AVI Limited (AVI) Earnings Call Transcript & Summary

Good morning, everybody, and a warm welcome to AVI's Interim Results through December to you all. I'm sorry that we're not in person. And hopefully, this is the last of these sorts of results presentations that we have to give you and that we can get some of the past year behind us. Anyway, some of you may have seen, obviously, the SENS document, and I'll start, obviously, with key features and then hand you to Owen Cressey, who will take you through some of the high level slides, and obviously, some of the group performance. And so far as key features are concerned, I guess the reality was COVID-19, obviously, played its hand into our first semester after a very tough second semester. And I guess, as you will see from some of the detail that we cover later, the demand impact, obviously, was different in the first quarter and the second quarter across the categories, some better and some worse. Obviously, with an improving performance from fashion brands as some of the COVID restrictions, at least from the first wave, obviously, reduced. We did incur ZAR 18 million worth of additional costs. There's lots of detail about group revenue, but in aggregate, largely flat over the prior semester of the prior year. There were some pricing necessary to deal with offsetting raw material costs in some categories, some of it exchange rate driven, obviously. I guess, a key feature for us across our businesses was to ensure in a very tough environment that we managed the selling and admin costs very effectively, which I think was well done by everybody and the credit to people who worked extremely hard through a very disrupted semester. I&J's performance notably affected by the abalone category with COVID-related export demand and price issues. Operating profit down by 2.6%. That's largely abalone. And obviously, the impact of the lockdown on the retail brand portfolio, most particularly in the first quarter of the semester. Finance charges, obviously, materially down in line with, obviously, lower net debt, and Owen will cover that in some detail and that contributing despite the decline in operating profit to a small improvement of 1.2% in the headline earnings number. Cash was strong and always sustained despite some of the challenges that we had. And of course, in line with that, interim dividend, largely at ZAR 1.60, the same as the prior year. And then a special dividend of ZAR 2.80, in line with, obviously, the improvement in net debt levels. And some of you will recall, obviously, the proceeds of the sale of the Simplot business. And we delayed, I think, our review of a return of capital until we had better line of sight of the COVID impact but are obviously increasingly confident that the balance sheet is in good condition. This slide essentially tries to dimension some of the quarterly impacts of our COVID-related disruption to sales. And you can see it, I'm not going to go through it all. Obviously, it's very notable the performance that we had from the grocery portfolio in the first phase of the hard lockdown, where there was quite a lot of stockpiling of food and beverages, both by consumers and retailers who are anxious about the availability of product. But then you can see the very substantial impact of the lockdown regulations on Ciro and the footwear and apparel business. So there was some impact in Personal Care as well. And then also the impact of losing access to the abalone market for I&J. The second half of the calendar year, the first semester, obviously, the impact, direct expenses of COVID were materially reduced. And the impact in the first semester, obviously, of last year was ZAR 58 million, which reduced in this particular semester to ZAR 18 million, and we're expecting that to continue reducing for H2. Obviously, the spot of a breakdown of the long history of the profit performance. I guess what it does demonstrate is the resilience of the grocery portfolio. And some of the sustained challenges of the fashion brand portfolio in a weaker macro environment, obviously affected by COVID in particular. Return on capital, slight uptick, largely in line with improvement of the balance sheet. And I guess, still sustained, notwithstanding the tough environment at a decent level. And then, of course, cash conversion, still very strong. A good performance across all of the businesses despite some of the challenges that we faced with respect to COVID and good management with respect to some of the I guess, stock issues in the retail business, but we will cover that in more detail later. And then in terms of dividend yield, this graph obviously doesn't include impact of the current interim dividend or the special dividend. And that will be covered, I guess, in a little more detail by Owen. And really, this slide just provides you some granularity. And I'll give you to Owen, who's going to take you through some of the group financial numbers.

