Dairibord hunts for value preservation strategies

Dairibord Holdings, one of the country’s largest manufacturers and marketers of milk, beverages and foods is looking at various revenue value preservation strategies as the country’s currency continues to lose ground against major currencies.

The Zimbabwean dollar, currently trading at US$1 for between $2 000 and $2 200 on the black market, suffered a stunning collapse against the greenback in the past few weeks and Dairibord said it was looking to optimise the US dollar generation and prioritising cash to near cash channels in order to preserve the value.

Chief executive, Mercy Ndoro, told analysts and journalists last week that this would be achieved through “re-balancing the cash and near cash channels, foreign currency generating channels and establishing niche markets in the region.”

“Our local currency remains under pressure, exchange running away and also imported inflation and interest rates continue to increase in the outside markets,” Ndoro said.

Last year, Dairibord’s foreign currency sales accounted for 58 percent of the total volumes sold, having started the year very slow and peaked during the last quarter.

Exports volumes expanded by 77 percent in 2022 while forex sales during the first quarter of 2023 grew by 58 percent, compared to 39 percent in the same period last year.

“We have had a very decent start to 2023, and we (expect to) continue on that growth trajectory for the rest of the year,” said Ndoro. The last quarter of 2022 saw significant use of foreign currency, with the official statistics putting the forex-based transaction at nearly 80 percent. Inflation is now being measured using a weighted average of items priced in Zimbabwean dollars and the U.S. dollars. Last year, the Government allowed the use of the multi-currency system until 2025.

Operations

Dairibord said raw milk supply output rose by 14 percent to 19,4 million liters in 2022. However, the demand for milk and milk-related products still remains very high—at between 130 and 140 million liters compared to the 90 million litres the country produced.

The gap between the two was met by the imports of milk solids, which normally come in milk powder or bulk cheeses. Ndoro noted Zimbabwe had probably the highest raw milk price in the region—at US60c per liter and this was pushing up production costs. The continued increases in stock feed prices “is impacting (on) the cost of growing milk on the farms and in turn increasing the cost of milk,” Ndoro said.

Last year, the cost of raw materials grew by 46 percent, at a faster rate than revenue, which increased by 40 percent on the back of a 208 percent growth in sales, the highest volume the company had in six years. About 28 percent of sales volumes were liquid milk, 10 percent foods, and 62 percent beverages. Milk declined by 7 percent largely due to a shortage of raw milk. This saw the company diverting resources to high-margin food categories mainly ice creams and yogurts.

In terms of distribution channels, 15 percent of the sales volumes went through the retail channel, 26 percent via the wholesale channel and 14 percent through franchises.

About 25 percent went through the general trade, dominated by tuck shops; 3 percent through sales shops, and 17 percent via other channels including hotels and vending.

Financials

At the end of the financial year 2022, US dollar local borrowing amounted to about US$3 million at an average cost of 11 percent from US$727 000 a year earlier. The funds were spent on capital equipment. Zimbabwe dollar borrowings amounted to $1 billion at an average cost of 110 percent, having come down from 200 percent to 145 percent and landing at 110 percent in December 2022.

The company generated positive cash flows from operations-about 431 percent growth compared to the previous year. It closed the year with $1,8 billion and US$1 million.

The board declared a dividend of $1 per share which will be paid by the end of this month.

First quarter update

Dairibord recorded a 40 percent volume growth during the first quarter of 2023 after the company added capacity in some of its key lines. Raw milk production grew by 7 percent to 6,9 million and accounted for 33 percent of the milk received by local milk processors in the country, recording “40 percent overall growth of sales volumes benefiting from increased capacity that we installed,” said Ms Ndoro.

In October last year, Dairibord introduced baobab flavoured cascade beverage, a new line of cartonised cultured milk (lacto), and reintroduced the re-innovated fun and fresh apricot-flavoured drink in Q1 2023. Food volume contracted by 8 percent largely due shortage of electricity which affected demand for ice creams and yoghurts.

Beverages grew by 20 percent. Revenue in historical terms grew 534 percent over the prior year driven by the volume growth also price adjustment to support the margins. As a result, operating profit increased by 2 percent to 6 percent.

Going forward

Margins will remain under pressure due to inflation and the erosion of disposable income and the company would look at reducing costs, particularly of the raw materials, which account for 60 percent of the cost of sales by optimising the value chain as well as rationalising employment cost. Ndoro said the company was looking forward to growing volumes leveraging on the additional capacities.

“Our research and development department continues to work on the development of new offerings particularly in the food and beverages category,” she said.

“We will also enhance our capacity through new geographies, looking at costs competitive ways of taking our products into the new geographies outside our country.”

Foreign currency shortages, delays in allocation from the auction, price distortions as well as the cost, quality and supply and quality of utilities remain a challenge, Ndoro added.

“The water quality is not good, electricity supply is also not right (and) these factors are affecting our operation and increasing the cost of doing business,” she said.

Also, interest rates are very high in both the Zimbabwe dollar and the U.S dollar. “Inconsistent policy changes happening all the time have been distributing trade in the formal channels.”

Partnering with some big commercial farmers to increase raw milk would be a priority.-ebusinessweekly