Libstar Holdings Limited (LBR) Earnings Call Transcript & Summary

Good morning, everyone. I'm Andries Rensburg, the CEO of Libstar. I think you can be glad to see me here because I've had several mishaps this morning, but I'm here, I made it. Or maybe you're not so glad. On behalf of the group, I welcome you to our interim results presentation for the 6 months ending the 30th of June. Special welcome to our Board members, our shareholders, investment community, the media and members of the Libstar family who maybe tuned into this. For my start, I would like to just announce something that Robin Smith, our Commercial Director, who's been with the group for better part of 17 years, both as Financial Director and Commercial Director, has decided to retire at the end of December, at the end of the year, and that has been announced in the press this morning. I would just like to thank Robin for the invaluable contribution that he's made to Libstar over the past 17 years and wish him well, him and his family. And again, a sincere thank you, Robin, you and I were together from day one. Remember the [ Mahindra ] Club launches and strategic plans and we wish you well. It will not be the last that we see of Robin. Robin will remain a friend and Robin will remain with us as a consultant as and when required. I'm sure we'll see a lot of Robin going forward. Best of luck, Robin. Charl will take us through the financial strategy. And finally, I'll conclude with a comment on the group outlook before we take questions, and we'll move as fast as possible through the presentation. Need to leave some time for questions and start preparing your difficult questions for us. We've got a number of our executive team here with us today that will be joining us later on to answer some questions as we can. Moving to the introduction. I think just carry on there, that's another introduction slide. We start the presentation by focusing on some key market features over the past 6 months and how Libstar has responded. Firstly, consumer spending remains constrained. In this context, both market and Libstar volumes have traded lower with pricing and mix changes driving growth. We can just stop there for a moment. And we've seen statistics in the past week or 3 coming from the bank, some information, some data where we've seen in quarters 1 and 2 in our related categories of consumer goods, volume shrinkage of between 4% and 6% in volume terms, which is quite significant. Group was able to address the constrained market demand by continuing to launch new products, which caters to our growing market trends. Libstar's diverse product portfolio, comprising of own branded, dealer-own brand, private label and principal brands continue to assist us in responding to changing consumer behavior. Secondly, as you know, the first half of this year also saw increase in industry input costs and resulting selling price inflation. In response, the group, we relentlessly focused on cost containment, with cost increases limited to much lower levels than last year, and we will come back to that in Charl's presentation. Finally, upper income bracket consumers have shown some resilience relative to other income brackets due to better job security, accumulated savings and lower debt servicing cost. Libstar's exposure to this consumer base, customer base, therefore, offered some underpin to our results in these challenging conditions. With the ongoing impact of COVID, we continue to prioritize the safety and well-being of our workforce. The preservation of our financial stability and delivery of superior service levels to our customers, glad to say that that has remained firm and ever improving, thanks to Wendy and her team. Our COVID spend of ZAR 8 million in the first half of the year showed a reduction from the ZAR 44 million spent in the comparative period. We have continued to provide personal protective equipment and to support our employees with private COVID testing. We have also been fortunate to report over 1,000 recoveries since the start of the pandemic. In terms of our financial stability, operating cash conversion ratio and interest cover ratio has continued to improve, with gearing levels remaining well within our optimal target band. Lastly, we continue to invest in systems that improve our customer service levels by enabling better production planning. These systems have also allowed us to improve inventory optimization and demand planning to key customers. Move on to the next slide. In this slide, we summarize the group's revenue performance for the first half of 2021. Libstar operates in 5 product categories sold in 4 channels. Looking at the summary of the group's revenue performance by sales channel. We see that retail and the wholesale channel revenue decreased by 1%. This channel's contribution to group revenue normalized from 67% of group revenue in the prior year to pre-COVID levels of 61% in the current year. And you will remember us showing that to you in the annual -- in the 12 months' presentation a while ago. Last year's performance was, of course, boosted by the stockpiling of groceries in retail markets. Food service demand, particularly in the QSR, quick-service restaurant industry, recovered strongly in the current period against the backdrop of prior year COVID lockdown measures. As a result, revenue from food service customers grew by 46% and the channel's contribution to group revenue increased to 16% as before. Export suffered consequences. The consequences of COVID related supply chain disruptions last year, particularly during the first half. Fortunately, most of these issues were resolved in the current period, resulting in a 22% revenue growth on comparative period. These exports, however, delivered lower margins as a result of the significant strengthening rand against major currencies relative to last year. The industrial and contract manufacturing channel after being under pressure in 2020 grew revenue by 15%, achieving improved orders and activity in that part of our business. New contract manufacturing arrangements in Dickon Hall Foods further contributed to improved results. In summary, the group revenue increased by 8.7% during the reporting period. To summarize our results, group revenue increased by 8.7% to ZAR 5.1 billion, and gross margins contracted by 1.4 percentage points to 22%. We saw strong sales and we will unpack that further as Charl goes along. We saw strong sales performance from the group's largest categories being perishables and groceries. However, gross profit margins were severely impacted by lower demand and rising input costs within the household and personal care category, which we refer to as HPC in this presentation, and this resulted in the EBITDA loss in this category. Group margins were also to a lesser extent impacted by the lower export margins mentioned on the previous slide, which further contributed to lower realized ForEx gains relative to last year. As a result, normalized EBITDA was flat on the prior year, and normalized EBIT was down 3.7%. Depreciation charges increased due to the continued investment in capital projects. We'll touch on these projects later in the presentation and planning around that. Normalized earnings per share increased by 2.5%, while HEPS was down 0.8%. The performance of the Libstar food categories during the first 6 months compares to that of HPC. Food categories delivered a resilient performance, recording revenue growth of 10.5% and EBITDA growth of 10.1%. Compared with that, the volume pressure in the market, and we think that is a strong result, as we say, resilient. These categories contributed 93% of the group revenue and all of the group's EBITDA. Divisions within these categories benefited from significantly improved food service channel demand, as discussed earlier, as well as a resilient performance in the retail channel. An HPC demand for hand sanitizer and bleach products in the retail channel benefited significantly from the COVID pandemic last year. In the current period, the category experienced reduced demand of this high base, combined with significant cost-push inflation and service level disruptions brought by the facility consolidation project, where we consolidated 4 facilities stealth warehouses into one. We will touch on the potential savings of that later on. As a result, HPC category revenue declined by 9.6%, and a ZAR 15 million loss was incurred at the EBITDA level. We move on to our key priorities and strategies. Strategically, our immediate priority has been to protect our workforce from the impacts of the pandemic, whilst maintaining the group's financial stability and cash flows. We support the national rollout COVID vaccinations and continue to educate and encourage our workforce in this regard. Our strategy on the right-hand of the slide, remains unchanged. And I will, therefore, not go into the detail. We can touch on it a little bit later on this as you will be familiar with our previous presentations. I'll now hand over to Charl, our CFO, to take us through the financial and category views in more detail.

