Rising input costs weigh on Astral’s earnings

Astral Foods, a leading poultry producer, has recently reported a 37% drop in headline earnings per share, while revenue saw a modest increase of 7%. Despite the boost in revenue, the company's operating profit also took a hit, declining by 37%. The primary reason cited for this downturn is the inability of poultry price increases to offset the surge in feed and other production-related costs. Chris Schutte, the CEO of Astral Foods, sheds light on the challenges faced by the company in mitigating the impact of rising input costs on its margins. In a candid discussion with CNBC Africa, Schutte highlighted the significant role that input costs, particularly feeding expenses, play in Astral's overall cost structure. He emphasized that feeding costs constitute a substantial 70% of the total production cost of a live bird. These costs escalated by 17% year-on-year, exacerbated by already high raw material prices from the previous reporting period. The relentless escalation of input costs has severely affected Astral's margins, which have dwindled to just over 4%, down from 7.5% in the prior period. To counter this trend, Schutte underscored the company's unwavering commitment to managing and controlling controllable costs, which have remained below inflationary levels. However, the sustained pressure from soaring raw material prices has necessitated a strategic shift towards passing on some of these costs to the market and ultimately to consumers. Amidst the current price volatility in soft commodities like soya, corn, maize, and wheat, Schutte expressed cautious optimism regarding a potential price stabilization in the upcoming months. The recent decline in local maize prices has offered a glimmer of hope, with Schutte anticipating a gradual correction in input costs. He highlighted the interplay of global demand dynamics, climatic conditions in key producing regions, and geopolitical factors influencing commodity prices. Looking ahead, Schutte acknowledged the imperative of balancing cost recovery with consumer demand realities. With the South African economy grappling with significant unemployment and tepid consumer spending, Astral faces the delicate task of navigating price adjustments without dampening market demand. Schutte outlined a prudent approach of modest price increments in the range of 150 to 200 cents per kilogram to offset input cost pressures responsibly. Moreover, the resurgence of highly pathogenic avian influenza poses a lingering threat to Astral's operations. Schutte highlighted the firm's enhanced biosecurity measures to mitigate the risk of avian influenza outbreaks. Drawing from past experiences in 2017, when the company lost a substantial portion of its breeding stock to the virus, Schutte reassured stakeholders of Astral's preparedness and vigilance in managing potential infections. As Astral Foods charts its course amidst a challenging operating environment characterized by volatile input costs and external risks, Schutte's strategic insights and resolute commitment to cost management and risk mitigation are poised to guide the company through turbulent waters.