Libstar Holdings Limited (LBR) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the interim results presentation of Libstar. We welcome our various stakeholders who are joining us by webcast today. Special welcome to our Board members, shareholders, the investment community, the media, the members of the Libstar family. Before I start with the presentation, you would have seen on SENS yesterday that we announced my retirement as CEO from the end of the year and the appointment of our current CFO, Charl De Villiers, as my replacement from January 2023. We also announced the appointment of Cornel Lodewyks, Managing Executive of Lancewood, as an Executive Director of Libstar. With more than 20 years of consumer packaged goods experience, Cornel's knowledge of the industry will further strengthen the Board. As a founder of Libstar, I am grateful to the Board for selecting a new CEO and another Executive Director who I'm truly confident to hand over to. I have full confidence in Charles ability to take the group forward with his deep knowledge of the original vision whilst injecting fresh energy into the future. We built this group with a breadth of skills at operational level, which has ensured that our key relationships who reside at the regional level and within our group brand and category teams, not just with me or 1 or 2 other people. Libstar has been an integral part of my life for 17 years. And although I will miss it deeply, I leave it in the very capable hands of a strong leader and a solid divisional and senior management team. I may say and stop you for a second, this -- my leaving and disappointment and the confidence that the Board has shown in the Libstar executive team of who you will see a few members here today. And we'll share a few questions and answers, hopefully, with them, would not have been possible if it wasn't for an absolute outstanding executive management team that has come together, not always in early -- in easy circumstances. But has really excelled, and I thank the Board for showing the confidence in not only Charl and Cornel, but also the rest of our team. Hopefully -- we will hopefully still be with us for a long time and leaders to new heights. I will now share the key strategic priorities and developments during the first half. Thereafter, Charl will take us through the financial category reviews and outlook. As always, please stay on the line while members of the Libstar central and divisional management team join us on stage for the concluding question-and-answer session. Moving on to the introduction. Libstar has shown -- for the first time in our April year-end presentation, this slide, as shown for the first time in our April year-end presentation serves as an important starting point to demonstrate how the group strategy has evolved and continues to develop over time. We started in 2006 as a branded and private label aggregator, built by mergers and acquisitions, as shown on the left-hand side. Since the 2018 listing, we have progressed to a more organic strategy investing in the establishment of category management expertise and focusing on building our capabilities and competencies organically and by reinvesting in the business. As we'll demonstrate in the remainder of this presentation, our low-cost manufacturing capability combined with our category-led approach has assisted us in mitigating the unprecedented local and global operating conditions. As we look ahead, the vision is to reinforce our position as a focused category leader as can be seen on the slide. We continue to seek ways in which to refocus the portfolio toward higher value add, higher growth food categories. Therefore, despite the improvement in operational performance from our HPC segment, it remains held for sale in our financials. The alignment of our capital decision-making and growth initiatives towards our 4 food categories remains of critical importance to our longer-term ambitions. We are clearly aware of the need to deliver increasing economic profits despite the numerous headwinds faced by our industry and greater economy, as we will demonstrate, in our disclosures and communications today. We will continue driving our brand solutions offering, including dealer-owned brands and private label growth as well as our recently established Libstar Nova, the home of incubation projects in value-add and high-growth areas. The group is a multichannel platform, supported by its category management expertise and strong strategic partnerships remains well positioned to capitalize on the growth opportunities we continue to see within the broader FMCG market. We carry on and look at our core enabling competencies by different Libstar is our 6 cog enabling competencies. We pride ourselves on the depths of talent within our organization. Whilst many of our founding entrepreneurs remain with the group, we also have a young pool of talented individuals who have succeeded them in the instances of Cecil Vinegar, Montagu Foods and Rialto with these businesses continuing to demonstrate the innovative culture and resilience in this reporting period. Our long-standing customers trust us to combine our category insights and world-class manufacturing capabilities in ways that unlock value for them and their customers. We enriched people's daily lives by managing categories for our customers and offering tier brand solutions of our own branded, private branded and other leading branded products in multiple channels. Finally, this platform of businesses is underpinned by a strong balance sheet and cash flows. If we can carry on and look at the key priorities in our first half of 2022. This leads me to the next slide, which outlines our key strategic priorities during the first half of the year in the diagram. Our strategy remains to grow our categories to build competencies and to acquire businesses, which complement our existing portfolio. On the left-hand side, Libstar's category-led approach has assisted the group in growing its share of the defined retail basket over the last 2 years. We grow our categories, not only by building on the existing base, but through our strategy of repositioning our group towards our value-added food categories. Our exit of Glenmor shortly after the close of H1 of the first half serves as a small yet important milestone in the repositioning of the group. The Board continues to assess the position of the HPC segment, which remains held for sale. We've continued to build our competencies, most recently starting a process to leverage our front-end capabilities within the Montagu Foods, Cecil Vinegar and Rialto brands divisions by combining our sales and marketing teams to lend greater focus to better service our customers and channels. The continued disruption of our important -- sorry, the continued disruption of our import and export supply chains will be featured throughout this presentation as it impacted our groceries category performance and cash generation during the period under review. Despite this, we've continued to maintain our crucially important customer service levels by continuing to utilize our business intelligence systems to improve our inventory planning and forecasting capabilities. On the far right-hand side, the Cape Foods acquisition is one that fits strategically within our portfolio and supports our ambition to grow our export channel exposure with value-added ROI condiments. This is a category that we understand and in which we have experienced. Cape Herb & Spice successfully integrated amongst others. The natural herbs and spices businesses -- business some years ago, and we'll continue to look for further opportunities in that category. Umatie, our first Libstar Nova acquisition is a value-added frozen baby food company. It has settled in nicely and has already increased our retail footprint from 72 to 100 stores since acquisition and continuing doing that. If we carry on to our Libstar brand solutions. For those in the audience who may be unfamiliar with the group, Libstar is a focused manufacturer of food products in 4 value-added categories. These products are sold in the retail and also food service, export and contract manufacturing channels. More than 80% of the group's revenue is generated through what we refer to as brand solutions, which comprises Libstar's own brands, private brand solutions and principal brands of which the largest contributor at 51% is private brand solutions. In the middle of the slide, we show the percentage contribution of branded solution sales for food category. Our product range predominantly comprises of our private label offerings, but also includes a strong portfolio of brands on which I will expand later in this presentation. We participate in the food service channel, which contributes 11% of group revenue. Contract manufacturing solutions are the smallest component of our portfolio at 6%, but the important cog in the wheel. If we carry on to Libstar brand solutions. No, sorry, the next one. If we look at our own brand market position, the growth of Libstar's own branded marketing position remains critical to our category-led approach. As such, Libstar's own brand showed 11% value growth on an annualized basis during the first half of the year. Lancewood continues to strengthen its market leadership as the leading prepacked hard cheese and soft cheese brand in its defined retail market. The brand reaffirmed its quality position in dairy at this year's SA Dairy Championships by once again being awarded the top position for its cream and cottage cheese ranges, with the mushroom sauce being awarded the coveted quality award 2 years in a row. We also lead the market in vinegar with Safari and continue to build our Denny brand representing the leading soup brand in South Africa. Goldcrest participates in upper-end food categories, amongst others being the second largest honey brand in South Africa. The group's significant brand presence in the Baking Aids category continues with Robertsons, our licensed Baking Aids brand and Cook'n Bake -- and our own brand, Cook'n Bake. As shown on the slide, we have driven innovation in our brands with various new products, some of which are shown on the right-hand side of the slide. If we move on to defined market share. Libstar competes in a defined retail basket value at of ZAR 35 billion. As shown on the left-hand side, Libstar's current value share is 11.4% of that ZAR 35 billion. In the middle of the slide, we show our Libstar's growth has exceeded the market growth over the 2-year period since 2020. The strength of Libstar's category competencies in dairy and wet condiments has underpinned the growth experienced in the defined markets. These product categories continue to drive growth in our business during the period under review and going forward. We can next go to our private label progress. As seen on the left, according to Nielsen, private label penetration continues to grow in the South African market, now commanding a 22.8% value share. This growth accelerated during the COVID lockdowns, spurred by the stockpiling phenomenon, the unavailability of certain branded products and affordability of private label ranges. Private label continues to grow due to improved quality and value perceptions. The perishables, ambient and frozen food categories contributed over 70% of incremental growth in private label. Libstar participates in these categories with product ranges, such as those offered by our Lancewood, Millennium, Finlar and Montagu Foods businesses. We continue to launch numerous products across all of our product categories. During the period under review, we launched 364 new and renovated products, some of which you can see on the slide. These include a diverse range of value-added dairy products, private label wet condiment ranges and a range of organic side of vinegars under the Safari brand, which, by the way, has won international awards lately. We launched new ranges of soups, pasta and cooking sauces under the Denny brand. These products continue to demonstrate Libstar's innovation capabilities across its branded private label and dealer-owned brands -- branded offerings. If we look at our group's result, the summary for the first half. The group revenue increased by 9.6%. Volumes have grown by 6.9%, with the remainder of the revenue growth accounted for by pricing and mix changes. Margins remain protected, down 10 basis points to 22.9% despite the continued inflationary cost pressures in raw materials, packaging, utilities and freight costs. Normalized operating profit and EBITDA grew by 10.1% and 4.6%, respectively. Normalized earnings per share and the headline earnings per share increased by 12.3% and 14.1%, respectively. Total diluted headline earnings, which includes the operating performance of our discontinued HPC segment, was up significantly. The last 12 months return on invested capital remains in line with our weighted average cost of capital rate. However, as Charl will explain in his section, we are encouraged by the improving returns and outlook from Millennium Foods, the Amaro Foods and our Lancewood divisions, benefiting most from our recent capital investment, which we will recall. If we go to the first half summary of our channel performance during the period under review, retail and wholesale channel revenue increased by 8.1%. This channel's contribution to the group revenue reduced slightly from 58% of group revenue in the prior period to 57.2% in the current period. The channel performance was mainly attributable to strong sales of prepacked hard cheese, yogurt and processed cheese within the Perishables category. The food service channel revenue increased by 23.9%, represented by beef products, cheeses and sauces as growth -- and cheese and sauces as growth in out-of-home consumption recovered post the pandemic. As a result of the strong performance, revenue contribution from this channel increased from 17.4% to 19.6% and hopefully will be sustainable. Export revenue decreased by 10.9%, mainly due to shipping delays caused by local and international supply chain disruptions. Industrial and contract manufacturing channel revenue increased by 18.3%, reflecting continued improved customer orders, a new contract manufacturing arrangements in the wet condiment subcategory. I'll now hand over to Charl for the financial overview and the outlook. Thank you, Charl.

