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When will volumes and profits converge?

By Admire Mavolwane

YESTERDAY’S Business Herald’s main story said this year’s tobacco selling season had been extended to the September 15. It w

as previously envisaged that the floors would have closed by August 31 but a two-week extension, meant to accommodate farmers who are yet to deliver their crop, has been granted.

By Friday last week, 49,1 million kg of flue-cured tobacco had been sold, which means roughly 5,9 million kg out of the expected 55 million kg is still outstanding. Last year, approximately 74 million kg were sold, meaning that a decline of 26% has occurred. Prior to the planting season a target for 150 million kg had been set, and the fact that the farmers produced only a third of the target should be a huge disappointment to all involved.

There is, however, a high and commendable level of transparency when it comes to the amount of tobacco that the country produces each year. By the time the marketing season commenced in April, the nation knew with a fair amount of certainty how many kilogrammes of tobacco were expected to go under the hammer. The same applies to the quantum of cotton seed, with figures freely available from Cottco and the Cotton Council of Zimbabwe. However, when it comes to maize, the production figures are a closely guarded secret. We are now mid-way through the GMB’s maize buying season but the total amount of tonnage delivered so far is not yet in the public domain.

What is public knowledge though is that the manufacturing sector is not doing all that well. The results from the listed companies which we believe mirror the rest of the sector show significant volume declines. Companies are now selling — locally — between 50% and 60% of what they did in the same period last year. In the most extreme of cases volumes are close to 60% lower. The bulk of these companies have managed to post profits, however, on the back of stock gains attributable to the replacement cost pricing strategy and, in some cases, to the benefits of finance income.

Zimbabwe’s foremost cable manufacturer, Cafca, recently published interim results showing the scars of the environment. Domestic sales declined by 58% after the company experienced difficulties in accessing foreign currency for the importation of copper. As a result Cafca could not meet local demand and even failed to export. For the first half, export volumes were virtually non existent after having recorded a 98% decline. Turnover, nevertheless, increased by 1 020% to $607,9 billion (old currency) due mainly to inflationary pricing.

The reduction in export volumes turned out to be a blessing in disguise as operating margins increased to 34% from 18%. Traditionally, exports attracted low margins which dampened the overall company margins. Consequently, the corresponding profit line grew at an enhanced pace of 1 962% to $206,1 billion. With foreign currency not available and volumes so low, the company was bound to have surplus cash as indeed it did. The investment of said funds saw interest inflows of $18,6 billion being recorded.

Attributable earnings of $151,9 billion were recorded, a increase of twenty four and half times over the comparable period.

The commentary accompanying the results had a two sentence outlook, which was non committal. The board conceded that “challenges” of foreign currency shortages and high inflation will be a feature of the second half, hardly a revelation to say the least. The company is said to be pursuing an export incentive with the authorities.

What is worrying is that with local volumes 40% of what they were last year and the ‘look east policy’ set to crowd the company out of the parastatal business segment, how will Cafca survive the remaining six months of 2006 let alone the medium term future?

Pioneer, the listed transport logistics concern, seems to have turned the corner and is now raking in the profits again. The group shrugged off the lower volumes and a rather static exchange rate to achieve turnover growth of 1 228% to $1,4 trillion. The group obviously benefited from the consolidation of the joint venture, Pioneer Clan Botswana.

Notwithstanding the huge increases in fuel prices, labour costs and price of spare parts, the latter of which track the parallel market rate, group margins increased by 3% to 8%. Profits from operations thus increased by 2 057% to $107,5 billion.

Besides the taxman, a number of financiers also laid claim to the profits before the shareholders could. $46,1 billion was paid to bankers in the form of interest payments, whilst a non-cash loss of $12,1 billion was incurred on the translation of the now US$5,2 million foreign debt exposure. Income from associates Trentyre and Skynet, of $17,5 billion, somewhat helped to mitigate against the said appropriations. In the end, shareholders were left with attributable profits of $33,5 billion, a significant improvement on the $1,2 billion loss recorded for the same period of 2005.

Volumes are undoubtedly dismally low in the manufacturing sector, but somehow most of the entities are still able to record profits mainly as a result of inflationary pricing. It appears, rather strange that margins are widening by an almost similar range to volume declines. In other words, volumes decline by 40% whilst operating margins increase by 20 to 40 percentage points. We are likely to have a situation in the not so distant future where a company has a margin increase of 98 percentage points whilst at the same time selling 98% less than what they used to do.

How sustainable is that?

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