AVI Limited (AVI) Earnings Call Transcript & Summary

Good afternoon, everybody. Welcome to AVI's year-end results to the 30th of June from Owen and myself. I hope you're all well. This is the second year-end presentation that we've done by podcast. Hopefully, in the future, we won't have to do it like this again. And we have a comprehensive presentation. We're going to go through it reasonably quickly, so that we can find time for some Q&A at the end. It's a pretty normal AVI format. I'll take you through some key features. Owen will take you through the group results in more detail, and then I'll take you through some of the business unit performance and prospects, and then we will take questions and answers. For those of you who've seen the SENS announcement, I guess, the important thing is revenue is contextual to some of the challenges we've had with COVID, particularly also the annualization of the financial performance of some of the business units against a very strong H2 demand of F '20. The results, I think, speak to excellent cost control and some of the benefits of some restructuring that has taken place over the last 18 months. Materially important also was price increases to support the various cost pressures that we've had across the group. And very important has been the focus on finding, I guess, the balance between volume and value with, I guess, the long-term gross margin performance, which is always important to our business. Results history, I guess, shows some of the more recent tough macro environment, I guess, coupled to the challenges of COVID. I think the grocery performance is very credible, particularly if you compare it back to F '19 and take out some of the spike in demand that came through in H2 of F '20. I think the business that is obviously struggling to adjust most specifically to the macro environment and also the COVID limitations has been obviously the fashion brands portfolio. Nonetheless, we've been able to, I guess, sustain an improved return on capital. It's still at very good levels across most of the businesses. And again, very strong cash conversion sustained, which is always a feature of our business. And then the dividend yield in F '20, if you recall, we paid a special dividend and that coupled to the normal dividend of ZAR 2.80 per share as a final dividend, will bring, I guess, the yield to around 10.1%, which I think off the year-end share price, which is, I think, a solid outcome in a difficult set of trading circumstances. And like that chart largely summarizes you can see, I guess, the effective payout ratio since 2015 of nearly 97-odd percent of headline earnings. I'm going to hand you to Owen, who will take you through the group financial results.

Good afternoon, everyone. As usual, I'll start summarizing, at a high level, the group trading results. And obviously, we unpacked this in quite a lot of detail through the rest of the presentation. Revenue slightly up, mostly from price increases across the group, offset by lower volumes, and we'll -- a lot of that to do with obviously the impact of COVID year-on-year, and we'll cover that in later slides. The gross profit under a bit of pressure from the lower volumes. Obviously, not getting the same recoveries. Most of our factories with quite high fixed costs. Also compounded in certain categories by higher raw material costs, a lot of that to do with the weaker rand. But again, we'll unpack that in more detail later on. So the gross profit margin declined slightly. Selling and admin expenses very tightly controlled in the year and supported by some savings from restructuring, although most of those benefits will flow next year. And that's helping us to get some growth in the group operating profit to 3.2% up and an improvement in the operating profit margin. If we look at the rest of the income statement. Finance costs are well down on last year. Obviously, we paid the special dividend quite late in the year, so it didn't have a huge impact on costs in this year. So mostly to do with lower average debt for the year as well as lower interest rates. The joint ventures is down because we sold Simplot in November of the prior financial year and had less of a contribution of joint venture in F '21. And similarly, with capital items, we had a large profit in F '20 from the disposal of the Simplot joint venture, obviously not repeated. So nonmaterial capital items in the current year. That's also linked to the effective tax rate, which has returned into our normal range of between 28% and 29%, about the impacts of capital gains being taxed at a slightly lower rate. And taking that into account, headline earnings up 6.4% and a slight dilution to headline earnings per share being 6.2% up at ZAR 4.999. Just unpacking the impact of COVID through the year on different parts of our business. So broadly, the food and beverage businesses enjoyed an uptick in demand in the second half of last year. Some of the categories more strongly than others, I think biscuits had the best pickup in demand in the second half of last year, that carried through into the first half of this year and particularly the first quarter of our financial year, continue to see good demand across most of our food and beverage categories and then started normalizing through the rest of the year. And in particular, we never got the repeat of that spike in demand in the fourth quarter of the financial year. And you can see that showing in H2, in Entyce and Snackworks revenue percentage. Conversely, Personal Care came into F '21 recovering from the impact of COVID in the second half of last year. So although we recovered steadily through the first half, trading densities in the stores were down and Personal Care remained under pressure. In H2, we never had the complete closures that these stores and the retail businesses were subject to for part of the fourth quarter last year. So obviously, we got some recovery there. But the businesses have still not recovered to F '19 levels, and there's still some pressure going forwards. Ciro is the slowest recovering of our businesses. It's -- all of its customers and out-of-home channel remain under pressure. And so it has started making progress in H2, and we expect that to continue into F '22. Looking at costs and provisions. It's important to note, we didn't have any material operational disruptions during F '21. In terms of direct costs, these were lower than last year. During the initial lockdown period, we paid special allowances and transport costs during the level 5 lockdown, and these weren't repeated. So we've spent ZAR 24 million for the year, and we think that's a level that should be sustained in F '22. In terms of stock and debtors provisions, no material impact last year or this year. So looking at the H1, H2 movements in operating profit and then full year as well, most of these movements can be ascribed to the impact of COVID-19 on volumes in each business in each semester. I think the standout or the difference to that would be I&J's second half, where -- although they were impacted by COVID last year, they were also impacted by poor vessel availability. We had more downtime on the vessels than we had been planning, and they had a much stronger second half of this year as well as benefiting from some better exchange rates. We've put this view in just to give some context to F '19, which was the last year, not impacted by COVID. And you'll see the slide in each of the business units as well. At group level, you'll see that we've improved on last year, but still behind F '19. That's primarily attributable to the fashion brands, which haven't recovered fully to the F '19 levels. The food and beverage brands, if you normalize through F '20, have all shown some growth and made some progress over F '19. On this slide, I think just to highlight, growth in operating profit in both fashion brands and food and beverage brands and progress of the operating profit margin level across most of the business. Looking at the split of revenue growth between price and volume. So we took price increases across just about all our categories, the exception being rooibos, where we had a drop in raw material prices and some of that fed through into the selling prices. Discounts were managed very tightly through the year to make sure we got value and didn't give away money needlessly. And most of that has been offset by lower volumes. Obviously, the biggest drop in volume year-on-year would have been biscuits because they never had such a significant spike in the fourth quarter, but most of the other businesses under some volume pressure due to COVID. The I&J export volumes being the standout with 13% growth year-on-year. The pressure on gross profit margins across both portfolios, food and beverage and fashion brands. The weaker rand has played a big part in that as well as, obviously, the effect of lower volumes and cost recoveries. This graph, I think, we've covered most of the aspects driving individual business unit performance. I think just important to emphasize the role that our focus on managing value and volume balance and getting price increases where we can as well as the cost focus throughout the year has played in underpinning the results of each business. Looking at cash flows. Cash flows remained strong. Cash conversion ratio over 100%. Working capital has been tightly managed through the year. Our debtors data has improved. We've continued to reduce stock levels in the footwear and apparel brands for the second year running. Capital expenditure has been tightly managed. Some timing differences there. You would remember, we were forecasting to spend slightly higher than that. The special dividend we paid in April 2021 has lifted net debt up into our targeted gearing range to end the year at ZAR 1.7 billion, and the return on capital has improved over the year through growth in earnings and lower capital employed. Looking at the dividend, we've declared a final dividend of ZAR 2.75, that brings the ordinary dividend for the year to ZAR 4.35, which is a 6.1% growth in line with the growth in headline earnings and a normal dividend payout ratio of about 87% for the year, together with the special dividend, as Simon has already alluded to, a 10% return on our share price. Just a summary of some of the restructuring work has gone on through the year, all of the areas of the business that have been under significant pressure due to COVID have done a lot of work through the year. The effect on F '21 is much smaller than we expect going forwards. We've obviously incurred costs around the restructurings and they've been implemented through the year, but we're expecting to achieve around about ZAR 50 million savings next year from these initiatives in these particular businesses. And just to end off with the CapEx summary, we continue to spend across the business. You can see next year, forecasting around about ZAR 400 million with projects in all the major parts of the business. I'll give you back to Simon to go through the business unit performance.

