AVI Limited (AVI) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to AVI's interim results to the 31st of December. I'm sorry that we're not still seeing you in person. We're very committed to doing that in September so that we can give you a proper goody bag, not a non-fungible token goody bag. I'm joined by Justin O'Meara, AVI's new CFO. And I guess we've got a pretty typical presentation, key features and results history, which I'll take you through. Justin will take you through the group financial results, and then we will talk about the business units individually and some prospects. I think given the volatility we're seeing today and, I guess, the fact that the next 6 months looks particularly interesting, we'll probably go through the presentation a little faster than usual so that there's more time for questions at the end. I think fundamentally, I think it was a reasonable result. It's easy to forget the significance of both COVID and the July unrest and the impact that it had across our business. We've obviously covered off some of that detail in the bullet points, so I'm not going to repeat them. I think the most challenging thing was obviously constrained revenue environment. Some of it, obviously, a function of the things that we faced in the semester and, of course, the ongoing constraints in the macro environment. We did have, I guess, a fair share of inflationary pressure, which forced us to lift selling prices to protect our gross margins, something that we've had to continue doing over the last couple of years. Ameliorating that was ongoing efforts to, I guess, keep costs as low as we could both at an administrative level and at a selling level, and that gave us some operating leverage despite the challenging environment. We did have some once-off costs related to the Mondelez interest in acquiring Snackworks. And of course, we were pleased to see some recovery in some of the COVID-affected businesses, most substantially I&J in particular, and then, of course, a couple of other headline features which you can read yourself. That gave us a headline earning increase of 6.5 -- 6.6%, strong cash generation which was pleasing and the interim dividend pretty much in line with the headline earnings performance. That chart shows you at least some recovery of the trend of the performance of this business, which has been, I guess, affected by both macro and COVID and, to some extent, the July issue in the last semester. I think you can see the constraint sitting in the Ciro business of Entyce, obviously, the footwear and apparel business; to some extent, in I&J with abalone, although there is some recovery; and then, of course, the retail businesses in general, although we were pleased by the December performance. Capital employed, a nice trend recovering, a slightly lower average capital deployed for the semester, but a pleasing recovery in the return on capital employed. And we maintain, I think, a strong return on capital, which is an important metric for AVI when we run and deploy capital and consider deploying capital into this risky environment. Cash generation was strong. Justin will give you a little bit more detail, which was also pleasing. Cash return to EBITDA also remains strong. And of course, in the last year, we had a special dividend. And so if you take the share price to the end of June, the yield, obviously, of the normal dividend and the total dividend, almost 10%, which I think speaks to the strong cash capability of our cash flows in general in AVI. And that's the return profile. Obviously, the interim dividend, pretty much in line with headline earnings, and we'll see how the second semester develops. I'm going to give you across to Justin, who will take you through the group financial results in a little more detail.

