and sale of day-old broilers and hatching eggs.

Transcription

1 a n n u a l r e p o r t

2 Profile Astral Foods is a leading South African food group with key activities in animal feed, animal feed pre-mix, broiler genetics, broiler operations and the production and sale of day-old broilers and hatching eggs.

3 Contents 01: Strategy and vision 02: Financial highlights 04: Group activities 05: Group structure 06: Directorate 08: Chairman s review 14: Chief executive officer s review 24: Corporate governance 30: Sustainability report 34: Ratios and statistics 36: Value-added statement 37: Annual financial statements 85: Analysis of ordinary shareholders 86: Notice to shareholders Attached: Form of proxy ibc: Shareholders diary and administration Strategy food commodity company. To grow the business in selected food markets to become a better balanced, leading Vision To become a leading food commodity business. Astral Foods Annual Report 2005 [ 1 ]

4 Financial highlights Good operating performances from both poultry and animal nutrition resulted in headline earnings per share improving by 45% to 918 cents. Operating profit up 47% to R572 million Dividend per share up 65% to 380 cents Cash generated up 100% to R829 million Astral Foods Annual Report 2005 [ 2 ]

5 * Revenue R m * Operating profit R m 00* Headline earnings per share cents Cashflow from operating activities R m Dividends per share cents Declared out of earnings for the relevant year *pre-listing Astral Foods Annual Report 2005 [ 3 ]

6 Group activities ANIMAL NUTRITION Animal feed The Animal Feed division operates from ten strategically placed feed mills in Southern Africa. These feed mills are well equipped to produce and distribute a wide range of specialised products for commercially farmed animal species. The South African operations consist of mills located in Randfontein, Delmas, Welkom, Paarl, Port Elizabeth, Pietermaritzburg and a speciality mill in Richmond. The Africa operations consist of a feed mill in Lusaka (Zambia), a 33% shareholding in a feed mill in Port Louis (Mauritius) and a 33% shareholding in an operation in Maputo (Mozambique). Animal feed pre-mixes NuTec Southern Africa (Pty) Limited, a 50% joint venture with Provimi Holdings based in Holland, produces and markets vitamin and mineral premixes for animal feed and also markets a wide range of feed additives and speciality raw materials for animal feed. Analytical laboratories Central Analytical Laboratories (Pty) Limited analyses feed, soil, plant material, water, fertiliser, lime and growth medium samples for feed and fertiliser manufacturers as well as for the agricultural sector. A new division, CAL-Tech has been established and offers independent precision farming solutions and specialist agricultural advice to most sectors of agriculture in Southern Africa. National veterinary supplies National Veterinary Supplies (Pty) Limited is involved in the sale, marketing and technical service of animal healthcare products, and manufactures and markets a full range of chemical products focused on both animal health and the commercial industry at large. POULTRY Broiler genetics Ross Poultry Breeders (Pty) Limited is the sole distributor and supplier of both Ross 788 and 308 parent stock to the South African broiler industry. The company has a technology agreement with Aviagen Limited, a multi-national company which holds the worldwide proprietary rights to the Ross name. Integrated broiler operations The group has two fully integrated broiler production, processing, distribution, sales and marketing operations in Earlybird and County Fair. Earlybird has processing plants in Olifantsfontein and Standerton and produces 2,2 million broilers per week. County Fair operates from the Western Cape and produces 1,1 million broilers per week. Both operations market a full range of fresh, frozen and value added poultry products. Day-old broiler and hatching egg supplier The National Chick division conducts business as an integrated day-old chick supplier to mainly the independent non-integrated broiler producers in South Africa, Swaziland and Mozambique. The company produces 1,2 million broiler chicks and fertile hatching eggs per week. Astral Foods Annual Report 2005 [ 4 ]

7 Group structure Investment Holding Poultry Operations Animal Nutrition Operations ASTRAL FOODS LIMITED National Chick Limited 100% Astral Operations Limited 100% NuTec SA (Pty) Limited 50% National Chicks Swaziland (Pty) Limited 67% National Veterinary Supplies (Pty) Limited 100% Meadow Feeds division Earlybird Farm division County Fair Foods division Meadow Feeds Eastern Cape (Pty) Limited 100% Africa Feeds Limited (Zambia) 100% Meaders Feeds Limited (Mauritius) 33% National Chick division Central Analytical Laboratories (Pty) Limited 100% Ross Poultry Breeders (Pty) Limited 90% Elite Breeding Farms partnership 82% Astral Foods Annual Report 2005 [ 5 ]

8 Directorate Independent non-executive directors Left to right Jan Louis van den Berg (69) BCom, Chairman, Director of companies, Appointed to the board on 19 February 2001, Member of the human resources and remuneration committee and the audit and risk management committee Independent director of companies including Tiger Brands Limited since 1990 and Iscor Limited until Previous positions included executive director of General Mining and Finance Corporation (Gencor) and director of other companies in the Gencor Group; managing director of Finansbank until its acquisition by Nedbank in Jurie Johannes Geldenhuys (62) BSc (Eng Elec), Director of companies, BSc (Eng Mining), MBA, Appointed to the board on 24 May 2001, Chairman of the human resources and remuneration committee Previously served on the boards of Anglovaal Limited, Avmin Limited, Freegold Consolidated Gold Mines Limited, Hartebeestfontein Gold Mining Company Limited, Lorraine Gold Mines Limited, Village Main Reef Limited, Eastern Transvaal Consolidated Gold Mines Limited and Iscor Limited. Served as the Chamber of Mines president ( ) and served on the Chamber s Executive Council, Gold Producers Committee and various other Chamber related board committees. Previously served on the Council of Atomic Energy Corporation and on the National Water Advisory Council. Retired as managing director of Avgold Limited during Currently a director of Kumba Resources Limited (chairman of safety, health and environmental committee) and Sallies Limited (chairman of the audit committee). Malcolm Macdonald (63) BCom, CA(SA), CIMA, Director of companies, Appointed to the board on 14 November 2003, Chairman of the audit and risk management committee After being employed as financial manager/director at various operations joined Volkskas Industrial Bank as Managing Director for a period of five years. Thereafter employed as General Manager, Finance for the Industrial Development Corporation for 15 years before joining Iscor Limited in 1997 as Executive Director, Finance until retirement in Currently serves on the board of GijimaAST Group Limited. Charles Gustav van Veyeren (71) BSc Agric, Director of companies, Appointed to the board on 19 February 2001, Member of the human resources and remuneration committee Chairman of Onderberg Processing Co-operative Limited, Malelane Citrus Co-Operative Limited, Malelane Irrigation Board and Crocodile River Major Irrigation Board. Previously an executive member of the South African Agricultural Union and served on the boards of the Land & Agricultural Bank of South Africa, Agricultural Research Council and Citrus Industry Trust. Also served on the Tariffs/Marketing Development Committee, National Water Advisory Committee and as a Council Member of Eskom. Thabang Charlotte Christine Mampane (47) BA Hons (Public Administration), Head of Regions: SABC, Appointed to the board on 14 November 2003, Member of the human resources and remuneration committee Started career at the SABC in 1983 as a junior announcer on Radio Setswana and remained in this position until 1988 when promoted into the role of announcer, and in 1989 senior announcer. Promoted to Manager: Drama, Culture and Language in Joined Telkom as Manager of the Audio Visual Section in 1995, and subsequently moved to the Independent Broadcasting Authority as the special assistant to the Chief Executive Officer. Returned to the SABC in 1996 as General Manager of the portfolio of eight radio stations, thereafter appointed as Chief Executive, Radio division for three years before moving into current position as Head of Regions. Previously chaired the NCRO Board and currently serves on the NEMISA and the National Film and Video Foundation boards. Astral Foods Annual Report 2005 [ 6 ]