Good afternoon, everyone. As usual, to start with the high level synopsis of the results for this semester. Starting with revenue. So we had a net volume decline from COVID-19, which was largely offset by higher realized selling prices for the semester. Some pressure on cost of sales and GP margin from rising costs. I think we've addressed a lot of that with price increases taken during the semester. We've also had the adverse impact on I&J's abalone business with much lower selling prices impacting the gross profit in this period. Selling and admin costs are very well-managed right across the group. So general savings drive, obviously, to help offset the impact of COVID-19 and protect the bottom line. And that has helped pull back operating profit to 2.6% decline for the semester and a similar decline in the operating profit margin. Net finance costs substantially down. It's a function, obviously, of lower gearing and also lower interest rates. So interest rate is about 2.5% lower than for the same period last year. Joint ventures as down. So what's remaining is a small joint venture that I&J has. But last year, it included their share of the Simplot joint venture in Australia, which was sold in November 2019. And that's also impacted the capital items. So last year, the large capital gain is primarily the gain on the disposal of the Simplot joint venture and no material capital items this year. The capital items has also affect the tax rate. So last year, it was much lower because, obviously, the capital gain is taxed at a lower rate. And this year, back pretty much in our normal range at 28.5%. Headline earnings, up 1.4% with the benefit, obviously, of the selling and admin savings and lower finance costs and a little bit of dilution, giving us headline earnings per share ZAR 2.973, 1.2% up from last year. Just looking at this slide at a high level. The food and beverage brands overall have performed well. Most of our categories have achieved volume and profit growth. Overall results, though being weighed down by a drop in the Performance abalone business. That was a decrease of ZAR 32 million. And also the Ciro out-of-home business is still under a lot of volume pressure, and that decline was ZAR 47 million. So both of those businesses impacted by COVID. But the rest of the food and beverage portfolio performing quite well in context. Fashion brands improved a lot from the second half of last year. So recovering from the COVID restrictions. Revenue has improved consistently through the period and ending the semester at 6.5% down. And obviously, going into the second half, where we shouldn't have as much disruption as we did in the second half of last year. Looking at the makeup of the volume movement, and particularly on the price side of things. So on prices, we had price increases during the semester. And Entyce and I&J and Indigo, I think were the main areas, and we were benefiting from price increases taken in the second half of last year in other businesses. So that would be Spitz and Snackworks primarily. The volume impact is mostly coming from Ciro and the fashion businesses due to COVID impacts with some volume growth for the semester across some of the food and beverage portfolios although diminishing through the semesters as Simon has highlighted already. Looking at the gross profit margin. So the drivers of the decrease are all summarized in the bullet points. I think important to note that the price increases we took were during the semester, so not all fully landed for the full 6 months. And so we expect to see more benefit from those in the second half of the year. And I guess at this stage, we're targeting a second half of some improved gross profit margin and ending the year closer to last year. Looking at the composition of the change in operating profit by business unit. We summarize the key drivers. And obviously, Simon goes through this in quite a lot more detail just now by business unit. I think just a couple of general points worth noting is across all of these businesses, we worked hard to manage selling prices and help protect the bottom line, and that's made a difference in all of these results. Similarly, good cost control, good -- and cost management across all of the businesses to help with that 6.9% reduction in selling and administrative costs. There's been restructuring activity in several places across the group during the first half, which is not really showing much benefit yet, but will give us more material benefits in H2. And our estimates is we should get ZAR 17 million worth of savings from those restructurings in the second half of the year. Just looking at some of the cash flow and balance sheet items. Cash generated by operations remained strong and has moved pretty much in line with the operating profit. Some improvement in the working capital ratio. Our debtors collection ratio improved over the same period in the prior year. And we've managed to reduce the inventory levels in the footwear businesses following some buildup during the second half of last year with COVID-19. Capital expenditure is being carefully managed in a constrained environment. Just the proceeds from Simplot last year, obviously, a material factor in reducing our net debt. And the net debt-to-capital employed ratio dropping below our normal targeted range. Return on capital employed, also benefiting from lower debt levels and improving slightly from last year's base. So maintaining our good returns on capital level. Looking at the dividend. So we've maintained our normal dividend ratio and paid ZAR 1.60 there, special dividend of ZAR 2.80. So that's in line with our consistent philosophy. This will give about ZAR 926 million back to shareholders. It will lift us well into our targeted gearing range. And, obviously, enhance the FY '21 earnings yields quite materially. The impact on headline earnings per share for FY '21 will be minor because we're paying the dividend quite late in the financial year. But the additional finance costs will impact next year in the region of 2% at current interest rates. Just to end with a summary of planned CapEx spend for FY '21. So as you can see, we continue to spend and invest properly across the business, although we are being careful with capital expenditure. And you can see in this forecast, we have decent chunks of money going into the biscuit factories and into I&J and then an underlying sort of base load of CapEx to maintain the group and its capabilities in good condition. Thank you. I'll give you back to Simon to continue with the business units.