Thank you, Owen. I think I'll just say upfront without repeating it in every category, it's been a tough year operationally for all of the businesses. I mean it's been disrupted, and there's been a lot of currency volatility, there's been commodity pressures. I think the overall performance, if I just talk now directly to Entyce, I think Gaynor and her team did an extremely good job defending the operating margin in the prior year, a 5% increase in operating profit margin. And that's in the face notwithstanding of the revenue decline with the pressure on Ciro, in particular, which I think is important to reflect on. If we think about each category, tea, we have, I think, a very defensive portfolio of brands and prices, including, obviously, both black and rooibos tea, where we're market leaders. I think it was a very good performance when you also consider the strong demand that we had in H2 of F '20. We did see some rotation into our lower price point brands, but I think overall, a very good job was done in managing both volume and value across all of the brands in the tea category. As Owen alluded, and I'm not going to repeat it, we worked extremely hard to manage costs across the portfolio. And so in tea, we benefited from lower admin costs and selling costs, which I think was an important theme. If we go across to coffee, a resilient performance, slightly different in each of the tiers that we trade in and obviously substantially impacted, as Owen has already said, with respect to Ciro, which continues to trade under lockdown circumstances. I think the standout performance was from premium and our affordable brewed brands, both contributed to an improvement in profitability. We needed to, obviously, do something with respect to Ciro structure. We were uncertain as to how long the current circumstances would prevail, so as the slide that Owen showed you earlier, put significant effort into restructuring Ciro, so that we would have a better opportunity in F '22. But in general, a reasonable performance from coffee. If we go to creamer, like the other categories, we had record levels of demand in F '20. Those weren't repeated in this last financial year. We had quite a lot of cost pressure in raw in particular for creamer, and we needed quite a lot of pricing. So we needed to manage the, I guess, value and volume quite carefully, put up prices, lost a little bit of share, but I think long term holding on to an extremely good position in creamer. And again, in this category, worked hard at selling and admin costs, which I think helped sustain the overall performance of the business. As per Owen slide in his section, these are a breakout of Entyce, in particular. And you can see actually in both semesters, we were able to improve the operating profitability, notwithstanding losing some of the exceptional demand of the second half of H '20. And that's largely through a generic statement of managing price points and managing discounts carefully. Of course, some of the raw material costs, which I'll reflect on soon have assisted in part and good cost control, which we've touched on. And these tables break out some of the volume value opportunities. It's a fairly, I guess, summarized version of quite a lot of moving parts. But in revenue, tea declined largely to do with volume, some aggressive pricing for a period of time and then also offset by some of the volume growth that we've seen in the past with rooibos, where the pricing up as a result of the drought several years ago, has impacted some of the volume growth in rooibos in the short term. We see that improving in, I guess, the year ahead and some selling price increases for tea as well. Coffee, that number is substantially driven by the performance of Ciro. Some selling prices, obviously, lifting the overall revenue. And then in creamer, notwithstanding the very high base, you can see the necessity of a near 10% increase in selling prices to offset, I guess, a combination of both currency and commodity costs in that particular category. If we look at market shares. These slides, I think, reflect some of the challenges of managing for the long term, where we chose to give up some share in favor of margin and lifted selling prices, not always followed by competitors. You can see, I guess, some growth in the Trinco position, which is a more affordable price point. Market certainly was volatile through this financial year. And you can see the impact of, I guess, some of the basket of our main commodities, palm oil and casein, all of those and glucose substantially into both creamer and mixed ins and coffee. And then, of course, the rooibos reduction, which is largely driven by the rooibos raw material price coming off cyclical highs. Snackworks. Again, a good performance from Snackworks, notwithstanding, as Owen said, the, I guess, strength of demand in H2, particularly the fourth quarter. Biscuit demand has been reasonable. And you can see that in the context of, I guess, the 3-year numbers, which we'll come to. Again, currency and some commodity pressures, particularly in soft commodities, necessitated a reasonable increase in selling prices. Factory performances were sound. And we did get some mix change in -- I guess, in line with the macro circumstances pushing people to some of our lower price points, which did affect some of the margins available to us. Good control of costs there, very much typical of the business. If I go to snacks as well, similarly, we never annualized the very high levels of demand in H2 of F '20. We did have to put our prices here. And generally, a good performance. And again, nothing specific that's different to the biscuit business in terms of cost management. This is, I guess, a good slide that highlights the very substantial difference between H1 and H2 for biscuits. As Owen said, we had a pretty strong first half where we annualized against the prior year. But in H2, we simply never got close to the volumes that we had seen, that spike in volumes, I guess, in that quarter. But nonetheless, a solid profit growth, I guess, in the quarters where we could achieve it. And if you go back to F '19, you can see that if you, I guess, take some of the spike of demand out of the second half of F '20, the F '21 second half actually doesn't look bad against the prior year for the F '19 year. This slide reflects some of the revenue and volume, I guess, relationships. We put prices up in the biscuit category of an average of 6.4% to deal with the cost pressures that we've talked about. And similarly, we had similar pressures in the snacks business where volumes were impacted, but selling prices were lifted and gross margins were largely protected. Market shares. Aside from sweet biscuits, a reasonable performance from the savory portfolio and from the Willards portfolio, and obviously, a small decline in the sweet biscuit portfolio. But we think a sensible, balanced performance in a volatile environment where it's really important that we defend our long-term GPs. Cost of raw materials. The price increase is certainly driven by the combination