9 Executive directors Left to right Nicolaas Cornelius Wentzel (50) BCom, CA(SA), Chief Executive Officer, Appointed to the board on 9 February 2001, Member of the human resources and remuneration committee and the audit and risk management committee Appointed divisional director of Tiger Agri-Poultry in 1995 and divisional chairman of Tiger Milling and Baking operations in On leaving Tiger Brands Limited in 1997, was appointed chief executive officer of Genfood. After successfully integrating the Premier Milling operations into Genfood Group, returned to head up Astral Foods Limited. Thomas Pritchard (50) BCom (Hons), CA(SA), Financial Director, Appointed to the board on 9 February 2001 Operated within the ICS Group for over 15 years and was Group Financial Director of ICS Holdings Limited for six years. Held directorships at all ICS s various investments. On the acquisition of ICS by Tiger Brands Limited during 1998, was appointed financial director of the Branded Consumer Division. Joined Thebe Investment Corporation Limited in 1999 as financial director prior to accepting the position as financial director at Astral Foods Limited. Michael Andrew Kingston (54) Director: Astral Operations: Poultry, Appointed to the board on 19 February 2001 Has extensive experience in the poultry industry having been with Rainbow Chicken for 12 years and prior to that at the commercial farming operations of Mid- Illovo. Joined County Bird in 1986 and returned the operations to profitability, thereafter taking up a managerial position at County Fair, being responsible for all aspects of parent breeding including sales, marketing and finance. Managed Elite Breeding Farms for a period. He is currently accountable for County Fair Foods, National Chicks, Ross Poultry Breeders (Pty) Limited and Elite Breeders. Has served on the South African Poultry Association for the past 20 years and is a past chairman of the Broiler Organisation Committee. Awarded Poultry Man of the Year in Cornelius Adolph du Toit (52) BCom, MBA, Director: Astral Operations: Poultry, Appointed to the board on 18 August 2005 Started career in 1975 as sales manager at Burroughs Machines. Joined Agricor in 1978 as general manager of Lesedi Cooperative in Tuang. Appointed managing director of Africhicks in Joined Earlybird Farm in Standerton in 1990 as managing director. From 1998 to 2001 was managing director of OTK (now Afgri). During this period responsible for Earlybird as chairman representing the OTK as shareholder. Returned to Earlybird in 2001 as managing director. Chairman of Southern African Poultry Association since early 1990s. Christiaan Ernst Schutte (45) Management Business Administration and Finance Dip, Director: Astral Operations: Animal Feed, Appointed to the board on 18 August 2005 Joined Golden Lay Farms, a division of Tiger Brands Limited and leading egg producing organisation in Southern Africa in October 1984 as an assistant farm manager. Spent 18 years with the group in various positions as career developed. Resigned in April 2002 and joined Astral Foods Limited as manager of retail sales for Meadow Feeds. Appointed as director: sales and marketing for Meadow Feeds in 2003 and in July 2004 was appointed as managing director for the Animal Feeds division. Member: human resource and remuneration committee Member: audit and risk management committee Astral Foods Annual Report 2005 [ 7 ]

10 Chairman s review Jan Louis van den Berg In line with the group s strategy and vision to grow the company in selected commodity food markets, several options were investigated both locally as well as abroad. Focus has been placed on the expansion of the group s current businesses, especially in poultry. OVERVIEW I am privileged and delighted to be able to repeat last year s complimentary remarks regarding Astral s results. Headline earnings per share increased by 45% for the year. For this achievement I must once again congratulate and thank our CEO, Nick Wentzel, every single member of the management team and our entire staff for their superb efforts. The consistency of their dedication and achievements translates into an annual compounded growth rate of 35% since listing in Likewise, I am pleased to pay tribute to our board members who provided excellent support, direction and leadership during the year. The board functioned effectively and productively and I want to thank my colleagues for their enthusiasm and dedication. The strong cash-flow ability of the group was once again demonstrated and the group finds itself in a net cash surplus situation in spite of an aggressive capital expenditure and share buy-back programme. The resultant strong balancesheet structure has made it possible for us further to reduce the dividend cover, for the fourth consecutive year, to 2,4 times (last year 2,7 times). Dividends per share therefore increased by 65% from 230 cents to 380 cents. STRATEGIC FOCUS In line with the group s strategy and vision to grow the company in selected commodity food markets, several options were investigated both locally as well as abroad. Focus has been placed on the expansion of the group s current businesses, especially in poultry. Included in this year s capital expenditure programme is R156 million that has been approved to expand Earlybird s production by ±19% over the next two years. This move has become possible following the acquisition of the other 50% in Earlybird and its successful integration into the group s activities. Most of the expansion will be on the breeding and laying segment of the business, with the financial benefit filtering through from 2007 onwards. Astral Foods Annual Report 2005 [ 8 ]

11 annual compounded growth rate of 35% since 2001 Production of coarse grain exceeded consumption by some margin, with the result that world stock levels reached record highs. Acquisition opportunities will continue to be pursued within the group s stated strategic focus. RAW-MATERIAL MARKET TRENDS Global In last year s review I reported that an all-time record crop of maize and soybean was expected. This indeed became true as indicated in graph 1 (world coarse grain) during the past season. Production of coarse grain exceeded consumption by some margin, with the result that world stock levels reached record highs (graph 1). This situation had a dampening effect on world prices as illustrated in graph 2, reflecting the Chicago Board of Trade maize prices, which are currently trading at their lowest levels during the past year. The outlook for 2005/2006 is for lower world production of coarse grain, following the record production during the current year and high stock levels. Given the above scenario, the 2005/2006 prices for maize are lower than the current year. There should, therefore, be no upward pressure in the foreseeable future on the group s major input costs, especially for maize which are ultimately all dollar based. Local The final official crop estimate puts the 2005 maize crop at just over 12 million tons. Although there is much debate on whether this is an over-estimate given the to-date deliveries reported by South African Grain Information Service ( SAGIS ), it remains a relatively substantial crop, as can be gauged from graph 3. This resulted in prices reducing substantially from previous years. More recently, prices have picked up markedly, primarily driven by uncertainty as to the actual crop size, substantially lower expected plantings for the new season, adverse weather conditions and a weakening rand. Astral Foods Annual Report 2005 [ 9 ]