So we'll start-up with Entyce. I guess the thing to say upfront is that it was a tough environment for our manufacturing teams. Our supply chain teams, our field marketing teams and our logistics teams, in general, I think, across the business, I'm not calling out Entyce specifically, but I guess, the numbers in the grocery portfolio I guess, reflect our ability to soak up a lot of the disruption through COVID and sustain service levels to all of our customers and then ultimately, to consumers, which was very pleasing and certainly credit to all of those people across all of AVI. Key profit performance was good. We've seen a little bit of a retraction in rooibos raw material costs. Some of you who've been part of AVI shareholding for some time know that, that was one of our material challenges over the last 3 or 4 years with very high rooibos raw material prices in line with some of the droughts that took place in the Western Cape, but that's coming back, which is pleasing. So in general, both red and rooibos tea and black tea performed well. We did have a little bit of aggressive competition in the black tea category. We had strong performance for our affordable black tea brand, particularly in the first quarter of the semester as we came off to the first hard lockdown, which was pleasing. But generally speaking, a decent performance from the tea portfolio with decent gross margins and excellent cost control. Turning to coffee. Coffee materially more impacted by COVID-19 because of our large out-of-home coffee solutions service business, Ciro, with most of the hospitality and leisure sectors very affected. And then the corporate customer base also with many people working from home. So very much more challenging in coffee. Interestingly, a good performance from the mixed instant and premium coffee volumes through retail. We had some offset, I guess, with more people at home, which was pleasing, but that matured as we got into the second quarter of the semester. But again, good control of selling and admin costs, obviously protecting some of the gross margin that was eroded by the decline in coffee. Creamer had a very, very good semester. Strong performance from a volume point of view and good cost control. Obviously, the demand again was substantial as of the slide earlier in our presentation demonstrated, which matured, obviously, as we got into the second quarter of the semester. Some pressure on gross margins, as Owen just reflected with some, I guess, needs for price increases, none of them have fully matured and will obviously help gross margins in the second semester. But again, also some selling price increases and good cost control in creamer. This slide gives you, I guess, a breakout of the volume and value. I think one of the challenges in the beverage portfolio was trying to manage I guess, that optimum point of volume and value, slightly more challenging in coffee, obviously. But I think on balance, a reasonable job done across the categories. And you see it showing up in the market share. We are always fastidious about ensuring that we don't only manage the business with market shares in mind, and you can see some impact, I guess, of our own willingness to hold on to GP's in a fairly volatile environment. And we -- I guess the shares under reflect the fact that we did get volume growth in all of these categories, albeit, obviously, perhaps less than we might have had we had a different philosophy around price in the semester. Raw materials, a mixed bag with a number of them increasing. But I guess the savings coming through in both red and black tea, raw material costs ameliorating some of the price pressures and the gross margin pressures. Turning to Snackworks. I mean, a decent performance, not quite as stronger performance for the Biscuit portfolio. With the demand in the hard lockdown, certainly lifting, as Owen said, the last quarter of last year's second semester. We did have reasonable demand in the first quarter. But in the second quarter, I think both customer and consumer inventory levels were high and people started returning to normal spending patterns, which took some of the opportunity off the table. We did, as Owen said, put through a price increase in April 2020 to try and deal with some of the raw material cost pressures, which are slowly creeping into our basket of raws and of course, a weaker exchange rate adding to that impact. Again, sound control over admin and selling costs also helping the category. Snacks had a good performance. I guess, lots of people sitting at home, which certainly helped. And that was pretty much sustained for a little longer in the second part of the first semester. I guess the portfolio mix issues played its hand with I guess, a difference between small bag and big bag volumes and to some extent, they're changing, I guess, some of the gross margin pressures in the category. We have also put price increases through in the snacking portfolio. But generally speaking, a reasonable performance, notwithstanding some of the cost pressures. This slide dimensions some of that with, obviously, most of the revenue performance coming through with, I guess, some of the price creases taken and the same to a different extent with the snacks portfolio because of some of the mix impact. Quite a wide basket of cost pressures. Hence, the price increases taken in April of 2020. And market shares, despite some of the pressures, reasonable performance across the portfolio in terms of shares, gains in all 3 of the categories. Turning to I&J. I mean I&J, I guess, dimensioned fairly simply a reasonable fishing performance, not nearly as disrupted as the second semester of last year. I guess the major disruption sustained through this semester was obviously the abalone business. And the abalone challenges are simply market access issues into Hong Kong and China. And those haven't gone away and probably are with us for a little longer, especially in Hong Kong, which continues to have much stricter lockdown rules than China does. That's impacted, obviously, the fair value on the biological asset, freight costs and airfreight access into our fresh market for Abalone still remains a challenge. We took a decision fairly early on to restructure danger point, thinking that the challenges would persist for longer that, as Owen says, some of those benefits will only flow in the second semester. The fishing performance I guess, from a catch rates perspective, it was reasonable, but I'll cover that in a slide to come. That gives you, I guess, some sense of the impact of the abalone performance, and you can see some ZAR 32 million, obviously, versus the prior year. That's the breakout now that we no longer have the Simplot asset, which has affected the royalty income. That's the red band. And you can see, obviously, the green band, which is an inversion of the abalone profit, which has now come