Thank you, Simon. I'll take you through a summary of the group results. I'm going to do this at a relatively high level. The detail is covered in the slides that follow in the presentation. Revenue at the group level increased 2.3% with the benefit of higher selling prices across most categories, offset by the impact of lower volumes. The increase in gross profit was largely in line with revenue growth with gross profit margins maintained at the group level. Selling and administrative expenses decreased by 2.5%, which largely reflected the strong cost control across the group as well as benefits from the restructuring initiatives undertaken last year. I think included in selling and admin expenses is also the insurance income, the details of which have been included in the information slides at the back of this pack as well as in the SENS announcement. So there's a lot more detail to unpack there. In addition, included in selling and admin costs is ZAR 20 million of additional cost related to Mondelez's interest in acquiring Snackworks. I think if we adjust for the impact of the insurance income as well as Mondelez's costs, selling and admin expenses would have increased by about 0.4%, which kind of highlights the benefits that we've seen through strong cost control across the group. Operating profit increased 6.7% to ZAR 1.5 billion for the semester, and our operating profit margin improved from 19.9% to 20.9%. Net financing costs increased 9.3% for the semester compared to last year. That's primarily a function of higher debt levels across the group, which resulted following our payment of our special dividend in April last year. There were no significant capital items, and our effective tax rate largely remained in line with our normal levels between 28% and 29%. Headline earnings grew 6.8% for the semester with headline earnings per share growing at a slightly lower rate of 6.6%, reflecting the dilutive impact of shares issued in terms of the group's share incentive schemes. The business unit financial results reflect the performance of the food and beverage brands as well as fashion brands segments of the business, both of which have delivered operating profit growth for the semester. Overall, our operating profit margin remains healthy with growth in the food and beverage brands supported by improvements in Snackworks and I&J and offset partly by the decrease in the Entyce business with a reduction in volumes with prior year lockdown demand not repeated in the first quarter and competitive pressure limiting the full recovery of some commodity cost increases. Fashion brands reflects the improvement in our footwear and apparel business with higher selling prices and effective cost management as well as the benefit from the recognition of insurance proceeds reflected in that margin improvement. The movement in revenue is highlighted in this graph and provides some -- which provides some context to the price and volume impact at the top line. Price increases were taken across most categories within our business and through the semester, with our abalone price recovering as a result of improved demand in our Asian markets. There was an exception to that which continues to be our rooibos category where we did see prices decline off the back of better raw material prices. Volumes were down in a number of our businesses, with demand in the beverage and snacks categories not benefiting from the lockdown demand in the first quarter last year and footwear volumes ending lower despite a very strong December festive performance. The gross profit margin was maintained at a group level. I think the graph here highlights some of the key sort of movements and underpins to that performance. The stock write-off costs related to July's unrest negatively impacted the margin performance, with the better pricing in our abalone business supporting an expansion in both I&J as well as the group. From the other, 0.3% down, largely reflects the pressure that we've experienced in some of our categories where competitor activity limited the recovery of input costs, which have escalated quite significantly through the semester. Good cost control of factory and input costs provided a partial offset to this and, therefore, limited the impact that we saw at a group level. From an operating profit perspective, the key drivers of the operating profit are captured in the bullets and will be covered in more detail in the slides. I think what has underpinned our operating profit performance through the semester has been our careful volume/value management, which continues to be an important underpin of our profit achievement, with selling prices taken to protect margins and recover rising input costs throughout the business. As mentioned earlier, a strong cost control and benefits of restructuring initiatives have supported some of the pricing taken through the semester. Cash generated by operations increased 7.1%, with a strong conversion of earnings through the semester. We continue to convert our earnings into cash and the conversion ratio being in excess of 100%. Working capital to revenue reduced from 24% last year to 22.5%. This was primarily a function of reduced inventory in our personal care as well as footwear and apparel businesses which was, in part, a function of timing of receipts, but also better sales performances in both parts of the business, with personal care carrying slightly higher levels in the base due to COVID-related impacts. Capital expenditure was carefully considered through the semester in a constrained environment with some of our projects delayed as a result of the finalization of the FRAP process. Net debt increased from ZAR 1.1 billion to ZAR 1.5 billion during the semester for the reasons I've explained earlier, which is primarily a function of the special dividend that was paid which, in turn, had an impact and increased our net debt to capital employed ratio. This remains in line with our target expectations, and we're quite comfortable with the levels at which we sit at the moment. Return on capital employed improved from 25.8% to 29% for the semester, supported by growth in earnings as well as lower average capital employed. And our normal dividend or interim dividend for the period of ZAR 1.70 per share increased in line with our growth in headline earnings. The investment in our factories continues to be an important function in our business. And ensuring the longevity and drivers of our performance continues to be important, and we will invest across the business. Capital expenditure is forecast to be higher in the second semester of the year, with forecast expenditure forecasted at ZAR 397 million for the 2022 financial year. We do believe this could be lower as we finalize some of our key projects. But at the moment, that is where we are forecasting.

I'm sorry, that slide has not come up. We seem to have a small problem with the presentation. Just see if we can -- the one that Justin has just been talking to, which was the CapEx slide. There it is. Anyway, sorry about that.

All right. Well, I'll hand back to Simon, who will take you through the business unit performance.

