Libstar Holdings Limited (LBR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Libstar Holdings Limited Results Presentation for the Year Ended 31 December, 2022. A special word of welcome to members of our Board, the analyst and media community, as well as the extended Libstar family joining us this morning. You'll be familiar with the presentation format. I would like to just start the presentation by welcoming Terri Ladbrooke to the Board. She was appointed this morning. Terri being a finance and operations executive of Rialto Foods, joins us at the central office, and we look forward to your contribution, Terri. This year, I'll be taking us through the presentation, starting with the financial review, the category performance, after which I'll spend a considerable amount of time unpacking the Libstar strategy. We'll then take a look at the way forward in terms of an outlook before I'm joined by senior managers for a Q&A session. To start the financial review and to set the scene for the circumstances that most impacted the year-end result at a group level, starting on the left-hand side of this slide in terms of highlights. Group revenue grew by 10.7%, with volume growth of 3%. This was predominantly a result of the strong food service channel, as well as the industrial and contract manufacturing channel performance, where volumes were up 8.1% and 12.9%, respectively. Group operating expenses were contained to an inflation rate of 6.3% against a published CPI of 6.9%. We also concluded the acquisition of our Cape Foods acquisition at the start of November 2022. This business, of course, being a value-added dry condiment supplier, mainly focusing on the export markets in the US, the UK, as well as the Japan regions. In terms of challenges during the financial year, the impact of load shedding has been severe, adding ZAR 39 million of direct operating costs, ZAR 31 million of that being attributable to the second part of the year. Of course, the impact of load shedding is broader than that, creating disruptions at an operating level as well. A key feature of this set of results is the performance of the export channel, with revenues in that channel down 4.1% on the prior year, with volumes down over [ 8.4% ]. This was mainly as a result of the implementation of dual supply strategies by international customers who shifted volume to local players in mitigation of the ongoing supply chain disruptions that we experienced throughout that channel. We also contended with local supply chain disruptions in terms of stacking dates and the availability thereof for most of the financial year. In terms of input costs, we recorded significant raw material and packaging increases, with the price of raw milk peaking at an inflation rate of 10.3% and corrugates up between 30% and 40%. The selling and distribution cost line item was also impacted by the [ increase in ] price. Moving on to divisional highlights and challenges and starting with the highlights on the left-hand side of the slide. Our Finlar Fine Foods division benefited from improved yields and efficiencies as well as price realization, as well as the boost from the increased volumes in the food service channel. Our Dickon Hall Foods division benefited from new customers within the industrial and contract manufacturing channel as a convenient option for customers and consumers during times of load shedding. Within our HPC division, we discontinued a number of unprofitable lines and a positive sales mix in this business resulted in improved margins. Looking at our challenges for the financial year. Within the Cape Herb & Spice and Khoisan Gourmet division, I've already touched on the dual-supply strategies. But in addition to this, we also recorded a decline in our average FX rates by about 10%. Customers in international markets were more conservative in terms of their inventory holding, and we also recorded limited price realization in this channel due to aggressive competitor behavior. These factors resulted in an under-recovery of manufacturing costs, which impacted both the groceries as well as the group margin. Within our Retailer Brands division, we experienced a slowing in wholesale channel performance, particularly of higher-margin baking aids that being the yeast products that we sell into that channel. That was predominantly as a result of 2 reasons: the first being aggressive competitor behavior discounting, as well as some counterfeit stock making its way into that channel. Our Cecil Vinegar business contended with margin pressure amid increased operational challenges from load shedding. The production process of vinegar is extremely sensitive to the interruption in power supply. An interruption of 8 seconds can create a delay in the production cycle of the vinegar by 2 weeks. And unfortunately, we contended with quite a number of these instances during the financial year, as well as early in the New Year. Our Denny Mushrooms business, it's well documented that we experienced that devastating fire in Shongweni, and our capacity was constrained, particularly during the latter part of the year, which is the peak trading period. This division is also severely impacted by the diesel cost, as well as the impact that this has using generated power on the yields, particularly at the back end of last year, as well as the start of the New Year. We've added this slide to show the direct impact of load shedding on our business. The graph in the middle of the slide shows the maximum amount of megawatts that was shed per day since 2021. And drawing your attention to the right-hand side of the slide, one can see the severity and the frequency was significant in the second part of 2022 relative to the first half as well as 2021. In response, and since 2020, we've continued to invest in generator capacity at a total cost to last year's year-end of ZAR 30 million, ZAR 13 million of that being incurred or invested in 2022, with a further ZAR 6 million after year-end. As we face these challenges, we're aggressively investigating solar PV installations, not such that we can run our facilities using solely the solar PV installations, but that we can reduce our reliance on generator capacity and also reduce our maintenance spend thereof. The diesel spend then in 2022, as I mentioned earlier, nearly ZAR 40 million, weighted heavily towards the second part of the year. In summary then, group revenue was up by 10.7% to ZAR 11.7 billion, with gross profit margins down from 22.2% to 20.7%. I would say at least 50 basis points of that attributable to the export channel performance. Normalized operating profit and EBITDA was down by 4.1%. Normalized earnings per share was down 68.2%, and this was a function of the ZAR 277 million of post-tax impairments, which were processed and which were attributable to intangible assets in 4 of our divisions, namely Denny Mushrooms, Retailer Brands, Cecil Vinegar and our HPC cluster. Normalized headline earnings and total diluted HEPS was down by 11.8% and 12.1%, respectively. The group's gearing ratio increased from 1.2x EBITDA to 1.6x in the current year. This was mainly attributable to the ZAR 277 million worth of investment in net working capital, predominantly in our import and our export facing divisions. This added at least 0.3x to the gearing ratio. The group's cash conversion was lower than the prior year at 68%, but significantly improved on the half year result, which was 15%. In line with the group's dividend policy, which is to declare a dividend, which is covered by normalized headline earnings per share by between 3x and 4x, the Board declared a dividend of ZAR 0.22 per share that equates to about ZAR 131 million, which will be payable in April. As I go through the remainder of the presentation, you will see this margin -- gross profit margin down to EBITDA margin, down to an impact on return on net assets. So this year, as I'll close off the presentation, the most significant focus will be on the protection of margin, as well as protection of cash and cash generation. Moving on to a summary of our channel performance and starting with our largest channel, retail and wholesale. In this channel, we recorded revenue growth of 8.6%, with volumes down 1.2%. Just to contextualize that, we saw a significant volume growth, particularly in pre-pack hard cheese, our production there being up 10%. But with the discontinuation within the HPC channel, as well as HPC division as well as the challenges we experienced within our Cecil Vinegar business, this contributed to the decline in volumes in that channel. Food service performed strongly with revenue up 23.4% and volumes up 8.1%. This was driven by a strong performance by quick-service restaurants or QSRs, as well as the upper end restaurant trade. It's fair to say that the food service channel was trading ahead of pre-COVID levels in terms of volumes. Looking at the export channel. As I mentioned earlier, volumes were down 8.4%, with revenue down 4.1%. In the industrial and contract manufacturing channel, revenue was up 17.1%, with volumes benefiting from new customers in this channel out of the Dickon Hall Foods, as well as the Cecil Vinegar divisions. