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Cottco Holdings Limited FY 2010 financial results

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Cottco Holdings Limited leading Agriculture company listed on the Zimbabwe Stock Exchange has released their full year Results . Check out insights into this company in their presentation which …

Cottco Holdings Limited leading Agriculture company listed on the Zimbabwe Stock Exchange has released their full year Results . Check out insights into this company in their presentation which appears below.
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  • 1. COMMENTARY OVERVIEW The year under review was both exciting and challenging. First, we saw the liberalisation of the economy and the introduction of the multicurrency regime. With this, we saw an end to hyperinflation which had so ravaged this economy for the past few years. Inflation receded for most of the year while supply and availability of basic commodities improved significantly. Nevertheless, costs of running businesses rose in real terms resulting in local businesses, particularly the manufacturing sector, being put under severe strain. Second, we experienced unprecedented liquidity constraints across the entire economy. Funds were scarce and, when available, facility tenures were short causing challenges to the smooth flow of operations. Consequently, the cost of money was expensive with interest rates migrating from about 13% in March/April 2009 to between 20% and 25% per annum in March 2010. This, together with increased operating costs (in real terms) and competition from imported products, caused viability challenges for local businesses. Despite notable improvements in capacity utilisation, power outages remained a major bottleneck to recovery of business and production levels. On the other hand, disposable incomes remained low and affected consumer demand. Global commodity prices which fell in 2008 have recovered and should propel improvements in revenue and aggregate earnings going forward. GROUP FINANCIAL PERFORMANCE Aggregate sales volumes grew by 37% over prior year, driven in the main by volume growth in the FMCG and Cotton business. Group turnover of US$162.9 million is 35% higher than last year due to turnover growth in Seed Co Limited arising mainly from improvements in Zimbabwe maize seed prices and volumes. Despite strong performance from the Seed SBU, Group operating profit of US$12.8 million (last year: US$26.9 million) was negated by the operating losses in the Cotton, FMCG and Spinning businesses. As a result, Group profit after tax fell by 84% to US$2.4 million. Earnings attributable to shareholders declined by US$12.0 million from US$7.8 million last year, to a loss of US$4.3 million. Discontinued operations contributed US$1.5 million to revenue and recorded combined losses after tax of US$2.1 million. Otherwise, profit after tax from continuing operations amounted to US$4.5 million (last year: US$15.3 million). Capital expenditure amounted to US$6.1 million. Net cash flow generated from operations was US$8.4 million. OPERATIONS REVIEW Cotton The national cotton crop fell to 211,000 tonnes from 230,000 tonnes last year. Consequently, Cotto's intake volumes fell to 98,000 tonnes from 122,000 tonnes last year. Sales volumes were 67% higher than prior year due to higher carryover stocks. However, revenue of US$78 million was 3% lower than prior year due to lower commodity prices obtained during the year under review. Seed cotton buying price averaged US$330 per tonne leading to cost overruns of US$17 million relative to budget. This, together with low sales prices and other cost overruns, resulted in a reduction in margins and subsequently a loss before tax of US$10.4 million. Interest costs of US$9.9 million are extremely high and will be addressed going forward. Efforts are underway to restructure this business and its cost base. A voluntary retrenchment package has been approved and concluded. Regulatory framework in the form of Statutory Instrument 142 of 2009 (SI142) was promulgated in August 2009. SI142 will govern the orderly production and marketing of cotton in the country. We, therefore, expect a significant reduction in side marketing and concomitant increases in crop support, crop production volumes and intake. We project the company's market share under these circumstances to be above 51%. The company invested US$11 million in crop inputs last year and we expect this to result in much higher intake in the forthcoming buying season. World lint prices have recovered and are now quoted at above 80US cents per pound. This, together with anticipated increases in crop intake and sales volumes, should see a significant improvement in profits in the new financial year. Seed Performance was more exciting in the Seed business stream, with all SBU's reporting profits and positive cash balances. Government and NGO inputs support programmes in Malawi, Zambia, Tanzania and Zimbabwe meant that all maize seed available had a ready market. In fact, low production in