    3 118 982
Total liabilities                     10 873 938   3 063 422   10 307 040
Total equity and liabilities          17 453 964   5 926 524   17 352 460

CONSOLIDATED INCOME STATEMENT
                                                             Restated      Restated
                                             Six months    Six months    Year ended
                                                 31 Dec        31 Dec       30 June
R'000                                              2013          2012          2013
Continuing operations
Revenue                                       8 782 733     4 500 609    10 108 812
Operating profit before depreciation
 and amortisation                               688 277       195 879       445 347
Depreciation and amortisation                 (245 228)     (105 945)     (278 294)
Operating profit                                443 049        89 934       167 053
Finance costs                                 (437 830)      (13 883)     (153 675)
Finance income                                   29 884         2 523        53 874
Profit before tax                                35 103        78 574        67 252
Income tax expense                             (17 600)      (26 150)      (75 435)
Profit/(loss) after tax from
  continuing operations                          17 503        52 424       (8 183)
Share of after tax profit of joint venture        2 491
(Loss)/profit for the period from
  discontinued operation                       (14 301)                      15 311
Profit for the period                             5 693        52 424         7 128
Attributable to:
Equity holders of the company                    13 096        52 424        27 246
Non-controlling interests                       (7 403)                    (20 118)
HEADLINE EARNINGS (R'000)
Continuing operations
Profit for the period attributable to
  equity holders of the company                  27 308        52 424        17 425
Loss on disposal of property,
  plant and equipment                                42           103         1 373
Headline earnings from
 continuing operations                           27 350        52 527        18 798
Discontinued operation
(Loss)/profit for the period attributable
  to equity holders of the company             (14 212)                       9 821
Headline earnings from 
 discontinued operation                        (14 212)                       9 821

                                                             Restated      Restated
                                             Six months    Six months    Year ended
                                                 31 Dec        31 Dec       30 June
Cents                                              2013          2012          2013
Earnings per share from continuing
and discontinued operation
attributable to equity holders
of the company
Continuing operations
Basic earnings per share*                           4,8          17,3           4,5
Basic earnings per share – diluted*                 4,7          17,3           4,4
Headline earnings per share*                        4,8          17,3           4,8
Headline earnings per share – diluted*              4,7          17,3           4,8
Discontinued operation
Basic earnings per share                          (2,5)                         2,5
Basic earnings per share – diluted                (2,5)                         2,5
Headline earnings per share                       (2,5)                         2,5
Headline earnings per share – diluted             (2,5)                         2,5

* Six months to December 2012 adjusted for the impact of the March 2013 rights offer.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
                                                            Restated      Restated
                                            Six months    Six months    Year ended
                                                31 Dec        31 Dec       30 June
R'000                                             2013          2012          2013
Profit for the period                            5 693        52 424         7 128
Other comprehensive income
Items that will not be
reclassified to profit and loss
Remeasurement of retirement
  medical obligations – net of tax                             (372)       (1 286)
Items that may be reclassified
subsequently to profit and loss
Cash flow hedges                                 2 565                       1 019
Currency translation differences                     6                          22
Other comprehensive income
 for the period – net of tax                     2 571         (372)         (245)
Total comprehensive income for the period        8 264        52 052         6 883
Total comprehensive income for the period
attributable to:
Equity holders of the company                   15 667        52 052        27 001
Non-controlling interests                      (7 403)                    (20 118)
                                                 8 264        52 052         6 883
CONSOLIDATED CASH FLOW INFORMATION
                                                           Restated      Restated
                                           Six months    Six months    Year ended
                                               31 Dec        31 Dec       30 June
R'000                                            2013          2012          2013
Operating profit                              443 049        89 934       167 053
Non-cash items                                247 560       155 080       349 759
Operating profit before working
 capital requirements                         690 609       245 014       516 812
Working capital requirements                  166 889     (491 266)       152 467
Cash generated by operations                  857 498     (246 252)       669 279
Net finance (cost)/income                   (201 824)      (11 360)        43 381
Net cash flows from operating activities
  – discontinued operation                     42 634                      53 293
Tax paid                                     (30 398)      (30 350)      (60 938)
Cash available from
  operating activities                        667 910     (287 962)       705 015
Dividend paid                                             (94 409)      (94 409)
Cash inflows/(outflows) from investing
  activities – continuing operations          253 367     (272 954)   (1 767 975)
Cash outflows from investing activities
  – discontinued operation                    (6 449)                       (759)
Cash (outflows)/inflows from financing
  activities – continuing operations      (1 021 824)       48 946      3 165 636
Cash inflows/(outflows) from financing
  activities – discontinued operation           1 543                       (109)
Net movement in cash
 and cash equivalents                       (105 453)     (606 379)     2 007 399
Cash and cash equivalents
 at the beginning of the period             2 313 191       305 792       305 792
Cash and cash equivalents
 at the end of the period                   2 207 738     (300 587)     2 313 191

