AVI Limited (AVI) Earnings Call Transcript & Summary

Good afternoon, everybody. It's Simon Crutchley and Justin O’Meara. Welcome to AVI's results presentation for the 6 months to December. And we've got normal format. I'll take you through some of the key features and the results history. Justin will take you through some of the detail around the group financial results. I'll take you through some business unit and performance, then a little about prospects, and then we'll take questions and answers. We'll try and be quick and efficient so that there's time for questions and answers. So from a key features perspective, I think you all are aware that the trading environment for consumer goods businesses has been tough. Many of our customers are being affected by, I guess, a tree out of inflation and rising interest rates, unemployment levels have continued to go sideways and are persist at very high levels. Load shedding has been a very topical issue for many of us operating businesses that use electricity to produce things. And of course, it's affected everybody, both personally directly and indirectly. In our case, I think we've had continuous load shedding since September, minus a couple of days. Obviously, the direct costs in the semester were ZAR 22 million. But of course, a lot of disruption for many of our suppliers and on the system in general, and those indirect costs are difficult to quantify. I&J had a particularly tough semester, fuel prices, obviously, a reduced quota. An unfavorable abalone sales mix to the extension of the Chinese lockdown. And of course, we'll cover these all in a little more detail. It was pleasing to lift group revenue, albeit revenue was largely left by selling price increases, obviously, to offset cost pressures, which were significant. And obviously, this is on a hedge basis, but we'll go into some of the detail around hedging later. I guess one particularly pleasing facet of the 6 months performance was the recovery in the Spitz group where both price and volume gains gave us a significant improvement on the prior semesters performance for the fashion brand portfolio. We work very hard in AVI to protect gross margins. These are the things that underpin the long-term promise of our cash flows. And it was a very tough semester, but I think well executed in general. Operating profit, excluding I&J, up 8.4%. Obviously, this constrained the headline earnings number. I think we told you when we last spoke that we were extremely worried. COVID, I think, taught us this, that we needed to ensure that we had quite significantly an inventory to support service levels. And our engine room business has continued despite all the constraints and pressures to deliver reasonable operating profit growth. The operating margin outside of I&J was pretty much the same at around 22.3% for the semester, excluding I&J. In terms of return on capital employed, what we've done in this chart, if you go to the F '23 normalized is to demonstrate, obviously, the short-term nature of the investment in inventory and particularly in supplier payments affecting obviously the working capital but the return on capital employed remains very strong as does in the next slide for the same reasons. I guess, the cash conversion in the business. Dividend. Obviously, this is the interim dividend stage, but the dividend yield in AVI continues to be good. Obviously, this excludes share buybacks, but special dividends have been a feature of the business, and you can see that on the following slide, with the interim dividend, obviously, pretty much in line with the normal cover. I'm going to give you to Justin, and he'll take you through some of the higher-level features of the group's financial performance.