through as a loss in this semester. Fishing performance, pretty reasonable sustained performance across both fresh and freezer fleets, which was pleasing to see. But you can see the impact, obviously, on the domestic demand, which was materially to do with the decline in foodservice, in line with many of, I guess, the fast food service restaurants being closed. And so what we did is we directed that product into exports, where we could, and we saw a benefit of both the translation value of the exchange rate into the export sales. There were certainly some challenges in some parts of the European market, where also the foodservice industry was slower, and we ended up putting materially more of our product in slightly different formats through the retail system in Europe, in particular. Some quite aggressive pricing in the domestic market. But as we, I guess, do always in our business, we try and sustain a view of the long-term profitability of our trademarks. So we don't mind giving up share if the share is being gained by competitors at poor pricing. Indigo brands, I guess, also affected by COVID with people obviously working from home. So substantially lower volumes, which you'll see in the next slide in color and in fragrances. A reasonable performance from the body spray business, which was pleasing, and obviously, some improvements from the low base of H2 in this semester, which was pleasing. A decent demand for fragrance body sprays, which was encouraging, particularly in the second quarter of the semester. We have increased prices here as well to deal with some of the cost pressures coming through because of a weaker exchange rate. And the driver as well of improved profitability this time last year or in the semester last year, we had a fairly considerable innovation pipeline, and that cost of that innovation pipeline isn't annualized. But also in Indigo, good cost control, which was pleasing. And you can see the recovery in the operating profit margin up to 17.1% from the 13.6% of the prior year. You can see the impact of COVID-19 on volumes. And obviously, that's substantially, as I've said, a function of cosmetics and fragrance volumes. Body spray share pretty much as it was last year, and you can see some of the cost increases coming through because of the price increases taken in the semester. Footwear and apparel, a lot has obviously changed here because we fully integrated the retail business of Green Cross into the structure now. We had a fairly busy time closing underperforming stores, where we made decisions based on what we consider to be the forward view on rental costs and volumes, and that sets itself out, obviously, for reading. I guess COVID has probably affected this portfolio the most. I mean some of it, obviously, practically because we had to close stores. And then, of course, once the store base was open, people's reluctance to shop was substantial. I think from our own experience, major metropolitan malls have the lowest footfalls, the benefit that this business has is that it has a pretty wide diversity of retail space, and a lot of it is in high streets. And certainly, high streets recovered way faster than some of the major metropolitan malls. And this was certainly tougher for Green Cross because its business is largely in major metropolitan malls. We work very hard to manage selling and admin costs. We did a restructuring of stores in the back office. As I've said, we've integrated the Green Cross business into Spitz, and that includes now, obviously, the supply chain and the warehousing and logistics, which we'll start seeing some benefits of in the next semester. And we continue to negotiate as effectively as we can with landlords, and we are seeing a considerable building rental saving that will benefit this business' margins in the semesters to come. What this slide shows you is we had a pretty credible performance from Spitz and Kurt Geiger. December is, obviously, a very critical month for Spitz particular and we managed to get to 97% of December 2019 sales in December 2020, which given the tough environment we were pleased by. The Green Cross volume losses were certainly, as I've just said, higher than Spitz and Kurt Geiger with the dentists being very affected by, I guess, the major metropolitan malls where shoppers have been slow to return to. Gant was impacted by losses of tourism, albeit obviously, small in the portfolio. And that gives you some of the cadence of volume in the Spitz and Kurt Geiger business, with volumes down 10% and so on -- I guess, ironing a pretty credible performance with good cost management, underpin the profitability despite those volume losses for the full semester, with some recovery coming in the second quarter or second quarter of the semester. Not a lot of selling price increases yet. We've certainly got some increases planned, I guess, for the second semester of this financial year. The Green Cross revenue decreased very much in line with store closures and lockdown restrictions, and I'll cover that in some detail. And the... Turning to international. International had a decent performance. Quite a lot of demand for our core categories across border through the lockdown, and that was sustained through the semester, which was pleasing. We were able to achieve good pricing in this market in general. Zambia obviously remains the most challenged with some of its own exchange rate issues for the decline in Kwacha impacting on demand in the short-term at least. But good cost control in international and a pleasing performance from a profitability point of view. And that just dimensions, I guess, the run rate for international versus the balance of the grocery portfolio with good profit margin in the international business, still very much part of our strategy, and we're continuing to drive all of our core brands into regional markets and certainly another successful semester. Turning to prospects. I guess, fundamentally, we think the environment, as you will have seen from our outlook statement remains very tough. We don't think there are a lot of reasons for the current calendar year to see, in the absence of major stimulus and material improvement in consumer spending. I think on balance, the environment in 2021 could be as tough as 2020. We certainly don't see at this stage, the repeat of the quarter 4 performance in the core grocery categories as an opportunity. As Owen said, we do need to manage some of our pricing in order to deal with cost pressures that are building, difficult to call what this volatile exchange rate environment means. And certainly, there are some soft commodity pressures building globally, which are also a challenge, and those will obviously play their hand probably more so in F '22 net of our hedge book. We're hoping the Ciro volumes will recover. But that's, I guess, not yet as clear as we would like it to be. There