AVI Limited (AVI) Earnings Call Transcript & Summary

Hey. Good morning, everybody. So it's been, I don't know, how many years since we did a physical presentation. So for those of you who still like to get out into the world, it's a warm welcome from AVI and my colleagues from the business units who are here, and Justin. And sorry, we don't have any goody bags but, cost cutting, unfortunately is the order of the day. So we have our normal presentation. I'll take you through some of the key features. Justin will do macro AVI consolidated financials, and I'll take you through some of the business units. There are a lot of common themes this year. I'm going to try and talk to macro mostly. I know you guys can all read. I hate PowerPoint because I want you to have to hear me say what's on the screen, so if I breeze through things, it leaves a little more time for questions. And of course, welcome to everybody listening in on the podcast. So that's the agenda for the day. Let's go straight in. I don't think I have to tell you, for any of us who make things, it's been a very tough period to operate large manufacturing businesses. Load-sheddings intensity has grown, disrupted our supply chains, cost us ZAR 58 million in direct costs. And it's easy to forget the impact on our suppliers, and even our categories. We sell hot beverages, and if there's no power, people don't boil kettles to produce to your coffee. So there's a very widely distributed set of indirect costs, which has affected also SA macro demand. I&J has also had a pretty tough year. It's easy to forget how substantial the fuel increase has been, about ZAR 165-odd million year-on-year cost, which then was compounded by poor catch rates, and 1 of the wettest and coldest winters that the Cape has had has continued to affect catch rates. And then load-shedding, in particular, I&J has the double jeopardy. Not only does it process by cooking things and then has to freeze them, and so you've got 2 large inductive loads, so the effect of load-shedding is very substantial in I&J. And then, of course, the abalone sales mix in the first semester affected by the Chinese lockdown for COVID lifted. Some improvement, but it did affect the mix. Revenue up 7.8%. I think for those of you who look at AVI, you will know that we had a very tough first semester from a volume point of view. We'll show you some detail later. The volumes improved materially in the second semester, and largely underpinned by us lifting selling prices for the full financial year. And we lifted selling prices in every single category, compounded by some very weak exchange rate. And then, of course, Ukraine affected soft commodity prices, particularly in the first semester. We did good hedging, and that will come up later in the presentation. The most important thing we try and do in AVI in a very tough macro environment is manage gross margins. The long-term value of this company is obviously its profitability, and that's all driven through gross margin, so pricing was important. We did see a strong recovery in the second semester across the business, with operating profit improving by 14.5%, and that was underpinned by a recovery in volumes. That's not to say that volumes all went back into positive territory. They built momentum through the second semester and the last quarter, in particular, was pleasing, which was encouraging. So operating profit up 7%. If we exclude the I&J business from the group's result, just under 13%, which was pleasing. And then, of course, there was a slightly lower tax rate, which you guys know about. Headline earnings diluted, Justin will come, cover this in his section. Obviously, much higher interest rates and a little bit of dilution because of share schemes. The most important thing is cash flow remains strong in the business across all categories. And I think you will remember that because of COVID and because of the uncertainty around ports, we lifted working capital in order to ensure that we were able to sustain service levels in all our categories, which we have continued to believe is important in this uncertain environment. And the dividend, pretty much in line with the headline earnings increase. That chart just gives you the history. I think the important thing to note is the improvement of COVID. We are building momentum back from a very tough period, I guess, both globally and regionally. The I&J business, of course, the 1 that was the real laggard, and I've talked about that. We'll talk more later. Return on capital employed, pleasing to see that recover despite the fact that we had higher working capital. And of course, the performance of I&J would have put some of a dampener on that, but that's, I think, a pleasing trend. And again, very strong cash conversion in the business which is also important, a very strong underpin to how we manage AVI's businesses. And then, of course, the dividend payout pretty much in line with the prior year as a percentage of the share price, obviously, at the end of June. And that just gives you some of the history. We continue to pay out substantially the company's earnings. We've paid out, I think, 87% over the last 15 years, which I think is a pretty interesting outcome given that we've also invested significantly in the business over the same time period. And I'll give you to Justin now.