Thank you, Andries, and good morning, ladies and gentlemen. If you'll allow me to go off script before we start the financial review section. It is my privilege to pay tribute this morning to the work of our CEO, Andries Van Rensburg, attempting to convey thanks and appreciation on behalf of our Board, the central office executive, the leaders of our businesses and indeed, each member of the 7,000 strong Libstar family, both past and present is an impossibility, but I will do my best. Andries armed with a wealth of FMCG experience and as he mentions a few cents in his pocket in a plan, you started this business in 2005. With no offices, you entrepreneurially plotted the way forward over a few bottles of good red wine sitting at the tables of the Ananda Club.

That's white wine.

You quickly sprung into work completing an acquisition, that of Dickon Hall Foods, one that would become the first in a long and illustrious list added to the group portfolio over more than 17 years. Your value didn't lie in your engineering and MBA training nor the accolades and the scars that you carried from your previous experiences, but rather in your ability to pull together and inspire the growth of such a diversity of businesses and they found the management teams. You told the truth, so that you didn't have to remember a lie and the people around you respected and continue to respect you for it. You are relentless in your ambition to see the future first. Yet where you encountered inevitable challenges, such as those experienced in the early days of Lancewood, you face them head on and with conviction of what success should look like. You successfully guided this group through multiple rounds of private equity ownership, the transition from a private to a public company and the COVID-19 pandemic, always ensuring that Libstar's people and its valued customers remained protected. Andries, it has been an absolute personal privilege working with you over the past 5 years. In our discussions, you always shared with me how you don't understand why some leaders try to comment on their own legacies as you believe that a legacy is something created in the minds and the hearts of those who walk the journey with you. Your legacy, Andries, is the strength of this group of businesses, its leaders and its people, not without their respective floors, but resolute in their resolve to build on your successes. Your mother taught you that you only have one name. Yours Andries is written into the hearts and the minds of the people of Libstar and all we can muster at this point in time is to say, thank you.

Thanks, Charl.