SUPPLEMENTARY INFORMATION
                                           Six months    Six months     Year ended
                                               31 Dec        31 Dec        30 June
R'000                                            2013          2012           2013
Capital expenditure contracted
 and committed                                150 054       155 369        110 702
Capital expenditure approved
 but not contracted                            98 826        21 413        184 529
Contingencies                                  23 792        59 382         14 737
STATISTICS
Ordinary shares in issue         (000's)      574 622       295 029        574 256
Weighted average ordinary
  shares in issue*               (000's)      574 404       302 832        391 076
Diluted weighted average
  ordinary shares in issue*      (000's)      576 799       302 832        392 189
Net asset value per share        (cents)      1 145,1         970,4        1 226,9

*Six months to December 2012 adjusted for the impact of the March 2013 rights offer.

SEGMENTAL ANALYSIS
                                          Restated      Restated
                           Six months   Six months    Year ended
                               31 Dec       31 Dec       30 June
R'000                            2013         2012          2013
Revenue                     8 782 733    4 500 609    10 108 812
Foodcorp                    3 976 139                  1 217 505
Rainbow                     4 413 617    4 121 050     8 143 587
Vector                        861 356      741 050     1 476 888
Sales between segments:
Foodcorp to Rainbow          (19 210)
Rainbow to Foodcorp          (16 139)
Vector to Foodcorp           (10 081)                    (3 378)
Vector to Rainbow           (422 949)     (361 491)    (725 790)
Operating profit/(loss):
Foodcorp                      249 437                     99 765
Rainbow                        97 705       (2 987)      (3 050)
Vector                         99 237        92 921      142 944
Unallocated Group costs       (3 330)                   (72 606)
Operating profit              443 049        89 934      167 053
Finance costs               (437 830)      (13 883)    (153 675)
Finance income                 29 884         2 523       53 874
Profit before tax              35 103        78 574       67 252

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
                                                                                                         Controlling          Non-
                                                          Stated      Other   Share-based     Retained      interest   controlling
R'000                                                    capital   reserves      payments     earnings         total     interests         Total
Balance at 1 July 2012 – restated                      1 198 253                  160 724    1 537 140     2 896 117                   2 896 117
Total comprehensive income for the period – restated                                            52 052        52 052                      52 052
Ordinary dividends paid                                                                       (94 409)      (94 409)                    (94 409)
BEE share-based payments charge                                                     1 729                      1 729                       1 729
Employee share option scheme:
   Proceeds from shares issued                               357                                                 357                         357
   Value of employee services                                                       7 256                      7 256                       7 256
Balance at 31 December 2012 – restated                 1 198 610                  169 709    1 494 783     2 863 102                   2 863 102
Total comprehensive income for the period – restated                  1 041                   (26 092)      (25 051)      (20 118)      (45 169)
Acquisition of a subsidiary                                                                                                331 424       331 424
BEE share-based payments charge                                                     1 607                      1 607                       1 607
Rights issue                                           3 857 469                                           3 857 469                   3 857 469
Employee share option scheme:
   Proceeds from shares issued                            23 115                                              23 115                      23 115
   Value of employee services                                                      13 872                     13 872                      13 872
Balance at 30 June 2013 – restated                     5 079 194      1 041       185 188    1 468 691     6 734 114       311 306     7 045 420
Total comprehensive income for the period                             2 571                     13 096        15 667       (7 403)         8 264
Acquisition of minority interest in subsidiary                                                                           (493 085)     (493 085)
BEE share-based payments charge                                                     1 693                      1 693                       1 693
Transfer to retained earnings                                                                (189 182)     (189 182)      189 182
Employee share option scheme:
   Proceeds from shares issued                             5 033                                               5 033                       5 033
   Value of employee services                                                      12 701                     12 701                      12 701
Balance at 31 December 2013                            5 084 227      3 612       199 582    1 292 605     6 580 026                   6 580 026