Thank you, Simon, and good afternoon, everybody. I think overall, a credible results in a challenging environment supported by a strong second semester, as Simon highlighted, Revenue growth of 7.8%, entirely driven by price increases taken across all categories. Volume pressure obviously played its part in most of our categories with a high level of inflation coming through and impacting consumers. Gross profit increased at slightly better than our revenue growth at 9.1%, with gross profit margins improving from 38.6% to 39%. Our selling and administrative expenses increased ahead of inflation. This is largely a function of the recognition of the insurance proceeds last year as a result of July's unrest. We have provided some more detail around the comparability impact of that in the information slides at the end of the presentation, but excluding that impact, selling and admin costs would have gone up about 8.7% driven primarily by higher fuel prices and the impact that that has had on our distribution costs, as well as some increased investments in marketing spend. Operating profit, up 6.9%, with the operating profit margin well protected at 18.2%. I will give a breakdown later on by a business unit of that. Finance costs materially increasing for the semester. Largely a function of higher interest rates, as we are all aware of, but also some higher average borrowing levels. We took a conscious decision early on in the year to increase our levels of inventory and protect service levels given the supply chain environment that we were experiencing. We did see that come off a little bit in the second semester, and year-end working capital levels are more in line with our expectation. The effective tax rate, as Simon has already alluded to, in line with the reduction in corporate rates from 27%. I think that you'll cast your mind back to last year, we did recognize the deferred tax assets and liabilities at 27%. So a portion of that benefit already recognized in the base with ZAR 9.7 million benefit in the current year. Headline earnings, growing 4.4% and headline earnings per share, slightly lower at 4.3%, reflecting the dilutive impact of shares issued in terms of the group's share incentive schemes. As indicated, a strong second semester. I think this graph just breaks this down and shows where and what the key drivers of that have been. Operating profit up 14.5% on last year through the second semester, underpinned primarily by our Snackworks and Personal Care businesses that benefited from higher selling prices, and as Simon has already mentioned, a slightly lower decline in volumes through the second half. I&J has had a difficult year, declines in both the first and second semesters with higher fuel prices, poor catch rates, load-shedding costs and also the lockdown in China, which had negatively impacted our abalone sales mix in the first semester. I think also worth mentioning is we did have a fire at our value-added plant during the month of April that resulted in the closure of that facility for a month and the loss of about ZAR 15.7 million worth of operating profit. We have not recognized the insurance income, and we are insured for that event and are currently going through that process of recovering that. From a business unit perspective, growth across all parts of the business with the exception of I&J. Excluding I&J, operating profit up 12.7%, so I think a pleasing result in the rest of the business. Our Food and Beverage brand's operating profit margins reduced from 18.5% to 18% primarily due to I&J, some pressure in Entyce as a result of competitor activity, which required us to discount through the second semester in order to protect volumes. But overall, I think a pleasing result. Snackworks benefited from some of the operational leverage that we got from higher prices, some factory efficiencies and then a lower reduction in volumes. Fashion brands, a nice improvement in our operating profit margins there. I think as expected, our Personal Care business delivered a strong improvement as a result of the acquisition of the Exclamation and Gravity trademarks from Coty at the end of last year. And our Footwear and Apparel business improved despite the nonrecurrence of some of the benefit that we got from the recognition of the insurance proceeds last year. This graph really contextualizes the impact that price and volume have had on our top line performance. You can see the significance of price increases taken across all of our categories to ameliorate the impact of significant input cost pressures from both the weaker rand as well as higher commodity prices. I&J, obviously, the benefits also includes the impact of a weaker rand, but unfortunately was offset by some lower fish sales volumes. I think what has always been important to us and underpins our protection of margins and management of margins has been our management of price and volume. I think this has been a particularly challenging environment in which to manage this, given the constrained consumer as well as the competitive landscape. I think whilst volumes are not unimportant, it is always important, it is important to understand that our business is more susceptible to a loss of value than volume. And as a result, we have managed our pricing in this context to protect the long-term profitability of our brands. As already alluded to, our gross profit margins have improved slightly on last year. Again, we have provided some further detail to the year-on-year drivers of the movements in the information slides at the back of the presentation. I think worth mentioning is that I&J have detracted from the group outcome by about 1 percentage point, so that would have returned us more in line with historical levels had it not been for the I&J performance. The bullets in this slide really encapsulate the underlying performances of the business units. This is going to be dealt with in more detail later on in the presentation, so I won't go through this in much detail. I think what is worth mentioning though is, as always, our drive and focus on cost management and efficiency has remained and has -- will continue to underpin our performances in most parts of our business. From a cash flow perspective, cash generated by operations increased 2.7%. This is slightly lower than the operating profit growth of 6.9% that we have recorded. Higher noncash adds backs were largely offset by some increases in our working capital position. Working capital was well managed. I think it ended in line with where we expected it to with inventory levels increasing in line with the inflationary pressures that we are seeing and some higher trade receivables as a result of a strong end to the year, with sales to be collected in the early part of FY '24. From a capital expenditure perspective, we increased our investments in our factories quite considerably from last year, an element of post-COVID catch-up in project activity. But we continue to carefully evaluate our spend in this area, particularly in the context of the constrained and difficult environment. Net debt increased to ZAR 1.75 billion. The increase on last year is entirely a function of the lease liabilities. We've had a number of renewal of operating leases in our businesses, and the lease accounting requires us to recognize that as a liability. Cash debt has remained in line with previous years, and our net debt to capital employed remains in our target range of 25%. As mentioned and highlighted by Simon, our return on average capital employed has improved to 29.5%. I think this is largely underpinned by an improvement in our earnings. It's something that we are carefully -- we carefully consider and look at, and obviously look to drive. From a dividend perspective, our final dividend of ZAR 3.10 has been approved, or taking the full year ordinary dividend to ZAR 4.82 with the increase of 4.3% in line with our earnings growth. Our ordinary dividend cover ratio has been maintained at 1.15x. I mean, this represents 87% payout ratio of our current year earnings. And our dividend yield remains very attractive at 7.1% based on the closing share price at the end of June. I will hand you back to Simon, who will take you through the business unit performances. Thank you very much.