Moving on to the financial review. This slide shows that the group's revenue and gross profit performance for the first half of 2022. On the left-hand side, we show that the group revenue from continuing operations increased by 9.6% to ZAR 5.2 billion. Volume sales improved in all categories, driven by prepacked hard cheese in the Perishables category and increased industrial and contract manufacturing volumes of wet condiments in the groceries category. Pricing and mix changes contributed 2.7% 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. In the current reporting period, margins declined by 0.2 percentage points, but remained largely protected against sharply rising input cost inflation due to improved capacity utilization and cost control. Looking at the remainder of the income statement. We start with the other income line, which is line 3 on the slide. Other income reduced from ZAR 15.1 million to ZAR 9.4 million due to a nonrecurring insurance claim in the prior period. Foreign currency translation losses of ZAR 15.3 million were recorded mainly due to an increase in unrealized foreign currency losses by ZAR 13.7 million from a profit of the ZAR 1.1 million recorded in the prior year. The group continued to pay close attention to the management of operating expense inflation in the period under review against the backdrop of increasing consumer pressure and rising costs, Libstar concentrated its efforts on driving cost efficiencies across multiple lines of the income statement. As such, the group recorded operating expense inflation of 4.8%, thereby improving the group OpEx margin from 18.5% of revenue to 17.7% in the current period. 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 10.1% and growth in normalized earnings before interest, tax, depreciation and amortization of 4.6%. Looking at the net finance cost line towards the lower part of the slide, the protection of Libstar's financial stability does remain a key priority. The group's net interest expense reduced by 2.1% to ZAR 71.7 million during the current period as an increase of 3% in term debt funding charges in line with the rise of JIBAR over the same period was offset by a reduction in finance charges incurred on lease liabilities. Moving on to the effective tax rate. You will recall 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 sale such as was -- such as in the prior year or there is a change in the corporate taxation rate, which will be the case from March 2023, the effective tax rate does tend to fluctuate. In this reporting period, the effective tax rate was 20.7% as a result of the downward revaluation of deferred tax liabilities to the 27% corporate tax rate applicable from next year. These deferred tax liabilities are measured at the effective tax rate, which applies to the future periods in which those liabilities will be settled, hence, the reduction in liability by ZAR 22 million in the current period. This revaluation will not repeat in the second half of the year. As a result of these factors, profit after taxation increased by 22% to ZAR 149.7 million. Moving on to the balance sheet on the left-hand side. Under current assets and liabilities, you will note that the HPC segment continues to be held for sale as the Board continues to evaluate its portfolio composition. On the right-hand side, the group's gearing ratio increased temporarily from 1.4x in the prior half year period to 1.5x, mainly due to a ZAR 285 million investment in inventory. The gearing ratio remains well within the group's 1 to 2x target debt ratio and below the lender covenant of 2.5x. I will comment on our working capital position in the slide after next. As a group, we do understand the strong correlation between shareholder value creation and the delivery of returns on invested capital, or ROIC, which exceeded -- which exceeds our WACC rate. Although the 12-month rolling ROIC still approximates our WACC rate, it should be noted that the calculation only partially gives credit to the improved operating results delivered in the current half year period. We will continue to report on this measure going forward as we target the medium-term ROIC of WACC plus 2 percentage points. Moving on to cash flows. Libstar's operating cash conversion ratio shown in the middle line graph on the left, following a period of steady improvement since the advent of COVID-19 reduced significantly in the short term. I now refer to the detailed cash flow analysis on the right-hand side. Firstly, this shows that cash generated from operations increased by 5.4% to ZAR 476 million, again demonstrating the resilience of the group's cash flow profile. Notwithstanding this, working capital changes resulted in an outflow of ZAR 336 million during the period under review, mainly as a result of an investment in inventory. As such, cash generated from operating activities reduced to ZAR 42 million. Cash flow from investing activities mainly relating to capital expenditure remained in line with the prior period. Finally, the group's new term debt facilities offer greater flexibility in terms of daily cash management. As such, we apply the group's cash resources ZAR 490 million in the current period against term debt facilities to reduce the effects of negative carry experienced in prior periods. Additional short-term facilities in the amount of ZAR 300 million remain available to fund ongoing requirements. Looking at net working capital. Net working capital increased from the 53 days of the comparative period to 65 days. The group's total investment in net working capital, therefore, ended at 17.4% of revenue, which remains above the group's targeted 13% to 15% range. Debtors and creditors days remained in line with our usual trading terms. However, inventory days jumped from 63 days to 75 days. To contextualize, our Cape Herb & Spice export division held ZAR 58 million more inventory at the close of H1. This resulted from higher raw material holdings to mitigate against longer lead times as well as delayed shipping of finished goods. Our Rialto division held ZAR 63 million more inventory at the close of H1 to mitigate longer import lead times and also to ensure product availability to our customers. Lancewood made a strategic decision to hold ZAR 70 million more inventory to ensure product availability as we head towards our busier second half. As we look ahead to the end of the year, shipment disruptions are expected to continue, however, the seasonality of local sales, particularly in relation to the likes of Lancewood, are expected to aid in the reduction of inventory holding to year-end. Group capital expenditure remained within the group's target range of 2% to 