Cargills hit by 2015 original Budget moves but remain optimistic

Monday, 16 February 2015 00:17 - - {{hitsCtrl.values.hits}}

Cargills (Ceylon) Plc has said measures announced in the original 2015 Budget have impacted its business and is looking for rectification of arbitrary deemed VAT but it remain optimistic of future prospects. Cargills Group experienced a 2.2% decline during the 3rd quarter closing at a turnover of Rs 15.1 Bn compared to Rs 15.5 Bn recorded during the corresponding period last year. The Revenue decline is attributed to the Manufacturing and Restaurants businesses experiencing a marginal setback during the quarter while the Distribution business is undergoing a re-organization to enhance efficiency. Nevertheless, the Manufacturing sector in particular has shown higher profitability during the 3 months under review with a strategic push of the value added range. The sharp rise in Administrative expenses is partly related to Group restructuring initiatives, and has brought down Group operating profit to Rs 368.4 Mn for the quarter. The Group recorded a profit of Rs 477.1 Mn for the 3 months ended compared to the profit of Rs 153.8 Mn recorded in the same period last year, attributable to the one-off gain of Rs 468.8 Mn from the disposal of Millers Brewery Limited. The Retail business maintained its Revenue levels at Rs 39.2 Bn for the 9 months ended but sees a decline in Operating Profit reported at Rs 701.9 Mn compared to Rs 1.5 Bn last year. The 2015 Budget proposals to revise the excise duty structure of the tobacco and alcohol categories, and remove VAT from the categories extended the “deemed-VAT” impact on the sector. At present more than 50% of the Retail turnover comprises of VAT-exempt products. The sector undertook to mitigate the profitability impact of this change in legislation by restricting the sale of tobacco and alcohol which had a negative impact on revenue during the quarter under review. Due to the 25% cap on VAT-exempt products, Cargills pays taxes on consumer essentials such as rice, fruits, vegetables, dairy products, seafood etc with ‘deemed’ VAT having increased to as much as Rs 332.0 Mn for the quarter ended. “Being compelled to absorb the “deemed VAT” and curtail initiatives of empowering rural farmers and small enterprises, we have urged the authorities to reconsider this arbitrary policy which has far reaching implications,” the Company said. The FMCG sector recorded an operating profit of Rs 465.2 Mn for the first 9 months on encouraging topline growth. The Dairy sub-segment continues to deliver revenue targets but is expected to be challenged by back-to-back increases in farm-gate prices of fresh milk. The twin price hikes imposed in the November Budget and the Interim-Budget in January takes the minimum farm-gate price of fresh milk to Rs 70/= per litre, from Rs 50/= per litre prior to November. Meanwhile the reduction of Milk Powder prices through the Interim-Budget would deteriorate demand for local dairy products. This double constraint would prove counterproductive to the goal of achieving self-sufficiency in the Country’s dairy requirements, Cargills said. Revenue levels in the Restaurants segment remains flat at Rs 1.6 Bn as at 31 December for the period due to the closure of three high-traffic Restaurants for refurbishment. The segment records an Operating Loss for the period due to high operational costs that are squeezing margins. The performance of TGI Fridays is also impacting segment profit. “The overall policy environment is positive for Consumption businesses with the drop in essential commodities coupled with wage hikes set to stimulate demand in Retail, FMCG and Restaurants segments in the coming quarter. The standardisation of fuel prices in line with the international market and the corresponding decline in electricity tariffs augurs well for all our businesses,” Cargills said. “In coming months we look forward to achieving greater clarity regarding the application of VAT on VAT-exempt items within the Supermarket Industry. We are also optimistic that the Government would substantiate the steps taken to encourage dairy farmers by encouraging the domestic dairy processing industry to create markets for local dairy products,” Cargills added. The restructuring process initiated by the Group is at a second stage with the dairy sector consolidation plan now in progress. The agreement reached with the International Finance Corporation (IFC) for an equity investment into Cargills Foods Company is also expected to conclude shortly. These initiatives would strengthen the efforts of the management to optimize resources, expertise and opportunities for sustainable business growth and profitability.

IFC completes Rs. 2.5 b investment in Cargills Foods

Cargills (Ceylon) Plc said on Friday that International Finance Corporation (IFC) has subscribed to an 8% stake in Cargills Foods Company Ltd., for Rs. 2.25 billion. The investment follows the IFC Board having approved the subscription and conditions for subscription duly completed. The investment was first announced in principle in August last year. The investment endorses a pre-money equity valuation of Rs. 29.3 billion for the Cargills Group’s retail business. Cargills Foods is a wholly-owned subsidiary of Cargills Ceylon and carries out the retail operations made up Cargills Food City and Cargills Food City Express supermarket chains. The rest of the Group operations such as the FMCG sector including the dairy sector (Magic and Kotmale), meat processing (Goldi, Sams and Finest sausages, meatballs, etc.), agri-processing (Kist nectars, jams, sauces, etc.) and Restaurants (KFC and TGI Fridays) as well as investments in banking and property continue under the holding company Cargills Ceylon PLC. According to the company’s Annual Report, the move comes as part of the restructuring exercise rolled out during 2013/14. Last year the Group embarked on a restructuring process with a view to establish business specific companies and strengthen the efforts of the management to optimise resources and expertise as well as create opportunities for value creation including attracting direct capital to the Group. In the year ended, Cargills received shareholder approval for its proposed restructuring exercise as a major transaction under the Companies Act No. 7 of 2007. The Retail operations that were partly under the Company were thereafter carried out by a wholly owned subsidiary Cargills Foods Company Ltd. with effect from 1 October 2013. The above process of restructuring and consolidation would result in the development of focused management and teams for each sector of operation, increased efficiency in the deployment of capital, reduction of Group debt and a resulting strengthening of the balance sheet.