So Entyce Beverages, which is our tea, coffee and creamer business, I mean, I think we don't break out, obviously, each division or each category for competitive reasons. But on balance, a strong performance despite a lot of constraints from a consumer demand perspective and also from a cost pressure perspective. The factories all operated effectively despite the load-shedding environment. We had to take a lot of price here, and I'll show you those slides. I'm going to go there reasonably quickly, because I think that's where, when we look at volume and value, you'll get the most interest. Our value brands definitely benefited in the environment where clearly, people continue to be constrained or parts of our customer base are very constrained. And we saw good growth, lots of raw material cost pressures in black tea, some on rooibos. I think the important thing, although the profitability of the tea business declined slightly, the gross profit margins, as Justin alluded to, very important to us. We're very well protected and well sustained. And I've already touched on the fact that load-shedding quite clearly shows up as a factor for consumers when they choose hot beverages. If we go to coffee, the pleasing thing is, well, we are all here and drinking coffee, I hope, before you started. The out-of-home business in Ciro continue to see improvements both in demand and in margin. We did a lot of work on that business during COVID to rightsize its cost base, and we're seeing the benefit and the operating leverage of that and working hard to ensure that we sustain that leverage. I mean there's no question here. Coffee prices rose very aggressively in the last, I guess, 15 months. They've ameliorated somewhat, but nonetheless, it's put a lot of pressure on margins. We had to lift selling prices, and in some categories, that just simply affected the consumers' ability to digest those price increases. Mixed instant coffee environment, which has been tough for a number of years, we've touched on that before. We're getting some progress, given the restructuring initiatives and cost management that's gone into that facility. And I talked quickly about Ciro. Let's go to creamer. Here, we also had to lift selling prices substantially. You'll see that when we come to the next slide. We did have, as we often do, some fairly aggressive competition. We have to see our way through that. Certainly, in the second half, we became a bit more combative, and I think we got some volumes back. But this was particularly challenging to try and manage, I guess, both volume and value in an environment that was competitive but with a very aggressive competitor at the same time. Again, we're seeing some impact on home baking. Creamer is used often in home baking and with load-shedding, we could see some trimming of demand as a consequence. So this slide, which I'm not going to read, gives you, I guess, the volume value realities for each of the tea categories. What we've done here is give you a sense of what happened in the second semester, so you get some sense of the momentum build. And although the second semester didn't, in tea, go positive, you can see a substantial improvement. And in the last quarter, that improvement, in fact, was positive. So there is some positive momentum that we're seeing in that category. Similar for coffee, not quite as significant as tea in terms of the improvement. But I guess the most important thing is to reflect on the degree of selling prices that you're seeing that were necessary just -- which I think people forget about, the cost pressures that everybody has been digesting in South Africa, there is a consequence of the exchange rate, soft commodity prices, and obviously, a materially weaker exchange rate. And the same is true for creamer -- sorry. And you can see here the sorts of price increases, and again, the volume improvement, I guess in the second semester, with our discounting and promotional activity playing a hand. Market shares. Now this is becoming tricky because there's a big part of the market that's not as well read. We have a very good and strong business in the informal channels. This is obviously market shares for the formal channels only, but we are pleased with the market shares in general. We are always willing to give up share. If we think strategically, that's the right thing to do. In the short term, we run the business with very much a medium-term, long-term perspective around shares and brands. And I think overall, the performance, very credible. Significant cost pressures right through the basket of key ingredients, as you can see, driven by both soft commodity pricing and exchange rate. Those are all the material drivers. Now keep in mind that those are the costs net of hedging, and we run a very substantial and continuous hedging program of both physical and exchange rates in order to try and manage our pricing and our margins. We turn to Snackworks, which is biscuits and snacks. I mean, this business had a very strong year, which was very pleasing, and both coming through in the margin line. Not as strong for the Snacking part of the business, but for the Biscuit business, a very strong performance once again, and you'll see that in the slide that deals with volume and value, the substantial price increases that were necessary. The Biscuit business, we had 3 price increases in the financial year to deal with, obviously, the sustained cost pressures. If you remember, the wheat price doubled with the Ukraine crisis. It's all lost because wheat prices have come back, which I guess is a positive as we look forward into F '24. We had very strong factory performance. We've been working extremely hard to continue to improve the efficiency of all of our facilities. But certainly, Isando and Westmead biscuit factories coming through very strongly in the year. Snacks, a very tough period. We had lots of competition. We've had -- what you're seeing in South Africa often is re-gramming. Our competitor has made pack smaller, and you go through a period where you're competing against different pack sizes, so your price points look difficult. This is a challenge that we continue to try and manage without obviously short changing consumers. Very important to AVI that we build long-term relationship with consumers and give them the premium that they deserve with the product that they deserve. Lots of cost pressure because of distribution. Unfortunately, when you're moving small, light packets of potato crisps around, the distribution costs were substantially higher. But on balance, I think a very strong performance from Snackworks, with the EBIT margin just under 20%. This will break out for you the volume and value. As you can see, Biscuits had a solid performance in a very difficult environment. The volume declines were fairly small, but you can see the price increases that came through both in the first semester, and obviously, in the year -- second semester as well. So price increases in March, September and April in order to deal with those cost pressures. And Snacks, obviously, you can see that for yourself again. Substantial price increases of 16-odd percent, necessary, 3 price increases as well. Market shares are not a material change. Obviously, a slight loss of share in formal retail, but we anticipated that knowing what we needed to do with pricing. We've got very good demand of our affordable formats in the informal channels, in the wholesale channel, which was very pleasing. And we think we did a pretty decent job under difficult circumstances of managing both the price and the volume in this portfolio. You can see substantial raw material cost price touched on flour, butter, every single 1 of our ingredients. And the 1 that doesn't show up here, of course, is