Okay. So we're going to kick off with Entyce. I think as Justin said, I mean, a fundamental challenge. Our Entyce business is our tea, coffee and creamer business. I mean, in general, I guess volumes were challenging and some of that a function of the heightened demand that we had during lockdown and have benefited from. And when annualizing against that, the decline in operating profit margin is mostly a function of, I guess, the pressure that I'll talk to in the coffee business. The tea business, we had, I think, the challenge of dealing with the annualization against the higher levels of demand in the prior year and, to some extent, with lower selling prices with respect to rooibos as we changed our selling prices to reflect better raw material costs. Obviously, that affected the revenue and partially affected the profitability. But the tea category remains strong and profitable and, in general, a pleasing performance. I'll come back to the market shares a little later. Coffee is where we've had, I think, a moving feast. We've had an improvement in the foodservice portfolio with Ciro recovering as the post-COVID period developed in a much more hospitality activity, which was pleasing, but we're not yet at least 60-odd percent of the way to recovering from the pre-COVID period. So there's still, I guess, an important amount of work to be done and the economy needs to continue improving for the Ciro recovery to be fulfilled in its totality. We remain challenged by ongoing aggressive discounting in mixed instant coffee. This has been something we've talked about for some time, and that pressure hasn't abated. The thing for us to manage always is the best opportunity for volume and value, and we've continued to take that philosophy with respect to mixed instant coffee and haven't always discounted and, of course, as a result, have lost some of the volumes that we might have had under normal circumstances. Good management. And I don't want to repeat this, as Justin said, we worked very hard over the last 18 to 24 months to ensure that we had effective control over all of the controllable variables in all of the portfolio. And certainly, in the Entyce business, that came through. And one of the major drivers of that, of course, was also restructuring Ciro to deal with what we thought was going to be a longer period of poor performance in the foodservice category. Creamer, we've got very strong demand again from this category, which was pleasing. Of course, one of the challenges has been elevated soft commodity prices, which has been coming, I guess, for some time, which forced us to lift selling prices. It is a category that we can test with a major competitor, and we always try and find the healthiest balance between volume and value. We've done quite a lot of good innovation in pack format and sizes in this category, and I think we're benefiting from some of that and got good support from some of our key trading partners. If we take a look at, I guess, Entyce's portfolio, tea, you can see the decline in volume and value, a function of essentially the lower rooibos selling prices and also declines in black tea volumes. And coffee, particularly the most challenged, where we had to lift selling prices, but also lost volume as a function of the discounting that I've just talked about by competitors. And creamer volume and value both healthy for the semester. If we take a look at market shares, we philosophically obviously keep a strong eye on market shares, although we tend to look at this with respect to finding the best targeted price of volume and value. I think the thing that we need to also emphasize is that in some of these categories, the read that we have here doesn't include some of the major wholesale channels, and where we get very good volume demand is not always reflected in the market share as red, which is one of the things that is a challenge when comparing, I guess, prior periods, is that if you get a strong growth in wholesale, which we certainly had in creamer, it's not going to show up in all of the market share data that you see here today. As Justin said, there's plenty of inflationary pressure across our basket. These are obviously the costs net of hedges. Fortunately, we continue to run sensible hedge programs, which protect partially some of the cost pressures that have come through in the semester, and that remains important. Moving to Snackworks, which is our biscuits and maize and potato snacking business, a very solid performance, mostly driven by the biscuit business with improved mix and volume. In the semester, we had a very strong festive season, which was pleasing, and also saw good demand for some of our lower-priced formats during the semester, which I guess is what you would expect in line with some of the macroeconomic realities that consumers are facing as real incomes tend to decline and have for probably 7 or 8 years now. Gross margin was improved by the top line growth and also materially improved factory efficiencies and also leveraged then by the same efforts that were made in Snackworks with respect to selling and admin expenses. Snack's profitability, unfortunately, seasonally affected by material problems and potato supply, which was similar for our competitors, but they certainly took some of the volume away from the category and affected the profitability for the semester. It's a short-term thing. It's recovering, which is pleasing. But again, important to manage both volume and value both in the potato and biscuit categories, which I think we did a pretty good job of in the semester. We have had, I guess, an April price increase last year, and some of the annualization of that certainly came through in the first semester, which was pleasing to see because we did face fairly extensive