Libstar Holdings Limited (LBR) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the 2021 year-end results presentation of Libstar. We've again decided to host this event virtually. We welcome all of our stakeholders who are joining us on the webcast today. Special welcome to our Board members, shareholders, the investment community, media, and members of Libstar, as Johan calls it, focused, fearless family. Special welcome to Robin Smith, who retired at the end of last year, and he surprised us here at the venue this morning by popping in. So welcome, Robin, and feel at home. I will start the presentation by sharing some introductory comments on the results and key themes of the year. Thereafter, Charl will take us through an overview of the group's newly launched ESG strategy, financial category reviews, and I will then conclude with some remarks on the year ahead before our team takes questions from the audience. Members of Libstar's divisional and group executive team will join us on the stage for this part. I see a few of them around already, so welcome to you, too, for this part of the presentation. Moving on to the introduction. Libstar has a strong balance sheet -- is that the introduction now that we've got on, let me get to the next slide. Libstar has a strong balance sheet and delivered strong cash conversion, as Charl will elaborate on later. The group's core enabling competencies include its ability to leverage its depth of talent and culture of innovation to deliver low-cost manufacturing solutions to customers supported by our category expertise. Libstar's platform of diverse channels and brand solutions not only the diversifies the group's risk, but also allows us to service each client through multiple offerings. We firmly believe in creating longer-term partnerships with our customers, many of them who have supported the group since its establishment and founding in 2005. Libstar, following its portfolio repositioning this year, which we will discuss in the slide after next, is now a focused manufacturer of food products in our 4 value-added categories. These products are sold through the retail and wholesale food service export and contract manufacturing channels. 80% of the group's revenue is generated through what we refer to as brand solutions. In the graph on the right-hand side of the slide, let me get to -- wait, I'm confused, is that the next slide. Let me go to the next slide -- that was that slide. In the graph on the right-hand side of the slide, we show the percentage contribution of branded solution sales per food category. Our product range predominantly comprises of our private label offerings, but also includes the strong portfolio of brands on which we'll expand later in the presentation. If we go to our portfolio repositioning. A key feature of the year under revision was the repositioning of the group's portfolio towards our 4 value-added food categories, as Charl said to me earlier, we used to be about 92% food in any way, which is up to 99% now after we've repositioned our portfolio. It was important for us to define our growth pillars and to execute on our intent to become a category-led focused food player. In this regard, we announced our intention to exit the Household and Personal Care category comprising of Chet, Contactim and Glenmor, having entered into a conditional binding offer to sell the Chet and Contactim divisions for a total consideration of ZAR 217 million. These assets are now held for sale pending the fulfillment of usual conditions precedent by June. Depending on market conditions, we will also seek to exit Glenmor Soap business by the end of the financial year. We have therefore included a ZAR 60 million impairment charge in continuing operations. The food categories have consistently outperformed HPC on all measures. In the graph on the left-hand side of the slide, we show you the EBIT margins of the food categories, represented by the green line versus HPC represented by the gray line. The sale of HPC will therefore have a positive effect on group margins, and we can talk about that later during questions and answers. This is one of the key reasons we indicated a few years ago that HPC was a noncore part of our group. With the repositioning of the portfolio now being actioned, we can increasingly turn our focus to the continued growth of our 4 food categories and adjacent categories. We have provisionally earmarked the proceeds from the disposal of HPC for targeted acquisitions, some of which have already been identified and specific incubation projects such as recently acquisition of Umatie, a value-added small frozen baby food manufacturer with a growing brand presence in the retail channel. The newly created vehicle for these projects, Libstar Nova, Nova meaning new star, takes us back to our roots in terms of building group capabilities through acquisition of smaller often owner-managed businesses and allowing them to keep a stake in the business and grow the business with us. We maintain our strategy to protect the strength of our balance sheet and will apply excess cash to the repayment of term facilities, whilst as always considering share buybacks. In support of the ongoing portfolio repositioning theme, the clustering of functions within the group will continue where viable. Now moving on to the key themes of 2021. Moving on to the market conditions and key themes that played out in the financial year. We continue to operate in an environment where customers are constrained and seek value-for-money alternatives. Promotional activity and price sensitivity have also intensified. Despite the challenge this poses, private label continued to grow and drive innovation in our categories. Cost inflation was evident across the board, and we placed an even greater emphasis on driving costs down and controlling margins in the businesses. We continued to experience volatility in the pricing, and I'm sure we're going to talk about that. We'll encounter more, and we are encountering, as you're all aware, steep price increases from all sides. We continue to experience volatility in pricing and availability of critical elements of the supply chain, again necessitating an agile approach to inventory planning as we sought to maintain our service levels and product availability amidst the turmoil. Our response has continued to be one of protecting, protecting our people, protecting the financial stability of the group and protecting our customers through increased efficiency, service levels, et cetera, which we believe is demonstrated in the results presented today. Going on the theme of protecting, we placed concerted effort into protecting and growing our own branded market position during the year. For example, Lancewood maintained its #1 market position in hard and soft cheese, whilst the group's significant brand presence in the Baking Aids category continues through Robertsons Baking Aids and cook'n bake. We also lead the market in vinegar and continue building our Goldcrest and Denny brands in selected food categories. If you look at our private brand progress, as seen on the left, according to Nielsen, private label penetration continues to grow in the South African market, now commanding a 24.3% value share. You will remember, quite a bit up from the 18s that we reported earlier, a year or 2, 3 years ago, Charl. This growth was accelerated by COVID lockdowns, spurred by the stockpiling phenomenon, the unavailability of certain branded products, and affordability and availability offered by private label ranges. I think you all see in the supermarkets quite an increase in dealer-owned brands, and we do participate in that activity in all of the retailers that we deal with. Private brands continue to grow due to improved quality and value perceptions. Changing perceptions in terms of quality, value and innovation remain key attributes to the diversification of our products, with private label gaining ground in 8 of the 10 categories with notable growth in frozen products, such as those offered by our Millennium and Finlar businesses. We continue to launch numerous products across all of our product categories. During the year under review, we launched 756 new and renovated products, including an own branded frozen-ready meal range in Millennium Foods and a range of innovative sauces and marinades endorsed by local Braai champion, Jan Braai. The products have increased our production utilization in various plants and cemented our presence in the wet condiments category. Since 2018, we've launched more than 2,200 products, a testament to our culture of innovation. To summarize our 2021 results, group revenue increased by 7.1% with volumes growing by 50 basis points, and the remainder of the revenue growth accounted for in pricing and mix changes. Normalized operating profit and EBITDA grew by 1.2% and 2.4%, respectively. Normalized earnings per share and the headline earnings per share increased significantly, mainly due to reduced impairment charges, interest charges, and taxation relative to the comparative prior period. Charl will provide more detail in each section on this. In light of the strong cash generation of the group, evidenced by improving cash conversion and interest cover ratios as well as a reduced gearing ratio, the Board strongly considered increasing this year's dividend payment. However, growing market volatility brought about by ongoing events in the macro environment necessitated that we continue to protect our cash position. As such, the Board resolved to keep the annual dividend constant at ZAR 0.25 per share, notably delivering consistent dividend payments to shareholders since listing despite of these challenging conditions. Looking at the summary of the group's revenue performance by sales channel. Retail and wholesale channel revenue increased 5.3%. This channel's contribution to group revenue normalized from 60.8% of group revenue in the prior year to around the pre-COVID levels of 57% in the current year. The prior year performance was, of course, significantly boosted by the stockpiling of groceries in retail markets. Food service demand, particularly in relation to our largest customer base in this channel, namely [indiscernible], 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 33.5% and the channel's contribution to group revenue increased to 18.7%. Export revenues grew by 2.8%. Volumes of exported bulk teas rose sharply, whilst volume shipments of herbs and spices declined marginally as a result of the localization and deal supply strategies adopted by some customers, and we can expand on that in the questions and answers also if we shall, as well as the ongoing impact of limited and sporadic shipment container availability. The industrial and contract manufacturing channel, after being under pressure in 2020, recorded revenue growth of 13.5%. New contract manufacturing arrangements in the Dickon Hall division further contributed to these improved results. I may just stop here and say that it's actually not giving us the full picture by comparing 2020 with 2021. We should rather look at the trends, and we can talk about the trends more fully as noted. Let's move on to Libstar Nova. To continue with our proven track record of innovation, we created a new structure, Libstar Nova, as we previously said, meaning new star, to invest in new, exciting businesses in selected growth categories. We're going back to our roots and we'll execute these acquisitions on the same basis as was done at the establishment of the group way back in 2005-2006, namely to acquire majority shareholdings in owner-managed businesses. The first acquisition that of Umatie was concluded in January, and we're excited to develop this value-added, small at the moment, frozen baby food manufacturer into a market-leading brand in the retail space. Other acquisitions are pending in the health and pet food categories, and we're excited about that. Okay, Charl your turn.