of a weaker rand and certainly a much higher basket of soft commodity pricing globally, and that pressure persists. Talking to I&J. I think it's a much better performance. I think Jonty and his team worked very hard on a number of important aspects. We had a very disrupted prior year with respect to COVID. We managed to get good revenue growth with better fishing and better exchange rates. So those translate obviously into the revenue line for the exported basket. COVID-19 was very disruptive to I&J, both to the fishing and processing parts of the business and especially so for abalone, where our major markets were closed off to us in, I guess, over an 18-month period. Certainly, an improvement in H2 of F '21, which was pleasing. We've seen ongoing price improvements and more access to the main markets of Hong Kong and China. We chose to do a meaningful restructuring at danger point that came through in Owen's slide in his section. We'll see those benefits certainly flowing in F '22. From an operating profit point of view, we like to give you -- I guess, it's a complex business, I&J, there are a lots of moving parts with both ForEx and fuel catch rates affecting performance. Certainly, the weaker rand, slightly lower fuel costs, all provided momentum. Certainly, as Owen said, though, the fleet is old or getting older, and that certainly continues to put pressure on our maintenance bill. The profit history. We no longer, in this year, had any benefit from Simplot. It wasn't meaningful in the prior year, however. A strong fishing recovery in F '21 versus F '20, I guess, the gearbox effect of no profitability from abalone. Certainly, although it improved in the second half of F '21, it's certainly a feature that we hope to bring back to the income statement in F '22 fairly strongly. Fishing performance. Continued improvements in catch rates, which is pleasing, and that bodes well, I think, to both the resource and potentially to an improvement in the TAC in the year ahead. And from a selling and volume and value perspective, the domestic market was pretty competitive unsurprisingly, particularly given the decline in foodservice demand, which is also important. And average selling prices were not moved materially in that context. Certainly, the export revenue benefiting both from volume and from selling prices, and that's a currency effect substantially. Turning to Indigo, a tough year. As Owen alluded, the business is being affected substantially by both COVID and macro continue to be our fashion brand portfolio. Some of it's to do with the changing demand because of people in lockdowns. And there's no doubt that these businesses need an improved macro environment and some normalization of people's daily lives for us to get to the levels of performance we had in F '19. We are seeing some improvement. And it was pleasing to see the business make some progress because of that. Of course, the beauty and color portfolio remain the most constrained, although there was some improvement in H2, which is pleasing. This business, because of a weaker rand, has had to lift selling prices in some of its categories. I think excellent cost control. And one feature in this business was in the prior year, we had a very substantial basket of money is invested in launching innovations and newness that wasn't annualized in this year. So that's provided some relief to the income statement. If we break out the same slide that we've looked at for each business unit, you can see H1, H2. The impact is a slow recovery for both of those. But as Owen has already said, we're substantially behind where we were in F '19. And that's largely a function of the impact on our beauty portfolio in Indigo. The volume/value equation is largely driven by volumes in the color portfolio and to some extent, in female body sprays, that's a category that's also being affected seemingly by lifestyle choices in the marketplace and also some quite aggressive competitive pricing in that portfolio. But selling prices were lifted fairly strongly in order to deal with the cost pressures that we've seen. You can see the impact in the female body spray category, where we chose to not follow some of the aggressive pricing, but the male portfolio performed reasonably effectively. And we think that there's some impact from, I guess, behavior post COVID, which is also driving the utilization of female body sprays in some instances. Turning to footwear and the apparel portfolio. Just in the similar sort of vein as the Indigo business. A tough macro environment impacted also by COVID, which, I guess, has impacted how people have shopped, the partial closures of stores in the prior period of the first part of this financial year. Gross margin pressures as well, which required selling price increases. But we worked extremely hard to manage the store base, closed underperforming stores, lower the operating costs of each of the stores, negotiate as sensibly as we could with landlords to improve our, I guess, rental costs. And we completed a full integration of the Green Cross business into the Spitz business for the year. And this slide again demonstrates, I guess, the challenges in this portfolio under COVID circumstances, also, I think, made tougher by macro circumstances as well for many of our consumers who have been affected by COVID, particularly with respect to employment. I think it's worth looking at each of the subsidiary pieces of this portfolio, Spitz and Kurt Geiger actually recovering reasonably well and improving the operating profit margin in F '21, I think, which bodes well for the year ahead. Green Cross, the integration took place substantially through the first half of the financial year. We're seeing some of those benefits flow through. Not many of them came through in F '21, but trading performance is improving. And then gained a very decent recovery, obviously, off the very impacted prior year base. Not much in the way of volume, as Owen alluded, but we've lifted selling prices, which was important given the exchange rate impact on our imported product. And then, of course, in Green Cross, largely a function of the restructuring that took place during F '21. International. A solid performance from international. We continue to work hard to build our brands in key distributor markets. We had good cost control. And we saw decent demand. We also managed to lift selling prices. And I think we managed to get to, I think, the highest level in terms of contribution of revenue to the FMCG portfolio of 12.9% of revenue. And then, of course, an improvement in operating profitability and margin, which was pleasing. We're going to talk now about prospects for F '22. I think everybody appreciates that we are in a very tough macro circumstance. We still are operating under COVID restrictions. So we are going to work hard to target growth in our core grocery brands off a normalized base with F '21 being more normalized than F '20. We don't think there's going to be a huge impact, at least, on our business as a consequence of the civil unrest in July. We are seeing some