cost pressures, which the slide after this will cover. From a value/volume point of view, I think you can see improved volume and obviously the lifting in selling prices, which I've just touched on. And to some extent, the decline in volume is a function of the potato decline, which I've also just touched on, but you can also see the elevated price increases which were put forward to ameliorate some of the cost pressures. Market shares, nothing material here. Slightly lower sweet biscuit market share. But again, it's, I guess, our focus on trying to find in every semester the best relationship between volume and value that we think makes the most sense for our cash flows. And again, I'd emphasize here that these are market shares in formal retail only, and we do have often better growth sometimes in wholesale channels in the semester. You can see the cost pressures coming through, particularly palm oil, material, and that's unfortunately, again, net of hedging. That pressure will continue into the second semester for sure. And we can talk a little about that a little later on. I&J. I&J's performance was really a function of the recovery in abalone, where we saw material improvements in demand and selling prices in the key Asian markets that Justin touched on. We also had the benefits from a material restructuring at the abalone farm that we went into in the early phase of the COVID period where we believed that we needed to deal with the cost pressures that we thought would last for longer. Fishing performance affected by relatively stronger rand. And certainly, I&J is taking the brunt of some of the constraints that are more generally spoken about through the supply chain, both globally and also nationally with respect to ports and shipping constraints. I mean, certainly, the cost of international boxes has become unprecedented over the last 6 months. We've also had higher fuel prices and partially lower catch rates. The domestic business, largely stable. And of course, we're also annualizing now a 5% decline in the TAC in the semester. You can see the waterfall graph, I guess, that breaks out the decline in the profitability as a function of catch rates and costs and offset obviously by ForEx and abalone improvements, which we've talked about. And that's the profit history. The real turnaround in the semester from F '21 is the clear improvement in the abalone profitability. And then, of course, offset partially by the decline in the fishing performance, which was materially lower in F '22 than F '21. Fishing performance, not a material change. But in a fixed cost business, small changes amplify. And so the operating leverage, coupled to the fuel cost and to the shipping delays, have spoken to a poorer performance. The domestic business, we had a lot more whole fish, which we were able to sell domestically. And against that, we had the constraints of the volume sales into international markets with respect to the delays in shipping in the semester. Now just keep in mind that some of those delays will come good in the second semester when we're able to move that product into the markets that we normally serve. Indigo still faces the challenges of COVID, particularly with respect to color and fragrance. Although those revenues have improved, they're still well below pre-COVID levels. And it was pleasing to see some progress. But of course, until such time as life goes back to normal, these 2 important categories, which are around 1/3 of Indigo's business, will remain compromised. It's been, again, a very competitive environment for our core body spray business as well. And this business, in particular, because many of its key ingredients are internationally sourced, was affected by global shipping delays, which in turn affected service levels in some of our categories. We have had to lift selling prices because the cost pressures have risen in this business as well, particularly aluminum, which affects the selling price of our deodorant can. We did, as we have in most of AVI, looked at every opportunity to restructure the businesses in order to protect, obviously, the operating profitability and cash flows during a more constrained period, which partially offset some of those declines. And you can see the impact of volume, and those particularly affect both the color and beauty businesses with some impact in aerosol body sprays as the category became contested more aggressively with everybody looking for volume growth in a very constrained environment. We did lift selling prices to deal with some of the cost pressures, which I've just talked about. And there, again, market shares, largely stable in male, more aggressive in female. But again, this is also a retail read. It doesn't include some of the shares that we have in wholesale channels. Footwear and apparel, as Justin said, it was pleasing to see an improvement, obviously, in the important December period for the Spitz business in particular. It was a very, very disruptive 6 months. However, July was certainly tough for many of us in retail, and this business certainly had its fair share of challenges. It affected stock availability. And it's easy to forget load shedding, which affects shopping centers on a continuous basis. And we had a very bad period of load shedding during the semester on at least 3 occasions. Certainly, the December sales were pleasing when set against the pre-COVID sales. This is the first time we've had some growth in a couple of years, which was pleasing. We did close 5 underperforming stores, materially in the Green Cross portfolio, only 1 in Spitz. In the Spitz business, again, we looked at our cost base, and we worked hard at lowering selling and administrative costs, which I think have come through. Justin has touched on the detail of