COMMENTARY
KEY FEATURES

- Results include Foodcorp which is not in the comparative period
- Material non-cash fair value adjustment to Foodcorp Euro bonds of R248,6 million
  reflected on interest line
- Rainbow's results remain depressed
- Despite this, strong cash generation

BASIS OF PREPARATION
The financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS), the information required by IAS 34 (Interim
financial reporting), IFRIC interpretations, SAICA financial reporting guides and in
compliance with the Companies Act of South Africa and the Listings Requirements
of the JSE Limited, under the supervision of the Chief Financial Officer, Robert Field
CA (SA). The accounting policies comply with IFRS and are consistent with those
applied in the previous year except for the adoption of IFRS 10 (Consolidated financial
statements), IFRS 11 (Joint arrangements), IFRS 12 (Disclosure of interests in other
entities), IFRS 13 (Fair value measurement) and the amendments to IFRS 7 (Financial
instruments disclosure) and IAS 19 (Employee benefits) (IAS 19R) which became
effective 1 July 2013. The adoption of IFRS 10, IFRS 11, IFRS 12 and IFRS 13 as well
as the amendments to IFRS 7 has no effect on the results, nor has it required any
restatement of results. The most significant impact on the Group relating to IAS 19
has been that IAS 19R eliminates the option to defer the recognition of actuarial gains
and losses. The remeasurements are required to be presented in other comprehensive
income in full.

IAS 19R has been applied retrospectively in accordance with the transitional
provisions. Consequently, the Group has restated its reported results throughout the
comparative periods presented and reported the cumulative effect as at 1 July 2012
as an adjustment to opening equity.

The effect of the application of IAS 19R on the reported results for the six months
ended 31 December 2012 and the year ended 30 June 2013 are as follows:

                                                          31 Dec     30 June
R'000                                                       2012        2013
Impact on profit for the period
Increase in operating profit                                 136       1 026
Increase in income tax expense                              (38)       (287)
Increase in profit for the period                             98         739
Impact on comprehensive income/(loss) for the period
Remeasurement of retirement medical obligations            (516)     (1 786)
Tax relating to items of other comprehensive income          144         500
Decrease in other comprehensive income for the period      (372)     (1 286)
Decrease in total comprehensive income for the period      (274)       (547)
Impact on the statement of financial position
Increase in retirement medical obligations                14 605      14 985
Decrease in deferred income tax liabilities              (4 089)     (4 196)
Decrease in retained earnings                           (10 516)    (10 789)

RCL FOODS CORPORATE ACTIVITY
RCL Foods' ambition is to build a diversified food business of scale in sub-Saharan
Africa with compelling brands that deliver to consumer and customer needs.

During the period under review RCL Foods acquired the remaining 35,82% minority
interest in New Foodcorp Holdings Proprietary Limited (Foodcorp) in two transactions
from Foodcorp management (1 July 2013) and Capitau Investment Advisers
Proprietary Limited (6 September 2013) for a total consideration of R520,7 million.

RCL Foods intends to implement an optimal capital structure. As a step toward this
objective, Foodcorp exercised its option to redeem 10% of the Euro denominated
Senior Secured Notes (SSNs) at 103% for a net R463,6million in November 2013 which
leaves €351,0 million in outstanding Euro debt. Foodcorp has the option to redeem
the remaining SSNs from 1 March 2014 at 108,75%. RCL Foods has engaged with local
banks to consider the most appropriate funding model for the Group.

On 21 November 2013, RCL Foods announced that it had entered into an agreement
with TSB Sugar Holdings Proprietary Limited (TSB Holdings) to acquire 100% of
the issued ordinary shares in its two operating subsidiaries, namely TSB Sugar RSA
Proprietary Limited and TSB Sugar International Proprietary Limited (collectively
referred to as "TSB") from TSB Holdings. The purchase consideration of R4,0 billion
was settled on 17 January 2014 via an issue of shares at a price of R17,32 per RCL
Foods share. TSB Holdings is an indirect wholly owned subsidiary of Remgro Limited,
RCL Foods' controlling shareholder.