Thank you, Simon, and good afternoon, everyone. I think, in aggregate, a credible performance in the context of an environment that has been significantly challenged by consumer demand and load shedding. Revenue up for this first semester, 7.2%, as Simon highlighted, primarily a function of selling price increases offset by the impact of lower volumes. The increase in gross profit was slightly better than revenue growth with gross profit margins increasing at a group level. What will stand out here is the selling and administration expenses increased at 14.6%, a rate higher than inflation. And there's a few factors that underpin this. The most material being the nonrecognition or the non-repeat rather of the recognition of insurance proceeds that we recognized last year as a result of July's unrest. Excluding the impact of this, the increase would be 9.7%. The rest of the increase is primarily a function of fuel price escalations that have impacted our distribution and selling activities as well as the mark-to-market of various group hedge positions at the end of December. Operating profit improved 1.7% to ZAR 1.54 billion for the semester and the operating profit margin reduced slightly from 20.8% last year to 19.7%, primarily a function of the performance out of I&J. Net finance costs, as Simon has highlighted, a function of the increased investment in working capital, which resulted in higher average debt levels through the semester as well as higher interest costs as interest rates have normalized back to pre-COVID levels. There's no significant capital items to speak of during the semester and the effective tax rate has reduced in line with the reduction in the corporate tax rate to 27%. Headline earnings through the semester increased 0.7% and headline earnings per share improved at a slightly lower 0.6%, which includes the dilution of shares issued in terms of the group's share incentive schemes. Operating profit growth was achieved across all segments, with the only exception really being I&J. I think excluding the impact of I&J, as Simon has highlighted, operating profit would have increased 8.4%. The operating profit margins across the group remain healthy. Food and beverage brands have managed their margins effectively through the semester, particularly Entyce and Snackworks with the decline at the food and beverage brands level, primarily a result of I&J. Fashion brands benefited from improved performances in both Personal Care and the footwear and apparel business. Personal Care benefited from the acquisition of the exclamation and gravity trademarks from -- that we acquired in the second half of last year from Coty as well. And footwear and apparel benefited from better pricing as well as better volumes through the semester. I think worth noting in the footwear and apparel business is that last year included some benefits from the acquisition -- sorry, it's not the acquisition, but benefits from the recognition of proceeds from the July unrest. This growth contextualizes the role that volume and price have played on the top line. As we highlighted earlier, price, a significant driver and largely offsetting the decline in volume. We've had to take significant price increases across most parts of the group to recover input cost inflation. I&J has been materially impacted by fuel prices. And unfortunately, the level of increases or price increases have not recovered that. Fish volumes have been lower and from an abalone perspective, the sales mix has been unfavorable, which is further negatively impacted on price. Retail fashion brands have benefited, as I've mentioned, from better selling prices as well as better volumes through the semester. The high level of inflation has obviously been something that we've had to carefully manage through the semester. Our focus on managing price and volume has continued to be an important underpin to managing margin and overall profitability. And I think that sort of plays out in the margin achievement for the semester. As highlighted earlier, the gross profit margin at the group level improved slightly. The non-recurrence of the stock write-offs of ZAR 31 million have provided a 0.7 -- sorry, 0.4% improvement to the margin relative to last year. Entyce and Snackworks have largely protected their margins despite the significant impact of input cost pressures and I&J has been materially impacted by higher diesel prices, which affected the fishing fleet costs as well as the unfavorable impact of abalone sales mix and the fair value adjustments for the biological revaluations that took place at the end of December. As mentioned before, our fashion brands business has performed well. And the selling price increases within our retail business as well as the benefits of the Coty trademark acquisitions have supported an improvement in our gross profit margins at this level. The key drivers that are captured in the bullet in this slide, I'm not going to go through them. They are covered later on in the presentation in a bit more detail. I think important to note is that the performances across all of our businesses have been underpinned by strong cost control, which continues to be a focus for us as a business and an important underpin to efficiencies in managing margin. Cash generated by operations before working capital decreased slightly by 0.8%. I think our cash conversion remains strong and in line with expectations. The increase in working capital has slightly or has detracted a bit from that with cash generating -- generated by operations declining by 38.6%. I am going to unpack the increase in working capital on the next slide in more detail. But I think important to note is that we are starting to see an improvement in supply chains and through the semester. And we will look to try and normalize inventory levels through the second half, although an important underpin to that will be the impact that load shedding has on our supplier base and our need to carry higher levels of inventory in order to mitigate that. The graph here shows -- a sort of waterfall graph shows the movements in the comparison between the December 2021 and December 2022 net working capital positions. I think inflation has been a key driver and a significant driver of cost increases, which has resulted from higher commodity costs as well as a weaker rand through the semester. As Simon highlighted, the timing of customer payments resulted in an incremental ZAR 249 million being received on the first working day of the calendar year and we've invested ZAR 252 million of additional inventory -- cost and inventory in order to mitigate supply risks that we foresaw through the semester. As communicated in the previous interim results, the base was negatively impacted by some delay in receipting of inventories, and that further impacted the increase by some ZAR 71 million. Capital expenditure continues to be carefully considered in the context of a constrained environment. Increases were in line with our investments in key projects to support our capabilities and efficiencies and continued investment in our factories. High-level summary has been provided in the information slides. I think the largest areas of spend have related to I&J's processing, storage and vessels. Our retail store environment as well as deposits that have had to be paid in respect of projects that cover the Entyce and Snackworks businesses that we anticipate coming online at the back end of the financial year and into the first half of the next financial year. Net debt levels rose from ZAR 1.5 billion to ZAR 2.4 billion, with the increase gearing largely attributable to the capital investment as well as the higher levels of working capital at December as well as some higher lease liabilities in line with renewals of those lease contracts through the semester. Our net debt to capital employed remains in line with our target levels. But on a normalized basis, those reduced to sort of 28.5% from the 33.4% that we are reflecting in this slide. As highlighted by Simon earlier, the return on capital employed on a normalized basis is marginally lower than the 29% that we reflected and an interim normal dividend of ZAR 1.72 per share has been declared in line with the growth in headline earnings for the semester. I'll hand you back to Simon now to take you through the category performances.