Thank you, Andries, and good morning, everyone. We will start the financial review with this slide, which summarizes the group's retail basket market share. On the left-hand side, we show that Libstar occupies a 12.8% market share of its defined retail basket for the 12 months ended June, unchanged in value from the comparative period ended June 2020. In the middle column, we note that the defined basket grew by 4.7%, with Libstar growing slightly behind the basket at 3.5%. This was mainly, as we note on the right-hand side, due to the underperformance of the HPC category relative to the market. As we will detail later in the presentation, first half service levels were impacted by the consolidation project. With this project now complete, we have already seen improved service levels to customers. Continuing with the financial review and looking at the group's revenue and gross profit margin performance for the first half of 2021. You can see on the left-hand side that revenue increased by 8.7% during the period under review. Group volumes declined by 3.7%, whilst pricing and product mix changes contributed 12.4% to group revenue. Food category revenue increased by 10.5%, with pricing increases and the channel mix of retail and foodservice covered by Andries earlier, mainly contributing to this result. Volumes at HPC declined by 17.4% and a 7.8% increase in pricing and mix could only partly compensate for these declines, resulting in an overall reduction in HPC category revenue of 9.6%. In the graph on the right-hand side of the slide, we show that the evolution of the gross -- group's gross profit margin since 2019. As shown, the group generally delivers higher margins in the second half of each financial year. In the current reporting period, margins declined by 1.4 percentage points as export margins suffered the impact of the strengthening of the rand against major currencies. In HPC, significant raw material cost inflation also affected margins as did reduced volume demand, which resulted in lower production throughputs. The group expects improved second half margins in line with its annual seasonality, assisted by improved average hedging rates relative to the first half of the year and improved service levels and efficiencies in HPC. In this slide, we break down the COVID related expenses for the first half of the year. The group has continued to provide support to its workforce and the communities in which it operates. As outlined earlier, a further ZAR 8 million was spent during the period under review. With the advent of the third wave of national infections, monthly COVID expenses have increased slightly. However, the year-to-date cost is in line with the upper end of the ZAR 1.5 million per month guidance provided previously. This guidance, therefore, remains unchanged through to the year-end. As committed to you at our last results presentation, we have paid close attention to controlling operating expenses in the period under review. Against the backdrop of Andries' opening comments regarding consumer pressure and rising input costs, Libstar concentrated its efforts on driving cost efficiencies across multiple line items of the income statement. As such, the group has contained increases in operating expenses to 0.9% before normalization adjustments and to 0.1% after these adjustments shown on the slide. Group OpEx after adjustments has, in fact, declined to 18.2% of revenue compared to 19.7% in the comparative period. As communicated to the market at the start of the year, a significant restructuring of the Denny business unit has been undertaken. Whilst retrenchment and settlement costs of ZAR 6.5 million were incurred by this business unit during the period under review, we expect to realize annual savings in excess of this cost. Further restructuring in this business unit will follow in the second half of the year. Below the green line, the group's depreciation expense increased by ZAR 6.6 million, in line with capital project investments last year. Operating expenses, excluding the depreciation of assets and COVID expenses, increased by 2.5%, also comparing favorably to the 7.9% growth shown this time last year. Looking at the remainder of the income statement, we start with other income. As mentioned in our trading update and commentary, the average rand USD exchange rate strengthened by 12.8% year-on-year with other major currencies following similar trends. We apply hedge accounting policies to the market revaluation of open foreign exchange contracts. However, realized FX gains and losses, which include the revaluation of foreign currency denominated cash, debtors and creditors are recorded in the income statement. The effects of these latter realized gains and revaluations predominantly resulted in the reduction of other income from the ZAR 77.8 million in the comparative period to ZAR 16.1 million this year. It is this reduction in other income, which also resulted in an 18.5% reduction in operating profit before normalization adjustments. Normalized operating profit and normalized EBITDA, which excludes the impact of unrealized foreign currency movements and other nonrecurring items, reduced slightly by 3.7% and 0.2%, respectively. In this slide, we unpack the EBITDA margins achieved by each product category compared to group targets. The food categories delivered an EBITDA margin of 11.1% before the allocation of corporate costs, which remains unchanged from the comparative period. Although the margin in Perishables increased from last year, it still fell below the group's stated target band. The groceries category delivered an improved margin and the performance within the group's target range, which was increased at the end of last year. The margins in the Snacks & Confectionery and Baking & Baking Aids categories reduced from the prior period and ended slightly below the stated targets. Clearly, HPC, having made a loss at the EBITDA level was also well below target. I will highlight the reasons for the margin performances of each category in our category review discussion a bit later. Moving on to the next line of the income statement. Net finance cost reduced by 18.3% as the group benefited from the full period inclusion of the reduction in JIBAR, which took effect in the prior year. The group has also benefited from the implementation of centralized treasury management to improve yields on idle cash balances. Profit before tax declined by 18.6%. The group's effective tax rate guidance remains at 28%. The 31.8% current period effective rate arises mainly from hedging gains and group share plan revaluation movements, which are recorded in other comprehensive income. Group profit after tax reduced by 25.8%. After normalizing for non-operating items, such as the amortization of intangibles, the retrenchment and settlement costs and unrealized FX movements, normalized earnings grew by 2.4%, whilst normalized headline earnings reduced slightly by 0.7%. On this slide, we show the reconciliation from our normalized EBITDA to normalized earnings and headline earnings. Lower finance costs more than offset the increase in asset depreciation and taxation, resulting in an increase of 2.4% in normalized earnings. Normalized headline earnings reduced slightly by 0.7% as the group recorded a gain of ZAR 2.3 million on the disposal of assets in the current period compared to a loss of a similar amount last year. We now move on to normalized EPS and HEPS. The weighted average number of shares in issue remained unchanged at 595.8 million shares during the period under review. This resulted in normalized EPS and HEPS being aligned to normalized earnings and headline earnings, which increased by 2.5% and declined by 0.8%, respectively. Our dividend policy remains unchanged. Dividends are therefore declared once per annum at the year-end results. That then completes our discussion of the income statement. Moving on to cash flows. Libstar reports an operating cash conversion rate in accordance with the formula shown at the top left of the slide. As shown in the line graph on the right, the group's cash conversion rate has been improving since 2019, with a conversion ratio of 102% achieved in the current reporting period. Please note that our calculation now includes lease payments, and the historic numbers have been restated accordingly. The contributing factors to this improved conversion rate are shown in analysis below, where cash generated from operating activities increased by 48% to ZAR 332 million as a result of significantly lower absolute investment in working capital and reduced finance charges. The reduction of cash outflows from investing activities represents a lower spend on capital projects relative to the prior period. The substantial increase in cash flows from financing activities during the period under review is due to 2 factors. Firstly, the group paid ZAR 150 million dividend in the current period compared to no dividend during the comparative period. You will remember that the 2020 dividend was deferred until the group had assessed the impact of COVID-19. Secondly, the group voluntarily repaid a group revolving credit facility of ZAR 150 million in the current period from internally generated cash. Moving on to capital expenditure. The ZAR 134 million spent on capital projects during the period under review shows that the group continued to invest in capacity and efficiency-enhancing projects in line with its strategy. As shown on the slide, we carried forward additional investment in the hard cheese packaging facilities of Lancewood during the period and also completed the facility consolidation project at HPC. The Lancewood and HPC projects will start contributing to group profitability later in the second half of 2021, whilst the other projects have already started to contribute from the first half. In line with the group's previous guidance, investment in capital projects at 2.6% of net revenue came back into the group's stated target range. As we then look ahead to the remainder of the year, the group will be investing in the expansion of its wrap facilities to service the growing demand for these products. The total investment is approximately ZAR 80 million, and we expect to commission these lines late in 2022. We therefore expect the total capital expenditure for this year to slightly exceed the 3% of net revenue guided for the full year. We showed this slide at our year-end results and have updated it for capital expenditure incurred during the current reporting period. As shown on the far left, group capital expenditure as a percentage of revenue peaked in 2019 at 4.1%, and this number has steadily reduced since then. The group has continued to invest the majority of its capital in its largest category by revenue, perishables. You will notice that all projects except the hard-cheese packing project in George are now complete. This project will be completed at the end of the third quarter of this year. We target to achieve production cost savings, packaging cost reductions and service level improvements from the fourth quarter of this year. During the period under review, the Millennium Foods business unit recorded improved line utilization from the production of frozen products, albeit from a lower prior year base. We continue to explore opportunities to expand the division's geographic footprint. The