the insurance proceeds, and those are well set out in the slide, so I'm not going to cover them here. But a good recovery in the operating profit margin and operating profit in the semester. And that breaks out each of the individual businesses. The Green Cross business continues to improve, but we still got a lot of work to do to bring that back to profitability. But we've made good progress despite the constrained environment in reducing the operating loss of a much smaller footprint, of course. That business is now fully integrated into the Spitz business. The real challenge has been, I guess, volume, and Justin mentioned that. Certainly, the July period and the knock-on effect of supply chain challenges did affect the first quarter. We did recover, as Justin said, well in December, but not sufficiently to offset some of those disruptions and, of course, volumes were affected. It's also true that the consumer environment remains challenging. We've seen a real decline in female shoppers in the Spitz business, in particular, we think a function of discretionary income stress in households. And the Green Cross volumes, I guess, are in line with the constraints that come through with the rightsizing of the store print, but some progress made. And Kurt Geiger, I mean one benefit here, of course, is the improvement of the revenue that we're seeing as people return to more normal working lives. Kurt Geiger is strongly underpinned by formalwear, and we're seeing sustained growth as people return to normal office work. AVI International, it wasn't a bad semester. We continue to benefit from growth in main regional markets. And we also saw some recovery in the [ quarter ], which was important because we have a subsidiary that does distribution in Zambia and we benefited from that. But it's pleasing to see that we can sustain, notwithstanding some of the COVID challenges, the basic ratios in this business as a percentage of our total portfolio and sustain the international profit margin, which was also, I think, pleasing, notwithstanding the inflationary pressures that we had in SA and the need to lift selling prices into the region to sustain the profitability that we were able to deliver in the semester. I guess, today, and the market will tell you that the prospects for H2, probably when we put this together a week ago, we certainly thought that we would see a lot of inflationary pressure. As I look today at where soft commodity costs and energy costs are headed, that's not looking any easier. If anything, things look more volatile and more uncertain. We obviously have reasonable hedges for the second semester. So I guess some of the unhedged portion, should current prices prevail, will affect F '23's first semester, and it's very difficult to make a call today where the destination of soft commodity prices are. But certainly, it's going to challenge us to manage both price and volume in a market that is less certain, where the macroeconomic realities remain probably as challenging as they were in the first half. We think Ciro will continue to see some improvement. This is an environment where we may get ongoing aggressive discounting by competitors, which certainly will be a challenge because we, no doubt, will need to lift selling prices, keeping an eye on volume in the semester to deal with the unanticipated cost pressures that are building and have built. We will continue to work wherever practical on cost savings and the structure of the group, not that there's an enormous amount left for us to do, but that's something that continues to get attention and will continue to get attention in the second half. We're working hard at extending our reach in our core portfolio in regional markets, which we think still has opportunity where we can eke out rates of growth that might exceed the rates of growth that we have domestically, and that remains important. And we do have a pipeline of projects which will improve efficiency and capacity where appropriate. And we will continue to innovate to support this constrained demand environment. We've seen some of the benefits of doing that in the first half. Indigo, our challenge will be to see what recovery we get in the beauty business and in the color business. We're obviously targeting revenue and volume growth off the H2 F '21 base, which was very affected by some of the COVID issues, but also underpinned by innovation in the core deodorant category, which we're hoping will get some traction in a slightly improved environment, particularly if there's more normalcy in people's working days. We have taken prices and we need to focus on discounts in a constrained environment. The cost pressures that we see in Indigo -- I mean, in Entyce and Snackworks are similar but different here. Certainly, energy costs and imported cost pressures are going to be an issue for the business in the second half as well. We've got the Coty license agreement up for renewal. Those conversations will start in the second half, and we'll see how we make progress. I&J is obviously going to be materially affected by the fuel price increase that we're seeing, and this will become more exacerbated by the events over the last 6 weeks or so and in the last week, I guess, particularly with the more recent spike in fuel costs to the levels we're seeing today. The degree to which they sustain obviously are hard to call. Our hedges are not significant enough here to ameliorate even in the short term the price pressures that we're seeing today. We have also had another calendar 5% cut in the TAC, which will affect the first semester. And we've also had the long-term fishing rights, which is good to have behind us, where effectively we will lose 4.4% of our quota volume in the calendar year. So all of those things will put