is, obviously, in this environment where demand is weak, the potential for aggressive discounting in core categories, which we have to remain ever vigilant about. We continue to focus on cost savings and any structural opportunities to reduce the cost of doing business in an environment where the growth that we can imagine is poorer for longer. Our branded business export market, we continue to believe we can get double-digit growth, and that's important. And we've got, I guess, a sensible amount of project activity, as Owen alluded to, in the CapEx program that helps us with efficiency and capacity where it's appropriate. I guess a risk is energy. If the boom in commodities is to be imagined, that's certainly going to distress the energy sector more and Eskom's ability to supply power on a continuous basis, I guess, still remains a question. We've invested heavily to protect the business from this disruption. So hopefully, we will manage it, should it become an issue. From Indigo, we think that we're not going to anniversary the real challenges of quarter 4's hard lockdown. We think we have enough in the tank in so far as innovation and product launch to give a sustained demand in the core portfolio. We've certainly got a focus on discounts and trade promotions to improve price realization in a thin market, and that's something that's getting lots of attention. As always, we trade against global multinationals in this category and our ability to, I guess, deal with aggressive discounting is something that always makes us anxious in a thin market. But again, this business will look at structure and fixed costs to ameliorate some of those risks. I&J, we're hoping for a materially better fishing performance than this time last year for the second semester. We're not seeing any impact of COVID-19. This was the business that was the most disrupted from a processing point of view. And in the second wave, we've had very few cases, at least in the land-based processing units, which is interesting for those interested in herd immunity. So the processing throughput, we think, will be stable. We've got, I guess, reasonable hedges, both in fuel and in currencies. We're seeing a recovery in the retail demand. Foodservice is still recovering, but not yet where we'd like it to be, but we think it will recover sensibly in the second semester. Cost reduction in all of our business, as in I&J, will be a key focus. We've got a reasonable amount of fleet maintenance in the semester. Hopefully, these projects will be completed on time, and we'll get the vessels out fishing as we expect. And we're not expecting any disruption, certainly in H2 of this year and so far as the long-term rights process plays out. Abalone, obviously, a very disruptive period for the Abalone business. It's difficult to call how quickly this market will recover. Much of it depends on the recovery in Hong Kong. We're seeing some improvement. We certainly put some price increases through to our core customer base, and it will be interesting to see if those prices stick. And that will give us, I guess, a stronger level of confidence that the market is recovering. Obviously, an uncertainty remains the value of the biological asset obviously, at the end of this financial year, but too many variables to have a clear view as to what that might mean at this stage. The Footwear and Apparel business, like Indigo, likely to benefit from a non-repeat of the very disruptive quarter 4 of F '20. We don't think the demand environment, obviously, is likely to improve materially. Having said that, we're reasonably confident that our brand portfolio, some of the innovation that we have will give us the opportunity to improve our rate of sale, and we're seeing some of that in the first few months of this calendar year, which is obviously encouraging. We will continue to work hard at managing the Green Cross, I guess, store portfolio to match, I guess, what we perceive the retail brand opportunity to be. We continue focusing on rental reductions. We've made some very considerable savings over a 3- to 5-year period depending on the rental renewal, which is pleasing and certainly will help us re-leverage this business so long as we can sustain reasonable levels of demand, which is encouraging. We don't have a huge investment in the very short-term in terms of store refurbishments. And we're excited by the continuing growth we're seeing in our Carvela Weekend range, which is coming out of our design team in Italy. So from an AVI point of view, we're not naive about the macro environment. We've been working hard for the last couple of years to ensure that the business is as efficient and effective as it can be in a period of limited growth. And I think we're benefiting from that, at least in the income statement and in cash flows. We have an unrelenting, I guess, belief in reviewing our business model, looking for ways of simplifying how we manage I guess, our portfolio and the businesses specifically. And I think we've seen some of the value of that in the last semester. Notwithstanding our long-dated focus on margins, procurement, cost savings and efficiency. There are always opportunities to find other ways of managing in a thin environment. And so everybody is still interested and challenged by, I guess, opportunities in that regard. I guess a key underpin to AVI is our unique brand portfolio. We're certainly never going to take, I guess, short-term decisions. We continue to try and run the portfolio with a long-term profitability as the strongest measure of success, hence, our long-term belief in managing price and volume as effectively as we can. We are targeting real earnings growth despite the constrained environment. And I guess there's enough across the portfolio for that to be possible. The dividend yield, I think, speaks for itself. We're not likely to change our normal payout ratio, but we will certainly, I guess, look to returning capital that is surplus to our normal requirements. We continue looking for ways of improving our capital employed, and that's obviously through the manufacturing capabilities of the business. We think that in the end, we've got some interesting brands, and we can continue building their presence and consumers' relationships with them in countries outside of South Africa. And I guess some of the evidence of that was in the international slide. We continue looking to find, I guess, more substantial ways of building market leadership in regional markets if those opportunities are appropriate on a risk-adjusted basis, and we continue to look at those. And we are seeing, obviously, some opportunities in the domestic market. I guess, as always, we need to make sure that they're underpinned by credible brands and that they're priced appropriately. So thank you very much for your time, and we'll take questions and answers and give you answers, if we can.