energy cost and also the impact of running generators, but we dealt with that in aggregate. I&J, as Justin said, this business had a perfect storm or an imperfect storm, lots of challenges. The fuel cost, as I said, there's a slide that will show you that ZAR 160-odd million. Tough fishing environment, lots of cost pressures. We needed to recover a lot of price affected demand, both in SA and internationally, so -- and of course, the load-shedding we discussed earlier in the introduction. The fire Justin touched on as well, which didn't help, obviously, the last quarter. That was load-shedding related, unfortunately. Insofar as Abalone is concerned, and we've got a slide that obviously breaks this out, I'll go there. Justin's touched on those points, I've touched on those points. Obviously, the biological asset fair value adjustment was a factor as well. And you can see, I guess, this is probably the best way of looking at I&J. We did a lot of pricing. We've got some benefit from the exchange rate, and then we gave it up in fuel, in catch rates and the load-shedding impact, the VAP fire and then the VAP -- Abalone fair value adjustment. So it's a pretty clear and comprehensive perspective on I&J's performance. We're hoping to see a turnaround in some of those factors in F '24. The profit history of I&J, I guess you can see the Abalone performance in there because of the fair value adjustment and the impact of the sustained lockdown period in China, which we've talked about. Fishing performance. As you can see, this is 1 of the poorest fishing performances we've had for some time. Certainly, it's been a very tough season, lots of very bad weather. And we're hoping that in F '24, we'll see some progress. We did get a TAC increase. Obviously, that only affects the second half because that's calendar year, not financial year. And you can see, obviously, the deleterious effect of both volume and selling price pressure in this business, which you can look at in more detail. The Indigo brands business, quite a lot of change in this business with us acquiring the Coty brands, and it was a good performance. The purchase of the Coty brand certainly came through in the P&L, and that was pleasing. There's been quite a lot of work rationalizing this business in the face of obviously, that acquisition. The margin expansion also driven by Exclamation and Gravity. We've been supporting this business out of COVID. If you remember, people stopped using beauty and fragrance products and personal care products because they were at home. And we, I guess, took the decision at the time not to overinvest in marketing. That's coming back quite strongly, quite a lot of marketing investment that obviously would have affected the financial performance, but necessary and important for these brands into the future and into FY '24. The Coty distributor agreement. We've been their partner for 19 years, having bought obviously, their personal care brands. They focus on beauty and fragrance, and they've decided to do that themselves in South Africa now. The ZAR 50 million contribution is somewhat overstated in F '23 because we sold in to support the transition. And of course, we will have to work hard in the new year to try and restructure this business to deal with that. We're very positive about what we can do. It's been a long relationship, a very productive relationship. We've made money, but a lot of these relationships eventually mature as business partners make different decisions about their own strategies. The value and volume here, obviously, the volume here is impressive, but that's because of the acquisition. We've tried to give you some sense, obviously, of the impact of that. When we go through to market share, we've rebased that so that we're not cheating and giving you a market share that is flattered by history. That's actually the improvement we've already made with respect to the Coty brands we've acquired where we've made some market share gains, which I think is pleasing despite the early nature of the acquisition. The Spitz portfolio, a pretty decent performance. We were pleased with this, a very tough environment. We've been working very hard post-COVID, which was tough on this business. We've put a lot of effort, energy into product design and marketing into extra inventory. We brought in inventory early. We found that in the prior year, the supply chain issues really affected our ability to have a stronger trading as we would have liked. The comparatives are obviously slightly distorted by the July event in the prior financial year, but I think a strong performance from the portfolio, strong need for pricing here too because everything we buy is imported. But I think we managed that reasonably effectively with currency hedges, I think, which is pleasing. That just gives you some sense. We've kept the Green Cross number there, continue to make progress, albeit a smaller part of the business, but it was pleasing to see, notwithstanding that we have been through a period of rightsizing this business and margin improvement and operating profit improvement, which is all there for you to look at. And then volume and value. This is the 1 part of the business where we actually got some volume gains underpinned by a very strong December, which was pleasing, and of course to some extent, the non-repeat of the July unrest. But in general, good volume momentum through this financial year. And selling price increases lifted by 12%, obviously, to ameliorate the decline in the exchange rate. Kurt Geiger clothing, still recovering. We're working very hard to premiumize this business because there is so much competition in apparel in lower price points, and we think that strategy is beginning to pay off, which is encouraging. International, I mean, this is -- what we do is we don't have any assets or we have distribution assets in markets. This is essentially using our South African manufacturing base and distribution, and we had, I think, a good year. We were pleased with that. There were some markets that were a bit tougher. We had the same need to lift selling prices in these markets because the cost pressures were systemic and there is relevant to our margins in SA as they are in the markets that we sell into, and we were pleased with that performance with strong growth and operating profit. That just breaks up what percentage, and you can see that the percentage of operating profit now at ZAR 20.4 million, up from ZAR 19.8 million in F '22, which was pleasing growth. So F '24. Well, we all know that load-shedding. I see we're back to Stage 5 now that the BRICS Conference is behind us, and we can now see reality again. Not easy for us. You need to understand that for those of us who make things, load-shedding is way, way more disruptive for lots of practical reasons. We're fully generator protected. It's expensive. We experienced brown power issues, which are also an issue for our sites. We've got lots of PLCs, and they're affected by this. I&J's value-added plant now is fully protected. That was the 1 area where we were not fully protected for Level 6 load-shedding, but we are now. So that, hopefully in F '24, will help us. You can see that we made the fatal mistake of saying that. And quite clearly, who knows where we go in F '24. We have to -- once you are hooked on diesel generators, because we can't reuse renewables except for warehouses, there's a big investment in infrastructure to support generating power with generators. And so that's a cost that unfortunately will show up in the P&L if the level of load-shedding is sustained. It's very important that we work with suppliers who also mitigate their load-shedding risks because we need them to be able to support us. I think this is 1 of the things that