Dairibord CEO sees bigger prospects in SA tolling deal

LISTED milk products processor, Dairibord Holdings Ltd, saw a near 50% drop in profit after tax to ZW$6,89 billion after expenses and finance costs doubled during the financial year ended December 31, 2023.

LISTED milk products processor, Dairibord Holdings Ltd, saw a near 50% drop in profit after tax to ZW$6,89 billion after expenses and finance costs doubled during the financial year ended December 31, 2023. In the prior year, the food and beverages concern posted a net profit of ZW$13,59 billion. This comes as the 2023 financial year saw selling and distribution, administration, and other operating expenses, as well as, finance costs totalling ZW$226,2 billion, up from the 2022 comparative of ZW$104,53 billion. Our business reporter Tafadzwa Mhlanga (TM) caught up with Dairibord group chief executive officer, Mercy Ndoro  to speak on the financial performance and future plans.

TM: In the financial statement, the company said frequent power outages and inconsistent municipal water supply increased the cost of business operations during the year ended December 31, 2023. Are power and water challenges what drove the increase in business expenses and costs?

MN: Indeed, the profit after tax (in inflation adjusted terms) for the year ended 31 December 2023 dropped by 49% over 2022. The decrease was mainly on account of foreign exchange losses arising from converting United States dollar obligations to Zimbabwe dollars. A total of ZW$92,99 billion in foreign exchange losses was charged to income in year 2023. ZW$56,7 billion was accounted for in other operating expenses and ZW$36,29 billion was accounted for in finance costs. It is, however, important to note that while revenue grew by 47%, over prior year, cost of sales grew by a lower 41% and selling, distribution and administration costs grew by an even lower 36%. This reflects the benefits of the cost reduction and containment measures implemented by management. The erratic supply of utilities continues to increase the cost of doing business because we have to rely on expensive diesel-powered generators to run the plants and also on bought in water.

TM: You noted challenges relating to power and water, yet in May last year, you said you would invest US$3,6 million in three one-megawatt (MW) solar plants and six one-million litre reservoirs. What is the status of these projects?

MN: Indeed, we communicated that we were considering one-megawatt solar projects for our Chipinge and Chitungwiza factories. I am happy to say that we are finalising a power purchase agreement for Chipinge, implementation of which should start in the second quarter of 2024.

We have already commissioned three-one million water reservoirs at our Harare, Chipinge and Chitungwiza factories. These tanks will go a long way in reducing the cost of bought in water as we now have capacity to store water for use in our production plants.

TM: Finance costs were significantly higher than the previous year. What caused that?

MN: As reported, included in the finance costs is ZW$36,29 billion in foreign exchange losses, relating to the conversion of foreign currency loans into Zimbabwe dollar (ZWL) at the exchange rate ruling on December 31, 2023.

TM: What cost saving measures are you implementing to reduce their impact on profit?

MN: The losses are arising because we are converting US dollar obligations to ZW dollars. Over 90% of our transactions are now in US dollars, therefore, the foreign exchange losses become a book entry and the US dollar obligations are adequately covered by the US dollar earnings.

TM: You spoke of the toll manufacturing project in South Africa. You said it is at an advanced stage. You indicated that this would support forex earnings. Can you please describe what this project is all about. How much investment have you put into it?

MN: We have very strong brands that are in demand in Zimbabwe and in the region. However, because we have been prioritising the domestic market, due to supply constraints, we have not been able to adequately meet the demand for both the domestic and export markets. 

To adequately meet demand in the exports markets, we have identified manufacturers in South Africa, who have excess capacity that they can use to manufacture our products.

TM: How far have you gone on this project?

MN: Our research and development team has been working on producing a product that matches our product specifications in South Africa. As soon as the research and development work is completed, we will move into commercial production, which is going to be very soon. Toll manufacturing is when you contract a third party to manufacture your products on your behalf according to your specification.

The major advantage of this approach is that Dairibord does not have to invest in plant and equipment, because we are using already installed capacity in factories in South Africa. This is a quick low cost, low risk entry into a big market like South Africa. Our investment has been in the research and development work to manufacture the products, which has been low.

TM: What do you seek to achieve by this project?

MN: The project will drive volumes, increase foreign currency generation, enhance brand visibility of our products in a bigger economy, and provide a low cost model for competitiveness in the face of the Africa Free Continental Trade Area (AfCFCA). We will produce our products in South Africa for selling in South Africa and the surrounding markets in foreign currency.

TM: When will the project be completed, and by what percentage do you estimate it will raise your foreign currency earnings?

MN: We are planning to do the first commercial runs in April 2024 (this month). However, research and development are a process and after full optimisation of the processes, we target to sell a minimum of 500 000 litres a month.

TM: Would you say there is now a bigger market outside Zimbabwe than inside?

MN: I would not say that there is now a bigger market outside Zimbabwe. Zimbabwe remains the anchor market for us. However, there are huge opportunities presented by the export markets, which Zimbabwean processors can take advantage of. If you take the AfCFTA as an example, it provides access to a population of 1,3 billion people and a GDP (gross domestic product) of US$3,4 trillion. Therefore, it is a huge potential market that cannot be ignored.

TM: How are you positioning the company to tap into that foreign market?

MN: We are deploying a two-pronged approach. We will continue to take our brands from Zimbabwe into selected markets like Zambia, the Democratic Republic of Congo, Malawi, Mozambique, and other markets.  The second approach is where we are establishing a physical presence in South Africa through the toll manufacturing agreements, from where we will sell and distribute products in South Africa and surrounding markets like Botswana, Lesotho and Swaziland.

TM: How much capital investment are you spending for the current financial year, and where will those funds be going towards in your operations?

MN: We are planning to spend US$24 million in year 2024, which will spill over into year 2025. Because of supply chain disruptions, capital projects now have long lead times. Therefore, delivery and beneficial use of the investments will only happen in 2025. The investments are meant to address two broad objectives, which are revenue growth from increased capacity and cost reduction from improved efficiencies through replacement equipment.

Official exchange rate in December 2023 stood at US$1:ZW$6 104

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