Thank you, Simon. The first question is from Shaun Chauke from HSBC. Well done on the resilient results, strong execution on cost control. However, how should we think about growth in AVI over the long-term in the absence of a macro recovery and the continued work on cost?

Well, we're a consumer business. So anybody who's, I guess, underpinned by the macroeconomic realities would be trite in saying that growth is easy to achieve. You can always grow, obviously by out competing, and there's certainly every ambition to do that, and that can be an interesting underpin to growth. The other opportunity, of course, is to find growth by making appropriate acquisitions. But again, the philosophy that we have in AVI is to do what we're good at. And if we're going to acquire something, it's got to be something that we can add value to that has got to be underpinned by a proper trademark and the discipline we've tried to display over many years around making acquisitions is that it's risky and that one needs to be pretty confident, that one can convert an acquisition into a good return. And I guess both competing in our categories and by making acquisitions by widening our distribution of our current portfolio and our manufacturing capacity, all represent opportunities in a constrained environment for us to at least say that we're targeting, I guess, earnings growth, but we certainly would agree that it's a tough environment to do that in.

Thank you. Continuing on the appetite for acquisition, it's a question from Karl Gernetzky from Business Day asking if there are any particular business lines that you would be most interested in when it comes to acquisition?

I think we've agnostic -- I mean, the first prize would always be the opportunity to leverage a core capability where you've got gross for net in the transaction. In other words, it was an opportunity to strengthen a category that we currently have where we could bring real leverage to that category. But the most important thing for us when we look is the ability to find a brand that we can add value to over the long term. And we're not so specifically interested in categories there it's really a question of whether there's a trademark underpinned by a product portfolio that we think we can bring what we think we're good at and pay the appropriate amount of money for and then grow.

Moving on. A question from Muneer Ahmed from Prescient. How much restructuring cost is included in the ZAR 25 million loss for abalone? And assuming no market recovery, can we expect a big reduction in the losses here?

But from a cost point of view, in the first half, there is costs and savings of roughly equivalent to amounts of about ZAR 5 million to ZAR 6 million in the first semester. And then obviously, that converts into primarily savings in the second semester. And with some further restructuring work in progress, which should yield further benefits to go into F '22 in the abalone operation. Sorry, if you can repeat the second part of that question?

Can we expect a big reduction in the losses there?

I think the second half is unlikely to be poor as the first half, depending on our outlook for -- going into F '22. So obviously, we're watching the Hong Kong market, in particular, to see what prospects that gives us of getting better prices. We've been able to get volumes but at much reduced prices, but we did have quite a big stock value reduction in the second half of last year. So that's the variable, which we've highlighted in the prospect slide. Operationally, the farm is performing well.

Thank you, once again. The questions are reloading. The next question is from Nontuthuko Zulu from Investec Wealth & Investment. Given the dynamics, competition, pricing, cheap imports and fast fashion in the clothing business, what is the probability and line of sight of recovery for your fashion brands?

I think the -- we have a very particular portfolio of premium retail, and they're underpinned by brands as opposed to -- we're not in fast fashion at all. It's a completely different segment. We think that South African's value fashionability, they value premium brands and that, I think, is a very, very well-defined opportunity for us. We have a small niche in both apparel and in footwear. And I think the opportunity is actually substantial, that we can continue building those relationships with consumers. Obviously, COVID-19 was a very, very disruptive period, both from a macro point of view, but also practically in terms of a lot of formal product that typically would have been purchased in our footwear brands, it wasn't purchased because of people working at home and working differently. So I think in the end, the opportunity for normalization of people's lifestyles and then the ambitions that people have for premium fashion brands, I think, remains a very strong growth opportunity, albeit off at the moment, a fairly compromised base. So we remain interested in the category. And we think we've got 2 very interesting brands that obviously can play an interesting role in this market in the years ahead.