recovery in sales in the first quarter, which is pleasing. Hopefully, we can sustain that. We will need price increases in all categories, except for rooibos, which, I guess, with the reduction in the raw material cost will give us the opportunity to pass some of that back to consumers, which we're doing, in order to find the best volume/value balance in rooibos, in particular. But managing volume and value will be as important in this year as it was in the prior year. Our focus will always be to protect our long-term profitability, and we hope, obviously, to be able to do that effectively, again. It will be helpful if we start seeing a maturing of the lockdown restrictions. There's some early talk of that at the moment, and that will certainly give Ciro the opportunity to gain some volume momentum in F '22. Of course, we are in an environment where competitors are also looking for volume growth or market share, and we anticipate to have to manage our own portfolio in the face of that. Hopefully, it will be more settled than it has been in the last 2 years. There's still some opportunity for us to focus on cost savings and structure. It gets ever harder, but there is always an opportunity to try and find a more effective way of managing our business, and we keep looking for every opportunity because the compounding effect of that is substantial over the time series. We think our brands still remain useful and relevant in the export markets that we're focusing. So we'll hopefully sustain reasonable growth in international. And we do have, as Owen showed you, a number of projects, all of which are focusing on either innovation or capacity or efficiency or hopefully a combination of all 3 of those. And there is a good project that we just approved in creamer to give us more efficiency and the ability to extract more capacity out of our infrastructure. And we're mostly protecting now all of our sites from any power disruption. So certainly, that's not a major risk for us in F '22. Looking at Indigo, obviously, we've come off a low base. I mean we'd like to see some of the innovation and the product launches that we've invested in, in the last 2 years, delivering some value. We've done some strong innovation in the core body spray business. We're hoping for some improved pricing. There's early indications that the price dynamics in the category are improving. Naturally, a big challenge will be to recover some of the volumes that we've lost in the beauty portfolio. And that, I guess, will depend on the degree to which life returns to normal in the year ahead and the degree to which we can expect any further lockdown restrictions. We continue to look at the structure of Indigo. Although we've made some progress in the last few years, we still think there's some opportunity to reduce the operating cost base of that business. In the current year, the Coty license at the end of the year comes up for a review and renewal and that will, I guess, be something that we'll be tackling in the early part of the second half of F '22. I&J, as always, fishing performance looms large. Although as you've seen from the slide previously, the fishing performance has continued to be reasonable. The size mix has been reasonable. Vessel availability is important under the circumstance, and there's a reasonable amount of CapEx invested in F '22 to sustain this fleet. The current exchange rates, I think, are reasonable, including the hedges, to support profitability. We hope that the local demand and prices remain stable. Cost management remains a priority in this business. We don't think the unresolved fishing rights will impact H1, but certainly, it's not clear yet as to whether DAFF makes good its commitment to settle fishing rights in December, but that would certainly not affect H1. Abalone. We are optimistic from our current trading environment and the work that we've done. We will see a return to profitability. The restrictions in Hong Kong are slowly easing. We've got improving selling prices, and we've got a fairly strong, I guess, and determined view of what we can achieve with respect to pricing in the year ahead, and that certainly will benefit. And then, of course, we have the added benefit of the restructuring savings that will come through. Footwear and apparel. We certainly know that the macro environment is unlikely to get any easier. This portfolio, obviously, has a very biased H1, H2. Very important for us is the opportunity in December. We've put a lot of hard work into our product into supporting a good December. We have the appropriate promotional activity to support it. We will have finished the Green Cross store footprint. We think certainly by -- towards the end of H1, we are continuing to look for rental reductions on renewals wherever practical and possible. We will see the annualizing benefit of the F '21 restructuring activity coming through in the year. We're going to be thoughtful about any CapEx until such time as we get a clearer view of what the horizon looks like for COVID. And that means that we won't be overinvesting in CapEx. We're seeing good progress out of our weekend range and the innovation coming through, and hopefully, that drives demand in December. From an overall group point of view, the business is in very good shape. My colleagues have worked extremely hard over the last 18 months to simplify our business, to reduce the cost base. We still think there are some clever things that we can continue to do and will do, depending, I guess, on what level of macro environment we see developing. Margin management is essential in this environment. It's so important that notwithstanding the demand pressures that we sustain and protect our GPs, our brands are in good shape. We've done some very good work in most of the portfolio over the last 18 months to improve product provenance, packaging. We're working hard at our procurement costs and all of those benefits and savings, I think, support a reasonable opportunity for F '22. Of course, the most important thing is to manage this portfolio to its long-term potential. We don't want to make any decisions with respect to product provenance or pricing that is deleterious to the gross margins that are important, unique and drive our strong cash flows. We are targeting real earnings growth, notwithstanding the constrained environment. I think we've got enough opportunity to do that across the portfolio. We expect to maintain our dividend yield. We just touched on CapEx. We've got some interesting and effective projects that we'll continue to review, aside from the ones that we've talked about superficially today. Now we continue to work hard at category leadership in our regional markets. I think that's important because it gives us an opportunity to get growth rates that are slightly ahead of the growth rates we can expect domestically. And certainly, in this environment, there's certainly more opportunity to acquire trademarks and businesses, and we continue to look for those. So thank you very much for your time and very happy to take questions from all of you.