3%, showing a declining trend from the peak of 2020. On the right-hand side, we show the largest projects completed during the period under review, including a ZAR 14 million upgrade to our retorting capacity at Montagu Foods, a ZAR 12 million investment in a new portable sources line at Dickon Hall Foods, which facilitated increased outsourced manufacturing volumes and further down the slide, a ZAR 12 million investment in electricity generation across multiple sites. The hard cheese production and packing upgrade at Lancewood was the largest CapEx project in the last 3 years. Since the commissioning of this project in H2 2021 following an initial 10-month delay during COVID-19, the facility has gradually increased its production output. Additional projected efficiency benefits are expected to be realized in the coming months. The project is also on track to deliver the group's investment return objectives within the planned period. The Millennium Foods division performed strongly during H1, expanding its retail footprint in fresh and frozen products. The Amaro Foods division delivered a resilient H1 performance, bolstered by the retail performance of rolls, specialty breads and gluten-free lines. The rollout of par-bake products in the retail channel, however, remained a challenge during the period under review, despite significant efforts in product and market development. Notwithstanding this, Amaro Foods lost 12 months return on net assets increased during the period under review. The group, therefore, remains confident in its ability to deliver on its medium-term objective to produce a ROIC of 14.5% being the current WACC rate plus 2%. Moving on to our category review. The impact of sharply rising input costs were evident in the group's margins during the period under review with most of our categories under pressure. The group's largest category by revenue, Perishables delivered a further improvement in EBITDA margin from the 8.2% in H1 last year and the 8.8% for the full 2021 year to 9.1%. This margin was achieved by a resilient performance from our Lancewood division and also efficiencies from our Finlar Fine Foods division. The group is targeting a further improvement in margin towards the end of the year, albeit not within the near-term target band. Groceries category EBITDA margins declined from 14.6% in H1 2021 to 11.7%, impacted by the delay of export shipments from Cape Herb & Spice and Khoisan, which weighed on the category performance. The snacks and confectionery category continued to benefit from efficiency improvements and as such, delivered an EBITDA margin of 18.4% during the first half, albeit down from the 20.4% achieved for the full 2021 year, and as guided at our April results presentation. In the Baking & Baking Aids category, EBITDA margin declined to 9.4% remaining below the stated 12% to 15% target range. Despite a strong retail performance by baked goods in this category, a reduction in wholesale channel revenue of higher-margin baking aids weighed on the category performance. The group aims to end the year close to the bottom end of the target range. Before we then take a look at the category performances individually, 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. Within the Perishables category, Finlar achieved a strong food service channel performance, supported by improved efficiencies. Lancewood maintained its leading market position in prepacked hard cheese and soft cheese, achieving growth through margin management and cost controls. In the groceries category, Dickon Hall Foods, Cecil Vinegar and Montagu Foods benefited from new outsourced manufacturing arrangements and a strong retail performance of sauces and marinades as consumers continue to benefit from Libstar's tiered product offering. In terms of challenges on the right-hand side of the slide, the group's EBITDA performance and margin in the groceries category was adversely impacted by lower export volumes from Cape Herb & Spice as the combination of increased out-of-home consumption in key markets and unavailability of stacking dates contributed to an under-recovery of fixed costs. Although we expect some assistance from improving currency spot rates and volumes in H2, margins are expected to remain under pressure in this division. In Baking & Baking Aids through Retailer Brands, the group experienced muted demand for higher-margin baking aids, particularly yeast in the whole channel -- in the wholesale channel. 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 division, which impacted the broader category performance as well. Moving on to the detailed performance within each product category. In the interest of time, I will address only the largest channels in each category and start with Perishables. Perishables is our largest category, contributing 54% of group revenue. In the pie chart at the top left of the slide, we note that retail and wholesale remains the single largest channel contributor to Perishables revenue, although its contribution to revenue reduced by 2 percentage points to 58% in H1. Food service, the second largest contributor, increased its contribution by 3 percentage points to 29% as growth in out-of-home consumption continued post-pandemic. When we look at the revenue performance by channel in the table at the top right, Perishable sales into each channel improved. Sales into retail and wholesale improved by 11.6%, delivering a resilient performance from dairy and value-added meat products. Food service continued its strong performance, growing by more than 20%, bolstered by sales of beef products, cheese and sauces in quick service restaurants and hospitality venues. The bottom table summarizes the performance of the Perishables category. The category's 14.6% revenue growth was driven by strong volume growth of dairy products, particularly prepacked hard cheese. Within the largest division Lancewood, volumes of these products increased as the division benefited from the commissioning of its prepacked hard cheese manufacturing and packing projects. Within the second largest business unit, Finlar, the division benefited from improved efficiencies. At Denny, the business unit continued to benefit from its prior year restructuring and production yields remained at benchmark levels for most of the reporting period, resulting in a marked improvement in EBITDA performance from this division. The impact of the very recent fire at the Shongweni facility is still under review. The category gross profit margin improved by 1 percentage point with normalized EBITDA up 27.8% at an improved margin of 9.1%. Groceries is our second largest category, contributing 32% of group revenue. The