RCL Foods further announced the intention to restructure its existing BEE notional
vendor financed shareholding, by virtue of it being unlikely to deliver valve to participants,
 as well as implement TSB's BEE scheme at the RCL Foods shareholding level. RCL Foods also
 proposed a capital raising in the amount of R2,5 billion through a combination of a pro rata offer
to existing minority shareholders (namely, all shareholders excluding Remgro and its
subsidiaries, and the existing BEE parties) and a specific issue of new shares via a
placement to qualifying investors.

Shareholders approved the TSB and BEE transactions referred to above on 16 January
2014. The IFRS 2 costs relating to the restructuring of the current BEE scheme and
the implementation of the TSB BEE deal will be recognised in the six months to June
2014. Transactions costs have only been recognised in the current reporting period to
the extent that they were not contingent on the approval of the TSB acquisition and
BEE deals at the special general meeting on 16 January 2014.

Equity capital raise
The result of the pro rata offer to existing minority shareholders was announced
on 5 February 2014 indicating that R790,1 million had been raised. The proposed
placement of new shares to raise the balance of the R2,5 billion has been delayed and
remains subject to market conditions, the Group's cash/gearing situation as well as the
anticipated timing of investment cash flows.

RCL FOODS FINANCIAL REVIEW
RCL Foods' revenue for the six months to December 2013 increased by 95,1% to
R8,8 billion, largely due to the inclusion of six months of Foodcorp's results. RCL
Foods' headline EBITDA increased by 251,2% from R196,0 million to R688,3 million
with the associated margin increasing from 4,4% to 7,8%.

The table below depicts headline EBITDA from a statutory perspective and adjusted
for unrealised gains and losses on financial instruments used in the Group's chicken
business' (Rainbow) feed raw material procurement strategy. Reporting (in terms of
IAS 39) the financial effects of certain financial instruments used in the feed
procurement strategy introduces volatility to the Group's financial results. For the
period under review, the pre-taxation impact on the Group's results of these unrealised
positions is a positive impact of R34,1 million (2012: negative R80,5 million), being
largely related to the increase in maize and soya prices and the deterioration in the
Rand/USD exchange rate.
                                               Restated
                                Six months   Six months
                                    31 Dec       31 Dec        %
                                      2013         2012      Var
Headline EBITDA          (Rm)
– Statutory                          688,3        196,0    251,2
– Pre-IAS 39                         654,2        276,5    136,6
Headline EBITDA margin   (%)
– Statutory                            7,8          4,4      3,4
– Pre-IAS 39                           7,4          6,1      1,3

Rainbow has again experienced difficult trading conditions with high import volumes
and record feed input costs suppressing margins. The introduction of a general tariff in
August was a positive message of support from Government but has had a negligible
financial impact due to the shifting of import volumes via the European Union
which benefits from a free trade agreement with South Africa. Rainbow recorded a
R97,7 million statutory operating profit for the period but the margin of 2,2%
remains unacceptable. Vector's operating profit increased by 6,8% to R99,2 million
due to the utilisation of additional capacity added in the prior year and the addition of
two new principals. Foodcorp's operating profit for the six months to December was
R249,4 million but earnings were compromised due to a R248,6 million non-cash flow
negative adjustment on the SSNs and related hedges. The Euro rate used to translate
the debt and related hedges at 31 December 2013 was R14,49 versus R12,86 at
30 June 2013.

Headline earnings from continuing operations of R27,4 million decreased by 47,9%
over the comparative period, largely due to the mark-to-market impact of Foodcorp's
Euro debt and related hedges.

The prior year earnings per share calculations have been restated in accordance with
IAS 33 to take into account the impact of the March 2013 rights offer, albeit an
immaterial adjustment.