The first question is from Muneer Ahmed of Prescient. He says well done on a great set of results. The strategy to protect GP margin is clearly working for now. But at what point do the volume declines become concerning?

Do you want me to answer that? You're going to have -- no, I don't need the mic. Sorry. Thank you. I guess, so much depends on what the macro environment looks like. I don't think in the end, people appreciate that in our basket, we have in each of our categories, different price points, and that allows us to flex our basket to support lower price points where appropriate and to provide opportunities for consumers to participate. I think it's difficult to answer in summary. It's so specific to each of the categories, and each of them have different competitive dynamics. We're comfortable for F '22 that we can do a good job in F '22. It would be good to see some of the trajectory of the macro environment. But long term, it's essential that we take a medium-term view of pricing and volume. So we think our portfolio is up to defending its position because we have multiple price points in almost every one of our categories. And that's an important component part of how we defend volume and value in the business.

Thank you, Simon. We have a similar question from Tinashe Kambadza of Afrifocus Securities. He has asked about, in terms of price increases in all the categories, can you quantify how you anticipate those moving across categories? And at what point does this start to have a negative impact on demand on categories? Which categories are at a higher risk of this?

Look, we have competitors in all of our categories. So I think the generic point is that all of our competitors have the same cost pressures. They buy the same basket of soft commodities and they often have to buy those through the gearbox of the exchange rate. So we have historically managed our cost base with respect to both raw wrap by hedging, sometimes physical positions and hedging consistently the exchange rate. When I look forward, I'm reasonably satisfied that we can achieve price increases across the basket necessary to ameliorate some of those cost pressures. The degree to which any category might be affected will depend on what our competitors' behavior will be in the short term. And you do sometimes see periods of aberrant behavior, which means that we may lose volumes. But in the end, we've got a pretty defensive portfolio in AVI. These are staple categories that people tend to continue putting into their shopping basket. And we think that in the current circumstances with the hedges that we have, we are in reasonable shape to be able to do that. I mean, I guess, so much in substance eventually depends on South Africa's macro circumstances. And if the economy continues to deteriorate, well, I guess, it's an open-ended question as to what one will need to do to defend one's margins across a pretty staple basket of categories, but that would be then, I think, largely true for anybody in FMCG. It's a permissive problem. But I think we run our business carefully and thoughtfully. We put a lot of effort and energy into product quality and product provenance. And as I've said already, we have multiple price points in all of our categories, which allows us, I guess, some level of flexibility to take the best mix of volume and value that we can regardless of the inflationary pressures that are necessary from a pricing point of view.

Thank you, Simon. The next question comes from Muneer Ahmed of Prescient again. The H1, H2 abalone breaks down talks to circa ZAR 20 million EBIT performance. Do you see that as a sustainable number with the current market conditions in the east?

I think we'd hope to do better than that. I mean certainly, that's what we budgeted to do. And I guess, in the absence of anything that we can't anticipate, that's what we would be expecting to improve meaningfully from.

Thank you, Simon. There are a couple of questions related to the fishing rights application process. The first one is from Shane Watkins of All Weather Capital. What are the risks to FRAP not being concluded in 2021? And then the next one is from [indiscernible]. Can you speak about the next steps regarding the FRAP 2021 and your thoughts on the manner in which DAFF are conducting the process? Are the group waiting uncertainty of quotas before making meaningful investment in the fleet?