12 Chairman s review continued The latest figure quantifying the intention to plant points to substantial lower planting with a resultant large drop in expected production (see graph 3). This, coupled with a slight reduction in expected consumption, could lead to ending stocks dropping to levels last seen three years ago. The SA maize farmer community faces a serious crisis because at current price levels they cannot make a decent profit and because banks and agricultural companies are not eager to finance the new crop. Recent rains in Mpumalanga and Free State will encourage planting but the North West remains dry, up to the time of writing. So a strong element of uncertainty remains present in any forecast for the current year. Graph 4 sets out the movement of the yellow maize price in South Africa and the US dollar over the past year. The price was as low as R560 per ton on 25 February 2005 and as high as R1 015 per ton on 29 October Since mid-august 2005 the price has risen markedly but it is still much lower than a year ago. It seems unlikely that prices will fall substantially from current levels given the lower expected planting and weather uncertainty. These prices clearly demonstrate the volatility of maize prices within a financial year and it underscores the importance of sound procurement strategies and risk management. The dollar hit a recent low against the rand in late December 2004 when it touched the 560 level. Since then the rand has depreciated to the current levels, which contributed to the higher maize price. It is difficult to forecast the rand but we do not expect it to appreciate to the levels we saw in December last year. AVIAN INFLUENZA The mutating virus known as bird flu is beginning to cause significant alarm in government, media and poultry circles worldwide. However, no indications of the presence of the virus (H5N1) has yet been found in chickens within South Africa. This disease has spread via wild migratory birds from the East and has recently been found in some European countries. This phenomenon has had a detrimental impact on chicken consumption in those regions. Bird flu virus cannot be contracted from eating cooked chicken and there is no evidence that humans can contract the virus from infected meat. South Africa is, unlike Europe, not on any of the major migratory routes in the world for avian species, which is one of the reasons for the spread of this disease across continents. Taking the seriousness of this disease into account, Astral has invested heavily in added bio-security measures in all its operations (feed and poultry) to combat the disease in the event of an outbreak. Astral Foods Annual Report 2005 [ 10 ]

13 /98 98/99 13/10/04 10/11/04 8/12/04 99/00 00/01 Graph 1 01/02 02/03 03/04 04/05 05/06 World coarse grain production World coarse grain consumption World coarse grain stocks (right axis) Graph 3 01/02 Graph 4 02/03 7/1/05 4/2/05 4/3/05 6/4/05 6/5/05 3/6/05 4/7/05 1/8/05 Yellow maize price and dollar rand exchange rate Million tons Source: Progressive Data Service Yellow maize price US dollar/rand exchange rate 03/04 04/05 05/06 06/ World coarse grain supply, demand and stocks Million tons Source: Progressive Data Service 21/10/04 11/11/04 2/12/04 24/12/04 17/1/05 7/2/05 Graph 2 28/2/05 22/3/05 14/4/05 9/5/05 30/5/05 21/6/05 12/7/05 2/8/05 24/8/05 14/9/05 5/10/05 26/10/05 16/11/05 CBOT corn price in $/ton rate Million tons Source: Progressive Data Service SA maize production, usage and stocks Million tons Source: CJA Strategic Risk Brokers Production Domestic usage Ending stocks (right axis) 30/8/05 27/9/05 25/10/05 22/11/ In addition, the South African Poultry Association ( SAPA ) has taken the following steps: Regular testing; Intensified bio-security; Communication with all poultry producers to ensure compliance with bio-security; Publicity campaign to reassure consumers; and Government s support. The real threat is to free-range poultry rather than enclosed broiler operations like Earlybird Farm and County Fair, as their controlled environment limits the exposure to wild birds. REGULATORY ENVIRONMENT The anti-dumping import tariff introduced five years ago on USA producers is due for review in December The effect of these tariffs has been diluted due to the strong rand over the past two years. SAPA has, in consultation with industry participants, submitted an application to the International Trade Administration Commission of South Africa ( ITAC ) for a further five-year extension to these tariffs. SHARE BUY-BACK In terms of the share buy-back programme initiated during the 2003 financial year, a further shares (2004: shares) were purchased by a wholly-owned subsidiary for R141 million at an average cost of R66,81. In total shares, representing 8,9% of our issued share capital, are held by the subsidiary as treasury shares at an average cost of R47,79 per share. SUSTAINABILITY Your board is committed to the principle of triple bottom-line, acknowledging the importance of social, environmental as well as financial issues to ensure long-term business sustainability. These issues are reviewed in the sustainability report. Astral Foods Annual Report 2005 [ 11 ]

14 Chairman s review continued CORPORATE GOVERNANCE Your board has always recognised its responsibilities in terms of risk management and sound corporate governance practices. The group s corporate governance standards adhere to the principles outlined in the King Code on Corporate Governance. The recommendations of the King Code have been fully incorporated into the group s management procedures and controls, at all levels of the business. THE BOARD Two additional executive directors were appointed to the board on 18 August 2005, namely Mr Connie du Toit, managing director of the Earlybird division, and Mr Chris Schutte, managing director of the Animal Feeds division. We welcome them to the board and look forward to their contributions. We regret the resignation of Mr Evert Groeneweg as a director, effective from 6 October I would like to thank him for his immense contribution to the board and as chairman of the audit and risk management committee. We wish Evert a happy retirement in the United Kingdom. Malcolm Macdonald has been appointed as the new chairman of the audit and risk management committee. PROSPECTS The year ahead will be characterised again by weather considerations in South Africa, China and the US. This, coupled with the normal uncertainty about the development of the crop yield, the USD/ZAR exchange rate and the activities of speculators, will again pose a challenge for the group to procure its raw material at market competitive rates. Avian influenza has led to material dislocations in the global trade and for some countries to build up their industries again could take two to three years. This will result in countries like Brazil continuing to export to most lucrative short supplied markets. The company is well poised to expand its operations during the next few years and we will continue to seek acquisitions that will improve value for shareholders. The strength of the South African economy is continuing as is evident in the increase in GDP and containment of inflation. Consumers are expected to continue to increase the per capita consumption of chicken meat which over time will ensure continuing demand for our products. All these factors should impact positively on the group s results for the future. Astral Foods Annual Report 2005 [ 12 ]

15 the strong cash flow ability of the group was demonstrated The company is well poised to expand its operations during the next few years. APPRECIATION I have already expressed my appreciation to my fellow board members for their valued input and support, and to management and staff for their continued dedication to our success. We also thank our suppliers and customers who supported us throughout the year. JL van den Berg Chairman 17 November 2005 Astral Foods Annual Report 2005 [ 13 ]

16 Left to right Animal feed G Arnold NuTec D Barnard Animal feed nutritionist G de Wet National veterinary supplies D Hattingh Central analytical laboratories C Neumann Animal feed Northern region M Schmitz Animal feed Natal region S Slippers Animal feed technical W Stander Animal feed procurement R Steenkamp Animal feed Zambia L Swanson Animal feed Cape region CEO s review Our people are our greatest investment Astral Foods Annual Report 2005 [ 14 ]

17 Left to right T Delport County Fair foods M Gericke Ross poultry breeders D Stock National Chick Poultry Astral Foods Annual Report 2005 [ 15 ]

18 CEO s review continued Nick Wentzel The group continuously re-invests in its existing assets to ensure they keep abreast of new technology and that the assets are kept in a good working order. FINANCIAL RESULTS The group improved on the good results for the first six months of 2005 with both divisions reporting higher operating profits and margins during the second half. Results for the year are reflected in the 45% increase in headline earnings per share and dividends per share increased by 65%. Revenue increased by 14% to R4,6 billion (2004: R4,1 billion) mainly as a result of the full consolidation of Earlybird for 12 months. Earlybird was consolidated with effect from 1 September 2004 following the acquisition of the remaining 50% of the shareholding. Revenue for the Animal Nutrition division was 7% lower than the previous year mainly due to lower raw material prices. Operating profit for the year increased by 47% to R572 million (2004: R389 million). The current year s figure includes R15 million profit on the forced sale of poultry properties following urban encroachment. The Poultry division was once again the main contributor to operating profit at R367 million (64%), whilst Animal Nutrition contributed R205 million (36%). Group operating margins reached a new all-time high at 12,4%, well up on last year s 9,6%. The group paid interest of R11,4 million compared to the previous year when the group received interest of R1,3 million. The effective tax rate of 29,1% is well below the previous year s 32,3% following the reduction in the statutory tax rate by 1% as well as adjustments to prior years over provisions. The net asset value strengthened by 29% to R22,33 (2004: R17,36). Capital expenditure of a maintenance nature increased to R92 million (2004: R55 million) as overdue expenditure was spent at Earlybird, following it becoming a subsidiary. Expansion capital expenditure amounted to R79 million, similar to last year s R78 million. The group continuously re-invests in its existing assets to ensure they keep abreast of new technology and that the assets are kept in a good working order. Continuous focus on working capital days resulted in an improvement to 17 days (2004: 30 days). Astral Foods Annual Report 2005 [ 16 ]