Thank you, Andries, and good morning, everyone. In response to an audience question last year, I mentioned that we were increasing the group's focus on environmental, social and governance matters. This morning, I'm able to share with you the outcome of this focused process. During the year under review, the group embarked on a detailed review of material ESG risks applicable to Libstar and the broader industry in which we operate. In the face of global disruption caused by climate change, natural resource scarcity, social volatility and fast-changing technology, what were once considered nonfinancial risks, are becoming material and systemic and therefore, warrant inclusion in our group's risk management framework. We are now ready to move into an implementation phase in which we will define measurable scientific KPIs to measure our progress in addressing each of the 7 material risk areas, whilst continuing to leverage the work that was already done in reporting and monitoring the important aspects of health and safety, food safety and governance. The relative importance of each category is denoted on the right-hand side of the slide and in the circles on the diagram. Water, climate change and sustainable sourcing have been identified as the most pressing items, closely followed by the remaining 4. We look forward to sharing more detail on these measures in our upcoming integrated report, which will be released in April. Moving on to the financial review and starting with the income statement. This slide shows the summary of the group's revenue and gross profit performance for 2021. On the left-hand side of the slide, group revenue from continuing operations increased by 7.1%. The revenue growth number is slightly higher than reported in our earlier trading update due to the reclassification of certain trading term expenses from cost of sales to revenue during the finalization of the audit. I need to add that it has no impact on the earnings per share, headline earnings per share, or any of the cash flows presented. Group volumes increased by 0.5%, driven by a strong performance within the food service and contract manufacturing channels. Pricing and product mix changes contributed 6.6% to group revenue. In the graph on the right-hand side of the slide, we show the evolution of the group's gross profit margin since 2017. In the current reporting period, margins declined by 1.4 percentage points, as export margins suffered the impact of a strengthening of the rand against major currencies and the group contended with significant cost inflation in raw materials, packaging and distribution charges. Notwithstanding, the group's GP margin was maintained above the 2017 and 2018 levels, owing to margin and cost control as well as the exclusion of the lower-margin HPC category from the 2021 results. Looking then at the remainder of the income statement, we start with the other income line, which is Line 3 on this slide. As mentioned in our financial commentary to the results, the average rand/USD exchange rate, representing the group's major export currency, strengthened by 10% 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 an increase of other income from the ZAR 44.6 million recorded in the comparative period to ZAR 50.5 million this year. 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 recorded a reduction in operating expenses of 6.7% this year. Group OpEx was 18.4% of revenue compared to 21.1% in the comparative period. After the adjustment for normalization items, including the impairment of Glenmor's intangible assets in the current year, and Denny in the prior year, group operating expenses declined by 1.1%. As a result of these cost control measures, the margin impact of rapidly rising cost push inflation was mitigated and the group delivered growth in normalized operating profit of 1.2% and growth in normalized EBITDA of 2.4%. Looking at the net finance cost line towards the lower part of the slide, and as mentioned by Andries, the protection of Libstar's financial stability remains a key priority. This includes securing tenure of funding facilities and being able to gain flexible access to funding in a manner that reduces the group's overall cost of debt, whilst also facilitating an agile approach to cash management. For this reason, the group completed a group refinancing of its term debt facilities towards the end of 2021 by firstly, extending the tenure of its existing term debt facilities to 3, 4 and 5 years, respectively. Secondly, increasing the component of revolving credit facilities in the term debt structure. And thirdly, marginally reducing the overall weighted cost of funding. As a result of improved cash management and the generation as well as the annualized benefit of lower dry bar rates during the year under review, the group's net interest expense reduced by 10% to ZAR 157 million. Moving on to the effective tax rate. You will remember that the group's effective tax rate is normally very close to the statutory rate of 28%. However, when operations are classified as held for sales such as we have in the case of the current year, the effective tax rate tends to fluctuate significantly. In this reporting period, the tax charge reduced by nearly 50% as the group was able to secure a refund of ZAR 34 million upon the finalization of a prior year tax assessment, and we were also able to utilize the trading losses of discontinued operations in Libstar operations, the legal entity, which houses the trading divisions of the group. As a result of these factors, profit after taxation increased to ZAR 302.7 million from ZAR 69.3 million in 2020. Moving on to the balance sheet and focusing on the right-hand side of the slide, the group protected its financial stability during the year, reducing its net debt-to-EBITDA ratio from 1.4 in the prior year to 1.2. This remains at the lower end of the 1x to 2x target debt ratio. The group's return on tangible invested capital reversed the downward trend of the prior year, improving from 12.3% to 12.5%, thus matching our weighted average cost of capital. We'll spend some time on the returns generated from recent capital projects in the upcoming slides. Moving on to cash flows. And as shown in the line graph on the left, Libstar has again reported on the new operating cash flow conversion calculation that was adopted last year. The group's cash conversion rate has been improving since 2019 with a conversion ratio of 96% achieved in the current reporting period. The contributing factors to this improved conversion rate are shown in the cash flow analysis on the right, where cash generated from operating activities increased by 23% to ZAR 786 million, mainly as a result of the significantly lower absolute investment in working capital and reduced finance charges. The group's cash flows from finance activities includes the partial repayment of facilities at year-end as part of our refinancing exercise. These facilities remain available to the group in the form of revolving credit facilities, as I mentioned earlier. Net working capital increased from 56 days at the comparative period to 57 days. The group's total investment in net working capital, therefore, ended at 15.6% of revenue, which remains above the group's target range of 13% to 15%. Although we expected inventory levels to decline significantly towards the end of the year, the intensified volatility in pricing and availability of raw material as well as the commissioning of Lancewood's hard cheese manufacturing facilities in the second half of the year resulted in higher inventory holding at year-end. We expect the volatility to continue and in line with our strategy to protect our customers by delivering superior service levels, foresee that net working capital will remain slightly above the group's target range in the coming year. As committed, the group capital expenditure declined to 3.1% of revenue in the current financial year to end slightly higher than the group's target range of 2% to 3%. On the right-hand side, we show the top projects completed since 2019, starting with our most significant investment in various capacity and distribution upgrades at Lancewood. The 2 Lancewood projects outlined in the first 2 lines of the slide, they've all been commissioned and have assisted the group in delivering double-digit EBITDA growth in the dairy category during 2021. In the third line, facilities upgrades at Ambassador assisted this division to deliver significant efficiency improvements during the year despite challenging market conditions. The Snacks and Confectionery category delivered an EBITDA growth of 23.1%. Although returns are not yet at benchmark levels, the capacity utilization at Millennium Foods has improved relative to the prior year bolstered by the growth in frozen ranges. The division delivered a strong performance in the third quarter of 2021 with further markets being developed in the new year to improve the returns on this project. Referring to Line 5, Amaro Foods continues to improve the capacity utilization of its par-bake production