projects in the groceries category were already performing to expectation for much of 2020. Moving down the slide to the Baking & Baking Aids category. We have seen an improvement in the par-bake line utilization during the period under review and are working with our trading partners to drive the further rollout of these products in the retail channel as well as exploring food service applications to increase capacity utilization. Finally, the HPC facility consolidation was completed in June and comprised the integration of 4 separately located production and warehousing sites. The project is intended to streamline production and distribution within the [ Czech ] chemicals business unit. As we mentioned earlier, these integrations do present their own unique challenges. And in this regard, we certainly experience service level disruptions despite building inventory in anticipation of the facility move. Now that we are producing and distributing from the site, we expect annual cost savings to materialize from the second half of the year. Looking at net working capital. The investment in net working capital decreased from the 55 days of the comparative period and the 54 days at year-end to 53 days at the end of June. The group's total investment in net working capital, therefore, ended at 14.5% of revenue, which is within the group's stated target of 13% to 15%. Creditors and debtors days have largely come in line with our peak over trading period. However, inventory days have remained higher than usual as we focus on retaining sufficient levels of inventory to service our customers and to withstand the impacts of global supply chain disruptions, which do continue to impact production planning. This is particularly true of our larger divisions, such as Lancewood, Finlar and Cape Herb & Spice, which have each held higher inventory levels relative to the comparative period. We do expect absolute inventory levels to remain higher than the 2019 levels for the foreseeable future, although the total net working capital balance should remain within the stated target band. Looking at interest-bearing net debt and gearing. This slide demonstrates that Libstar has been able to maintain a consistent gearing level despite continuing to invest in significant capital projects since the 2018 IPO. We have also been able to maintain our dividend policy. Our capital allocation priority continues to be one of investing in group capacity in growth areas as well as efficiency enhancing projects, whilst maintaining our dividend policy of declaring one dividend per annum at the final results. The group operates well within its 1x to 2x gearing ratio target range and has complied with all lender financial covenants throughout the reporting period. Share buybacks remain a hot topic for investors. In this regard, the group will consider further buybacks to the extent that it de-gears below the current levels. However, gearing will not be increased for this purpose. This slide summarizes the group's key financial ratios, most of which we've discussed in the preceding slide. The important ratio to discuss is return on tangible invested capital or ROIC, at the bottom of the table. In the first half of 2021, Libstar delivered an annualized ROIC of 12.9%, which is lower than the 14.3% delivered in the comparative period and slightly lower than the 13% reported at year-end. This return remains above the group's 12.2% approximate weighted average cost of capital and is expected to improve as we extract benefits from our capital projects. Moving then on to the category review. Libstar continues to operate in 5 product categories. As shown on the slide, each business unit operates in a fully decentralized manner with support from the group executive. Since listing, the operations of 3 separate HPC divisions have been merged into a single market-facing division. From the fourth quarter of this year, the food service facing components of Rialto and Multi-Cup will be combined to improve the group's route to market into this channel. Other divisions within the group continued to benefit from resource sharing where appropriate. When we turn to the revenue contributions of group categories, the pie chart on the left shows that our food categories contributed 93% of group revenue in the first half, with HPC contributing 7%. In 2020, food categories and HPC contributed 91% and 9% of revenue, respectively. Perishables constitutes 48% of the group's revenue, up 2 percentage points from the comparative period and remains the largest category by revenue, followed by groceries, which at 32%, increased its contribution by 1 percentage point. When we look at the same breakdown for normalized EBITDA, the relative changes in category contribution are more significant. The perishables and groceries categories each increased their EBITDA contributions by 6 and 7 percentage points, respectively, with the food categories contributing all of the group's EBITDA. Moving on to the detailed performance within each product category and then starting with perishables. Due to time constraints, I'll confine myself to addressing the 2 largest sales channels, namely retail and wholesale and food service within each product category. In the pie chart at the top left of the slide, you'll see that retail and wholesale remains the single largest channel contributor to perishables revenue. This channel's contribution to category revenue reduced by 8 percentage points to 60% in 2021 as the sales mix normalized to pre-COVID levels. Food service, the second largest contributor increased its contribution by 6 percentage points to 27% as demand recovered from the lows of Q2 last year. When we look at the revenue performance by channel in the table at the top right, perishable sales into the retail and wholesale channel declined slightly by 0.7%, delivering a resilient performance when compared to the high base of last year, which benefited from Q2 stockpiling. Food service recovered strongly, growing by more than 40% with Finlar driving the category's 12.5% revenue growth. The bottom table summarizes the performance of the perishables category. The category's 12.5% revenue growth was primarily driven by a change in the price and mix of products. Within the largest division, Lancewood, volumes of hard and soft cheese increased, whilst volumes of fresh milk and juices reduced significantly. Within the second largest business unit, Finlar, volumes grew significantly following the recovery of food service channel demand and the continued strong performance of fresh and frozen products within the retail channel. At Denny, the business unit achieved its cost containment and price realization objectives. However, significantly lower production yields, particularly at the [indiscernible] facility, resulted in reduced absolute revenues and EBITDA margins. The category gross profit margin reduced by 1.4 percentage points as lower yields from Finlar and higher milk prices impacted manufacturing margins. However, EBITDA increased by 17.1% at an improved margin of 8.2% as overhead costs were generally well contained, particularly within the Lancewood division, where cost savings more than compensated for increased input costs. The contribution to groceries category revenue from the retail sales channel, shown in the pie charts, reduced by 3 percentage points to 47%. The export channel contribution grew by 2 percentage points to 28% of category revenue. Looking at the table on the right, the retail sales channel continued to perform strongly, recording a 5.7% revenue growth despite the effects of COVID stockpiling in the prior year. The 20.5% growth in export channel revenue was largely brought about by the ability to improve our shipment performance rates in the first half of this year following significant delays experienced in the comparative period. This bolstered the category revenue, which grew by 12.9%. In the bottom table, revenue growth was, like the perishables category, largely driven by pricing and mix changes as strong volume growth in value-added meal ingredients and exports were offset by lower volumes of vinegar and water. Whilst lower export margins impacted the groceries category EBITDA margin, the recovery of food service channel demand, the addition of new outsourced manufacturing customers at Dickon Hall Foods and continued strong retail channel performance of value-added meal ingredients assisted the category to improve normalized EBITDA by 17.6% at an improved margin. The retail channel remained the largest contributor to the Snacks & Confectionery revenue at 82%. Looking at the table on the right-hand side, revenue from this channel reduced by 12.2% as demand for nut mixes, granolas and bars did not recover from pre-pandemic levels. As a result, and as shown on the table at the bottom of the slide, volumes declined by a significant 33.3%. Pricing slightly compensated for this, resulting in a category decline in revenue of 11%. Significant cost containment measures and production efficiency enhancements completed in the prior year assisted in the improvement of category gross profit margin by 2.5 percentage points. However, category EBITDA declined by 22.1%, as it should be noted that the prior period included a realized foreign exchange gain of ZAR 6 million, which did not recur in the current period. The EBITDA margin is still within the group's target range of 14% to 17%. Looking at the Baking & Baking Aids category and starting with the channel contribution to revenue on the left, you will see that the retail channel decreased its contribution to category revenue from 88% to 84%. Sales into this channel were resilient despite the high 2020 base. Food service channel demand for wraps, particularly in the quick-service restaurant industry recovered strongly, recording over 50% growth and increasing the channel's contribution to category revenue from 7% to 11%. The food service channel recovery bolstered category volumes, which is shown at the bottom of the slide, increased by 5%. However, a significant reduction in low volume, high-value baking aids relative to the prior year as well as increased baking input costs resulted in a lower category gross profit margin of 25.8% and a reduction in category EBITDA of 9.5%. Moving on to HPC. Category revenue on the right-hand side reduced by 9.6% with the largest sales channel, retail and wholesale, largely driving this decline. On the bottom of the slide, we show that volume sales declined by 17.4%. Pricing and mix changes offered limited compensation for significant increases in the pricing of critical raw materials, resulting in a 10 percentage point reduction in category gross profit margin to 9.2%. Some additional challenges were experienced during the facility consolidation, including the write-off of slow-moving inventories and pellets in the amount of ZAR 9 million. Lower volume throughput in the facility resulted in a decreased recovery of fixed overheads, which contributed to the reduction in EBITDA from a ZAR 37.1 million positive number in the prior year to a loss of ZAR 15.3 million in the current year. Whilst an improved performance in line with last year as expected in the second half of this year, HPC's performance will, therefore, nevertheless, be down on the full year. I will now hand back to Andries, who will take us through the group outlook.