19 net asset value strengthened by 29% The net surplus cash position of the group, together with its strong cash-flow capability places the group in a strong position. Cash operating profits increased from R471 million to R658 million. Inflow from working capital of R171 million reflects the reduction in prices of raw materials. Net cash inflow for the year was R351 million. After a more aggressive share buy-back of R141 million (2004: R36 million) the group reduced borrowings by R198 million at year-end with a net surplus cash balance of R61 million (2004: borrowing of R158 million). The net surplus cash position of the group seen together with its strong cash-flow capability places the group in a strong position for further expansion in line with its vision and strategy. Return on equity, following the sharp increase in earnings, improved to 48% (2004: 39%). Economic value added doubled from R134 million to R278 million based on a weighted average cost of capital of 14%. REVIEW OF OPERATIONS ANIMAL NUTRITION The Animal Nutrition division consists of three sub-business units namely Animal Feeds, Animal Feed Pre-mixes and Service Companies. Animal Feeds The Animal Feeds division operates from ten strategically placed feed mills in the Southern African region. The feed mills are well equipped to produce and distribute a wide range of specialised products for all commercially farmed animal species. The South African operations consist of mills located in Randfontein, Delmas, Welkom, Paarl, Port Elizabeth, Pietermaritzburg and a speciality mill in Richmond. The African operations consist of a feed mill in Lusaka (Zambia), a 33% shareholding in a feed mill in Port Louis (Mauritius) and a 33% Astral Foods Annual Report 2005 [ 17 ]

20 CEO s review continued Animal nutrition shareholding in an operation in Maputo (Mozambique). The South African mills market under the leading Meadow Feeds brand, established in The African operations trade under the Tiger Animal Feeds brand in Zambia and the Meaders Feed brand in Mauritius. South African yellow maize prices dropped dramatically from a high of R1 015 in October 2004 to R560 per ton in February 2005 on the back of ideal weather and a crop estimate in excess of 12 million tons. Local maize has subsequently increased by R280 per ton since mid-august 2005 due to weather concerns, speculation about the current crop size and the threat of a significant reduction in maize hectares to be planted for the new season. Realisations of animal feed followed the same downward trend with prices levelling out in the last quarter of the financial year. With the record global crop of maize during the 2004/2005 season and high stockholding there was no upward pressure from global markets. Consequently, local raw material prices were lower than the previous year and feed realisations dropped by 7%. Due to the bearishness of the market few procurement opportunities were available. The consolidation of the division created opportunities to enhance its profitability. Contributing factors were the implementation of a centralised raw material procurement strategy, the implementation of stringent cost control measures by using expense benchmarking and improving production efficiencies through sharing best operating practices. As a result of the above, operating margins improved to 8,1% (2004: 5,6%). Operating profit increased by 36% to R205 million (2004: R151 million). Sales volumes dropped by 3% due to dairy and cattle farmers moving to home mixing because of the relatively low price of maize and the outbreak of various diseases within specific groups of species (pigs and poultry). Although the disease outbreaks were limited to specific geographical areas within the local market, these outbreaks negatively impacted on feed consumption. During the period under review the division spent R39 million on replacement and expansion capital expenditure projects to further entrench itself as the preferred supplier of animal feed. The Port Elizabeth mill that was commissioned during the previous year recorded a loss for the past year. Current results are encouraging and a major turnaround in profitability is expected in Quality remains one of the core focus areas of the division and we strive to continuously improve our quality systems. The division achieved certification with regard to ISO 9001/2000, Good Manufacturing Practices Astral Foods Annual Report 2005 [ 18 ]

21 quality remains one of the core focus areas of the division Operating margins improved to 8,1% (2004: 5,6%). Operating profit increased by 36% to R205 million (2004: R151 million). ( GMP ) and Hazard Analysis and Critical Control Point ( HACCP ) within all of its main feed mills. The three major mills continued to offer complete product traceability in line with European Union ( EU ) standards of feed safety. Complementary to this, the Paarl feed mill joined the Randfontein and Pietermaritzburg mills in achieving the Excellence Award of the internationally highly acclaimed 20 Keys Management Programme. The division continued its technical agreement with the Dutchbased company, Provimi, a leading international animal feed research and development organisation. The purpose of the agreement is to ensure access to all of the latest developments with regard to animal feed nutrition. The new Prolick and Blocklick product ranges were launched during the year as an entry into the lucrative ruminant supplement market. Meadow previously had no presence within the supplement market and, as such, this new product range was developed to obtain a share of this market. Meadow s product range is continuously reviewed to ensure that products achieve the desired results on farms. The division s African operations continued to produce satisfactory results. The Zambian operation in Lusaka (Tiger Animal Feeds) had an exceptional year, increasing its market share and profitability significantly. The excellent results were achieved by taking advantage of specific procurement opportunities offered in this market. The Zambian operation further entrenched itself as the African hub of the Animal Feed division. The Mauritius (Meaders Feeds) and Mozambique operations performed satisfactorily. The division aims to increase its activities in Africa by further investments in sub-saharan countries. Astral Foods Annual Report 2005 [ 19 ]

22 CEO s review continued Animal nutrition/poultry Animal feed pre-mix NuTec SA (50% joint venture with Provimi of Holland) produced excellent financial results, as a result of a shift in the overall pre-mix market. The low price of maize created an opportunity for many farmers to move to home mixing. The shift in the market resulted in the new home mixers requiring specific premixed products that are available from NuTec SA. The result was an increase in volumes sold and improvement of profitability. Service companies Central Analytical Laboratories achieved increased operating profits compared to the previous year. A new division that will offer independent precision farming solutions to the agricultural sector was established in the last quarter. National Veterinary Supplies Biocare showed consistent growth and achieved an operating profit, which is an improvement on the previous year s marginal loss. POULTRY The Poultry division comprises three separate business units, namely broiler genetics, integrated broiler operations and the production and sale of day-old broilers and hatching eggs. The combined financial information of these business units is disclosed under the broiler operations. Integrated broiler operations The group s integrated broiler operations are represented by Earlybird with production and processing facilities in Gauteng and County Fair in the Western Cape. The operating activities of these operations were restructured into Astral Operations Limited with effect from 1 October Following the Earlybird acquisition during September 2004 this operation has settled in well within the group s activities. The 7% reduction in feed prices during the year had a material impact on this division s profitability as 55% of the cost of production is feed related. Improved broiler performances were also recorded at both operations, which contributed to the low cost of production and an improvement in overhead recovery throughout the processing plants. Imports of poultry products, predominantly from Brazil, increased to an all-time high of 20% of local production. Although a large portion of these imports are routed to the catering markets, it did place a dampening effect on realisations. The steady growth of the South African economy has boosted disposable income, with the per capita consumption of poultry meat increasing by 12% over the past five years from 19,74 kg in 2000 to 22,04 kg in Astral Foods Annual Report 2005 [ 20 ]