contribution to groceries category revenue from retail and wholesale channel sales shown in the pie charts, reduced by 1 percentage point to 44%. For reasons already discussed, export channel revenue reduced to 22% of category revenue, down 6 percentage points from the prior year. In contrast, the food service and industrial and contract manufacturing channels added 3 and 4 percentage points respectively, to contribute 11% and 23% of category revenue. Looking at the table on the right, the shift in channel contribution in this category was positively impacted by the increase of out-of-home consumption in the food service channel, which grew by more than 32% as well as the strong 26% growth in industrial channel wet condiments achieved mainly by the Dickon Hall Foods, Montagu Foods and Cecil Vinegar divisions. Notwithstanding this strong performance by the food service and industrial channels, retail channel sales declined marginally by 1.7%, whilst export sales declined significantly by 16.8% in the context of increasing out-of-home consumption in export markets and unavailability of export stacking dates during the period under review. As such, the category revenue increased by 2.2%. As can be seen in the bottom table, the category revenue was impacted by an increase in volumes of 8.3% and a reduction in pricing and mix of 6.1%. Both representative of the significant increase in category revenue contribution from the industrial and contract manufacturing products as well as a reduction in export revenues. These factors contributed to the 1.5 percentage points decline in gross profit margin and a 17.7% reduction in category normalized EBITDA. Snacks & Confectionery comprises 5% of group revenue. The retail channel remained the largest contributor to category revenue at 82%. Looking at the table on the right-hand side. Revenue from this channel increased by 12.5% as demand for higher-value nut tubs, mixes and granolas improved relative to the low prior year base. As a result, and as shown on the table at the bottom of the slide, volumes increased by 14%. The significant cost containment measures and production efficiency enhancements implemented in the prior year continue to assist the category gross profit margins, which improved by 30 basis points. Category EBITDA improved by 23.2% at an improved margin of 18.4%, albeit not at the level achieved during the full year in 2021. The EBITDA margin, therefore, again ended above the group's target range of 14% to 17%. But as mentioned earlier, the near-term margin target does remain appropriate. The contract manufacturing arrangement between Libstar and Kellogg's terminated with effect from H2 as a result of the changing strategic requirements of the brand owner. This will not have a material impact on the cluster or the group. Finally, we provide an overview of the Baking and Baking Aids category, which comprises 9% of group revenue, starting with the channel contribution to revenue on the left. The retail and wholesale channel increased its revenue contribution to the category from 84% to 86%. Sales into the retail channel were resilient despite the high-covered base with baked goods driving the performance. However, Retailer Brands experienced a significant reduction in demand for higher value baking aids in the wholesale channel. As such, category revenue was up 8.6% as shown in the bottom table, but margins declined by 60 basis points, resulting in a 6.1% reduction in category EBITDA. Before I move on to the outlook section, just a few words on the post period trading. During the month of July and August, growth in group revenue was in line with that recorded in the first half of the year. Within the retail and wholesale channel, growth of low single digits was recorded as consumers remain under pressure. We expect this trend to continue into the latter part of H2. Food service continued its strong year-on-year growth, supported by QSR. Exports were flat year-on-year with stacking date availability remaining a concern into the remainder of the year. New contract manufacturing arrangements will benefit our industrial channel. During this 2-month period, manufacturing margins tracked lower than the prior year, continuing the trend that we saw in the first half. The group, however, does continue to focus on achieving its cost efficiency objectives. On this slide, we have summarized the anticipated headwinds and tailwinds faced by the group for the remainder of this year. Starting on the left-hand side, manufacturing cost pressure remains elevated. And as we mentioned in our April presentation, we do have to contend with a timing delay in the recovery of these costs through pricing. The unavailability of export stacking dates remains a significant risk to the full year outlook. Although our market presence remains strong, and we look forward to the integration of Cape Foods towards the end of the year. Margin protection remains one of the single biggest focus areas, although inflation pressure and its impact on the consumer volume demand is being closely monitored as is our dependence on critical infrastructure such as water supply and electricity generation in our plants. Notwithstanding these challenges, there are some encouraging tailwinds as well. The group's diversified product mix and channel exposure leaves its structural growth drivers intact even despite the challenges experienced in the export channel. We continue to seek ways in which to simplify the group structure and plus the functions where it leverages our capabilities. The group's brand solutions offering leaves it well positioned to benefit from its strong brand presence in key categories, the growth of private label and select subcategories thereof, such as frozen food as well as the continued growth of upper-end food service. Finally, concluding with the key takeouts from this morning's presentation. We emphasize the group's category-led strategy and the success that this has yielded during this particular reporting period. We remain confident in our ability to deliver improving yields from large CapEx projects in order to deliver on our ROIC targets. The clustering of functions, like those mentioned within our wet-condiment divisions, continues at a category level as we also seek to optimize the broader portfolio composition as is the case with the HPC segment being held for sale. Lastly, the group's strong brand solutions offering and the noncommoditized nature of its product ranges leaves Libstar well positioned to grow its own branded, principal branded and private label share. Thank you, and please stay on the line for our Q&A session with the Libstar senior management team. [Break]