Okay. So I think it's probably worth saying, what I'm going to say once rather than in every category, as Justin has highlighted, it's been an extremely challenging environment because of the ramp in inflation and raw material costs. And then, of course, the inflationary effect for consumers who consume our categories has been more widespread than just our own input cost pressures. So in many instances, in FMCG categories, for those of you who look at detail, in some instances, some categories, not AVI share of those categories, but the categories themselves declined in volumes. Now tea happens to be one of those categories where the total amount of tea consumed in South Africa has actually declined across the entire system. What, of course, our own philosophy in AVI is that we try and sell really special products to consumers. So we focus on quality and product delivery, and we try and do that at different price points. We had to lift our selling prices significantly in order to preserve the long-term gross margins that we believe are fundamental to our business model. And of course, we have to do that against competitive behavior. And also, I guess, except that higher selling prices does constrain obviously, the consumers' ability to consume. So it's been one of those semesters where it's required a very, very careful and ongoing care and attention to how we manage both price and volume. I think it was done effectively in the tea category. We saw a slight gross margin improvement, obviously, but that, to some extent, is merely timing. But I think in general, pleasing. If we then turn to the other categories in Entyce, coffee improved, largely driven by the recovery on the ongoing recovery of our out of home solutions, coffee solutions business. It was pleasing to see the improvement, I guess, post-COVID continuing, and that business is getting slowly back to the original pre-2019 performance levels, although it's taken a fair amount of time to see that recovery come through. You might not be aware but coffee prices at a raw material level almost doubled over an 18-month period. It has ameliorated in the last 3 to 4 months. But nonetheless, that pushed significant cost pressures into our production facilities, and we had to lift selling prices very significantly. So the performance in this category is pleasing given those cost pressures. We've seen some recovery in the instant coffee business or for low base, albeit. But that is pleasing. Obviously, demand here, like tea is constrained by higher selling prices. This is not just a South African issue. If you go and look at coffee companies around the world, they've also had to push through very significant price increases. And if you have a look at the performance of European coffee businesses, their own demands have declined in line with the increased selling prices required. I've touched on the Ciro performance. And then creamer, which has been a good growth vector for us, had to face a significant price pressure from palm oil, which is one of its main constituent ingredients. That significantly required us to push prices in the semester, net of hedges and to some extent, as I said earlier, your ability to price is always a function of what your competitor chooses to do. So we had some volume pressure. We always feel fundamentally that we have to play the long game. And here, we really had to work hard to balance volume and value, and we lost a little bit of gross margin in this category because we under recovered some of the price required in order to protect margins to deal with the competitive environment that I've just mentioned. If we turn to, I guess, these charts, these give you some indication of the movement between volume and value at a category level. As I said, tea declined. Selling prices obviously offset some of that, but the 14% volume decline was fairly significant. The same is true of coffee with a very significant price increase on average of 17% and the same then true of creamer, which required a 22.7% increase in order to not even fully recover the inflationary pressures in this category. Market shares. No significant change here. I think a pretty good performance. Having said what I've just said with respect to both the category issues and then the price and volume requirements, the balance that was necessary. And if we go to the next slide, these are obviously the impact of the costs, but these are net of hedging and hedging strategies for both physical and for currency would have protected, I guess, the worst of this. But nonetheless, this is the impact in the semester. The only category that didn't have on average, and that's a mix between, obviously, rooibos and black tea. Black tea, obviously coming into South Africa, it's not a domestically produced ingredient. We then turn to Snackworks. I mean I think a very pleasing performance, slightly different performance between the sweet and savory biscuit portfolio and the snacking portfolio. But again, selling price increases to recover a whole U.K. of cost pressures into biscuits in particular. Volumes