Well, we don't control the FRAP process. DAFF does. Their current commitment is to conclude it in December. There's an enormous amount of work that they would need to do, some of which we don't yet have access to. We still do not have a policy framework, and we're in September. So it's certainly going to be a very busy period if we are to get to the December outcome. I don't think there will be any disruption should it not be concluded. I think everybody, including DAFF, appreciates that continuity in the industry is important. I guess the biggest challenge is the one question regarding CapEx. So this is a heavy asset environment and certainty is very important for us and deploying capital will certainly depend on certainty. And so in the current circumstances, delays are obviously not helpful. There's certainly no critical or fatal problem with the fleet. It's just in some parts a little older than we would like it to be, and we're having to invest money to sustain its effectiveness. But we do not control, obviously, that process, but we don't think if it's not achieved in December that it will create unusual disruption. It will just largely, I guess, underpin the uncertainty that I've just spoken of.

Thank you, Simon. There is another related question from [indiscernible] of Citadel. It's a great set of results under the circumstances. To what extent are you not investing in your aging fleet due to regulatory uncertainties? Are there any benefits that could be had from a refreshed fleet if current quota levels are maintained after the FRAP decision?

Well, I guess we'll look at it as we always do with respect to CapEx. Vessel management strategies are different under different circumstances. Now if one had certainty, one might, then when you look at investing in new equipment or new fleet or parts of your fleet, it will be determined by certainty of what you perceive the return will be. At the moment, we're perfectly capable of sustaining the current fleet, obviously, with a higher level of maintenance. And we would, I guess, assess once we have certainty what the DCF valuations would look like if we were to have a fleet that might have lower levels of maintenance versus the current maintenance cost. And that's something we do all the time. But certainly, as I've already said, the uncertainty isn't helpful because it doesn't allow us to, I guess, choose between 2 strategies.

Thank you, Simon. We have 2 questions related to Green Cross, Muneer Ahmed of Prescient. Is the complete closure of GX becoming a more serious consideration? Or are you still hopeful of a good recovery within the rebranding and strategy change with GX&Co? And then the second one comes from [ Chris Gilmour ] of [indiscernible] Research. Similar question, but the difference is what point do you decide to call it a day?

Well, we're making good progress. I mean I think F '21 is a dreadful year to assess the continuity opportunity. If I look at current trading, it's improving very nicely off a much smaller footprint. And we've gone through a COVID period that kept the core customer for Green Cross and GX&Co at home and certainly not at work, not going out. So we've done a lot. We've done a lot in the product mix. We've rightsized the store base. I think we certainly need F '22 to make a full assessment of the opportunity. But as things stand today, we're making enough progress to feel more optimistic.

Thank you, Simon. We have a second question from [indiscernible] of Citadel. What sort of demand dynamics can we expect in the Spitz business considering the macro headwinds, the younger asset consumer is facing?

I'm just staring into my crystal ball. We're in a tough macro environment. I guess the best proxy for what you expect as your current trading. Of course, current trading is partially impacted by at least in the Spitz business, some of the store closures that were forced upon us by the looting that took place in July and then some refurbishments. But if I break it out on a like-for-like basis, I mean, we see reasonable demand. We're seeing reasonable recoveries in Kurt Geiger. We're seeing reasonable demand, as I've just said, in the Green Cross portfolio. And certainly, in unaffected parts of SA, we're seeing reasonable demand in Spitz. Now reasonable demand, I think, needs to be seen in the context of probably F '21. It's not as good as it was in F '19. But we are making progress. So we have some reason at this point to be optimistic. What's critical, of course, is December. And it's just so difficult to call at this stage because we're still living with the uncertainty of COVID. What we're not living with is the uncertainty about the macro environment, although there are 1 or 2 bits of data showing up that give you some sense that there might be some progress. So at this stage, it's hard to call, but we've got no reason to be negative.

Thank you, Simon. The next question is from Charles Boles of Titanium Capital. There seems to be a never-ending cycle of specials in the premium instant coffee market. Do you think the cycle in coffee and repeated in some other categories will ultimately destroy damaged product price points?

I think the instant coffee market globally and certainly in South Africa is being affected by the ongoing battle between the newly IPO JDE and Nestlé and certainly mixed instant coffee in our business is being affected by the very low prices of 100% instant coffee. Arabica prices are doubled what they were a year ago. And one has to believe that in the end, those businesses will need to lift selling prices in order to deal with cost pressure and profitability. And so we anticipate in F'22 an improvement in coffee selling prices in instant coffee, and that will help our portfolio. There's no ways that it can be sustained at the current level. I can't really speak for obviously a broader portfolio. I think what we demonstrate always is the importance of having sensible pricing and price increases to deal with cost pressures. And in general, we compete in markets that largely have to manage with those cost sets and therefore, pricing is unlikely to tumble for specific reasons. I think the mixed instant and instant coffee business as a category driver and dynamic is very specific to circumstances over the last 2 or 3 years, and that's to do with 2 large players, I guess, fighting for share.

Thank you, Simon. We have a couple of questions related to acquisitions. The first one, Shane Watkins from All Weather Capital. Do you see any acquisition opportunities? Or would you rather buy back your own shares? The next one is from Tinashe Kambadza of Afrifocus Securities. Given the constrained macro environment, which is making it difficult to achieve growth across the diverse portfolio, if there is no improvement, it seems like acquisitions may be imperative for some growth. Therefore, what are some of the opportunities being potentially considered?

Look, I can't obviously answer the acquisition question specifically. Certainly, we're in an environment where there's more for sale than there has been, and there are more opportunities potentially for acquisitions. The important thing to reflect on is what are you acquiring? And does it give you the opportunity to extract value for shareholders versus the risks? Are the brands or the brand portfolio is strong enough to defend against competitors? So yes, we are, and we'll continue to look. I don't think an acquisition can be set against share buyback though. I mean I think they're completely different notions. Whether you do a share buyback or pay a special dividend is probably a more relevant question, but acquisition strategies, I think, are vital and important, but -- and it's not something that we wouldn't like to do. But of course, one always has to look at the opportunity holistically and how one creates value versus those risks. And it will, I guess, depend on what is available and what the price expectations are over the next year.