Impact of Foodcorp acquisition on the statement of financial position
The acquisition of Foodcorp during the second half of the previous financial year has
had a significant impact on the Group's statement of financial position with IFRS 3
(Statement of business combinations) requiring recognition of net assets acquired
at fair value. The statement of financial position reflects an increase in working
capital balances due to the scale of the Foodcorp business included in RCL Foods'
results when compared to the six months to December 2012. Certain key items are
highlighted below.

Trademarks and customer relationship intangible assets of R2,8 billion were recognised
on the acquisition of Foodcorp. The significant value of these intangibles acquired
shows the wealth of the brands added to the Group by the Foodcorp acquisition.

The preference shares receivable of R130,3 million was settled in July 2013 as part of
the Foodcorp management shareholding purchase.

The sale agreement that has been entered into to dispose of the fishing division of
Foodcorp has resulted in R434,2 million of assets and R125,6 million of liabilities
classified as held-for-sale.The fishing division's results have accordingly been disclosed
as a discontinued operation.

The significant increase in interest bearing liabilities primarily relates to Foodcorp's
remaining €351,0 million SSNs. These liabilities are offset by a positive R622,7 million
of derivative financial instruments that are mark-to-market relating to the hedging
structures.

The increase in deferred income tax liabilities to R1,4 billion is mostly due to the
revaluation of assets and liabilities arising from the purchase price allocation (PPA)
exercise performed as part of the acquisition of Foodcorp.

Cash flow and working capital
Cash generated by operations improved to R857,5 million (increase of 448,2%),
mainly as a result of the inclusion of Foodcorp, but also contributed to by strict
working capital management.

The difference between the net finance cost paid of R201,8 million versus the
net finance cost of R407,9 million per the income statement is largely due to the
R248,6 million non-cash flow mark-to-market revaluation of the SSNs and related
hedges.

The cash inflow from investing activities is largely attributable to the R300,0 million
reduction in investment in money market fund. The cash outflow from financing
activities is largely due to the 10% redemption of the Foodcorp bonds and the
acquisition of Foodcorp's remaining minority interest.

Capital expenditure
Capital expenditure for the six-month period was R184,0 million (2012: R274,1 million)
with Foodcorp accounting for R107,1 million of this spend. Capital expenditure
within Rainbow remains limited to necessary replacement spends. An amount of
R150,0 million (2012: R155,4 million) has been contracted and committed, but not
spent, whilst a further R98,8 million (2012: R21,4 million) has been approved, but not
contracted. Foodcorp accounts for R101,1 million and R51,8 million of these values
respectively.

Return on equity decreased to a negative 0,3% (2012: positive 4,2%) being impacted
by Rainbow's poor operating performance, the negative mark-to-market adjustment
on Foodcorp's SSNs and the additional equity following last year's rights offer.

FOODCORP REVIEW OF OPERATIONS
Foodcorp had a reasonable trading performance for the six months ended 31 December
2013, amidst tough trading conditions and constrained consumer spending. The
South African economy has experienced a continuation of pedestrian growth with
the latest reported annual GDP growth rate at 1,9%. Growth in consumer spending
slowed to its lowest level in five years during this reporting period.

Revenue from continuing operations for the six months ended 31 December 2013
was R3 976,1 million, an increase of 5,9% over the comparable (unaudited) period
prior to acquisition of the business. During this period selling price increases were
necessary in certain categories, due to the increase in commodity prices of raw
materials, coupled with higher energy and distribution costs. The effect of the weaker
rand on commodity, packaging and transport costs will necessitate the need for
additional price increases in the short term.

Operating profit from continuing operations for the six months ended 31 December
2013 was in line with expectations at R249,4 million.

Disposal of fishing division
Foodcorp concluded an agreement in June 2013 to dispose of the Fishing operations
to Oceana subject to regulatory approvals. The division operates in the pelagic, hake
and lobster sectors of the market. The Competition Commission has approved the
disposal transaction, subject to certain divestiture conditions. One of these conditions
is not acceptable to the parties who accordingly have filed a Request for Consideration
with the Competition Tribunal challenging the condition. The Competition Tribunal
hearing commenced on 20 January 2014, but the outcome will only be finalised
once all witnesses have appeared before the Tribunal which is expected by April 2014.

RAINBOW REVIEW OF OPERATIONS
There has been little change to the crisis facing Rainbow and the poultry industry in
the past six months. High import volumes, consumers under pressure and record feed
costs continue to contribute negatively to the results.