were lower but supported by higher selling prices. I think a feature of the biscuit sales for the semester was very strong demand in our lower-priced formats, which I think is probably inevitable in such a constrained environment with lots of inflationary pressure. Having said that, we had very strong demand for the Bakers choice assorted range through the festive season, which was very pleasing. I think Justin focused and paid some attention to selling and admin costs. This is something that we continue to work hard at. But of course, fuel and energy costs in the baking business was significant and the non-repeated insurance proceeds Justin touched on. So in general, a good performance from biscuits. Snacking slightly different, lots of cost pressures here, frying costs. With palm oil and other oils, obviously, accelerating in cost pretty much like the creamer category. We had some good innovation and improved potato supply that helped. We did have quite a lot of competitive pricing and aggressive pricing in this category in the 6 months. So we had to manage our own value and volume, and we didn't fully recover all the cost pressures. And it's easy to forget, but potato crisps, a bag of potato crisps was largely air and lots of volume. So from a fuel and distribution cost more affected by the increase in fuel and increased distribution cost. If you turn to the value and volume. You can see in biscuits, not a large volume decline, but a material increase in selling prices to recover and protect gross margins. We have 2 price increases that would have affected the semester's performance. And then turning to what I said earlier about snacks low volume, dealing with some competitive activity and obviously, a higher selling price to deal with the cost pressures. Market shares, again, not materially changed under the circumstances, which I think was quite pleasing. And certainly, we had good demand in the informal channels for some of our affordable formats, particularly in the biscuit portfolio. Very much like the tea business. The cost pressure is very significant with those pricing increases that you see, very necessary to ameliorate a raft of cost pressures. And again, these are net of hedge positions, both in physical and in currency. It's certainly a challenging environment from a price point of view. If we then turn to I&J. I&J has had a very, very tough 6 months, very little went its way. The exogenous issues of both fuel declines in the quota and then, of course, fishing performance, a materially higher diesel costs for the fleet. And then, of course, significant disruption from load shedding. In this business, we both cook things and then freeze things. And so load shedding is very disruptive to this particular business. And then China's lockdowns and sustenance of their lockdowns affected our selling into both our key markets, China and Hong Kong, particularly from a mix perspective, which Justin touched on. And of course, the abalone business, a significant user of electricity because we pump about 7 million liters of water an hour to keep our animals in healthy condition, and there was a significant cost in the semester to do that. So a substantial decline in profitability, which unfortunately affected the group's performance as we've touched on. If we look at the waterfall chart, you can see in more detail. I won't go through this. You can read it at your own leisure, but you can see we did lift selling prices. Obviously, to some extent, domestically, that affected demand. We had a very significant, I guess, cost push because of fuel, which was both for catching and for production, catch rates slightly lower, and the chart that comes will show you that. Justin mentioned the fair value adjustment impact on the biological asset and then, of course, load shedding. And then the other is obviously the inflationary effect across much of our cost base. The performance. The history here includes obviously the Simplot assets, which we've ended in F '20, but you can see the significant contraction both in the fishing business and in the abalone performance. I'll talk a little bit about prospects in H2, but it was a very tough semester as you can see for I&J. If we go to catch rates. obviously, the pressure from fishing performance, not overwhelming, but in a business that's highly leveraged as I&J is, any decline in catch rates does affect profitability, largely in the wet fleet, not in the freezer vessels. And if we talk to market share and revenue growth for I&J -- sorry, you can see the impact of the decline in volumes domestically. The price pressures that I referred to. We haven't actually in the domestic business recovered adequately the cost pressures. But of course, here, we have to try and work with competition and value and volume. And then on the international business, we did lift selling prices significantly. And of course, volume decline is pretty much in line with the previous semester. Indigo's performance, I think, credible under the circumstances, the same demand pressures that exist in the food