lines, supported by the launch of complementary ranges manufactured in the same facility. As such, the division delivered an improved return on its net assets during the year under review, although still slightly behind our expectations. In summary, group return on tangible invested capital improved during the year under review to 12.5%, mainly driven by the successful commissioning of new projects as well as the improving plant utilization in relation to previous projects that were completed. Moving on to the category review. During the year under review, the group's largest category by revenue, Perishables, delivered an improved EBITDA margin of 8.8%, although this result was still below the target market range of 10% to 13%. Despite the resilient performance by Lancewood in all respects, the category margin was impacted by rising input costs and lower cost recoveries in the Finlar division. Groceries category EBITDA margins declined to 15.3%, but remain within the stated target band. Whilst lower average foreign currency translation rates impacted export margins, the category performance was bolstered by a resilient performance by Rialto in predominantly its food service channel as well as the strong result by Dickon Hall Foods in its contract manufacturing channel. The snacks and confectionery category benefited from efficiency improvements that I mentioned earlier and as such delivered an EBITDA margin performance of 20.4%, exceeding the category margin target band. In the Baking and Baking Aids category, EBITDA margin declined to 11.2% to end below the stated 12% to 15% range. A strong food service recovery in this category could not compensate for adverse sales mix changes in retailer brands due to the lower volumes of high-margin baking aid products relative to the unusual demand experienced during the COVID-19 lockdown period last year. In the forthcoming year, we will target improved EBITDA margins in the Perishables and Baking Aids categories, albeit towards the lower end of the stated ranges on the slide. The near-term targets of the Groceries and the Snacks and Confectionery categories remain appropriate. Before we take a look at the category performances, this slide provides some color on the divisional highlights and challenges experienced during the year. On the left, we show the 3 main highlights of divisional performance in 2021. Within the Perishables category, Lancewood maintained its #1 market position in hard and soft cheese, achieving double-digit EBITDA growth through margin management and cost controls. Secondly, in the Groceries category, the combination of the multi-cup and Rialto Foods businesses during the year assisted the group in delivering an expanded and focused basket of food service channel products to the market. Despite contending with ongoing supply chain disruption, the Rialto retail business delivered a resilient performance. Thirdly, in Dickon Hall Foods, the group recorded improved capacity utilization driven by the manufacture of a new range of salad dressings for a local brand owner. In terms of challenges, on the right-hand side of the slide, the group's EBITDA margin in the Perishables category was adversely impacted by rising input costs and lower cost recoveries from the QSR market customers in the Finlar division. Cost and margin management remain a key priority for this division in the coming year as well as the development of Retail and Food Service channel products to improve margins. The group's main export-facing business unit, Cape Herb & Spice, contended with significant currency volatility, whilst customers localized the component of supply and also implemented dual sourcing strategies, a theme we are seeing playing out across the globe. Despite this, the business remains sound and focused on developing existing and new markets in the forthcoming year. In the third line in Retailer Brands, the prior year sales mix was weighted towards higher value and margin baking aid products. Demand for these products, particularly yeast, normalized during the reporting year. This, in combination with significant cost push inflation of raw materials used in the production of these products, resulted in a weaker margin and EBITDA performance from this unit. Notwithstanding, the Robertsons and cook'n bake branded baking aids continued to maintain a strong brand market position. Moving on to the detailed performance within each product category and starting with Perishables. In the pie chart at the top left of the slide, you'll see the retail and wholesale channel remains the single largest channel contributor to Perishables' revenue. This channel's contribution to category revenue reduced by 5 percentage points to 59% in 2021 as the sales mix normalized to pre-COVID levels. Food Service, the second largest contributor, increased its contribution by 4 percentage points to 28% 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 retail and wholesale improved by 3.1%, delivering a resilient performance from Dairy and value-added Chicken products when compared to the high base of last year, which benefited from Q2 stockpiling. Food Service recovered strongly, growing by more than 30%, with Finlar mainly driving the category's revenue growth in this channel. The bottom table summarizes the performance of the Perishables category, and the category's 12.1% revenue growth was primarily driven by a change in price and mix of products. Within the largest division, Lancewood, volumes of hard and soft cheese declined slightly as the business unit prioritized the maintenance of cost and the margin control in the price and volume equation. Within the second largest business unit, Finlar, volumes grew significantly following the recovery in QSR 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 in the first half of the year, particularly at the Fisantekraal facility in Cape Town, resulted in reduced absolute revenues and EBITDA margins. From the third quarter of the year, production yields improved to benchmark levels with the performance in January and February tracking well against expectations. The category gross profit margin reduced by 1.2 percentage points. However, EBITDA increased by 12.5% at a margin of 8.8%, 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 chart, reduced by 3 percentage points to 43% and the export channel by 1 percentage point to 27% of category revenue. Looking at the table on the right, the retail sales channel recorded a 3.6% decline in revenue growth as value-added meal ingredients performed in line with the prior year, and sales of vinegar, spreads and tea products were marginally lower off a high base set in 2020. Export revenue declined slightly from the prior period, as increased volume sales of bulk tea was offset by the effects of marginally lower export volumes of herbs and spices as well as the impact of lower average FX rates on the rand value sales. Food Service channel revenue grew sharply in the Rialto Foods division, whilst Dickon Hall Foods benefited from new outsourced manufacturing contracts for wet condiments products, as I mentioned earlier. As such, the category revenue increased by 2.6%. As can be seen in the bottom table, the category revenue benefited from increased volumes of wet condiments, whilst price and mix changes were adversely impacted by export currency translations as explained earlier. Normalized EBITDA reduced by 3.4% at 100 basis points lower margin. The retail channel remained the largest contributor to snacks and confectionery revenue at 81%. Looking at the table on the right-hand side, revenue from this channel reduced by 10.1% as demand for higher-value nut dips, mixes, granolas and bars did not recover from prepandemic levels. As a result, and as shown on the table at the bottom of the slide, volumes declined by a significant 22.8%. Pricing slightly compensated for this, resulting in a category decline in revenue of 6%. The significant cost containment measures and production efficiency enhancements, which we spoke about in the capital expenditure slides, assisted in the improvement of category gross profit margin by 5.2 percentage points. Category EBITDA improved by 23.1% at an improved margin of 20.4%. The EBITDA margin therefore ended above the group's target range of 14% to 17%, although I did mention earlier that the near-term margin target remains appropriate. Looking at the Baking and 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 87% to 84%. Sales into this channel were resilient despite the high 2020 base. Food Service channel sales of wraps, particularly in the quick service restaurant industry, recovered strongly, recording over 40% growth and increasing the channel's contribution to category revenue from 8% to 11%. The Food Service channel recovery bolstered category volumes, which is shown at the bottom of the slide, increased by 4.1%. However, the 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 26% and a reduction in category EBITDA of 7.5%. I'll now hand back to Andries, who will take us through the outlook section of the presentation.