Thank you. Next question from David Lerche from Sanlam Private Wealth. Please can you give some detail on the hedging policy? What gets hedged and how far in advance?

So we've been pretty consistent in both currency and commodities. We take a view on a 12-month forward sort of rolling forecast. And our starting point would be to hedge roughly 50% of that, but we can flex that up or down. So within ranges, but we would always have decent levels of cover for at least the next 3 to 4 months and then thinning out as you go out further in the period. So in the information slide is a summary of our currency hedges, and you will see that 1 or 2 of those are a little bit lighter than they would have been a year ago. But essentially, I look at the second half of this year, we've got decent levels of cover across all the key commodities and currencies.

I think the important thing to add to Owen's answer is just that we hedge in order to give us the ability to price consistently with our customer base, which can really only absorb maybe 2 price increases a year under the worst of circumstances and what hedging does this gives us the ability to manage pricing and margins with less volatility, a very important part, how we've run the group for a long time.

A question from Bank of America, Paul Steegers, asking if you can elaborate on the footwear and apparel rent savings as a percentage of revenue.

Rent savings? No. I mean, because they obviously forward savings over the time of a lease, it's not a number that I can give him. But I mean they are considerable in aggregate and building.

Thank you. From Kgosi Rahube from Citi. Could you please quantify the potential savings or benefits from the Green Cross and Spitz integration?

Not yet. But I mean they are again considerable because they are, obviously, again, building, as Owen said earlier, a lot of these savings are not yet annualized. So much will depend on where we finally settle in so far as our store footprint is concerned. So I prefer not now to put a number to it.

Thank you. Moving on to Personal Care from [ Murry Mo from 8x10 Co. ]. What were the biggest drivers of the Personal Care operating profit performance? Was it largely holding back on new product launches?

No, it was a combination of, obviously, a recovery in the semester versus the prior year, which had been a particularly poor semester. And then it was a function of, obviously, lower innovation costs as the presentation said, but also a decent performance from our core categories and some improved pricing. So some releveraging of the income statement, which came through and higher, obviously, economic profits and better margins.

Next from JPMorgan from Dino Constantinou. What was the possibility of launching a share buyback considered as opposed to the special dividend? And can you please remind us what targeted gearing is as the first question. And the second question from Dino is, could you provide a bit of color on the scale of recent abalone price increases passed? And when they were passed.

We do the abalone first. So it's $2 a kilo at this stage is the pricing that we've put to our customer base. And so far, as I'll let Owen talk about the target of gearing, and I'll come and take the question on the share buyback. Obviously, we always look at the best way of returning capital to shareholders, which would include, obviously, a full review of a share buyback. And I guess, the Board's considered opinion when we looked at both of the alternatives was the return of capital via the special dividend that was the most favored for, I guess, all of the theoretical and practical reasons, which are always on the table when one's looking at a return of capital. And in our, I guess, opinion a return of capital through a special dividend was easily the most appropriate under the current circumstances in share price.

Thank you. From Nick Webster from...

Sorry, [ Fred ]. Can I just cover the gearing.

Of course, my apologies.

The target of gearing. So just historically, we've always communicated a targeted gearing ratio, which we define as net debt-to-capital employed of 20% to 25%. And that was prior to the implementation of lease accounting. If you take the additional lease liabilities into account an equivalent ratio of 25% to 30%. And so that's what we're using as a rule of thumb at the moment.

Thank you. Going back to the question from Nick Webster from HSBC. It seems you are suggesting that the normalization in demand for snacking and beverages is fully captured in these results. Is that fair? Or could you comment on any trends in the opening 2 months of this year or the half?

Yes, the demand is pretty much as we expected. It's reasonable. And it's certainly not like, I guess, the demand that we saw in a very specific second quarter of last year into the hard lockdown. But certainly, the demand is reasonable. We're perfectly satisfied at this stage. I mean, we'd obviously like it to be stronger. But in the context of the environment, it's credible.

Thank you. Moving on to I&J. Do you expect margin improvement in the second half for them? And do you also expect margin improvement for footwear and apparel, and that's from [ Sinclair Mahyco from Anchor Capital ].