business, quite permissive and Personal Care as well. I think on balance, the performance from the aerosol and fragrance business was significantly decent under the circumstances. There is a little bit of a nonannualized ability to compare like-for-like here because we did acquire certain aerosol brands from Coty in the prior year. And so that, to some extent, we do try and show a slightly more normalized view a little in the slide or 2. We have been working hard at Indigo to rationalize a very complex range of production. And so there are some costs associated in this income statement with that work. There's a little bit more of that to be done in the second half. We did benefit from the acquisition of Exclamation and the Gravity brands from Coty. But again, here, there is the significance of high distribution costs. And of course, we did invest more significantly to support some of our brand and innovation efforts with respect to marketing investment in the semester. If we go to volume and value, I think here, pleasingly, we have made good progress. Volume underpinned by the acquisition of some of the Coty brands, but selling prices necessary here, too, to recover cost pressures, and that comes through. We look at market shares. And now these have been normalized to try and compare on a like-for-like basis. I think very credible performance in the body spray female and in male brands. I think in general, Indigo's core business, which is its body spray business across all of its brands and both in male and female a good performance in the semester. If we go to footwear and apparel brands. I think a strong performance, some of this a function of, I guess, comparatives that were impacted by the July events in the prior semester, but nonetheless, I think ongoing good performance. We invested here in working capital to ensure that we had stock availability. I think some of the work that's been done over the last 2 years underpinned a very strong December, and December is very important to this business. We did invest quite significantly to ensure that our shops could trade through load shedding, and we made that decision some time ago, and I think we benefited significantly in some centers where we were able to continue trading notwithstanding, I guess, the impact of load shedding on centers itself and in high streets where some of our stores are. Margin and mix played a good role, non-repeated stock write-offs as well, played an important role in this performance. And of course, we did benefit from the recovery of the Green Cross business, which is profitable, albeit and still on the road to a fuller and better performance. And I think Justin covered on the insurance proceeds. If we break that out, you can see, I guess, the individual business units' performances. And I think the only one I'll highlight on this is obviously the recovery of the Green Cross business, which is albeit smaller, at least profitable with strong revenue gains supported by both price and volumes. If we go to volume and value, I think here you see good volume growth in the Spitz and Kurt Geiger business. Selling prices obviously had to be raised in order to deal with the inflationary pressures, particularly as most of our product is sourced either out of Asian markets or European markets and those price increases were necessary to protect gross margins. And similarly, in Green Cross, where the volume gain here is low, but that's largely to do with us selecting the best stores and the closure of obviously underperforming doors, which we've been doing for the last 18 months. We look at AVI International. This is the distribution of our main brands in regional markets, principally, sustained performance here, quite a lot of challenges in some markets because of currency and inflation. But in general, I think a credible performance, notwithstanding some of the distribution costs that are necessary to move product cross-border on balance. We were pleased with that performance. And you can see very much a sustained performance of the international business relative to our Grocery and Personal Care brands. So deal with that, that's something you can read. H2. I guess a big subject is load shedding. We've had not a single day this calendar year of no load shedding. Obviously, this has a material impact on the country, on consumers and certainly on manufacturing. Manufacturing without the sustainable and credible power utility is a significant challenge. And I think, to some extent, the full brunt of this current predicament is going to play out more significantly than most people anticipate. There are lots of systems costs attached to people using backup power solutions, particularly the use of generators, which are necessary in some circumstances. And this is a system cost that's got to find its way all the way through to consumers. How this plays out, I think, is something that hasn't yet being fully digested because whether you're a retailer or a manufacturer, there are significant costs that are necessarily hard to recover in selling prices in a constrained