23 we are committed to realising value for our shareholders Improved broiler performances also contributed to the low cost of production and an improvement in overhead recovery. Overall sales realisations of poultry products were 1% higher than last year. Revenue increased by 46% to R3,3 billion (2004: R2,3 billion). Expansions of facilities resulted in a volume increase of 5%. The balance of the increase in revenue is a result of the consolidation of Earlybird for the full year against one month in Operating profit increased by 54% to R367 million (2004: R238 million), mainly due to the Earlybird acquisition and operating margins increased to a high of 11,0% (2004: 10,4%). Poultry supply and demand were balanced for the third consecutive year and at no stage did significant industry stock levels distort the situation. Outbreaks of the Velogenic Newcastle disease were experienced amongst the majority of poultry producers in KwaZulu Natal, Mpumalanga, Free State, Limpopo, North West and Gauteng. The effect of this disease was significant, resulting in higher broiler mortality, lower live-weight-for-age and poorer feed conversions. The resultant effect on breeding stock was a drop in egg production. The current status of the disease is that new outbreaks are on the decline and that the situation is under control. Major capital expenditure during 2005 comprised the two new broiler farms at County Fair at a cost of R46 million, aimed at increasing turnaround time. The benefit of this expenditure on broiler performances is already evident. County Fair also bought the broiler operations of a non-performing grower for R12 million. Earlybird spent R19 million on cold store expansion at Standerton and R12 million on vehicle replacements. Broiler genetics The broiler genetics company, Ross Poultry Breeders (Pty) Limited ( RPB ), operates in association with one Astral Foods Annual Report 2005 [ 21 ]

24 CEO s review continued Poultry of the two largest global providers of broiler breeding stock, Aviagen Limited which is a 10% shareholder. RPB is responsible for the 788 Ross broiler breeder, which is unique to South Africa, specifically at high altitude. Holding the Ross franchise in South Africa, the company benefited from lower feed costs as well as lower import costs of pure line livestock and recorded satisfactory results. Day-old broilers and hatching eggs This business unit consists of the National Chicks group with activities in South Africa and Swaziland. During the financial year the assets in a 67% subsidiary in Botswana were disposed of. National Chicks has expanded its hatchingegg production in KwaZulu Natal as well as the hatchery in Swaziland, with both scheduled to come into production in the first half of National Chicks has remained in an oversold situation for most of the year, as the demand for day-old chicks and hatching eggs has outstripped supply. All hatcheries have, as a result, been functioning at full capacity throughout the year. These favourable conditions, coupled with reduced feed costs, have resulted in a material improvement in profitability. CONCLUSION With the successful integration of the Earlybird acquisition into the group s operations, we can now focus on expanding our existing facilities and, at the same time, search for suitable acquisitions. A facilities plan for internal expansion has been drawn up specifically for the poultry division. The first phase will commence during the next month in order to expand the breeding and laying operations at Earlybird. The aim of this plan is to optimise the current facilities and to catch up and expand with market demand for poultry products. Through this expansion phase the current underutilised feed mills will also benefit and assist to make Astral an even lower cost producer of poultry meat and place the group in an even stronger competitive position, not only locally but also against imports. We are committed to realising value for our shareholders. We are bound by the highest ethical and moral standards in relation to the physical and social environment. I would like to thank our clients for their support during the past year. We remain committed to delivering excellent client service and providing products of the highest quality. Astral Foods Annual Report 2005 [ 22 ]

25 we are bound by the highest ethical and moral standards With the successful integration of the Earlybird acquisition, we can now focus on expanding our existing facilities. I also wish to express our thanks to our suppliers and service providers for assisting Astral in achieving high performance standards. To my colleagues in management and to our staff, thank you for your support and contribution to the group during Finally, the support received from our chairman, Jan van den Berg, and the board is highly valued. The group has benefited from their wise counsel and depth of experience during the past year. NC Wentzel Chief executive officer 17 November 2005 Astral Foods Annual Report 2005 [ 23 ]

26 Corporate governance The group subscribes to the principles of discipline, transparency, independence, accountability, responsibility, fairness and social responsibility identified as the primary characteristics of good governance in the Code of Corporate Practices and Conduct (the King Code 2002 ), contained within the King II Report on Corporate Governance for South Africa The board believes that the group s governance practices are strong and that in all material respects, the group conforms to the principles embodied within the King Code 2002 and the listing requirements of the JSE Limited. The board remains committed to ensure that these principles continue to be an integral part of the way in which the group s business is conducted. THE CONSTITUTION AND OPERATION OF THE BOARD OF DIRECTORS The board Astral has a unitary board structure, comprising 10 directors with a balance between executive (5) and independent non-executive (5) directors. On 6 October 2005, Mr EM Groeneweg tendered his resignation as an independent non-executive director. We believe that the independent non-executive directors are of sufficient calibre and number for their views to carry significant weight in the board s decisions. An independent non-executive chairman leads the board. A complete list of board members, their respective qualifications, responsibilities, and director status is available on pages 6 and 7 of this report. There are no contracts of service between any of the non-executive directors and the group. An analysis of directors remuneration, share options and shareholding is disclosed on pages 43 to 45 of this report. In terms of the company s articles of association all new directors appointed during the year, as well as one third of the existing directors, have to retire on a rotational basis each year and may offer themselves for re-election. The directors are experienced businesspeople and are required to exercise leadership, enterprise, integrity and judgment based on the principles of good governance. The board is committed to guiding and monitoring that high standard. The board is aware that it is accountable for the actions of management and has retained full and effective control of the organisation over the last year. The board defines levels of materiality, reserving specific powers to itself, and delegates other matters with the necessary written authority to management. These matters are monitored and evaluated on a regular basis. The board, in terms of its charter, is required to meet at least quarterly so as to monitor important issues and meet its objectives. Additional meetings may be called whenever deemed necessary. All board members are expected to attend all board meetings. Matters reviewed include strategy, planning, technology, information systems, operational performance, acquisitions and disposals, stakeholder communications and other material aspects pertaining to the achievement of the group s objectives. The board periodically reviews the mix of skills and experience required of directors to assess its effectiveness. Procedures for appointment to the board are formal and transparent and are a matter for the board. Following the appointment of new directors, visits to the group s businesses and meetings with senior management, as appropriate, are offered to facilitate their understanding of the group. An induction programme is followed including a presentation by the company s sponsor on the listing requirements of the JSE Limited. The board has ensured that its information needs are well defined and regularly monitored. Directors are provided with comprehensive board packs prior to each scheduled meeting. The board has unrestricted access to all group information, records, documents and property. All directors have access to management should they wish to discuss any matter separate from executive directors. If necessary, a board member may take independent professional advice at the group s expense. Astral Foods Annual Report 2005 [ 24 ]