Thanks, Charl. Just get my stuff sorted out. We're pleased to -- that our food businesses have held up well despite continuing pressure on consumer demand. And Charl has illustrated well of where we see the pressures going forward. As we indicated previously, consumer demand will remain tight. And yes, we've got a few things to fix. Let's move on. On product innovation, product innovation remains a core advantage of Libstar in being able to respond to the changing consumer behavior and needs. The first 6 months of 2021, we launched 316 new and renovated products, including a cheesecake mix in Lancewood and a few others and plant-based meat alternative products in Denny. Since listing in 2018, we have launched more than 1,800 products, and we will continue this drive strongly within our companies and with -- in conjunction with our retailers and wholesale market and food service market that we work with. I heard this morning, I heard about one or two, three very exciting new initiatives that's being launched. If we move on, taking advantage of our market trends, we are seeing key 4 changes in market trends since the start of the pandemic. Firstly, consumers are buying different items than before, trying to stretch their disposable income further with a focus on the necessities. Consumers are also cooking at home more often, cleaning their own homes more often, not in my house, but any case, and performing their own beauty regimens at home. Thirdly, there's been a shift to favoring local and sustainable products. Whilst finally, the affordability of goods has become very important and more important than ever. Wendy, we can show you a bit later on if we deal on it in question time that new information that we received from Nielsen yesterday indicates that private label, dealer owned brands and -- are becoming more prevalent and growing market share in this time that we're living. On the right-hand side, we show that Libstar has responded to this change in consumer behaviors. Libstar offers a well-diversified portfolio of brand solutions that include private label and dealer owned brands, which means that we can cater to varying needs and price points, as indicated, across the categories in which we operate. Looking at Libstar's competitive advantages, we have a resilient, adaptable and diversified portfolio, which is well positioned to take advantage of the market trends discussed in the previous slide. Our consumer profile is also resilient and our strong customer relationships are supported by our hands-on category approach, in which we've invested a lot more lately, both in time and money and resources. Our private label DOB offering continues to go ahead of the market with strong growth in sauces and condiments, underpinned by our culture of innovation. Moving on to the outlook of our sales channels on the left and product categories on the right. We look ahead to the remainder of the year, we see retail and wholesale channel revenue largely normalizing around the current levels with pressure as experienced and alluded to earlier. With food service continuing its recovery, see, we're moving to level 2, one of these days they speculate. We expect to see continued strong volume demand for our dry-condiment products in key export markets, although we're experiencing higher freight costs and periodic shipment delays on the import side. The industrial and contract manufacturing channels are expected to continue to benefit of new wet-condiments outsourced manufacturing agreements into the second half. Looking at the category impact on the right-hand side, all categories should continue to benefit from the resilient performance of the retail and wholesale channel. However, consumer pressure remain prevalent as indicated and pose downside risk to volume growth. The perishable and baking categories are expected to benefit from the recovery in the food service demand. In the groceries category, improved ForEx cover rates are expected to assist somewhat in increasing export margins, although further shipment delays could impact the year-end result. In Snacks & Confectionery, we expect continued weak demand for higher value nuts, nut mixes and granolas, and we'll continue to diversify our product, working with our key customers to compensate and make the basket more attractive to the consumer. Now that the facility consolidation at HPC is complete, we expect the facility consolidation and a renewed focus on the frontend of the business to aid in second half recovery, especially savings coming through. Looking at trading in the first 2 months of the year, retail and wholesale channel revenue has been off to a slow start, mainly impacted by the timing of deliveries into distribution centers and some container shipment delays, particularly during the recent cyber attack at Transnet. As these issues are largely of a timing in nature, we do expect improved sales into the channel as we near our high-value impediments of the fourth quarter. The food service channel continues to recover gradually, while export demand remains strong. However, export container costs and availability continue to impact the timing of our shipments. The industrial and contract manufacturing channel has experienced continued growth from existing and new customers into the start of the second half. Let me just see where I'm now. There we go. We look at the headwinds and tailwinds, group outlook going forward. There is a list that I've listed there, a [ CAS ] list, some of it more applicable, some of it less applicable, but just mainly discussion points that we can touch on a bit later. In conclusion, we still face a number of headwinds. Regarding pressure on the consumer and rising cost inflation, we expect it to continue to see volume guided pressure in certain select categories. We also continue to operate in a very competitive HPC market, currency volatility and supply chain disruptions also pose a risk to the value and timing of revenues. The tailwinds, we look forward to include the fact that we will benefit from various cost control improvements in addition to the completion of significant capital projects. We will continue to innovate and work with our trading partners to offer pricing support and invest in the categories, both in terms of cost efficiencies, but also in terms of innovation, planning, category, exportation, et cetera. Maybe it's important that I stop here, and we can come back to that, although we measure our performance in categories. All of our companies are fiercely independent in addressing the customer needs. And the customer to us has become and will be very important in our lives. So we -- in our different companies, we have a very strong customer focus, individual customer focus. As Charl indicated, in a decentralized manner, addressing the customer needs, and we will continue to focus on our customers who is very important to us, especially in retail and wholesale, but also in our larger food service customers and export customers. In Slide 42, I can carry on to that, for your own perusal, we have summarized the reasons why Libstar is well positioned to weather the challenging conditions in which we operate. We thank you for your time. We'll take a quick break. And then we turn over to the executive management team to take questions from the audience. Please share your questions in the spaces provided in the meantime. Thank you very much.