environment. This is something that we continue to focus and work on. We are pretty well protected across all facilities. Of course, some of the second order realities of an inadequate power utility is the impact that it has on the supply of water. Many of our production facilities, we took a decision several years ago to significantly add back up water to each site. Most of those projects are either underway or complete. But obviously, they come at a significant capital cost and only add to the burden of costs that load shedding brings to manufacturers. The direct cost of running generators, which are important assets, I think people tend to think that manufacturing facilities can use solar and other forms of electricity to sustain high inductive loads. That's not that simple, particularly when your sites do not have the sort of space necessary on roofs or the space, I guess, generally industrial sites to invest in alternative energy solutions. These are all subjects that need, obviously, much more time and care and depend ultimately on what solutions are made available with respect to Eskom and its own recovery. We continue to have to invest in inventory to protect ourselves because many of our suppliers are facing the same realities around load shedding and the impact of load shedding on their own capacity and capability. The other thing that makes it challenging is how we manage our shift system. In some instances, obviously, the inefficiency of load shedding with respect to timing does place a different burden on how we plan our shifts. And these are things that we continue to look at because we need to optimize our shift patterns, it's quite difficult to do this when the level of load shedding changes on a daily basis. We will look at alternative energy solutions. These come at significant and meaningful costs. And for some of our sites because of space constraints, there are not obvious alternative energy solutions in some cases. So load shedding will have a material impact on our cost base in the semester. I think we have, obviously, the ability to run our sites from a continuity basis. That's not in question. The reality is to what extent load shedding brings costs as they have in the first semester in the second semester. And that's quite difficult to predict at this time. In terms of hedging and commodity costs, I think, as you know, we spent quite a lot of time looking at hedging strategies. We try to hedge on a continuous basis. We know that our second half is reasonably well protected. This will obviously run out and so much will depend on, I guess, finally, where commodity prices land and where the exchange rate lands at this stage, we're pretty well protected for H2. And you can see from this chart, at least from H1's perspective, that had we not been hedged, we would have paid a materially higher price or raw materials across the business, and that's partially true for H2 under the current circumstances. We think the demand environment remains obviously challenged by load shedding, inflation, unemployment. The macro environment for South Africa remains complex, volatile. And certainly, from a consumer point of view, we don't think the marketplace gets any easier in the second semester. We will have to continue focusing on price and volume, certainly one of the most challenging environments that I can ever remember. But we will continue to run the business with respect to long-term profitability. We are, I guess, confident that ultimately, South Africa will find solutions to some of these near-term challenges, and it's important that we protect our cash flows through a very particularly volatile period. The degree to which we have to lift selling prices, I guess, is a function of the rand volatility, net of our hedges. I think I'm reasonably optimistic that for the second semester, we will be in reasonable shape, but of course, that becomes more of a challenge for the next financial year, the second semester of this calendar year. In general, I think the businesses are in good shape. I think we have a very hard grip on costs. I think our factory performance under the circumstances, notwithstanding load shedding are good. We continue to work on building our brands' presence in regional markets as an adjunct to the performance domestically that we can see. We think Ciro will improve, and we have a reasonable pipeline of innovation. We're hoping that Indigo's profitability now that we have the Coty trademarks in our business, we can gain market share and improve the market penetration for that portfolio. We accept that consumers in the Indigo business are also affected by inflation. But I think we have enough efficiency focus and enough work done in the last 6 to 12 months to deliver some improvements in Indigo's profitability. If we go to I&J, this is the hard one to call. None of the near-term pressures have gone away. The fishing performance remains pretty much in line with the first semester. Fuel prices, obviously, with the exchange rate having weakened again are stubbornly high, and certainly, we'll continue to