some pressure on the operating leverage of the company which needs to be managed. We're seeing ongoing supply chain disruptions. Keep in mind, I&J's core business is exports into European and Australian and American markets. The inefficiency of South Africa's ports and the global supply chain cost pressures are all going to be a challenge in the second half. In general, markets are stable as we speak, both domestically and internationally. We don't think that that's something that will be a challenge. We're certainly going to need price increases certainly into the European markets if the current exchange rate, cross-rate between the dollar and the euro persists because we have quite a lot of dollar costs mostly in energy, but a material portion of I&J's income is in euros. We do have a reasonable currency secured, but certainly not sufficient to offset the unexpected shock in energy costs. We will focus on operating costs as we have. And we certainly will focus and maintain our fleet now much better in the context of obviously the FRAP allocation process. So we now know with more certainty as to what our quota looks like, and that will give us an opportunity to better optimize the fleet and pick how we maintain and manage the fleet's infrastructure. Abalone's result, clearly, we think it will improve. But it will depend, I guess, on the sustainability of the recovery in the key markets that we saw in the first semester. The footwear and apparel business, I mean, this is obviously a business that does depend on the macroeconomic realities. We don't think in the short term, unless there's going to be a substantial shift in employment, that the consumer demand environment will get any easier. So we think the challenges that we saw in H1 will persist. We will need price increases to offset some of the margin pressure. Obviously, a weakening euro will assist us because most of our product in the Spitz business is sourced out of Europe and Italy, in particular. And that's obviously going to be a small benefit for us, obviously, different for I&J. We are seeing a pleasing improvement in demand in lots of the categories within both the Spitz business and in Kurt Geiger and in Gant as people work back in offices and we see some of the COVID restrictions being eased. Kurt Geiger, in particular, which I touched on and certainly in Spitz and Green Cross, the formalwear category are all benefiting from this. We are seeing sustained growth in the Carvela weekend range, which is pleasing, and that's an important driver of demand for the Spitz business in particular. We're targeting an improvement in the Green Cross profitability. And once again, the same that I've already said will be true, we will manage and focus on costs. We limited our capital expenditure for store refurbishments to the bare minimum and where appropriate and necessary. So from an investor proposition point of view, this is a very tough macroeconomic environment. I think everybody knows that. And that means that we need to continue looking at the business model to ensure that it is, I guess, appropriate and structured to deal with the constraints that we're seeing. We are focusing on relevant innovation, and that partially also includes affordability and managing price points, and that continues to get attention. It's really important in a time like this to focus on the basics. Critical that we've spoken about for many years is margin management, procurement cost savings across the entire business. And then also keeping in mind that we produce much of what we sell, process and production efficiency is getting a lot of attention. The most important thing that you do when you have a unique brand portfolio, which AVI is lucky enough to have, is to manage it to its long-term potential. It's times like this where you can make, I think, reckless and permissive decisions where you change ingredients in order to manage costs. We certainly won't be doing that. Our relationship with our consumers is essential, and we must preserve the integrity of our product offering and remain relevant and to sustain our market leadership in the categories where we enjoy market leadership. We are targeting real earnings growth. This is certainly going to be a challenge in, I guess, the current environment where things in the most recent few days have become constrained by the Ukraine crisis. It's difficult to predict whether we will see a contraction in some of the costs that we're seeing in soft commodities. But nonetheless, that's our ambition. As I said earlier, we're reasonably well hedged for the second semester, probably more exposed to the uncertainty of F '23, but it's far too early to call whether we see the same cost pressures in that semester sustained at the levels we're seeing today. We continue to work hard at sustaining a high return on capital employed. We still think that's really important. We know growth is also important, but it's extremely difficult to find growth in the current constrained environment. We will work on ensuring that any capital that we do deploy is effective, will contribute to a return over the medium term. We're looking to use our domestic manufacturing as aggressively as we can to grow export markets where there might be more growth opportunity. And as always, subject to how we can deploy capital, any excess cash, we certainly will return to shareholders as efficiently as we can. Markets regionally remain important, and I've touched on that. And of course, in a volatile environment, we remain interested in making acquisitions if they're available. On a risk-adjusted basis, we think they're in our shareholders' best interest. So thank you very much for listening. A tough semester, and certainly very happy to take questions for those of you who have any.