Good morning, everyone. My name is Johan Greeff. I'd like to welcome you to the question-and-answer session. I'd like to start with an apology. I was informed that there were some connection issues during the presentation. So we hope you managed to reconnect and apologize for the technical problems that crept in. We'll be posting the video on our website after the Q&A session to those that might have missed a portion of the presentation. So I encourage you to please view the video. Please feel free to send your questions to the panel. Thanks to those questions that's already coming through. We will try and answer as many as possible in the next 30 minutes. Those that we don't get to, we'll respond by e-mail. So let's get started by introducing you to the Libstar leadership team that's joining now on stage. Joining us virtually from Libstar and following on from the right on the stage, we have Daniel Jacobs from Ambassador Foods. We've got Tim Judge from Finlar Fine Foods. We've got Cornel Lodewyks from Lancewood as well as Millennium Foods. Andries Van Rensburg from Libstar, Charl De Villiers from Libstar, Paul Jibson from Cape Herb & Spice. And finally, Wendy van Zyl from Libstar as well. Thank you, Charl, Andries for taking us through the first half year results. The first question I'd like to pose to Andries with regards to where do you see the group's performance in H1 2021 in light of the challenges that were faced by the market, if so, please elaborate why?

Yes, I think it was quite clear out of the presentation that Charl did is if you look at our food side of the business vis-a-vis the non-food side of the business, food side of the business representing about 90-odd percent of the business as such. You will see that our revenue and our normalized EBITDA were both up in excess of 10%. Compare that to market, market trends, as I've indicated, I think Standard Bank Securities issued a report of a measurement of volume growth in selected food categories from '17, which include ours, was around 4% to 6%, Wendy, am I right, in the first 2 quarters in our comparative period. So with volume pressures like this, sort of 4% to 6% drop in volume off-take in the retail, which is the biggest part of our business. I think our performance is quite good and strong. There is, of course, the things that always catch up with you, this terrible performance from HPC is due to the reasons that we can unpack further, but that we've mentioned in the presentation. And then to me, the biggest disappointment has been, after all the hard work that we put into mushrooms into Denny Fresh. I have to state that Denny Fresh is Denny groceries, which is the soups and the sauces and that side of the business. The Denny Fresh side of the business, the production challenges that we've experienced, to a lesser extent still experiencing was very disappointing after getting up the pricing to acceptable levels, our volumes, our customers being the service there was improving, et cetera. Now we sit with no mushrooms to sell. So yes, we do have our disappointments. But all in all, in our -- by far, the biggest part of our business, we've seen resilience, resilient growth despite quite challenging conditions as we indicated in the presentation.