drag the performance of this business in the near term. We will need further price increases if we are to ameliorate that cost. And of course, that might affect demand. We do have a 5% calendar increase, which is a benefit, which will come through obviously, in this semester because our financial year doesn't run with a total reliable catch quota increase. We have here, I guess, the contra benefit of weakening rand, and that certainly should help us net of hedges in the second semester. The load shedding, I guess, if it's more of the same, I think you've seen some of that impact already in H1. Hopefully, it won't be more significant in H2. Certainly, load shedding Level 6 are a real burden on I&J as a business. So if we can stay closer to 3 or 4, it will certainly assist in the second semester. We have to look at this business model in the context of energy security. This is our business that has the most significant, I guess, electricity risk in the both abalone and the manufacturing value-added plants, Woodstock and Blockbusters, both heat and freeze product and of course, the energy requirement in this particular business is quite different to the balance of AVI's businesses. And then abalone demand, we think it will improve in the second half. We are obviously emerging now finally from the post-COVID lockdowns in China, and we look forward to an improving H2, but we think it will take a few months for markets to normalize for I&J with respect to abalone. The footwear and apparel business, again, affected by consumer demand. I think we've got a lot right in this business. We do see, obviously, I guess, the potential for rental renewals and in particular, with respect to rental renewals, how landlords will deal with the permanent cost of providing electricity in shopping centers. This is a new cost pressure for both of us as partners in the retail environment, and that undoubtedly is going to have to be recovered. And so that's certainly going to put, I think, a cost back into the system that needs to be, I guess, recovered from consumers and the degree to which that can be done, I think, isn't quite clear yet. We don't have a lot of capital in the second half, but we are hoping that in the second half, the footwear and apparel businesses can annualize against the prior semester and provide some growth. We do have a more significant capital project program in F '23 than we did in F '22. Some of that was timing. I think we did tell you that some of our projects were delayed. Some of it was to do with COVID and supply chain issues, and those are coming through. There are some significant investments that are necessary in the I&J business which are systemic and are timing-based in order to keep facilities and the condition that you are required to and certainly with respect to the safety on board vessels and the upgrades that are necessary in I&J. That's fairly challenging, given obviously, the I&J performance in the near term. But on balance, a fairly good number of projects that both improve capacity and efficiency in the food and beverage businesses as well. So I guess, in an environment like this, what's the AVI investor proposition. I think we run an effective business with a high return on capital. We focus on that as a very strong and fundamental long-term, I guess, focus on cash conversion. We continue to invest in projects. We know that the domestic market is tough. We continue to try and work with our domestic manufacturing capability to grow export markets, particularly with the weaker rand. The problem that we have, of course, is that as the rand weakens, we reimport inflation into South Africa because South Africa tends still to be an import parity priced economy. We will continue to focus on returning excess cash to shareholders. All of these things are not different. One thing that is fundamentally important is that we continue to examine and work out how we simplify our business model, accepting that our realities domestically remain very challenging. This gets lots of attention. We focused on cost for a significant number of years, and the degree to which the current model can continue to provide cost savings is obviously constrained. But that challenges us to look at how we might do things differently depending on what we perceive the outlook to be over the, I guess, the medium term. We continue to innovate where appropriate and applicable. We've got any number of initiatives which will continue to focus on margin management, so critical in a time like this on procurement cost savings and obviously running our factories as efficiently as we can. Load shedding is obviously making that more difficult. So we continue to run the business for the long term. And I guess that is the real challenge for myself and our teams. And we've talked about I guess, our expansion into regional markets. This is something that gets more and more attention because it's important that we find growth that we might not find in SA in the short term. Thank you very much, and I appreciate your time and very happy to take questions.