Thank you, Charl. Let us move forward to the outlook. At the start of the COVID pandemic, Libstar and other corporates flagged that market conditions were volatile. With the advent of the recent and ongoing conflict in the Ukraine, meaningfully predicting the longer-term impacts of current events on the broader economy and Libstar becomes even more difficult. All we can do is to continue to adapt and respond to evolving consumer trends in the categories that we participate and do that with our trading partners, now is the time to hold hands and you have already seen what steps we've taken to mitigate some of the cost increases that we have faced and that's facing us going forward. I'm sure we're going to get questions on that and we'll expand more fully as we carry on. In response in the strained consumer environment, consumer baskets are changing with shoppers focusing on value for money. Libstar is able to offer a diversified product mix, including a number of new ranges across our categories. This year also saw a change in consumer behavior as it relates to the location of purchase and consumption. Whilst we saw the rapid growth of in-home consumption, online sales and the reopening of hospitality venues have also driven retail and food service growth. We're focusing on consolidating and improving Libstar's online presence in the coming year by leveraging the various platforms, which already exist within the group. We will also be targeting further growth in the Frozen category, which has shown significant growth in the past year, as indicated, with a specific focus on the retail and food service channels. The wholesale channel is an important growth pillar for selected Libstar categories, so I'm thinking about wet condiments and a few others, baking aids, et cetera, which we will seek to develop in the coming year. I also mentioned earlier that we will enter growth categories like baby and pet food through our Libstar Nova initiative, getting our feet wet. We're taking our ESG journey seriously, and as explained earlier, we'll continue to develop KPIs to measure our progress going forward. In conclusion, Libstar is well placed to meet the consumers' increased focus on affordability and choice. With our diversified product basket in multiple channels, Libstar is well positioned to create tiered brand solutions to cater for changing shopper needs. Moving on to our expectations in terms of the categories and channels. Despite retail sales largely normalizing to pre-COVID levels, we remain well positioned with value-added new ingredients trading resiliently. We're working on improving our wholesale channel offering beyond the current range of mainly baking aids, and we'll seek to leverage the broader group basket of products through detailed wholesale channel plans. Our presence in the quick service restaurant industry is a strength with the recovery in the food service channel and new product innovations. Costs, although we're saying that costs remain a very serious impact [Foreign Language] we need to address our cost base servicing this channel. Whilst exports were under pressure in 2021, this remains a pillar of growth for the group with complementary targeted acquisitions being investigated in this channel to diversify the group's geography and customer footprint. Finally, we remain a low-cost manufacturer and partner of choice in the contract manufacturing channel. Spending some time on the trading post-period. The retail channel delivered a strong performance in December with January and February growth around mid-single digits and on par with growth recorded this time last year. Food Service continues to perform strongly. As I mentioned, our presence in QSR remains a strength. Pricing and availability of shipping containers, however, remains a concern. We've seen increasing delays at the start of the year, although demand remains robust, both for imported products and on the export side, if we may qualify. Our contract manufacturing businesses continue to grow as anticipated. If we then summarize the headwinds and tailwinds expected in the coming year, the impact of the conflict in the Ukraine means that the challenges of rising input inflation, supply chain disruptions, currency volatility and margin maintenance remain front of mind. On the positive side, we see our diverse category, channel and brand solution exposure together with a decentralized operating model as the strength allowing us to remain agile. We will continue to reduce group complexity, improving margins with the exit from HPC and the repositioning of other portfolios. Our position of protecting our people, protecting our customers and protecting our cash flows and balance sheet will remain a key theme. As I've said the other day, we have to protect to grow, and we can expand on that further during question time. If we look at the Libstar strategic journey since its inception. Having started as a branded and private label aggregator built by mergers and acquisitions, as shown on the left-hand side of the slide, we have progressed to become an efficient low-cost manufacturer as depicted in the middle triangle. Going forward to the right-hand side of the slide, we have developed category management expertise, which differentiates us and strengthens our capabilities. As we enter the next phase of our journey, we will continue to reposition our portfolio towards focused, value-added categories, driving our brand solutions offering and nurturing our strategic partnerships with our long-standing customer base. All of these actions will strongly support our vision of being a focused category leader. To summarize what we believe will be key growth drivers to our business. Fundamentally, we believe our business is positioned for growth, supported by our culture of innovation, our branded and private label market position and our diversified product and channel mix. These growth drivers enable us to remain agile and respond to the changing consumer landscape. This concludes the annual results. Our questions-and-answer session with senior management and divisional leaders will follow after the video. Thank you. Thank you very much. [Presentation]