Thank you, Andries. There's a few questions that pertains to HPC coming through. So I'm going to try and group them together. So from [indiscernible] as well as a further question from Sumil around HPC. The question follows; HPC continues to be a volatile [indiscernible] performer. The losses detracted from an otherwise solid group performance. Are we considering selling this business and doesn't make sense within the portfolio. Andries, do you want to comment on that?

I think, Johan, we have considered it previously. I still remember [indiscernible] some of the stage a while ago. But we realized that we had a lot of fixing to do in the business. And the business was spread over 4 different business sites, very inefficiently run and very inefficiently -- inefficient on logistics and costing us a lot of money in logistics. We spent a bit of money, and I'm pleased to say that it's come online where everything is now housed in one facility. And I think out of that rationalization, we're projecting at least a ZAR 15 million, ZAR 20 million in saving per annum. As you are aware, our previous period performance was quite good despite the fact that we have not consolidated the business as we've consolidated it, but they have a lot to do with the pandemic. With the pandemic moving in another direction, we had headwinds in terms of mainly the retail and it is the retail facing business. And the competitive set has changed quite dramatically. Together with that, we experienced and did not handle it very well, the transition from one facility to the next to -- 4 facilities to one facility, which has been done now. I think we're in good shape to save money. We have addressed our pricing in the market. Our volumes have come back in the month of August to budgeted volumes and we feel that we're in a much better position now. Will we consider shutting the business? It depends. It depends on whether there is a willing taker for this business now because the track record, and we talked about the volatility or Sumil has talked about the volatility there in the question or someone has talked to it. How do you sell the business before we've settled it in nicely? But I won't term it out for sale at the moment. Let us first see the consolidation effect playing out and the market service that was playing out in the second half. Having said all of that, it is a very competitive market. And our competitors are actively attacking pricing in the market. It's a market where volumes are under pressure at the moment coming off quite a high base. So yes. Anybody want to add to that, Robin or Charl or?

No, thanks.

All right. Let's move on to the next question. Charl, this one is for you from [ Peter Cromberg ]. Does this plan to settle or refinance the ZAR 120 million of debt due to the next 12 months, how much headroom is available for acquisitions?

Thanks, Johan. Yes, I think that's a good question. We have a component of our term debt coming up for maturity next year, November. So we've been quite proactive in that regard. We've already engaged various counterparties to look at options around a refinancing exercise, and that is progressing nicely. So I think the next time we report, we would like to report on that in particular. In terms of headroom, going forward, we mentioned that the gearing level has remained relatively stable despite investing, I would say, unusually high or above guided levels in capital projects. But despite that, we sit within our range at 1.4x EBITDA gearing. And we think that we could push that up close to the 2x comfortably within the listed space. So that does offer quite a considerable headroom should we find a chunky investment that makes sense in the context of the food portfolio.

Thanks, Charl. There's a question here for Wendy, [ Tinashe ] from Afrifocus Securities, asks, good morning, and thank you for the presentation. May you please provide more insights in the private label versus branded products dynamics, as noted with records Nielsen which product or product categories are growing their market share?

Thanks, Johan. Private label continues to show a really positive performance throughout the year, especially versus a year ago, where we saw exponential growth and growing quite handsomely ahead of the name brands within the total market, gaining more than a percentage point. So sitting at about 24.6% at the moment, which is a sizable position to be. I think if you look at the ever-evolving and changing role of private label within the market, private label will continue to grow as they enter different categories and into different segments and also addressing different consumer needs and also consumption occasions. Some of the key categories that have shown really good growth has been wet-condiment, some specialty sort of reward categories. We also find that this private label dealer owned brand kind of products are becoming more really available to shoppers in the retail environments that they shop in. So this phenomenon will continue to grow and private label is definitely here for the long run.

Great. Thank you so much for that. There's a question from Sumil Seeraj, maybe I'll turn this to Charl. Further, can you please comment on the group hedging policy? How consistent is the policy? Why has there been such significant deteriorating in ForEx guidance given the policy?