Thank you, Simon. Another question related to M&A from Chris Gilmour of [indiscernible] Research. Has AVI been approached by any offshore investment companies seeking to buy a quality well-managed brands company at a cheap price?

Well, they've always shown interest is all I can say.

Thank you. We have a question from [indiscernible] of [ Moneywave ]. Do you think the HEPS indicator is a true reflection of the group's performance? If not which indicator does?

I'll let Owen answer that.

So I think for AVI, if you look at our proposition, I think the headline earnings and growth is obviously a key driver of valuation. In our case, cash generation and our dividend yield, combined with special dividends over time has come to be a big part of our value underpin. So yes, we'll take that return on capital employed is how we manage the business internally. It's a very strong driver and linked to incentives as well. So yes -- to confirm, yes, HEPS is very important, but in conjunction with various other measures.

Thank you, Owen. We have 2 further questions related to capital investment. The first one from Asanda Notshe of Mazi Asset Management. What are the key criteria you consider when evaluating new prospective of brand opportunities? And the second one is from Zaid Paruk of Aeon Investment Management. In the absence of significant CapEx requirements or acquisition opportunities, how are you thinking about capital management, dividends versus share buybacks or both?

Well, I'll answer the first one, and then I'll let Owen answer the second one. Brands are the lifeblood of AVI, and they obviously loom large if we ever look at making acquisitions because the fundamental requirement is that you have to compete and you have to be relevant and you need brand utility and believability in order to, I guess, sustain, defend your proposition to invest in your proposition, which means you need decent gross margins and gross margins are very important categories that have -- or brands that support higher levels of gross margin are fundamentally necessary. It's extremely difficult to give consumers a good proposition if you don't have the ability to defend your brand position and have a reasonable level of gross margin. It's hard to reinvest in product provenance. It's hard to invest in innovation unless you have that. So when we look at any category, we ask ourselves whether there's brand utility and brand value in the category? And then, of course, we also ask ourselves who -- what are the competing brands and what are their philosophies? People tend to forget that AVI largely competes against multinationals in most of our FMCG categories. And those businesses are generally run by managers who have similar philosophies about long-term brand equity, although they had slightly different philosophies around market share, I guess, which is notably different from how we see the world sometimes. But gross margins and the ability to lift selling price pressures in an inflationary environment are absolutely essential when assessing the value of a brand.

So just on the dividend versus share buyback question. That's obviously something we consider whenever we want to put money back to shareholders. We've never been mechanical in terms of share buybacks. We always assess what we think is the best way of returning an amount of cash to shareholders. So you'll see in our past, we have on several occasions bought back shares in combination with a special dividend, and this last special dividend in April, notwithstanding low interest rates and the fact that it would have been slightly earnings accretive, I think in terms of the headline earnings per share, we did think that was more useful for shareholders to receive the cash and be able to deploy that on their side and that would give them a better benefit than the reduction in shares, the equivalent reduction in shares if we had done a share buyback.

Thank you, Owen. We have another question related to acquisitions. Sharat Dua from Fiera Capital. Can you give any color around acquisitions that you have considered in the past year? And what are the main reasons why you have not proceeded with any?

I can't because I'm bound by confidentialities, if there were things we would have spoken about. But we are agnostic. I mean for us, we believe that we manage brands at an AVI level, and we deploy capital behind those brands. So we're open to exploring other categories that might not be germane to the basket that we manage today. And that's why we would have a wider remit of what we would look at then people might naturally anticipate, but that's all I can actually offer unfortunately.

Thank you, Simon. I think we have 1 more -- time for 1 more question. It's Wim Murray from Foord Asset Management. Please comment on the timing and potential impact from the current stronger rand going into FY '22 and beyond?

Well, rand has gone from ZAR 1,340-odd to today's exchange rate to much weaker and then back obviously to the current levels. It's very volatile is, I think, what I would say. I mean, I'm not sure that you can easily peg what the exchange rate will be. We manage that in AVI in any financial year is to, I guess, have a strong, stable philosophy around revolving hedges in both commodities and in currencies. And that's essentially what we have. In our presentation, there is a slide that sets out what some of those hedges look like. Obviously, some businesses are more affected by a weaker currency and some obviously benefit from a weaker currency like I&J. So I think there's very little that's going to change that we can anticipate. We simply cannot predict what the currency will be. What we've learned to do over a long time is try and manage the consequences of the currency through hedging and through pricing, where appropriate, applicable and necessary, and that's what we anticipate doing in the year ahead.

Thank you, Simon. I think we'll handle the rest of the questions offline as we're out of time.

Okay. We can take 1 or 2 more. I think we've a little bit of time.

All right. The next question comes from Vikhyat Sharma of RMB Morgan Stanley. COVID grant removal did have some impact on food spends from April onwards. The COVID grant is back now from August. Are you seeing some positive impact of COVID grant being reintroduced?

Too early to say, but the last week has been slightly stronger also for wholesalers. I think some of the impact of July made some of our major customers more conservative with respect to stockholding. So it's difficult to, I guess, draw a straight conclusion between the question and current demand. So I think it's probably potentially a combination of both, but there has been a small improvement in the last 2 weeks.

Thank you. Question from James [indiscernible] of Bank of America. What is the outlook for raw material input costs and gross margins?