Good morning, and welcome to our question-and-answer session. My name is Johan Greeff, and I'll be facilitating our panel discussion for the next 30 minutes. So please feel free to put your questions into the panel, so that we can try and get them answered. We only have 30 minutes, so that's not a lot of time we have. So those questions that we don't get to, we will make sure that we answer you directly via e-mail afterwards. So let me start by introducing the panel to you. On my left-hand side, we have Wendy Van Zyl, our Customer and Category Executive; followed by Paul Jibson, heading up our Cape Herb & Spice business; then we have Cornel Lodewyks, which is heading up both the Lancewood and Millennium Foods businesses in our Perishable space; we've got Andries Van Rensburg, our Libstar CEO; followed by Tim Judge, heading up our Finlar Fine Foods division; and then we've got Charl De Villiers, our CFO; and then lastly, Daniel Jacobs, our business development executive. So let's start with the first question we've got for Andries. You've spoken about the repositioning of the portfolio. Can you please give us your thinking about exiting HPC and acquisition of the Libstar Nova project?

Thank you, Johan. Yes, I think we can start by saying that food has always been around 91%, 92% of our portfolio, with HPC the remaining 7%, 8%, 9%. Our repositioning of the portfolio came after a lot of thinking and soul searching and finding that our real focus in the expertise lies in the value-added food side. If you look at HPC, we're up against multinationals' expertise in the market. And we remained in the category with a 30% shareholding with carefully selected partners who will really focus on the HPC side of the business and deliver, I think, what we should have been delivering. You will remember a year or 2 ago we said that we are consolidating the facilities. I think we've done that successfully. We've got good management in place. And we are convinced that we are leaving the category in good shape with new owners remaining, as I said, with 30% shareholder, good management and giving us the opportunity to focus on our strengths going forward, the Libstar Nova project and other acquisitions, which will strengthen our existing food categories and adjacent interesting food categories as we indicated.