I guess on a comparative basis, yes, I mean, having said to both of those business units. In I&J, in particular, we expect to have a much stronger second half in the fishing business, which is the real engine room of I&J so inevitably, that will, I guess, give us a margin improvement. If we are able to deliver that successfully. And the same will be true of the fashion businesses, which were closed for a period of the, I guess, the second half of last year because of COVID, and that, obviously, we paid everybody we paid all our rentals or we paid most of our rentals. So of course, we'd expect the margins to recover in the second half.

Thank you. A follow-up question from Shaun Chauke from HSBC. On Spitz, some new launches that he has noticed on the shoes on occasion and semi casual way would you be looking to invest the portfolio more into casual wear versus formalwear, given the trend towards casual?

Yes, we're getting our best growth, obviously, from expensive casual wear. It's our Carvela Weekend range, which we're designing out of our Italian office, and we've got very, very decent growth. And we've got some quite interesting innovation potentially both in retail formats and in product for this semester. So the answer is yes.

From [ Murry Mo ] again from [ 8x10 Co. ] which export markets saw weaker selling prices for I&J fish? Was this mostly in the foodservice channel or also in the retail channel?

Essentially, we just lost access to food service because the demand matured. And so there was lots of stock in Europe because Europe had a much harder lockdown for longer. And so there was a need to take that product. There wasn't so much of a change in pricing. If there was any dollar impact in pricing, it was maybe 1% or 2% in some formats, it wasn't substantial.

Thank you. From Tinashe from Afrifocus Securities. He's got a couple of questions. First one is, can you quantify the price increases in biscuits and snacks intended for H2?

We prefer not to say at this stage because we haven't really, I think, finalized our thought process.

And then a little bit more detail on the 10.6% decline in domestic volumes for I&J, especially with regards to retail, but I think that's been mostly covered.

I think that's covered in the presentation, if they don't mind.

And finally, if you are considering different regions for abalone?

Different regions to sell, for sure. I mean, we do have a wider distribution in the countries we've talked about. But the market for abalone is very specific to a number of key countries, particularly for the product and the formats and the sizes we sell. We are obviously looking at some markets. We've moved some product to the U.S., but it's not substantial. We've got some opportunities in Taiwan. But again, it's not substantial. The fundamental driver for the Abalone business is the recovery in Hong Kong, and that's obviously a function of how quickly the COVID regulations normalize.

Thank you. A question from [ Tom Twalo from Prime Research] . To what extent were market share losses in beverages due to private label? And how confident are you that share losses will revert?

They weren't material for private label. They were, I guess, decisions we took basically to protect our selling prices and our margins. We'd expect the market shares to move around and recover if we think that it's worth them recovering. And remember, market share reads in South Africa, always not quite as complete as one would like them to be because there's a number of parts of the market that are not well read. So our own intelligence satisfies us that market shares across the portfolio are perfectly credible. And if they recover, that's something that we will deliberately make happen if we believe it's worth doing. So it's difficult to say whether they'll recover in the short-term or the medium-term. But on balance, they're not losses that we didn't manage ourselves.

And the second question is around the contribution of fuel cost to I&J's cost base?

So we've had a benefit in this semester in H1 compared to H1 of last year, which was, I think, shown on the I&J profit graph. H2 other costs will be, I think, pretty decent again year-on-year. We're not expecting a major movement at current prices. So we do have hedges in place, obviously at current prices, if they are sustained, there will be a bit of additional cost to come through in H2, but a much bigger impact going into F '22. So current prices are sustained, that could be an extra ZAR 20 million on I&J's fuel bill for F '22.

Jiten Bechoo from Avior. If you could break down the absolute GP change here on you between Spitz and Green Cross.

No, too complicated to do now.

No problem. And final question from HSBC, Nick Webster again. Marketing expenditure was down over 11% year-on-year, and you mentioned the deferral due to COVID. So should we expect that to pick up meaningfully in the second half?

Well, it depends on whether we think that we've got things worth supporting. So we do have some activity in the second semester. We remember that marketing cost is a pretty big basket of promotional money. Some of it, obviously, in traditional promotional money, not all of it in above the line marketing or below the line marketing. So under no circumstances, would we ever thrift the long-term value of supporting our brands. What we, I think, accepted in the COVID period was there was very little need or even relevance in some of the marketing activity. So the long-term ratios that we've demonstrated over many years are more likely to return. Whether it will happen in the semester, I think, is not clear yet. But certainly, our philosophy of supporting our brands with the appropriate marketing support will continue. And I'm not sure it will all recover in the next semester. But certainly, over the next 18 months, those levels are much more likely to surface and assert themselves.

Thank you both. We have no further questions. Would you like to make a closing comment?

Well, thank you very much, difficult times, but we appreciate the support and interest, and look forward to seeing you personally as soon as we can. Take care.