Thanks for that very valid question. So your hedging policy is there and it has been developed in conjunction with our business units who each have a unique hedging policy that is catered to the circumstances and with the assistance of a counterparty. The hedging policy only takes you that far. So we hedge account for the revaluation of open FEC contracts, but you do not hedge account from the date that that sale is realized up until the date that you finally settle your creditor or your debtor settles you. So your revaluations of your foreign-denominated cash and your debtors and your creditors, that will still go through your income statement. And in this regard, we held quite a bit of U.S. dollars in our foreign currency accounts during the comparative period and into this period. And that unfortunately resulted in us recording a big swing in realized gains. At the end of the day, we want the volatility to be as low as possible. So it was mainly the swing from the high gain of last year to the minimal gain of this year that recorded that swing. Looking forward, I think what we want to do is we want to reduce the balances that we hold in foreign currency. It was a unique circumstance that resulted in this. So we will be looking to further reduce the volatility by reducing cash balances where it makes sense.

Thanks, Charl. Daniel, there's a question for you on Ambassador Foods from [ Dirk ] from [ Gafisa ] Asset Management. What is the plan at Ambassador Foods given the significant volume declines? Are exports a viable option yet?

Yes. So Johan, just -- I think you want me to just put it a little bit in perspective as well. So if you look at the snack category as well. So there's ups and downs movement within the category as well. So I mean, obviously, your luxury nuts has been declining because there's quite a strain on the consumer's wallet. So we've seen a lot of down value, down purchase in terms of value and price. Having said that as well, we've seen a little bit of uptick and up-spike in terms of the confectionery balance within that business as well, which means that it kind of looks like people like something sweet when it's in difficult times as well. Within the snack category itself, there's a lot of damage or loss of sale specifically in the [ box ] and the smaller package sizes as well. But with schools and universities and business starting reopening as well, we're slowly but surely seeing that trend picking up a little bit, specifically in regards to more bulk offering with multipacks and so forth. Having said that as well, is that, I mean, on the export sides, we've been working hard on the export sides. We've got one or two customers, which were opened, and we continue to focus on those as well. But I think the business has been built for the past 3 years on innovation and being able to adapt. So I mean, we're constantly looking at the market, looking at opportunities and invest into those capabilities and restructure ourselves. So yes, I think we will be -- we'll start seeing the results quite soon to actually make up for those losses.

Thanks, Daniel. There's a question from [ Taylor Ginsberg ]. Andries, I'll pose this to you. What is the succession planning for Libstar, if they are any?

Good to hear that last part of the sentence, if there are any. I think we've just illustrated with Robin moving on after 17 years. He said that Charl is now more than fit enough to take over his role. And he's moving on at the end of the year. If you refer to me, we have been, and as I indicated previously, in consistent discussion with the Board, with the subcommittee of the Board, the NOMCO responsible for this -- for looking at succession planning. Talking about myself, yes, we are in discussion, and we will inform the market well ahead of time regarding my replacement and, yes, discussions are being conducted. So that's all I can -- all I would like to say at the moment. You, Charl.

If I can maybe just add to that, at least to start with the succession at the executive level, but what is also quite important to us is the succession within the business itself. And we believe we have quite a depth of talent, and we've done a lot of work with our internal HR teams in terms of identifying young and upcoming talent and giving them a mentor within the business and giving them the opportunity to learn and to grow. So I think we're in a much stronger position within the divisional side of the business than we were, say, 2 years ago. So that is also something that needs attention.

Thank you, Charl and Andries. There's a question here for Paul also from [ Dirk ] from [ Gafisa ] Asset Management. You mentioned strong export demand at Cape Herb. Can you give us more details on the categories or geographies behind this? Is this new customers or existing? And how is the key business performing here?

Okay. So I think let's talk about the first 6 months versus last year. As Charl said, we had a lot of -- apart from the erratic order patterns from our customers last year, we had significant delays in getting the vessels and the containers out in the first 6 months. So we're still faced with quite a bit of challenges in getting our containers on a vessel and to our customers, but a lot less this year than last year, which is why we're showing that 22% grand value growth. If you smooth out demand and you take our grand, we're kind of year-on-year showing a 5% growth. That 5% in volume growth is existing business, its organic growth. Last year, our customers around the world consolidated. They're focused on the current SKUs, making sure their shelves are full, very little talk about innovation and newness. So this year, it's almost as if the world has opened up and everyone's now excited and they're wanting all the innovation and new products. So in your mature markets, very much opportunity exists in kind of ethical and clear labeling and convenience health sectors. And those are your, I mean, we export globally. So your North America, your Europe, your U.K., Australia type, Japanese type markets. We're also seeing significant opportunities in other markets where disposable income seems to be increasing. So in Indonesia, China, Turkey, where the category isn't as developed as mature markets, which we need to target aggressively. So Australia, slightly down on previous year, and that's due to the seriously hard lockdowns and also our customer base that doesn't have an online outlet. But then we're seeing massive growth in -- out of Japan, for instance, out of the U.K., out of Europe and out of the USA. So it's -- we're well spread around the world. Especially in the herbs and spices, we've been doing it for 25 years. And if one market is down in the year, the other market picks up. But there's plenty of opportunity for us to grow. But a lot of focus is on getting the existing demand, the existing organic growth, getting it out onto a ship and getting it to our customer. On the tea side, fantastic acquisition of that Healthwise brand, that's packed into Japan, predominantly robust. We're seeing massive, but good demand coming out of that product and out of Japan, which obviously gives us opportunity to leverage our other customers around the world with the same product. So all in all, pretty pleased with the growth that we're seeing. It has continued into the second half of the year. So hopefully it will continue into many years to come.

Thank you, Paul. Much appreciate it. There's a question here from [ Actis ], I'll pose it to Robin. What is the group's outlook and strategy on new acquisitions?