Well, in the basket of soft commodities in some instances are still high, relatively speaking. Having said that, we've got reasonable hedges in a number of them and also reasonable currency hedges. I guess, the question we are asking ourselves is net of those hedge positions, to what extent of speculative demand in the financial system drive some of the raw material cost pressures that we've seen? And if those ameliorates, we might see some of those cost pressures come back. So at this stage, we're reasonably, I guess, neutral on what we think will be the impact on GPs. Having said that, we know that we're going to need some price increases, and we, I guess, flagged that in the presentation.

Thank you, Simon. We have a question from David Lerche of Sanlam Private Wealth. Please give some detail about your preferred debt level within the group.

Owen, do you want to answer that?

Yes. So our targeted gearing is defined on net debt to capital employed, and our range is between 25% and 30% is what we would target lifting net debt into when we do additional returns of capital. That's not a very rigid set of limits, if you want. And speaking to other opportunities, pretty sure the Board would support different levels of gearing if it were appropriate. But when -- certainly, when we think of putting money back to shareholders through special dividends or buybacks, we would typically lift it into that range and then it would come down from that over the next few years.

The next question comes from [indiscernible]. How significant is the Coty review and renewal for Indigo?

Well, it affects the beauty portfolio which we bring our portfolio and their portfolio together, which gives us, I guess, scale and presence across the retail system. So from that perspective, it's important, it's not overwhelmingly financially significant and less so, obviously, if there's a sustained and slow recovery of the beauty portfolio because of, I guess, COVID macro outcomes. So it's something that has been renewed for a long time on a continuous basis, and we'll go into another round of those renewals. So I can't really add more flavor than that.

Thank you, Simon. We have another question from James [indiscernible] of Bank of America. What is the outlook for volume growth in Entyce and Snackworks?

The outlook, I guess, depends on the horizon. We are hoping to get some volume growth off the F '21 base in the year ahead, that will depend to some extent on macro circumstances and will depend on how competitors in each of those categories behave. But we think with the work we've done and the opportunities we have, there is enough of the categories an opportunity for volume growth, not significant because of macro circumstances, but I guess there is some opportunity, and we've certainly targeted to try and achieve some volume growth in the year ahead.

Thank you. We have a couple of questions related to I&J. Are you -- can we continue the questions?

Yes. I'm happy to go until quarter past.

Okay. The first one from Johannes [indiscernible] of ClucasGray. Can you talk in more detail to the abalone business' operations currently compared to the pre-pandemic i.e., production capability, sales volume, status of export markets, pricing, et cetera? There's another one related to I&J as well from James [indiscernible] of Bank of America. How much vessel maintenance is required? And what does this mean for revenue and margins? Can I tell you the next one?

No. Let me just take those 2. I mean the first question is how does the abalone business operate and function? I mean it's a complex business. And there's no -- I could never do justice to the question in a short answer. But I guess from a capability point of view, the business isn't exactly the same place as it was prior to COVID. And it has the same ability, the same operational capabilities. I mean 2 things have improved. One is we've being able to, through the COVID period, look at the operating model and try and structure for a more efficient business, which I think gives us a lower cost base and therefore, more economic leverage if we can recover the market to COVID -- pre-COVID-19. And then we've integrated, obviously, from 2 sites to 1 site, and that gives us an added benefit in terms of capabilities. So the business is identical, just more efficient and more able to, I guess, execute and sell into the market. The other thing that has improved because of the decline in the rate of sales through F '21 was the seismics because these are animals that obviously grow slowly, but have grown into a better size class, and that gives us the opportunity to use a different format strategy to sell at better prices into its main market of Hong Kong. So I think in aggregate, the abalone business is in better shape than it was in F '19. It's opportunity to extract improved profitability, of course, is a function of the rate of demand and the rate of recovery in Hong Kong and China, net of lockdown restrictions. So we're fairly optimistic.

Thank you, Simon. The second part of the question was how much vessel maintenance is required and what does this mean for revenue and margins? And then there's a related question from [ Steven Horwitz of 361 ]. Should you retain your quota as part of FRAP, and there is greater certainty going forward, how much CapEx needs to be spent on the aging fleet?

Well, again, as I've said, there's no catastrophe and there should be no sense that in the end, we don't have different opportunities, and we can choose to spend a little more on maintenance and invest a little less in CapEx. The plans that we have for the budget F '22 and I&J are comprehensive. Owen's alluded to that and given you some of that detail in the capital slide. So it's unlikely to be more than that and unlikely to be more than budgeted, net of, I guess, an unplanned maintenance event. So nothing out of the normal. Obviously, at slightly higher levels than historically because of the age of the fleet. With respect to -- I answered the question earlier, with respect to new capacity with certainty. One's got the ability to look at both strategies, more CapEx-intensive strategy versus a more maintenance-intensive strategy, and of course, certainty will allow us to do that, and we will as soon as we have certainty.

Thank you, Simon. We have 2 more questions. Talya Ginsberg of Umthombo Wealth. How is Carvela's new type of weekend shoes range supposed to catch up to the market or catch on to the market? Would people not just go to Cape Union Mart for hiking boots?

Well, some people will definitely go for hiking boots. No, I mean, we're making good progress. We've got good demand. We've got a lot of innovation. We've got a lot of marketing supporting. That innovation, it just depends on whether you're a weekend consumer or not. I can invite you all to go to the new Sandton store that opened last week. And I think you'll understand it better. We're excited by the prospects for Carvela weekend, and we think we are getting noticed and making progress, and we've got proper marketing campaigns to support it, which will play out over the next couple of months.

Thank you. The last question is Sharat Dua of Fiera Capital. Is Green Cross now expected to be profitable, assuming normal shopping patterns?

We forecast to make a profit in F '22, small.

Thank you, Simon. There are no further questions.

Thank you very much, everybody, and have a good day. Thank you for attending.