Thank you, Simon. We have a number of questions from the listeners. [Operator Instructions] The first question comes from [ Taylor Ginsberg from Tomer Wealth ]. She says, I noticed that the dividend paid is greater than initially indicated. Will the difference be paid through our working capital unwind in the next 6 months or temporary debt?

Sorry, I didn't really understand the question. The dividend is?

Higher than initially indicated.

And it's the cash flows generated.

Well, I think the dividend cover philosophy. I mean, we're not in any way uncertain of our ability to sustain the dividend, so the dividend cover. It's just very marginal. I mean, it's just being rounded up in terms of our policy. So I mean, finally, the final dividend is what will come through at the year-end, not really sure. Perhaps I misunderstood your question.

Thank you, Simon. The next question comes from [ Manya Ahmed from Denker Capital ]. The 14% volume losses in black tea seems aggressive. Are you concerned that the extent of the decline indicates significantly declining brand equity? It seems private label are the ones discounting aggressively on shelf.

The private label is not big in tea fundamentally. And as I said, this is a category issue and there's always some timing in this. I'm not -- if you look at the market share slide, you will see that the market shares are not materially different. But the cost pressures that we needed to ameliorate had to be managed through certain price increases. The near-term performance of the category is improving. I think it's just a systemic issue through the semester. There's no question, of course, that affordability generally is something that's affecting the consumption in some categories more substantially than in others, and tea is one of those in the near term that has been affected by that. But we're not losing a substantial amount of share as the slides demonstrate.

Thank you, Simon. The next question comes from [indiscernible] Where is Ciro versus pre-COVID.

Sorry, where is?

Ciro, sorry.

Justin, do you want to answer that?

I'm happy to I think we've delivered quite a lot of benefit with regards to the restructuring that we undertook when the lockdown hit. I think profitability is looking a lot better. We have benefited from an opening up of the sort of hospitality and leisure space. The top line is probably a little bit short, but I think the profitability metrics are looking a lot stronger.

Thank you, Justin. The next question also from [indiscernible]. Any major changes that Spitz could [indiscernible] Green Cross to put up a result like that?

No. I mean I think, fundamentally, we continue to work hard on product and product provenance, our engagement with consumers, our marketing strategies, I think, give us the confidence that both a combination of product innovation and availability were substantially improved in the semester, and I think that's what delivered the number.

Thank you, Simon. The next question comes from [ Hannes Prinsloo of ] [indiscernible]. Do you expect a major benefit both for running generators and for I&J from the lower fuel levies announced by the Minister of Finance?

Well, they are very insignificant. I think Justin can give you the number.

Yes, I think we quantified for the first semester, we would probably receive between ZAR 0.5 million and ZAR 1 million benefit relative to ZAR 22 million cost, that's not material at all.

Thank you, Justin. A question from [ Ryan Dedrick ]. I see I&J as a drag on the group, any prospects on selling the business?

I'm not going to answer that. Certainly, a very poor performance with lots of, I think, the things we've explained as an underpin. We are still, unfortunately, despite the fact that the [ frac ] process was concluded, we're waiting for the appeals process to be finalized in the appeals process once it's finalized. And we're now 2.5 years late in this process, which means that we don't yet have 100% certainty over what our final quotas may be. We're hoping there will be no change. We believe there shouldn't be any change. But in terms of our own overall strategy for I&J, the one thing that we have to have is certainty. And we're hoping to have that certainty, the ministers give us a commitment that we'll have certainty, certainly by the middle of this calendar year.

Thank you, Simon. The next question from Thapelo Mokonyane of HSBC. Timing-wise, when will you execute on the new hedges for FY '24 and beyond? How do you plan around the given current levels? Do you wait for better levels on a day-to-day? Or is there a set time of executing on them?

We have a very sophisticated, I guess, but simple philosophy. We're not speculating. We hedge on a continuous basis. So every month or every week of every month, we will be taking rolling hedges. Now of course, we do have views as to whether we think a commodity or even the exchange rate might be oversold or underbought and that might mean that we will run range bound. So we have on our risk strategy, a range-bound view of what we will be exposed to or not exposed to. And that's something that we manage with respect to our Risk and Audit Committee. And we run the book through that lens on a continuous basis. If we are going to go outside of that lens, we would have to obviously engage with our Board on the basis that we would be taking a different perspective than we have historically. But that's how we do it. And we do that on a continuous and a daily basis.

Thank you, Simon. There appear to be no more questions for now. Perhaps we'll give them a few minutes just to see if there are any more that comes through. There don't appear to be any further questions.

Well, thanks very much, everybody. Have a good day.