Thanks, Andries. We've got a question for you, Charl. This is from Ryan Hill, what sort of inflationary pressure do you anticipate from both the Ukraine war as well as the elevated oil prices?

Yes. It's a very topical one. And we don't use the word volatility lightly. I mean, these countries are big exporters of soft commodities. And clearly, we are not directly procuring from them, but we are indirectly also affected and obviously, a part of the global ecosystems that takes these product price increases in soft commodities. I think as we've tried to demonstrate in the presentation today, we have a high value-added component to our portfolio, and that should assist us with the cost-saving initiatives that we have in place to attempt to mitigate some of that risk in the longer run.

Great. Thanks, Charl. This follows on from a question from Shawn Bains, Wendy, I would direct this question to you, which follows on the cost push inflation. The question is, are we able to have discussions with our major customers? And will we take more price increases to recover the cost push? Or do you expect naked margins to come under pressure in aggregate?

Thank you, Johan. I think if you take the market conditions into account and the cost pushes aligned with that as well as the competitive nature of the environment we compete in, we will definitely have to have those discussions. I think this is not the exception. It's going to be what is expected, to be responsible and act responsible towards our business.

Great. Thanks, Wendy. It seems like the cost inputs remain a big question. I'm going to tip this one to you, Charl, from Sumil Seeraj. Can you please give an indication of the fixed versus variable costs in the group, cost of goods sales? So furthermore, what would be the key cost drivers for the group in 2022? And what are the strategies in place to ameliorate this? Can we expect a further reduction in operating costs in '22?

Okay. I'll try my best. Thanks, Johan. You have 5 questions in 1. So in our cost of goods sold, obviously, a lot of that is variable, raw material and packaging. We have a large -- if you look at the general cost base of the business, you have a larger fixed base component mainly comprising the labor side. If you look at our largest procurement items within the group, you have milk probably being the highest one. We mentioned in the presentation that we saw significant input inflation on that side, but through margin and cost controls at the Lancewood business, we could manage to deliver 10% EBITDA growth -- or more than 10% EBITDA growth in that business. If you look at some of the other businesses like Finlar, we have contract manufacturing arrangements in place where we are able to mitigate some of the commodity pricing impacts that affect that business. But as I said earlier, we're not immune to the general inflationary environment that we operate in. To answer the question, will further cost saving be implemented? I think Andries always uses the term, it's not an event, it's a process. This is a process. So the process will continue in the forthcoming year. We did manage to reduce the operating expenses by 1.1% after all the normalization items. I think our target is to remain a low-cost manufacturer and that will be our key aim in the forthcoming year.

Thanks, Charl.

A value add. We add value. I think that's quite important. We are not -- we are very -- although we are sensitive to the commodity cost increases, for instance, on our baking side, we do a lot more value-adding than the government loved baker. So that helps and that assists. So we've got a bit of control on the cost of value-adding, you can almost say.