Good morning, everyone, and thank you for joining us this morning's interim results question-and-answer session. [Operator Instructions] We'll try and get through everything and all your questions in due time. So let's just start by welcoming everybody on the panel. So joining me on my left-hand side is Wendy Van Zyl, she's our Category and Customer Executive. Then we've got Paul Jibson, who is our Managing Executive for Cape Herb & Spice. We've got Andries Van Rensburg, our CEO of Libstar. We've got Charl De Villiers, our CFO; and then we have Cornel Lodewyks, he's our Managing Executive for Lancewood, as well as the Millennium business. We've got Tim Judge, our Managing Executive of Finlar Fine Foods. And lastly, Daniel Jacobs, our managing -- our Business Development Executive for the Libstar Group. All right. So let's get started with the first question. The first one is what's your expectations for inventory to unwind in the second half? Or is it likely to remain elevated? Cornel, can I maybe direct that to you?

The increase in inventory in Lancewood is basically threefold in nature, that being increasing finished good stock, increase in principal brand and dry good stock as well as maturing stock. Firstly, we might come to the decision to increase our finished goods stock. And is the reason Charl mentioned that the return that we got from our investment in our packing line. We showed a growth of 8% in value on prepacked cheese. We obviously increased our service levels to the trade and increase our output. And even if you look at the difference in Q1 and Q2, a significant increase in volume on prepacked cheese. Secondly, strategic decision to increase our principal brands. And that's how our brands have to be imported from Denmark, France and Germany. And obviously, that was to mitigate the risk with obviously local and international supply chain disruptions. And thirdly, maturing stock, I think we're well positioned to service demand and then we outperform our H1 performance on prepacked cheese.