27 Attendance at meetings The following is a list of board meetings and board committee meetings attended by each director during the year: Audit and Risk Management Remuneration Board Committee Committee Director CA du Toit JJ Geldenhuys EM Groeneweg MA Kingston M Macdonald TCC Mampane a T Pritchard CE Schutte JL van den Berg CG van Veyeren NC Wentzel Key: Present a Apologies tendered Appointed 18 August 2005 Board charter The board operates in terms of a charter which sets out its role and responsibilities. In accordance with this charter: The chairman of the board is an independent, nonexecutive director; A formal orientation programme for new directors is followed; Specific clauses, in line with the requirements of the Companies Act and King Code 2002, exist with regard to conflicts of interest. The company secretary maintains a register. The board is not aware that any of the directors, or their families, have any direct or indirect interest in any transaction during the last financial year or in any proposed transaction with any of the operations within the group which has affected or will materially affect the group; The board is required to conduct a self-evaluation. Evaluations include expertise, inquiring attitude, objectivity and independence, judgement, understanding of the group s business, understanding of and commitment to the board s duties and responsibilities, willingness to devote the time needed to prepare for and participate in committee deliberations, timely responses and attendance at meetings. An evaluation of the board and its members is conducted from time to time; Directors have access to staff, records and the advice and services of the company secretary; Succession planning for executive management is in place and is updated as appropriate; A strategic plan and approvals framework for the business have been adopted and are regularly reviewed; Values of the company in support of its vision, and principles and standards of ethical business practice in support of these values, have been established and are maintained; Policies and processes necessary to ensure the integrity of internal controls and risk management have been formulated; and The nature and extent of social transformation, ethical, safety and health, human capital, and environmental Astral Foods Annual Report 2005 [ 25 ]

28 Corporate governance continued management policies and practices are monitored and reported on. The board is satisfied that, for the period under review, it has effectively adhered to all duties and responsibilities as set out in the charter. Furthermore, the board is not aware of any cases of non-compliance with legislation and regulation within the group during the period under review. Board committees To enable the board to properly discharge its onerous responsibilities and duties, certain responsibilities of the board have been delegated to board committees. The board is satisfied that all committees have met their respective responsibilities for the period under review. The existence of these committees does not, however, reduce overall responsibility and therefore all committees must report and make recommendations to the board. All board committees are chaired by an independent non-executive director. The board committees are as follows: The audit and risk management committee The audit and risk management committee consists of appropriately qualified members, the majority of whom are independent non-executive directors, and meets at least twice a year with management, internal and external audit as well as the group s risk managers. The members, number of meetings and attendance of members is shown on page 25 of this report. On 6 October 2005, Mr EM Groeneweg tendered his resignation as director and chairman of the audit and risk management committee and Mr M Macdonald was elected as chairman. Responsibilities of the audit and risk management committee include: Oversee the internal and external audit function; Assist the board in the discharge of its duties relating to the safeguarding of assets, the operation of adequate systems and internal controls, control processes and the preparation of accurate financial reporting and statements in compliance with all applicable legal requirements, corporate governance and accounting standards; and Provide support to the board on the risk profile and risk management of the group. Both the group internal audit manager and external auditor have unfettered access to the chief executive officer, the chairman of the board and the audit and risk management committee. To further enhance the effectiveness of the group s audit and risk management committee the group also has biannual divisional audit committee meetings for each operation. The group internal audit manager and external auditor report at all divisional audit committee meetings and these meetings are also attended by the chief executive officer and group financial director. The results of these meetings are tabled at the group audit and risk management committee. As part of the group s enterprise wide risk management programme, quarterly risk management meetings are held at operational and corporate level under the chairmanship of a risk control manager who reports to the group audit and risk management committee. The human resources committee The human resources committee consists of four independent non-executive directors including the chairman of the committee, plus one executive director. The committee meets at least twice a year with additional meetings being called when required. The members, number of meetings and attendance of members is shown on page 25 of this report. Responsibilities of the human resources committee include: Development of the group s general policy and remuneration system for executive and senior management and to make recommendations to the board on remuneration packages applicable to nonexecutive directors; Astral Foods Annual Report 2005 [ 26 ]

29 Measuring the performance of executive directors to ensure that they are fairly rewarded for their individual contributions to the group s overall performance, to demonstrate to all stakeholders that the remuneration of senior executive members of Astral is set by a committee of the board who are not personally interested in the outcomes of their decisions and who will give due regard to the interests of the shareholders and to the financial and commercial health of the group; Employment equity and skills retention matters; and Management succession planning. REMUNERATION POLICY, SHARE INCENTIVE SCHEMES AND SHARE APPRECIATION OPTION SCHEME Astral s remuneration policy is to attract, retain and incentivise management and personnel of the highest calibre. Previously executive directors, senior management and middle management were eligible to participate in the group s share incentive scheme, which was designed to enable them to share in the wealth that they helped to create for shareholders. Options were allocated at the market price ruling at the date they were granted, vested after stipulated periods, and were exercisable over a maximum period of ten years from the date of issue. Non-executive directors are not entitled to options in terms of the group s share option scheme or the share appreciation option scheme. During 2004 the share incentive scheme was closed for further allocations and replaced by a share appreciation option scheme based on the market performance of Astral s shares over a three to five year period. This scheme provides for annual allocations to eligible employees and eliminates the issue of new shares in the capital of the company. The number of options outstanding, forfeited and exercised is shown in note 18 to the annual financial statements on page 74 of this report. ORGANISATIONAL INTEGRITY AND ETHICS The continued success of the group depends on the highest levels of integrity across all sectors of the business. The board believes that the group maintains a high standard of ethical behaviour, which is effectively enforced throughout the group by the board, executive and operational management. The chief executive officer has overall responsibility for ethical behaviour within the group and management throughout the organisation is responsible for ensuring that the various operations are run ethically. The audit and risk management committee oversees the overall standard of ethical behaviour and legal compliance. The group maintains a code of ethics, which requires all employees to comply with the letter and spirit of the code by observing the highest ethical standards and striving to ensure that all business practices are conducted in a manner which is beyond reproach. The purpose of the code is to guide employees behaviour, not to provide specific answers to every conceivable situation in the workplace. Directors and employees are prohibited from dealing in Astral shares during price-sensitive periods. Closed periods extend one month prior to interim and year-end reporting dates up to the date of announcement of interim and year-end financial results and include any other period during which the group is trading under a cautionary announcement. The company has also implemented a formal clearance procedure in respect of directors dealing in Astral shares. Astral maintains a zero-tolerance approach to unethical behaviour. Any employee found to be acting unethically is subject to disciplinary proceedings, which can lead to dismissal. The group also has an independent hotline where unethical behaviour may be reported anonymously. The board has no reason to believe that there has been any material non-adherence to the code of ethics during the year under review. Astral Foods Annual Report 2005 [ 27 ]

30 Corporate governance continued RISK MANAGEMENT AND INTERNAL CONTROL The board takes responsibility for the total process of risk management in the group. Risk management is an integral part of the group s culture and strategic operations. To this end the group has an audit and risk management committee, which is responsible for assessing the group s management of identified risk issues. The board has established a process that will regularly evaluate the effectiveness of the risk management processes throughout the group. The group strives to identify, evaluate and manage all significant business and financial risks. The board believes its focus on risk issues, including those relating to information technology and information systems, is appropriate for the requirements and nature of the group and that the group has an adequate system of internal control in place to mitigate significant risks identified to an acceptable level. The systems of internal control in place within the group also provide the board with a reliable means of monitoring the group s operational sustainability, the reliability of its reporting, safeguarding of its assets, its behaviour towards all stakeholders and proper planning for the mitigation of the identified risks. Internal control self-appraisal systems are in place for all operations and are reviewed at the divisional audit committee meetings. Annual audits are conducted in respect of health and safety, risk control organisation, emergency planning and fire and loss control. Documented crisis management plans are in place for all operations. In addition, the group promotes ongoing commitment to risk management and control by participating in externally organised risk management and safety programmes such as ISO 9001/2000, Good Manufacturing Processes ( GMP ) and Hazard Analysis and Critical Control Points ( HACCP ) at its various operations. The risk management processes and systems of internal control have been evaluated for the year under review and up to the date of the approval of the annual report and financial statements. The board believes that it has reasonable, but not absolute, assurance with regard to the effectiveness and efficiency of the group s operations, protection of its assets and information, and regulatory and legal compliance. INTERNAL AUDIT Astral has established an independent, objective and effective internal audit department with a charter approved by the board. The internal audit function reports to the group financial director, and has a direct reporting line to the audit and risk management committee. The audit and risk management committee approves the annual internal audit plan. Although the role of internal audit is to review internal controls, systems, procedures, risks, etc, management, and ultimately the board retains full responsibility for ensuring that Astral maintains an appropriate framework of controls to reduce business risks to an acceptable level. The board is satisfied that the group s internal controls are adequate in safeguarding our assets, preventing and detecting errors and fraud, ensuring the accuracy and completeness of accounting records and preparing reliable financial statements. EXTERNAL AUDIT The audit and risk management committee recommends to the board the appointment of external auditors. The audit and risk management committee also considers the independence of the external auditors, and has set principles for the use of external auditors to provide nonaudit services. Consultation and co-operation between external auditors and internal auditors is encouraged by the board. MANAGEMENT REPORTING The group has comprehensive management reporting disciplines, which include the preparation of annual strategic plans and budgets by all operations. Group Astral Foods Annual Report 2005 [ 28 ]