Rainbow posted a pre-IAS 39 operating profit of R63,6 million (2012: R77,5 million)
and a R97,7 million statutory operating profit (2012: R3,0 million loss) for the
period, mainly as a result of not being able to recover the 10,0% rand per ton feed
cost increase. Overall volume growth in tons per day was 3,7% whilst the average
realisation increase over the comparable period was 4,3%. Rainbow's agricultural and
processing operations have performed well in the period, limiting c/kg increases to
only 0,9%.

Poultry industry
The local industry continues to be impacted by three major issues, namely:

- Imports at record levels with dumping of product;
- Escalating feed raw material costs; and
- Proposed injection regulation.

Imports maintaining their record levels
Despite Government assistance through the implementation of an increased general
tariff implemented in August 2013, imports of chicken (excluding Mechanically
Deboned Meat) for the calendar year 2013 was 213 007 tons and represents
approximately 10% of the local market.

The country of origin of imports has changed over the last few years with a significant
increase being experienced from European countries which enjoy a free trade
agreement with South Africa. The EU share of chicken imports has increased to a
monthly average of 74% (August to December) from 55% (January to July) since the
implementation of increased tariffs in August 2013, with a peak of 84% (Source:
SARS).

The South African Poultry Association (SAPA) has engaged extensively with
Government and the International Trade and Administration Commission of South
Africa (ITAC) to find an acceptable solution that promotes fair trade whilst affording
protection to local jobs. A decision regarding the anti-dumping application against
certain European countries is expected before June 2014.

Escalating feed raw material costs
Significantly improved international crops, especially from the US, have not yet
positively impacted local feed raw material costs. Local maize supply remains tight
mainly due to exports and the 2014 crop is at a critical phase from a weather
perspective. The exchange rate volatility and recent rand weakness has had a material
impact on the prices of both maize and soya.

Injection cap proposed by Government
In December 2013, the Department of Agriculture, Forestry and Fisheries (DAFF)
published draft regulations to cap injection at 15% in South Africa from March 2015.
The key issues addressed by this legislation are:

- The maximum added moisture content for portions has been confirmed at 15%
  of the product, resulting in IQF chicken having a maximum declaration of 85%
  chicken/15% brine;
- This legislation clarifies that moisture content includes pickup by any means and is
  not limited to brine injection specifically; and
- Wherever brine is added it will need to be highlighted in the product descriptor on
  the packs.

Rainbow has always supported the principle of an injection cap and welcomes the
new legislation and proposd 15% cap to ensure a level playing field and that consumers' best interests are
protected.

Impairment assessment
A restoration of normal trading conditions is required for the poultry industry in South
Africa to survive. The Rainbow and RCL Foods Boards of directors continue to assess
the need for an impairment of assets. A return to profitability is dependent on the
successful outcome of the anti-dumping applications that are before the relevant
authorities.

There are a number of action steps that have been implemented by management
in an attempt to improve the trading performance of Rainbow. These include a
reduction in fixed costs, improved agriculture KPI performance, limiting investment to
maintain operations only and lowering volumes, the majority of which will be evident
in the second six months of the financial year.

An impairment will need to be raised should these applications be unsuccessful or,
despite the management interventions referred to above, there is no improvement in
Rainbow's operating margins.

VECTOR REVIEW OF OPERATIONS
Vector's revenue for the first six months of the year grew by 16,2% compared to
the prior period. This was largely due to new revenue being derived from bulk
storage following the recent expansion of the facilities in Midrand, growth in the
primary transport business and the take-on of new customers, namely Burger King
and Captain Dorego's. Organic growth, however, remains subdued in the secondary
distribution environment where most of Vector's trading partners have experienced
slow sales, influenced by a sluggish economy. Added to this, the logistics sector
continues to be challenged by increasing operating costs driven by high fuel and
electricity prices. The net effect of the above resulted in a modest growth in Vector's
operating profit of 6,8% compared to the same period last year.