people forget about load-shedding is that there's an enormous compounding, I guess, consequence that finds its way into supply chains as a cost, and with respect to disruption of packaging materials and the risks that come with facilities that are run with standby electricity. Another material risk for us is water. For those of you who live in [indiscernible] which I presume you all do, you will know that water shortages are a perennial problem. The infrastructure is underinvested in, and we know that we need a lot of water in some of our facilities. And this is not as simple as electricity, but we are working extremely hard to build the best and the most effective solution we can to protect our sites. So we're well on our way to having extra capacity. The other risk we are looking at very carefully is the quality of municipal water that we get where, in some instances, when we test it, we know that the free chlorine is lower than it should be. So those are challenges for us. The most important thing we need to do is to accept that we're in a tough macro environment. Consumers are under pressure, interest rate increases have affected disposable incomes, inflation is permissive across people's cost basis. So clearly, lifting selling prices is not something we choose to do. We try and be as tactical and as careful as we can. We're going to continue to have to do that. It's been encouraging to see some improvement in demand particularly in the last couple of months, but we're not naive. We can't, at this point in time, say that unless the economy does improve, that our ability to sustain volume growth will be easy. We are seeing some abating of soft commodity prices, obviously, the rand's weakness thins that out to some extent. I think you can see substantially that we're well protected generally with -- except in a few circumstances. If we look at the current spot price of commodities in general, our hedges are pretty well positioned for the first semester and into the second semester of this financial year, which is obviously an important ingredient in ensuring we don't have to lift selling prices. And hopefully, in some instances, we can become a little bit more aggressive and hold on to our gross margins. The volatility of the rand, it's very easy to forget that South Africa is a rand import parity priced economy. Our cost pressures are always driven by the exchange rate in general. Some of them have leads and lags, so we're going to have to manage that. We have, as I've said, always in AVI, avoid speculating. But any hedging strategy is in its own way of speculation, but we do it to try and manage pricing and margins. I've touched on the fact that we don't have a real risk in H1. It does obviously bleed away into H2. We've got a lot of innovation. We're trying very hard to find intelligent ways of innovating, but at the same time, remaining affordable, recognizing that there are lots of constrained consumers. Of course, it's really important to us that we produce good quality products, things that support our brand and that supports our ability to price and to leave a price when we need to in order to protect gross margins. There's quite a lot of capital that will be spent, and some of it is COVID catch-up. Some of it gives us extra capacity and extra capabilities. We'll work hard to use those to try and drive operating profit growth. We still continue to see momentum in our export business, which is encouraging, and we're hoping for a good year in F '24. And as always, we work extremely hard diligently across this business on cost savings and the organizational structure. It's harder and harder to do because we have a very, very lean organizational structure in AVI. I've touched on the Coty impact. We're quite encouraged by what we can do in Indigo notwithstanding the loss of the last part of Coty's business with us. I&J. Well, so much will depend on the big levers in this business. Will catch rates improve? I guess, so much depends on La Nina or El Nino. The talk is that we're going into a dry cycle that might make catching a little easier. We have a newbie E-scheme. There will be some early first semester costs for that and recognizing it's not cash, obviously, but it will affect the P&L. We're hoping -- well, we were hoping for the FRAC to be finalized on the last day of August. John T. Tells me we, hopefully, we'll get something in the next week or 2, which we really, really need because we need to work on how we run this business with certainty. It's something that we really do need to see. We're hoping that the Abalone performance will improve now that restrictions in China obviously have abated. Of course, the Chinese economy, as you guys know, isn't performing as well, and that certainly affects Abalone because it is a luxury category. We're looking hard to optimize and diversify that risk. I think John T. is off to Singapore next week to keep working on that. We are obviously hoping that the momentum we have in the Spitz portfolio will continue. Early part of this financial year is telling us that so far, so good. We keep working on developing our own brands and building momentum there. We are actually looking at a few new sites, which is encouraging, but we will be very disciplined about any expansion. We really expect capital return which is a big driver in AVI. We won't expand just for the sake of it. I mean, we're focusing as we do in all of the businesses on costs. We try and run this business very leanly but without compromising customer service. That's the CapEx that's obviously planned, so it's not insignificant. Those are the main projects. Some of those are carryover. The creamer capacity increase, that's fully automated, and that's certainly going to help us manage some of the costs. We continue to look at the opportunity to automate, but we look for a very, very reliable payback. This -- quite a lot of money going into I&J, which is a bit challenging because we're anxious about the return on capital, and we need to see an improved performance to underpin those investments. I know that all of you have a very challenging environment, too. Picking equities in the SA macro environment is not an enviable responsibility, I'm sure. And to some extent, we're all in this together. We've always tried to be direct and frank about the challenges of running our business. We continue to find clever, thoughtful and innovative ways of simplifying the business model to deal with this challenging macro environment. We are, as I've said, committed to innovation, but we've got to make sure that they're scalable and that they're relevant to consumers and people can afford them. We work very hard on an ongoing basis on all of the real drivers of costs, which I'm not going to list because they're there and they're obvious. We have a unique brand portfolio. It's given us the ability to protect our gross margins. We spend a lot of time, care and attention in ensuring that everything we produce is really high quality, is worth it, and that will continue. And we hope that that is giving us the ability to build some momentum against competitors. We're certainly not planning to change how we return capital to shareholders unless we can find something useful to purchase. We do look at expansion CapEx wherever it's appropriate, and we certainly continue to see opportunity regionally. It's something that obviously is important, given the constraints domestically. And we have looked at quite a lot of opportunities, but so far, we've not found anything that we think is the quality that we need at the price or even, in fact, the scale. So thank you very much for listening and for coming today. We appreciate that and your time, and very happy to take questions either from the ether or from the floor.