Correct. And that we can drive through...

And that we can drive through efficiencies, working more clever and smarter -- working smarter.

Yes. Correct. Paul, there's a question directed to you. Can you shed some light on whether or not delays relating to shipping have improved? If not, how are we managing those?

Okay. Thanks, Johan. I would assume -- we would expect after 24 months of disruption, there would be some stability in the shipping game. Outside of shortages of containers and vessels and long lead times in transhipment ports, there's also the cost aspect. So depending on, as importer, original exporter destination, costs have increased anything from 200% to 700% over the last 2 years on shipping rates. The shipping industry, and in our experience year-to-date, anticipate that this is going to worsen in the short, near term, not only on the capacity but also on cost. They believe some relief on capacity issues by the end of this year, but consensus is that costs are not going to return pre-COVID. So with that in mind, we've had to increase our order cycle terms, incoming goods, increase our lead times, hold capacity in our facility and hold more stock. So enabling us to turn around orders quicker, so less processing time, getting around the water quicker, shorten the lead time to our customers or anticipate longer lead times, customers still gets it to shop on time. So that's what we've had to do.

Great. Thanks so much for that. There's a question from Dirk Van Vlaanderen from Camissa Asset Management. What are your CapEx plans for 2022? And what are the growth efficiency projects you have planned. Charl?

Thanks, Johan. I think this year, we're guiding to end slightly higher than the 3% range, somewhere between 3.1% and 3.5%, but those are very specific numbers. We flagged at the half year that we were expanding our raps line business in Tony Amaro Foods and that we intend to commission towards the end of the year. That's an ZAR 86 million project. And that's, I would say, the largest project that is ongoing. In terms of efficiencies, it's very much driven by incrementally measuring and building systems, being able to measure operating effectiveness, being very close to analyzing variances in the business, and that will continue. Whilst obviously, this year, we will have a bit of a full year benefit from the restructuring that was undertaken in Denny last year. So we look forward to that, but nothing other significant that I think needs to be mentioned here.

Thanks, Charl. There's a QSR question, I'm going to direct this to you, Tim. Please, can you provide an update on where you stand with volumes into QSR? Has Finlar recovered to pre-COVID volumes and as a value-added protein supplier, are there any noteworthy industry trends?

[ 69 ], so that's where we are from a volume perspective. In terms of the mix inside the business, we're a value-added manufacturer for both beef and for chicken. We continue to see very strong growth in our chicken side of the business, and that's mainly driven by affordability and the favorable trend there is that we're close to now 60% of the business is chicken and 40% is beef. So that's very positive for Finlar. In terms of industry trends, we're very well placed with the movement towards meat alternatives. And Finlar has the capacity and the technologies available to address the growing trend in plant-based derivatives, and we'll be coming to market shortly with solutions in that regard.

Great. Thanks, Tim. There's a question from Nick Webster. You mentioned in the outlook that retail and wholesale trends in Jan to Feb were consistent with the prior year. That was just 0.3%. So you confirm you're saying it's basically flat. Wendy, do you want to take that one?

Yes. The trend is definitely flat. I think if you take into consideration the upswing or the benefits we had when the buying was happening and the market was quite buoyant, we ended off as a business internally slightly better. So I think we definitely did better and our baseline is intact.

Great. Thanks so much for that, Wendy. Shawn Bains makes an interesting question. Surely, a target of 12.5% return on tangible invested capital on Slide 20 is a bit on the low side. At that level, which ignores the substantial intangible assets, the group is barely making economic profit. Charl, do you want to take this?

Yes. Shawn, it's a valid point. We're well aware of the fact that we operate at a certain weighted average cost of capital and our job is to deliver a return on that. Again, this is not an event, it's a process. So I think what was encouraging was to see the improved returns coming through on some historically problematic projects. Are we where we want to be? No, we're not. But I think we're moving in the right direction, and there seems to be a positive momentum gaining in that regard. So we want to get back to the 14% and 15% of the 2017 period despite all of these numerous challenges and volatile conditions that we are speaking about as we sit around the table.

And the next question that follows on from that, Cornel, it's for you. Lancewood has invested significant capital into its factories through capital investments. Please elaborate on these projects and benefits that these projects will bring to Lancewood?

Thank you, Johan. For the last 2 years, the division focused its investments on the production and the packing of our cheese. These investments enable us to increase our production capacity by 60% and more than double our capacity on the packing side. Further to that, it allows us to debottleneck certain areas in our facility, especially in George, and also helped us to further assist with efficiency improvements.

Great. Thanks so much, Cornel. There's a question from [indiscernible] around glass. Maybe Daniel, you can take this one. How has the glass shortage impacted Libstar over the last 12 months? And has the glass shortage caused you a shift more towards cans in the certain categories? Can you also speak about the price increases in the various packaging substrates?

Yes, Johan. I think to jump from 1 packaging commodity to another packaging commodity takes time. I mean you look at average about between 6 to 18 months before you can actually change in terms of branding and packaging and so forth. So I think that's not always a solution. I think adding to all the discussions we had around the table as well, is we've got challenges and we need to live with that challenges, and we need to kind of manage it within those parameters as well. With regards to glass, glass has been a problem for a while. I mean we've facilitated within our relationship with our suppliers with our forecasting model. And we're quite well equipped in terms of sourcing internationally. So I mean we kind of manage -- we need to manage and we need to be agile to actually be able to kind of facilitate the business in between the business units as well. Now that's kind of how we survived and how we kind of facilitate the whole crisis up to now.