31 strategic plans and budgets are approved by the board. Results and the financial status of the operations are reported monthly against approved budgets and compared to the previous year. Working capital requirements and borrowing levels are monitored on an ongoing basis and corrective or remedial action taken as appropriate. COMPANY SECRETARY The company secretary plays a pivotal role in the achievement of good corporate governance and is empowered accordingly by the board. The company secretary supports the chairman in: COMMUNICATION The board has ensured that communication with relevant stakeholders has been both open and prompt throughout the group. The group will continue communicating with the stakeholders on a balanced, transparent and open basis. The board believes that material matters of significant interest and concern to shareholders and other stakeholders are addressed in the company s public disclosure and communication. In this regard, the board ensures that the group provides adequate transparency on all pertinent financial and non-financial matters. Ensuring the effective functioning of the board; Providing guidance to the chairman, the board and directors of the group s subsidiaries on their responsibilities and duties within the prevailing regulatory and statutory environment; Providing the board with guidance as to how to, in the best interests of the group, discharge their responsibilities and duties; Raising matters that may warrant the attention of the board; and Ensuring compliance with all relevant statutory and regulatory requirements, having due regard to the specific business interests of the group. In addition, the company secretary also assists in carrying out corporate strategies by ensuring that the board s decisions and instructions are clearly communicated to the relevant persons, and is available to provide a central source of guidance and advice within Astral on matters of ethics and good governance. PROMOTION OF ACCESS TO INFORMATION ACT The group complies with the Access to Information Act, 2 of All stakeholders have access to the information manual via the website, Astral Foods Annual Report 2005 [ 29 ]

32 Sustainability report Being conscious of its social, environmental and economic responsibility to employees, the broader community and future generations, the group subscribes to the principles of sustainable development. Sustainability is the essence of the group s corporate citizenship and the group is committed to the implementation of triple-bottom-line reporting, as it accepts that good corporate governance and social and environmental issues can no longer be regarded as secondary to more conventional business imperatives. This sustainability report is included within the annual report as it enables our stakeholders to get a clear view of all the financial and non-financial issues that affect our business, its long-term stability and value and provides information about the group s strategies in the following areas of sustainable development: Organisational development; Safety and health; HIV/AIDS; Transformation; and Environment. ORGANISATIONAL DEVELOPMENT Workplace improvement programme Over the past year we have continued with our drive for excellence through the implementation of the 20 Keys total workplace improvement programme. All employees at the various workplaces participate as teams to improve productivity and efficiencies. As a group we can claim that we have made the best progress in South Africa with the implementation of these concepts. Meadow Feeds Paarl has recently been awarded the International Excellence Award and together with Meadow Feeds Pietermaritzburg and Randfontein are the only three feed mills in the world to have received this award. Attraction and retention of people The group is continuously evaluating its recruitment processes to ensure that high calibre talent is employed, taking cognisance of leadership capabilities, identified competencies for positions and employment equity plans. Our approach is to attract the best people in the industry. Human resources development An integral part of the 20 Keys workplace improvement programme is the training and development of employees in all key areas. Each employee attends a number of training sessions in this regard. Much emphasis is also placed on the development of technical skills, which includes training under our technical agreement with Provimi of Holland, a world leader in animal nutrition solutions. Some of the other training and development interventions that are focused on are: IT skills; Supervisory skills; Sales; and Quality systems. Astral Foods Annual Report 2005 [ 30 ]

33 Social, environmental and economic responsibility Sustainability is the essence of the group s corporate citizenhip and the group is committed to the implementation of triplebottom-line reporting, as it accepts that good corporate governance and social and environmental issues can no longer be regarded as secondary to more conventional business imperatives.

34 Sustainability report continued The group has, for the past four years, been committed to the Skills Development Act. Our submission of skills development plans and our implementation against targets have ensured the maximum benefit in this regard. The group has a study loan policy providing employees with financial assistance to further their academic qualifications in line with current and future job requirements. SAFETY AND HEALTH The group has implemented a mandatory risk control programme with emphasis on compliance with the Occupational Health and Safety Act ( the Act ). A three tiered approach is followed in order to ensure compliance with the Act. The first tier consists of employee awareness of their responsibilities in terms of the Act. Executive management and employees are regularly updated on issues pertaining to the implementation and compliance with the Act through established structures. Seminars were conducted during the past year to make employees once again aware of their responsibilities. The second tier comprises education. All employees are put through induction training. This training specifically deals with health and safety in the workplace and compliance with regulations of the Act. Furthermore, legislatively required responsible persons, such as safety representatives and first aiders, are trained on a regular basis. The third tier comprises the implementation, monitoring and auditing of OSHACT management systems, developed by external consultants who specialise in the field of compliance with the Act. A step by step documentary system is compulsory for each site. This system is in its entirety cross referenced to the actual sections of the Act. The system has received much praise from the Department of Labour inspectors conducting site inspections. The system has been designed to be used by all levels of employees and provides the necessary tools to ensure compliance. The group makes use of two external consultants to monitor the implementation of these systems. Annual audits are done by them and results reported through established structures. The structures in place are built up from safety committee meetings for each site in the group, to be held at least every second month. It is compulsory for the site manager to attend these meetings. Proper minutes and attendance records are kept. These minutes are discussed as part of a quarterly site visit by the external consultants together with the items affecting the wider risk management of the site. Once again the site manager is required to attend this meeting. Matters arising from these meetings are discussed at monthly corporate risk management meetings under the chairmanship of the group s risk control officer. Matters arising from these meetings are referred to the group audit and risk management committee (board sub-committee) and is attended by the risk officer. In addition to the above twice annual group risk management meetings are held where senior management representing all the sites in the group are present. Audits conducted by the external consultants, who produce a rating by site indicating the level of compliance, are discussed. The group has a minimum standard of 80% for its sites to comply with risk management. Compliance with the Act, which is built into this rating but separately disclosed, should be 100%. HIV/AIDS The group recognises the devastating consequences the death of a loved one can have on a family and the implications of the pandemic on the family structure, the community and long-term issues of sustainability. We understand that HIV/AIDS as a life threatening disease should be managed in the same way as other serious diseases but the reality is that HIV/AIDS is more prevalent than other chronic diseases among the Astral workforce (currently estimated to be ±15%). Astral Foods Annual Report 2005 [ 32 ]