Thank you, Simon.

We have a couple of questions from Anthony Clark of Small Talk Daily Research. The first one, can I please ask what the ongoing strategy is for the company? The market is aware that Entyce was viewed by some a couple of years ago as well as I&J. Lately, Snackworks was in play but failed. Is the former Anglo-Transvaal Consolidated investments in breakup mode as it feels like it?

Well, I think the reality is, is that our job is to remain shareholder-centric. So we've had long relationships with many parties who've shown an interest in our market-leading brands and their profitability and have always been interested to give that light of day if, on balance, there was an outcome that was in the best interest of our shareholders. And that's not something that's distinct to continuity. It's important always to be willing to have optionality. And I think from an AVI point of view, we've always said that to shareholders, is that AVI has optionality because it's obviously an attractive business as an amalgam. But equally, should someone bring an offer that makes sense, that can be executed and creates value, then it's management's responsibility to take that as seriously as it takes operating the business seriously. So I don't think it means that we have a strategy that's to break up AVI. We have a strategy that is always willing to examine the best outcome for shareholders over the medium term on a risk-adjusted basis.

Thank you, Simon. The second question from Anthony Clark. With FRAP now out of the way, can you give us an opinion of AVI's ongoing interest in fishing and the capital that may need to be spent given the company and sector now has certainty? Is AVI keen to keep investing in I&J? Or could it again be in play?

I think what we need to do is to make sure that the FRAP allocations are formalized and finalized. They're still subject to review and we don't yet know with absolute certainty. I mean in the same way as we look at all of the businesses and when we're deploying capital, we will be making, I guess, a decision based on, a, certainty; and, b, what we perceive the return profile to be against the risks. And at this stage, we're still digesting the data. And I guess perhaps within 3 to 6 months, we might have a better view and a better answer.

Thank you. The next question is from Myuran Rajaratnam from MIBFA. He has asked 2 questions. Can you please provide some color as to how big wheat is in AVI's group total raw material basket? And the second one, there's a good recovery in abalone from ZAR 25 million loss to a ZAR 50 million profit. How much is possible stock profits and how much is based on trading?

Well, wheat is obviously a critical component to the biscuit business, and it probably represents around 25% of the bill of material for, I guess, ingredients. And so obviously, it's significant. And the price of wheat, at least in the futures market, has doubled. We would have hedges at substantially lower prices, but it's very difficult to know whether what we're dealing with in the short term is an aberration and that it will mean revert or not. But obviously, it's a significant ingredient in the biscuit business. I'm not going to give more detail than that at this stage because it's so hard to give a view at current spot prices. With respect to abalone, no, it's materially volume and pricing that improved. There is a small portion, obviously, of biological [ valley ], but that's not significant in the semester.

Thank you. The next question is from Paul Steegers of Bank of America. How important is the Coty license deal to Indigo? If not renewed, what is the impact on sales and profitability?

Well, it's been important, but become less important over time as the relationship was reconstructed, where Coty took over much of the marketing and product development for their own account, where we were doing some contract manufacturing and some distribution. So it's a different relationship today and, I guess, so much depends on what the terms of the renewal look like, but it's not as significant as it was historically. And it's too early for me to comment on what the impact might or might not be given that we haven't even started these discussions.

Thank you. The next question is from Jami Jepthas of Mergence Investment Managers. Excluding the benefit of the insurance proceeds from the footwear and apparels business, can we assume the balance of the operating profit margin expansion is due to the benefits of restructuring? Is this a sustainable level of operating margin going forward outside of any benefit coming from the work you are doing on Green Cross? And what is the time line for getting Green Cross rightsized?