Thanks, Johan. Let's deal with the strategy first. You'll be aware that Libstar was indeed started and developed on a buy-and-build strategy with more focus, perhaps, in a lot in recent years on build rather than buy. However, strategic acquisitions remain very much part of our 3 pronged growth strategy as enunciated by Andries earlier. And we currently, as Charl said, we have a solid and fit balance sheet. So we have sufficient cash and facility headroom to execute on strategic acquisitions. And we are currently looking at a number of promising opportunities. From an outlook perspective, just going back slightly, 2020 seemed to be a very subdued year in terms of acquisition activity. But things have changed. As Paul pointed out, I think the world has started to wake up and realize that pandemic is not going anywhere soon and people who are perhaps sitting on their hands in terms of thinking about disposing of their businesses, all or parts, have kind of changed their minds and got into gear. And so we've seen an increase in potential M&A activity, particularly in our space, but talking to banks and others in other sectors as well. And so, yes, 3 or 4 or 5 opportunities have come across our desk recently, and we're in the process of evaluating these against our acquisition criteria.

Thanks, Robin. Charl, there's a question I'd like to pose to you from [ Mira, McKina ] Capital. Do you expect the GP margin pressure in HPC to continue into the second half of 2021, given the competitive pressure and adjustment of pricing towards downwards? Is this long-term margin guidance for HPC still valid?

Thanks. I think based on where we sit at the moment, we've come out of a very tough 6 months. We are starting to see some of the initiatives that were delayed into the second half, like the facility consolidation, like some costing and pricing changes taking effect into the second half of the year. As we said in the presentation, we expect it to be kind of tracking on a like-for-like basis, flat on last year in the second half of the year. So that should mean that we have an improved margin. And for that reason, given that both the historic performance of the category over a longer period of time and what we expect to realize in terms of the cost savings that Andries mentioned, the 4% to 6% EBITDA margin target still remains relevant.

Thank you, Charl. A further question to you from [ Ziaf, AM ] Investment Management. You mentioned items of nonrecurring nature are excluded from the normalized earnings figure. Are you expecting a reoccurrence of any insurance proceeds and government grants in the upcoming year? Please advise if this was considered in your normalized earnings figure.

Thanks for that. Yes, both of those items were considered in the insurance. I'll have to confirm on the insurance proceeds side, but certainly on the government grants. We do not expect insurance proceeds to recur because if it happens, it means something has gone wrong. So as far as we can, we can help it, we would not want to see that one recur. We do receive a small amount of government grants on an annual basis and that item will recur. I can maybe respond on the insurance proceeds under a separate cover.

Great. There's a question here for Cornel. The significant portion of Libstar's capital investment has been within the Lancewood group division. What was the capital place invested? And when will the projects be completed?

Lancewood invested capital in both RG's production capacity as well as RG's packing capacity. And obviously, both the investments, we did it to capitalize on growing demand. If you look at the production capacity side, we acquired the assets of Lancewood cheese facility in Sonnendal, further develop or further enhance the factory to Libstar industry standards. And that gathers approximately 7,000 tonnes additional capacity on RGs. Obviously, the benefit of cream handling as well as the benefit of a concentrated way perfectly positioned between the 2 big factories in [indiscernible] and in George. Then on the packing capacity side, the investment was to increase our utility capacity on electricity as well as cooling. And they're in the commissioning, very excited about that, the commissioning of a first of its kind of African [indiscernible] industry, a fully automated packing line from cutting to pelletization. Both of these projects has been commissioned, delivering earnings on the Sonnendal side or the production side. And then obviously, it will deliver earnings in quarter 4 on the packaging side.

Thanks, Cornel. There's a question on quick-service restaurants. Tim, maybe you can field this one. The hospitality industry is far from fully recovered with trade in quick-service restaurants recovering faster than sit-down restaurants. What is our view on that?

Thanks, Johan. Fortunately our partner is very well positioned with the drive-through solution offering call and click solutions. So we've recovered very strongly through that channel. We're not particularly exposed to formal sit-down restaurants. I think we've previously indicated to the market that if you look at pre-COVID levels that we were 10% to 15% off. I'm pleased to say that we've strongly recovered. We're not at pre-COVID levels yet, but -- at full pre-over levels, but we're currently operating between 90% to 95% of those previous volumes. If I look back over the last 2 years, though, probably the standout feature has been -- where previously, 2019, we would have had 50% of our volume in beef and 50% in chicken. We currently now have 56% of our volume coming through in chicken and 44% in beef. And that's a very strong performance through our formal retail partners that we work with.

Great. Thank you so much, Tim. That concludes the question. There doesn't seem to be any other further questions. If there's anything else anybody would like to mention, Andries, to maybe wrap us up, and then that will complete the question and answer session for today.

Maybe just as a remark, something that we touched on earlier and thinking about what Tim has said now. What we did not mention is that we've just approved significant capital to expand our [indiscernible] line for the third time Tony, Tony is sitting over there, for the third time in 6 years, 7 years, to add production capacity, mainly because of the QSR industry where we manufacture wraps for one of the bigger players or, I would say, the biggest player. It also indicates a change in eating habits, where the wrap is used as a cost-effective tool to make treats and snacks and whatever you want to call it, meals in the QSR industry. So we firmly believe that QSR will be back. Convenience will be back. And it's illustrated in what's happening at the moment. I think there will be a few changing habits, but we are well placed for that. Having said that, just to round off with, we have more and more in Libstar become aware of the need for our different companies to operate seriously independently and to face the competitive fit out there. We are reporting under our categories of perishables, groceries, et cetera, et cetera. But our companies are very seriously independent and very proud of their relationship with their customers and very protective of the relationship with the customers. Where we see the synergistic relationship is, as I've just indicated, investing in those companies like Tony Amaro, like Amaro Foods to produce cutting edge, innovative products going forward. And that is happening, I'm proud to say, in 90% of our companies. So I think I want to emphasize that fiercely independent, proud operators that we have out there, and I want to load them for that. And at the same time, the support of people sitting around with me in terms of financial support, operating support, market support, Wendy helping the guys on the key accounting side, the category analysis, et cetera. But that all is in support of the real heroes that's out there running our companies individually.

Thank you, Andries. Appreciate that. So that brings us to the end of the question-and-answer session. Thank you, everybody. Please go online if there was bad connection. The full record question-and-answer session as well as the presentation will be available for you to download and watch. Thank you very much.