Poultry company, Sovereign Foods, has reported diluted headline earnings per share of 0.7 cents for the six months ended August 2011 from 2.6 cents a year ago, reports Fast Moving of South Africa.

Revenue rose to 610.5 million rand (ZAR) from ZAR43.3 million, however, operating profit before depreciation and impairments declined to ZAR25.98 million from ZAR43.26 million.

Sovereign said that while gearing has improved, the cash flow position is still not at a level acceptable to the Board and it therefore considers it prudent to not declare an interim dividend for the period under review.

The company attributed the lower earnings to higher mortalities as a result of a harsh early winter disease and a 23 per cent increase in non-feed costs per kilo sold including a once-off charge of ZAR8.4 million relating to the stepping down of the CEO.

From a production perspective, the feed conversion ratio improved by six per cent while maintaining the same live mass per bird. Negative production indicators were mortalities increasing from six per cent to eight per cent and processing yield declining by one per cent. The Group slaughtered six per cent more birds, which resulted in an increase in sales volume of five per cent to 50,400 tons.

The Group maintained the pricing increase realised during the 2011 financial year and pricing increased by 10 per cent over the six months ended August 2010 and two per cent over the six months ended February 2011.

Through the continued pursuit of its product diversification strategy, the Group has managed to further decrease its dependence on the IQF (Individual Quick Frozen) market over the past 18 months with sales into this category declining from 53 per cent in the first half-year (H1) of 2011 and 50 per cent in H2 2011 to 46 per cent in H1 2012.

However, the volume of poultry imports into SA increased by 47 per cent over H1 2011 and 28 per cent over H2 2011 and continues to place pressure on local pricing. Of particular concern is the sudden increase in the import volumes of leg quarters from the European Union which attract no tariffs.

The poultry industry also saw a substantial increase in maize prices and the Group's broiler feed costs increased by per cent per ton. Average SAFEX white maize spot prices increased from ZAR1,120 per ton in H1 2011 and ZAR1,350 per ton in H2 2011 to ZAR1,750 per ton in H1 2012 and March 2012 SAFEX white maize prices are currently trading at approximately ZAR2,200 per ton. This increase in maize prices will continue to place the poultry industry under pressure for the next six months, it said.

The group's primary challenge for the next six months is to contain and reduce its non-feed costs. It has embarked on an aggressive plan to reduce discretionary and direct production costs and this plan is expected to yield results in the next six months.

Looking ahead, the group said over the festive season poultry prices traditionally increase, however increased import volumes may continue to suppress poultry prices and this, coupled with the increase in maize and soya prices, could keep margins within the poultry industry under pressure for the next six months.

"Despite the poor trading results experienced in the first six months, the group believes its core business model of high yield farming and processing operations remains sound," it said.

The Fast Moving report concludes that the cost reduction plan, coupled with the strong production results, is expected to yield progressive results going forward despite the expected margin pressure.