Great. Thanks, Daniel. There's a question from Tanasha from Afrifocus. Charl, I'll give this to you. Thank you for the presentation. May you please provide more insight on the performance, price and volume of the new product basket launched since 2018?

Price and volume mix. So Tanasha, we can maybe delve into that detail separately. But in speaking about the innovation, I think we've mentioned that it's not always a question of only developing new products, it's also a question of discontinuation. So there's a constant process of discontinuation and new innovation. It speaks more to the growth in the private label and branded category and the need from consumers. In terms of the volume trends, it's very much similar to what we would have reported in our results. So within the year that has just passed, we saw slight volume increases and that would have been bolstered by the new product ranges that we launched. So it would be very much in line with that.

Great. Thanks. There's a question from Bruce Anderson. A mention was made of acquisitions in export division, I'm not sure whether that's the case. But can you clarify if this is SA produced product brands that are exported or actually business domiciled in foreign countries? If the latter, does Libstar have the capacity? So I think the question is maybe a little bit misunderstood. We don't currently visit any acquisitions internationally, and we focus on our local business, but we do export. Paul, do you want to maybe add something from an export point of view from -- just give us some color around the export side.

Sure. I mean, look, previously, we've been in the export game for 20 years. We successfully acquired a similar company to Cape Herb & Spice, Natural Herbs & Spices, in 2014, which kind of they're doing similar things that Cape Herb & Spice does. Acquiring that business, not only did we double that business from 2014 in 5 years, but we doubled the total business. So that's a natural obvious bolt-on that gives us entry into new markets, new channels and some diversification in products, whether it be high-end products or low-end products. So we're always on the lookout for those similar type of acquisitions, but it must be smart acquisitions. It must be something that is natural to our business. I can add new markets, specifically, new customers in new markets. And that's what we'll be on the lookout for. Obviously, herbs and spices is 1 side, there's wet condiments, there's baking ingredients, there's a host of products that we can export. But very, very careful acquisition.

Great.

To put it quite simply, we are a net exporter to the tune of about ZAR 1.2 billion worth of exports in other divisions also. And that's a focus area. We would like to grow our export business into new markets going forward and become more of a net exporter than importer. That's a strategic focus of the group.

Thanks, Andries. Wendy, there's a question for you. Have you seen consumer changing their buying behavior over the last 12 months?

Thanks, Johan. Yes, indeed, I think a cautious consumer sentiment together with wallet pressures has definitely affected the buying behavior. This didn't only affect the basket size as much, but also the product choices that consumers make. We know that absolute price point and value for money are key drivers when consumers are making these decisions, especially within the grocery categories. We know that more shoppers are buying private label products relative to a year ago. Private label now represents 24.3% of SA basket sales, which has increased substantially. If you look at our diversified portfolio of brand solutions, which includes private label, dealer-owned brand and own brand products. We have the ability to cater to these different consumer needs and also across various price points to grow the categories and act in these categories we participate in. We will continue to partner with our customers, we will grow their categories and we will also keep on adding value, so that we can meet these changing consumer needs.

Great. Thank you. There's time for 2 more questions. Charl, I think both are directed at you. The first is from Sumil. What were the problematic projects that are depressing the group's ROIC in your opinion?

So we flagged 2, Sumil. The first one has been the fact that we invested into the upgrade of facilities at our Millennium Foods facility in the Perishables category and the second one was the par-bake line in Amaro Foods. And although I think positively so, we've seen improved utilization, maybe not to the levels that we are targeting, and that speaks to Shawn's question earlier, to get the returns up, you need to be really ramping up your production utilization to your full expectation. I think the trend is going in the right direction, but those 2 would still be flagged as items that we need to deliver on. I think in a very short amount of time that we've implemented the project at Lancewood, we have started to see the increased capacity and that we had the inventory on hand at the year-end, so we're able to service the market. The return on that will start to flow through in the forthcoming year. So the trend is more important in my view, but those 2 projects have been flagged, and we'll continue to report back on those 2.

Great. Thanks, Charl. There's 2 questions sort of linked together, 1 from Paul Steegers, 1 from Nick Webster. The question is around raw material hedging strategy, what's the impact on gross margin? Do you see rising input costs and packaging costs for '22, which then links into the next question around expected cost growth in the coming year?

If I knew and I could hedge it -- and could find a financial institution to hedge that for us, we might consider it strongly. I think what we've tried to demonstrate is that inflationary pressures are evident across numerous kind of inputs. You have the commodity inputs, you have the packaging inputs, you have the production inputs, which a large component is labor, and obviously, we've spoken about a few others. The quantum of that does place pressure on the system in terms of maintaining our margins. We want to act responsibly, as Wendy mentioned, by doing what we can and what we can do is we can manage controllable overheads, so we can try and be more productive with the people and the resources that we have available. We believe that there are still opportunities in that regard, but the pressures are going to remain in the coming year. Quantifying them in a volatile environment is quite difficult.

So we just have to stay agile and do what we can. Great. Well, that brings us to the end of our Q&A session and the results presentation for 2021. Thank you for joining us, and we'll see you soon. Thank you.