Great. Thanks, Cornel. We've got a question from Nick Webster. I'm going to direct that to you, Wendy. Could you give us some context around the discussions with food retailers and pushing through price increases?

I don't think it's any new news that margins will be under pressure and as a business, it's not possible for us to absorb these input -- rising input costs. We need to be responsible. We collaborate with our key trade partners, as we've done in the past to see how we can mitigate risk and make the best possible decision going forward. But yes, we will be under pressure with margins. So those costs have to be put through.

Thanks, Wendy. Paul, there's a question for you. Can you please give us some information on the reasons behind the acquisition of Cape Foods?

Okay. So Johan without repeating what's been said earlier. Just some background about the business Cape Foods. It's a very need well-managed business, been around for 20 years. It's got a strong export focus. And with long-serving customers. So it's something that we know. It's what we do. So we're very familiar with the business and its model and exports. So outside of the obvious synergies of economies of scale, some market share gains, I think the biggest opportunity lies in the cross-selling of the Libstar basket into this new market and customers that this acquisition brings.

Great. Tim, there's a question for you with regards to the recent outbreak of foot and mouth disease and how Finlar has been affected. Can you maybe give us some color?

Sure. Finlar produces circa 22,000 tonnes of protein on an annual basis, of which between 40% to 45% of that is beef related. So obviously, a concern for us. We mitigate that risk through the supply of -- through 6 approved suppliers who have facilities and feedlots across all 9 provinces. There was 1 supplier that did have an outbreak, but it didn't have any material impact on us. We're in daily contact with not only the arbitrage, but more importantly, the feedlots and the vets at those feedlots together with the state vet in understanding the vaccination rollout program, which is proving to be successful. I must emphasize that the big players that we deal with really are industry leaders in this regard. They have quarantine feedlots, and they have very strict protocols in place regarding cross-contamination. There is a slight impact in terms of export revenues to Mauritius, where beef imports have been restricted. But this accounts for less than 2% of our total volume. We're very pleased with the recovery in QSR and we're now back to those levels that we had pre-COVID, and we have a very strong order book.