That's a lot of questions. I mean I think, fundamentally, I mean, clearly, there was a small benefit from the insurance monies that were banked in the semester. But you've got to keep in mind the significance of the disruption, both in supply chain and the impact that had on volume. The sustainability of the Spitz profitability is always a function, and they're broken out differently in the slide that we showed you, which are largely a function of the ability for us to sustain both gross margins and rates of sale. And then the economics of the business will have benefited from some of the restructuring. But essentially, the recovery has more to do with the improvement in revenue than the improvement just in costs. And Green Cross, in particular, I mean there's a lot of work to be done to improve retail densities. And it's going to take more than 18 months for us to start seeing any real benefit from the current strategies. But they're quite separate, and I think the slides demonstrate the difference in the profitability because we've shown that as we historically have.

Thank you, Simon. The next question is from Vikhyat Sharma of RMB Morgan Stanley. Cost savings of ZAR 50 million promised for FY '22, how much of it has been delivered? And what is left for the second half? Also, are there any more opportunities to cut costs for FY '23 considering very high margins already?

I don't think we gave a number of ZAR 50 million in terms of cost savings anywhere. So I'm not going to comment.

Thank you. There's another question from Jami Jepthas of Mergence Investment Managers. Are you able to disclose the split of sales through the retail versus wholesale channel in the various businesses?

They're so different and so varied that we can't in aggregate or generally. Some categories are clearly more than others, but it would be a -- take a long time, and I'm not sure we want to do that either.

Thank you. We have a question from Nick Webster of HSBC. A couple of questions. Could you comment a bit more on the capacity additions given the weak macro and how much they will add to the respective divisions? Second question. Please, could you give us a sense of your split between selling -- okay, you've already addressed that. It's also the retail versus wholesale split.

Yes. Remember, CapEx is not just to do with capacity. CapEx is often to do with maintenance and the making good of what we currently have. So we are spending CapEx in the context of what is our best view in each of our categories of forward demand. So we've got some CapEx in creamer because we have sustained high levels of demand, and we'll continue to invest behind that. In other parts of the business, we're sustaining the asset base in the condition that we need to keep it in. So it's a combination of both. In I&J, in particular, some of the CapEx is obviously to sustain the vessels' ability to go out in the very dangerous environment that we catch fish. And we are always going to ensure that those vessels can operate effectively and safely. So it's pretty different across the portfolio. But at this stage, wherever we think we have a meaningful requirement to extend capacity, then we would invest on the assumption that we're making a good return decision.

Thank you, Simon. The next question is from Tinashe Kambadza of Afrifocus Securities. May you please shed more light on the level of price increases being considered within Entyce and Snackworks given the balance required with volume management?

Well, if you can give me what basically the exchange rate and the soft commodity prices are going to be, I'll give them an answer. But at the moment, I mean we would have had a pretty strong view and a developed view, and that would be taking account of our hedges and what is our best judgment of the forward view of some of these commodity costs. But the last week has made even our best assumptions inaccurate, so -- and we don't know how long these current highly elevated spot prices will be sustained for. So at this stage, we're doing the work. I think we understand our models extremely well. And everybody is aware that we need to obviously take a forward view of the inflationary pressures that we see. And once we have more security and more certainty, I guess, we'll be calculating what we think we require. I think what we've said in the presentation is that we know that we've had enough cost pressure in the first semester to lift selling prices. So we've just lifted selling prices in biscuits. We plan to lift selling prices in creamer, and we're talking around 8% to 10%. Another issue that, I guess, we can use is to manage our discount levels, but also then again in the context of what competitors do. And then, as I said right at the beginning of this, what will the final selling prices would be if current commodity prices persist at the levels that we're seeing today. And that's difficult to judge when there's so much uncertainty.

Thank you, Simon. There are no further questions.

Well, thank you very much, everybody. And I hope that your day is not as stressed as some of ours, and we will look forward to seeing you in due course. Thanks very much for your time and attendance.