Surely it wasn't that boring that I put you all to sleep. Sorry, I can't really see anyone. You need a mic, I think.

Just a quick one on the potential [indiscernible] on the Japanese [indiscernible]? Or is there something that could potentially meaningfully because [indiscernible]?

We don't sell into China. I mean certainly, Abalone. We don't think would have affected it. It certainly sounds like that the traditional Japanese, Chinese tit-for-tat. Anything else?

[indiscernible] couple of questions. First one is on CapEx. There was a bump up [indiscernible]. How do you think about it over the next couple of years supposed to be and also start to break it down that how much is actually maintenance [indiscernible].

Look, we take deploying capital very seriously at AVI, so we're capital allocators at the center. It's really important that, firstly, we sustain the efficiency of all of our productive assets and where we can, at the same time, add either capacity and efficiency that gives us extra volume. We do do that. But you've got a big business. There's a big complex business, lots of different manufacturing sites, different processes. So I'd say in the CapEx that you're seeing, most of it would be replacement sustainable CapEx. But with each of them, and in some instances, there's the ability to extract extra value or lower costs. So at this point in time, it's materially business as usual CapEx.

And will it hold at this sort of levels for a couple of years?

Well, it went down through COVID, and I think people thought that we'd given up, but we always flex CapEx against what we consider to be both the risk of the environment, the opportunity in the environment, and then of course, our responsibility to sustain the current cash flows. So I would say that in my own mind, we spend a lot of time worrying about, I guess, return. We can flex it, and I'd say that probably at around ZAR 400 million. But keep in mind, a lot of what we spend money on is dollar-related, so you've got inflation in that number that is not to do with necessarily I guess, us investing more. It's just the cost of CapEx having gone up. Yes, I'd say it's probably between ZAR 400 million and ZAR 500 million, but it certainly can flex lower as it did in the prior year.

Great. The second question is on -- I think I'm getting nostalgic, you know. Your investor proposition, I missed that line which used to say real earnings growth going forward. Well, let me finish. Right. So you've had a lot of hits in the last 5 years. I mean South Africa, the world, COVID, load-shedding, consumer and so on, right? And you get to see under the hood of this business. Given where it is now and how you rightsize the business, at least for the next few years, is that -- I'm not asking you to give a profit forecast, but --

I'm in the [indiscernible] after all.

Surely, it's a better place to be now than it was in the past where things might be slightly turning better and the prospects are a little bit better, as you said.

Look, this business is in a -- you have to compare our capital return and our EBIT margins against many other businesses in SA. So we've worked extremely hard to preserve the original pedigree of this business so that we haven't compromised it in the pursuit of a top line number. You simply can't prosper in South Africa if you don't deal with inflation. Inflation is something people -- we think about real money, and that's why we had a target of real earnings growth. The business' health is as good as it's ever been. If the macro environment improves, AVI has remarkable potential to deliver earnings growth because it's fit, it's got high capital returns, it's well capitalized, it's well managed. It's got obviously some categories that are more challenged, but any business in South Africa that sells to consumers you can decouple themselves from the reality of what consumers experience every day with job losses, inflationary pressure, load-shedding, load-shedding costs. I would be sitting here and I guess, it would be nice just to be optimistic. We don't run AVI like that. We've never dealt with investors like that. The business is in great shape. We need an improvement in the macro environment. I think we delivered, in a semester 12% operating profit growth. That, I think, is reasonably impressive. But for the business to really accelerate, which it could do, we're going to need to see an improvement in SA's macro environment. And I think you guys all know that, too. I don't think I'm alone in saying that. We wish we could walk on water, but we can't.