Great. Thanks, Tim. There's another question with regards to exports, Paul, so can you give more detail on the impact of the shipping delays in Cape Herb and how much is due to delays versus softness in high-end demand?

Okay. So let's talk about the shipping disruption. I mean we're still experiencing it. It's quite turbulent at the moment. Stacking availability although it's improved slightly, it's still not where we would like it to be. So we're rolling a lot of orders monthly. These delays could be compounded. It's 3 weeks out of Cape Town, but then 2 weeks out of a transshipment and then port delays in the other side. So it is our biggest concern. It's our biggest impact on our business at the moment. As far as demand goes in export markets, just like South Africa, the consumers are under pressure inflationary increases. We're also coming off a high of COVID erratic higher demands. So it is slightly conservative at the moment. We do believe it will improve. If you look at the upside that we predominantly trade in dollars. That's looking good at the moment. So we have to remain a proactive exporter, and we have to develop exported solutions for our customers.

Great. Thanks, Paul. Wendy, there's a question with regards to customer down trading. So could you please provide us with some insights on customer down trading? What's been the substitution? Or do you feel our product ranges cater for this?

We've seen an increase in private label products. So yes, shoppers are shopping across wider categories because they are searching for better value offerings within these different categories. Yes, they are definitely down trading because they've only got so much disposable income. But within the categories that we represent, we have a full private label offering within key categories, and we've seen a nice increase within these categories as a result of -- I mean, consumers purchasing these products.

Great. Thanks, Wendy. Daniel, there's a question with regards to the Snacks & Confectionery business. So can you share more info on the internal business development activities and particularly the development of innovation in Snacks & Confectionery?

Yes, Johan, it's just adding to what Wendy is saying. So I mean, there's a lot of shift in terms of the actual buying patterns. So traditionally, Johan, that's not commodities well. It's #1, there was a downsizing or down purchase from the high-end value to other alternative and mixes. So I think that was the one side. I think the other side as well as like your raw material, you're grading, your formulation. We like to call it value engineering. So it's a question of the customer spending is under pressure, and we kind of need to constantly make sure that we get the raw material and the capabilities, and the awards and the cost effectiveness is to actually maintain that basket as well. So I think it was a combination of a multiple of things that we did instead of just one thing that kind of still make us.

Yes. Thank you so much. Charl, there's a question for you in terms of what are the practical implications of load shedding in the group in terms of reduction and resulting costs?

Thanks, Johan. You would have seen -- we've emphasized it more in, I would say, the last 2 set of results. But for quite some time now, we've been investing in generation capacity in our facilities where to a large extent, most of our facilities are able to operate not at full capacity, but at least at some capacity when load shedding hits. Unfortunately, these generators run on diesel, and we all know what's happened to the cost of energy. So in the case of a large mushroom plant like a Deodar or the plant in George for Lancewood, you will have a significant diesel impact and that will reflect in your energy cost at the end of the day.

Great. Thanks, Charl. Paul, there's a question around sustainable sourcing. Maybe you want to take this one. How is Libstar planning on increasing disclosure on sustainable sourcing? And have there been any commitments to addressing this?

I'll take that.

You going to take that.

Yes.

I know you do a lot of sourcing in terms of internationally and making sure we get the right type of quality products that we use for producing our Cape Herb & Spices businesses. But maybe yourself or Charl can take this.

Okay. So just on the -- I mean, we obviously -- we complied to a lot of food safety regulations and certifications around the world. Outside of what we have to do to meet this compliance. We obviously want to buy from source and that's where we're buying from is sustainable. So it's 2-part, one is the compliance side, which we meet, and one is the site we want to meet, which is an internal business decision. So we do have buying from source and traceable programs in place. That being said, that's, I would say, 80% of what we do. There are small items that we're not on top of what we can't control fully, but we work through those from top to bottom.

Absolutely. Great. Charl, do you want to add something?

Just to note that at the April presentation, we mentioned that we increasing our emphasis on ESG matters and the disclosures that go around that. So one of the elements that we're looking at is developing our sustainable sourcing policy across the group and implementing the controls that Paul has mentioned into our disclosures going forward. I think you shouldn't expect to see that in this next round, but we're certainly working towards increasing our disclosure because it is an important part of our business.

Correct.

Johan, I think what we need to add as well is a big focus in terms of localization. In terms of the raw materials well, which goes over Paul as well as the snacks industry as well. And wherever we can actually support the local industry and where we can actually source from local. We actually do you have that responsibility in terms of responsible sourcing as well.

Great. Thank you. It seems like there's not many other questions. So if there's not anything else, we're going to wrap up. Thank you so much for your time, and have a great day.