35 The group has implemented a policy on HIV/AIDS focusing on: Voluntary testing to determine the prevalence of HIV/AIDS; Counselling of affected employees; and Educational programmes at all operations. eg, schools, feeding schemes and allocation of bursaries to children of black employees. The group has been nominated in the past year by the Department of Trade and Industry as one of South Africa s top 300 empowerment companies, as a result of the impact and extent of its corporate social investment initiatives. TRANSFORMATION The group is committed to providing equal opportunities to all its employees. Employment equity All our operations comply with the Employment Equity Act, 55 of 1998, and annual reports are submitted to the Department of Labour. Employment equity committees have been established at every business unit to set and monitor progress. The different occupational levels within the group reflect that between 35% and 92% of employees are from the designated group. The figure on the management level is 18%, which is already good progress, considering that the target set by the Department of Trade and Industry is 25% 30% within 10 years. We believe that all unfair discrimination has been eliminated in the workplace. Black economic empowerment The group is supportive of and committed to the concept of black economic empowerment and actively promotes the empowerment of staff members and the communities in which they operate. The company has embarked on an official rating of its BEE status by EmpowerDEX. ENVIRONMENT Awareness of the environment is of utmost importance to the group. To be able to survive in the long term we need to protect the environment. To this end the group has measures and controls in place to ensure a friendly environment. The implementation of quality systems, ie ISO , Good Manufacturing Practices ( GMP ) and HACCP, enable the group to have full traceability of the product that goes into the market. In accordance with our group environmental philosophy, third party environmental compliance audits are regularly completed at key sites. No significant environmental incidents were recorded during the year under review. CONCLUSION We believe that the sustainability of our business lies firmly in the hands of our people, as they are the greatest source of our competitive advantage. We implement best practices in all areas of our operations in order to achieve meaningful improvement in the productivity of our people and in their quality of life and that of their communities. As a group the score for skills development came out high as a result of our focused approach to the training and development of staff. In this regard we spend at least 1% of payroll on skills development. The score for employment equity was also to our satisfaction as indicated earlier in this report. The group has also established a procurement committee to focus on securing the services of providers who meet certain BEE requirements. A formal policy in this regard was implemented. In a number of instances business units also become involved in local communities, Astral Foods Annual Report 2005 [ 33 ]

36 Ratios and statistics Pre-listing Income statement information Revenue (Rmillion) EBITDA (Rmillion) EBITDA margin (%) 14,6 11,4 10,0 7,5 8,9 8,6 Operating profit (Rmillion) Operating profit margin (%) 12,4 9,6 8,3 5,9 7,3 7,1 Net profit for year (Rmillion) Headline earnings for year (Rmillion) Balance sheet information Total assets (Rmillion) Total shareholders funds (Rmillion) Total liabilities (Rmillion) Net assets (Rmillion) Profitability and asset management Return on total assets (%) 30,8 27,1 23,0 14,8 17,0 13,6 Return on equity (%) 47,5 38,6 39,0 33,4 31,2 34,2 Return on net assets (%) 52,8 48,3 48,1 35,8 37,1 31,6 Net asset turn (times) 4,2 4,7 5,8 6,0 5,1 4,4 Shareholders ratios Basic earnings per share (cents) Headline earnings per share (cents) Dividend per share (cents) Dividend cover (times) 2,4 2,7 2,9 3,0 3,0 Stock exchange statistics Market value per share Upon listing (9 April 2001) (cents) 775 At year end (cents) Highest (cents) Lowest (cents) Closing dividend yield (%) 3,8 4,7 5,0 8,2 7,6 Closing earnings yield (%) 10,3 13,7 15,2 24,9 22,9 Closing price/earnings ratio (times) 9,7 7,3 6,5 4,0 4,4 Number of shares issued net # ( 000) Number of transactions Number of shares traded ( 000) Number of shares traded as a percentage of shares issued (%) Value of shares traded (Rmillion) Closing market capitalisation (Rmillion) # Refer to note 17 of the financial statements for the number of shares effectively in issue net of treasury shares Prior year figures have been restated to include goodwill in total and net assets, and to calculate returns on the average of opening and closing balances. (previously only on closing balances) Astral Foods Annual Report 2005 [ 34 ]

37 DEFINITIONS Operating profit margin Operating profit before interest and taxation as a percentage of revenue. (Measures the return on the operating activities of the group) EBITDA Earnings before interest, tax, depreciation and amortisation. Net assets Total assets less total liabilities excluding cash and cash equivalents, interest-bearing borrowings, normal and deferred tax, shareholders for dividends. Dividend cover Headline earnings per share divided by dividend per share declared out of earnings for the year. Closing dividend yield Dividends per share as a percentage of market value per share at year end. Closing earnings yield Headline earnings per share as a percentage of market value per share at year end. Closing price/earnings ratio Market value per share divided by headline earnings per share at year end. (Indicates the level of net assets utilised) Return on total assets Operating profit less finance costs as a percentage of average total assets. (Measures the effectiveness with which the total assets were utilised) Return on equity Net profit attributable to ordinary shareholders as a percentage of average ordinary shareholders interest. (Measures the earning power of the suppliers of share capital) Return on net assets Operating profit before interest and taxation as a percentage of average net assets. (Measures the earning capacity of net assets) Net asset turn Revenue divided by average net assets. Basic earnings per share Profit attributable to ordinary shareholders for the year divided by the weighted average number of ordinary shares in issue during the year. Headline earnings per share Headline earnings divided by the weighted average number of ordinary shares in issue during the year. Astral Foods Annual Report 2005 [ 35 ]

38 Value-added statement for the year ended 30 September 2005 The value-added statement measures performance in terms of value added by the group through the collective efforts of management, employees and the providers of capital. The statement shows how value has been distributed to those contributing to its creation, and the portion retained for future investments R 000 % R 000 % Value-added Sales of goods and services Less cost of materials and services ( ) ( ) Value added from trading operations , Income from investments , ,5 Total value added , ,0 Value distributed To labour , ,7 To government , ,3 Taxation Regional Service Council levies Skills development levies To providers of capital , ,8 Dividends to shareholders Interest on borrowings Total distributions , ,8 Income retained in the business , ,2 Depreciation/amortisation Retained profit for the year Outside shareholders interest in subsidiaries (596) Total value distributed and reinvested , ,0 Sales per permanent employee Value added per permanent employee Employee cost per permanent employee Average number of employees Number Number Management Other employees Total permanent employees Contracted labour Total Labour 39% 43% Reinvestment 34% 31% Government 16% 16% Providers of capital 12% % Astral Foods Annual Report 2005 [ 36 ]

39 Annual financial statements Contents 37: Approval of annual financial statements 38: Responsibility for annual financial statements 38: Certificate by company secretary 39: Report of the independent auditors 40: Directors report 43: Directors remuneration report 46: Segmental reporting 47: Accounting policies 58: Income statement 59: Balance sheet 60: Statement of changes in equity 61: Cash flow statement 62: Notes to the cash flow statement 64: Notes to the annual financial statements Approval of annual financial statements The annual financial statements and group annual financial statements of Astral Foods Limited for the year ending 30 September 2005, set out on pages 40 to 84, were approved by the board of directors on 17 November 2005 and signed on its behalf by: JL van den Berg Chairman NC Wentzel Chief executive director Pretoria 17 November 2005 Astral Foods Annual Report 2005 [ 37 ]