Thanks for the presentation. Two quick questions, if I may. The first 1 is in the food manufacturing FMCG space, and I appreciate that you are disciplined in your acquisition strategy. But just generally, as an industry, there have been very few acquisitions or transactions in that space. In an environment where top lines are struggling, you might have thought that firms might look to acquire to facilitate some growth. Any thoughts on why acquisitions have been at such low levels in that space? Is it a price inward focus? Just your thoughts on that.

Well, I can't speak for everybody else. I can speak obviously for AVI and our philosophy. So we compete against multinationals mostly. Everybody thinks we compete against the South African listed food sector. In general, we don't. Our competitors are all global PCG businesses, and they have fabulous brands. And we'd like to own those brands because that gives you the ability to manage your price and your volume in an environment like ours. So in our case, I mean, there are assets that 1 could look to acquiring. But the question then is, are you getting into categories where you can manage the selling price requirement in order to deal with the inflationary pressure? And those kinds of assets, in our experience, both scaled. And obviously, with strong brands, simply don't show up in the way we would like them to persuade us to participate. The balance of the market, I can't speak for other people. They might have a different perspective. But as you say, there haven't been a lot of transactions. So I guess, the other part of the system or other businesses for their own reasons look at it differently or perhaps in the same way.

Multinational, you're not finding any, say, in South Africa doesn't have a growth profile that suits them and maybe it makes sense to withdrawing these opportunities in that space?

Well, if they did, we'd certainly show up as interested for sure. But we can't, I mean I can't speak for them. I don't know if any of them who've got to that place.

Another question, if I may. Your -- the category that surprises me is your Biscuit volumes. Given the pricing, the premium nature of your product, your volumes held up a lot better than I might have expected. Just -- I'm surprised there hasn't been more down trading and more volume erosion. Just some thoughts on that?

Well, we've got a lot of affordable price points. I mean, we trade with 100 SKUs probably and some of those SKUs like Topper are very well priced. I mean they're certainly not as well priced as some of the things that you can buy, but I won't give you my personal prejudice. Those aren't very nice. So I think we meet a market need at a price point. So we saw a lot of growth in Topper where we provide consumers with what we think is a very affordable price point, but with a fantastic product, and that's, I guess, where we saw real benefits. We had a fantastic Choice season, Choice Assorted traditionally still a very important item across SA in season, so we saw good volumes there. And we got some good volume growth. We certainly had, as you would have expected in some of our higher price points, and obviously, some volume pressures. But in general, we've got reasonable growth in some of those categories, which offset some of the higher price points. But yes, we do -- people tend to think AVI is only premium. But like tea, we have Five Roses, which is still a Ceylon-based tea. It's -- we got a tea as you can drink anywhere in the world, but we will also sell Trinco. And that allows us to span price points in the system. We don't only sell at the top end.

[indiscernible] from [indiscernible] Capital. I just want to ask something about the Coty contract. So there's -- you mentioned that there's going to be the potential working capital release, as well as they are obliged to buy some of the property plant and equipment in that. Did you have a rough estimate of what the cash flow impact of that is going to be?

No, I don't think we would like to say that. I think just at this stage. We'll report that later, if I may. Sorry, at the back.

Yes. Andrew from Sanlam. Maybe if you could talk around your relationship with labor? I mean as the business -- manufacturing businesses get more optimized and more efficient, obviously, you'd likely let people go. Also, cost of living going up, wage settlements, I mean, maybe you could just give me your perspective?

Yes. Our average wage settlement was very much in line with the target that we expected. Our relationships with the unions are productive across the business. We didn't have any disputes in finalizing all of the bargaining arrangements, and we deal with quite a lot of different unions. So at this point in time that those relationships are sound, and our increases were around the 7% in general. So they were pretty sensible. I think the unions also understand that we're in a tough environment, so I think it was a pretty reasonable outcome.

Simon, we've got a few questions -- or quite a few questions from the webcast. [ Lebohang ] from [ Citibank ] has submitted several, so.

I might not answer all of them.

Would you prefer that I just read them out?

Yes, yes. Just read 1 at a time.

Okay. Segment questions on Indigo brands. How much sales will be lost from the Coty contract? How should we expect Indigo EBIT percent margin to look post removal of Coty brands?

It will look higher, as you've seen already. I'm not going to give a forecast on what the revenue will be because it will also depend on the work that we've -- going to do with our own brands or the brands we've acquired. That would be, I think, a forward statement.

On to Entyce, what will help drive operating margin expansion in Entyce? Better input pricing or operating costs?

More sales. Operating leverage, these are manufacturing businesses. So obviously, clearly, if we can get volume throughput, we're going to get an expansion in margin within reason.

On to I&J. Should we expect better I&J top line in FY '24? An estimate as hedging rolls off and Abalone sales pick up? Are you expecting some margin expansion of improved cost structure and better management of load-shedding in I&J?

I guess, let's say, that fishing improves, then the answer to those are yes. I think in general, certainly, that's what Jonty has budgeted for. Jonty, do you want to add anything? I mean you need to speak -- a mic.

Thanks, Simon. I think it's as you said in the presentation, there are so many dependencies on the drivers of the business. If catch rates improve, we should get a very good top line growth, and if currency improves, similarly too. So we have got an increase in quota. If we can harness the benefit of that, we should get that anyway.

Okay. On to apparel. How should we think about the performance of apparel during FY '24 estimated? And should sales track the second half '23 performance?