the previous season occasioned by dry conditions coupled with low carryover stocks meant that demand outstripped supply. Efforts are being intensified to increase production and address this shortfall. In Zimbabwe, production will increase threefold, Tanzania will commence local seed production, Malawi will enhance resources and seed production capacity, while the new farm acquired in Zambia will be used to produce some of the key varieties required by the market. Maize seed volumes grew 70% on the back of firm demand in all markets. Revenue grew 43% to reach US$77.0 million. Costs rose in real terms in Zimbabwe due to “dollarisation”' while regional overhead costs went up on the back of initiatives to increase maize seed production. Consequently, profit before tax of US$17.9 million rose by 7% over prior year. Future performance will be propelled by the trebling of production in Zimbabwe and by harnessing the growth of the East African business units. FMCG Despite the many challenges facing this business, it remains one of the more exciting opportunities within the Group. Nevertheless, volume and sales performance were hampered by low demand due to low disposable incomes and, in some instances, the narrow product range occasioned by funding constraints. Notwithstanding power and working capital constraints, sales volumes grew by 86% relative to prior year. Volumes sold amounted to 17,305 tonnes (last year: 9,300 tonnes). The product range herein enjoys good brand equity and preference and has held its own against imported products - albeit at lower margins. Revenue rose by 464% to US$14.9 million. Turnover increased significantly as a result of the removal of price controls and growth in volumes. Lower margins and high operating costs resulted in a loss before tax of US$3.6 million. Rationalisation of costs and the product range are ongoing with a view to enhancing both sales volume performance and overall earnings. Subject to availability of working capital and attendant improvements in efficiency and capacity utilisation, we expect production and sales volumes, profitability and competitiveness to improve. Spinning Yarn prices, despite recovery of lint prices, remained low for most of the year. Resistance to price increases in South Africa affected revenue. As a result, operating margins fell substantially. This has, however, now been corrected. The supply of raw materials was erratic due to liquidity constraints. Consequently, production levels were 55% of capacity resulting in substantial cost under recoveries. However, yarn volumes were 9% higher than prior year. Turnover of US$5.9 million is 20% higher than last year. The loss after tax amounted to US$1.7 million. Yarn prices are now recovering and this, coupled with attendant improvements in working capital, will see earnings improve in the new financial year. DISCONTINUED OPERATIONS During the year, the Group Board decided to close down two of its smaller operations. Exhort Enterprises (Pvt) Limited The Group's frozen vegetables operation has continued to perform unsatisfactorily. In particular it continues to face challenges relating to on-farm quality of contracted produce together with very low yields thereon. In addition, it is the Board's view that this operation has now become sub-scale relative to the Group's other operations and no longer fits the Group's strategy going forward. Consequently, the Board has decided to wind down and dispose of this operation. Salamax Trading (Pty) Limited In 2008, the Group established a buying office in South Africa, under the name Salamax Trading (Pty) Limited. Given the change in circumstances, particularly "dollarisation" of the economy and subsequent improvements in availability of goods and services at competitive costs, it is the Board's view that this vehicle is no longer necessary. Accordingly, the Board has decided that this operation be closed down. DIVIDEND Due to the prevailing liquidity challenges, the Directors have not declared a dividend. PROSPECTS Prospects for the Group are good. Projected recovery in intake and sales volumes in Seed Co Zimbabwe and the Cotton business as well as improvement in underlying commodity prices will result in a significant improvement in earnings. The FMCG business will grow substantially on the back of higher efficiencies arising from improving capacity utilisation. Appropriate funding of key Group operations and rationalisation of the Group balance sheet will, however, be critical for overall future performance. DIRECTORATE Mr. Patrick Devenish was appointed Group Chief Executive for AICO Africa Limited with effect from 1 January 2010 and joined the Board on the same date. He replaced Mr. Happymore Mapara who left the Group in November 2009 to pursue private interests. By order of the Board P. Manamike Company Secretary 23 June 2010 Head Office: 1st Floor, SAZ Building, Northend Close, Northridge Park, Borrowdale, Harare, Box BW537, Borrowdale, Harare, Tel: 263-4-852795, 853054-6, 853059 Fax: 263-4-850705

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