In an on-going attempt to further optimise its network, Vector closed its Klerksdorp
operation at the end of May 2013 and moved its secondary distribution operation from
Roodepoort to the Midrand facilities in November 2013. Through the consolidation of
stock at fewer sites, these changes are expected to improve efficiencies in the Inland
region and reduce operating costs going forward. The Adexa demand planning tool
continues to deliver benefits with inventory levels reduced in excess of 7% year on
year through improved forecast accuracy and planning.

ZAM CHICK REVIEW OF OPERATIONS
RCL Foods holds a 49% stake in Zam Chick Limited in Zambia under joint
management control with Zambeef Products PLC. Due to differing year-end periods,
RCL Foods has accounted for Zam Chick's six-month results to September 2013 in
these reported results. The Zambian chicken market was in an oversupply situation
around the 1 April 2013 effective date of the transaction, however, this has since
normalised with recent months trading in line with expectation.

INFORMATION TECHNOLOGY
During this reporting period, RCL Foods has continued to optimise the Enterprise
Resource Planning systems within the Rainbow, Vector and Foodcorp businesses.

Significant focus has been placed on leveraging the SAP system to drive procurement
benefits across the Group. Rainbow upgraded its poultry based agriculture solution
with specific initiatives to improve the planning processes throughout the integrated
chicken supply chain. Extended focus has also been placed on the optimisation of
the outbound supply chain through the Vector SAP system solutions. Foodcorp
has commenced with a number of key ERP enhancement projects that will provide
improved levels of business process integration. The implementation of global best
practice processes and shared services will enable the delivery of significant business
benefits into the future. The leveraging of the Group's IT systems and optimised
business processes remains a key enabler within the business.

DIVIDEND
The Board has resolved to defer a dividend decision to year-end.

DIRECTORATE
Mr Derrick Msibi and Mr George Steyn were appointed as independent non-executive
directors of the Board with effect from 27 August 2013. Dr Munro Griessel and
Mr JB Magwaza retired as non-executive directors from the Board with effect from
18 November 2013 due to reaching retirement age. The Board would like to thank both
 retiring directors for their years of dedicated service and insightful advice.

PROSPECTS
The poor state of the South African economy, rising interest rates, mining sector
strikes and the significant devaluation of the local currency means a sustainable
improvement in consumer spending is unlikely in the near future. The impact of this is
pervasive across all RCL Foods' segments.

The poultry industry is at crisis point and anti-dumping protection will be key to the
survival of the industry.

The acquisition of TSB provides a unique opportunity for RCL Foods to diversify
across the food industry value chain. The outlook for global sugar, however, remains
challenging with the South African market suffering under high levels of imports.

ITAC gazetted the Sugar Industry's application for an increase in the Dollar based
reference price in September 2013 which is expected to be heard in the first quarter
of 2014.

The trading outlook for Vector is mixed, with solid profit growth coming from the
filling of capacity offset by the retail business where Vector's principals are coming
under increased pressure from cheap imports.

The Group continues to explore opportunities in strategic growth markets in the food
sector in South Africa and sub-Saharan Africa in line with its long-term aspirations.

For and on behalf of the Board

JJ Durand                                                   M Dally
Non-executive Chairman                      Chief Executive Officer
Durban                                             19 February 2014

CORPORATE INFORMATION

RCL FOODS LIMITED ("RCL Foods" or "Group")
(Formerly known as Rainbow Chicken Limited)
Registration number: 1966/004972/06
JSE share code: RCL
ISIN: ZAE000179438
                  
Registered office: RCL Foods Limited
                   Six The Boulevard, Westway Office
                   Park, Westville, 3629
           
Directors: JJ Durand (Non-executive Chairman),
           M Dally (CEO)*, HJ Carse, RH Field*, PR Louw,
           NP Mageza, DTV Msibi, MM Nhlanhla,
           RV Smither, GM Steyn, GC Zondi
           *Executive directors

Company secretary: JMJ Maher

Auditors: PricewaterhouseCoopers Inc
                      
Transfer secretaries: Computershare Investor Services
                      Proprietary Limited, 70 Marshall
                      Street, Johannesburg, 2001
 
Sponsor: Rand Merchant Bank
         (a division of FirstRand Bank Limited)

Bankers: ABSA Bank Limited

Website: www.rclfoods.com
Date: 19/02/2014 05:15:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
 the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, 
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
 information disseminated through SENS.

Share This Story