I hope so.

Further questions from [ Lebohang ] Do you expect volume uplift in ZAR strengthens and inflation softens? Or is the consumer still too weak to see volume uplift?

Yes. It's such a difficult thing to answer usefully. [indiscernible] I like that. I mean clearly, if we can get into an environment where there is some improvement in the metrics for consumers' costs that certainly finds its way into consumption, that's the 1 thing we know about South Africa is that people spend money. And so if there is obviously an improvement in wage settlements and employment, in confidence, because confidence plays its hand, we'll start seeing it in people's demand habits. But I guess it's -- anyone in the room might have a view. I'm cautiously hopeful based off, I guess, some of the metrics we're seeing, and that's specifically for our categories. But yes, it's still going to be a tough environment until we see some of those metrics change. It's my own view. I'm sure other people might have other views, but that's my view.

Further questions. Can you provide some color on post year-end sales for the business as well as [indiscernible] trading on a segmental basis?

I'd say that post year-end trading in general is reasonable. I can't be more specific than that, I'm not in a position to do that. But certainly, we're seeing some positive momentum in many of our categories which I think is encouraging, which I think I alluded to in the presentation.

What sort of inflation are you seeing in the first half of '24 so far?

Which exchange rate are you going to give me? Net of hedges, what we anticipate is what we're seeing. Clearly, some things fundamentally have to change for the inflation rate to come back quickly. There's still quite a lot of embedded inflation in SA, which compounds its way through. And of course, I hate to say it, everybody tends to forget about load-shedding. It's not a trivial problem. It's a real big issue. It's a big cost driver. You see everybody reporting results. There are hundreds and hundreds of millions of rands worth of cost that are finding their way into the system. So I guess that will affect inflation substantially. And then, of course, the rand. I mean, the rand has moved in 8 weeks from 17.28-odd back to nearly 19. So that's also a big driver for anybody who's not hedged.

So the last question from [ Lebohang ]. Can you explain tactics by retailers? We see retailers discounting aggressively. How are you managing that? And are they asking for more volume discounts, et cetera? Or has it been good for your brands?

No. I mean our relationship with retailers and the retailers themselves, they're competing in a very competitive, tough market, too. So like us, they use strategies. I mean we play our role, and we support what we think makes sense to both of us. I mean, they're our partners. Yes, it's like any set of circumstances where you've got competing constituencies all trying to create value, you're going to have tension and -- but in my experience, it's similar and it's sensible. But clearly, everybody is fighting for share.

The next question from [ Talya Ginsburg ] from [ Umthombo Wealth ]. Why were there lower catch rates for [indiscernible] and I&J?

I'd say largely weather-related.

Then we have a couple of questions from Shaun Chauke of [indiscernible]. First one, can you please speak about the launch of Tennis Rusks into your Snackworks performance? Or is that substantial in reducing the volume decline?

It was important. Rusk is not the biggest category in biscuits, but we can tell you that Tennis Rusks is now South Africa's biggest single Rusks. That was pleasing and that's obviously important, and it did contribute obviously to those volumes.

Another question from Shaun. On Creamer, with more CapEx coming online. Are you seeing Nestle regress from the SA market given unavailability of the 750 grams on creamer? Or are they generally having capacity constraints?

Look, we don't know inside the black box of their process environments. I mean we compete, we meet our own orders, and we obviously compete. We've been gaining share recently. Now, that might be a function of manufacturing issues or it might be a function of them holding price. We know that PCG businesses globally, goodness me, how long has it taken them to work out that actually you can put up selling prices? Isn't this a shock, I mean, for a decade or even longer in Europe, they never put prices up. So I've always had quite strong opinions about what it means to operate in an inflationary environment like ours, where in Europe, they haven't had much inflation. So, yes. My own view is that I think that if they are behaving differently, it's probably because they are more interested in probably making a little bit more money, we hope. But from a manufacturing point of view, I can't comment.

The last question from Shaun. With a strong performance to 85% on sales, and what is the ideal sales mix target looking ahead given normalization in trade and the challenge in retail sales?

If only business was like that, I could say, [indiscernible] I want 85% and 15%. It's unfortunately not like that. We work hard to sell as much of everything that we can, and in the end, the ratio's the ratio. We don't try and target the completely different categories, different consumption occasions, different consumers, different products. It's just definitely not that simple. I wish it was, but it isn't.

The next question from Siphelele Mdudu of Matrix Fund Managers. Tea volumes were positive in Q4 of FY '23. How do you reconcile this to high load-shedding?

Well, you remember that we went through a period where people obviously are completely exposed to low churning and then people start making a plan. Some people buy gas stoves, some people buy gas cookers, some people make different plans eventually to deal with the experience that they have. So we think that some of that has flown through back into consumption. It's my own take on this? Tea is very important. You can't live without it. You all know that.

Then the last question from the webcast for now, from Mothusi Phiri of Benguela Global Fund Managers. In addition to CapEx spending, do you expect to increase the advertising spending in FY '24?

Yes, definitely, yes, across all of our businesses.

Perhaps we can take some more questions.

I think we're going to call it there, unless there are any final pills that anyone wants to try and ask. If not, thank you so much for coming. Appreciate your time and take care.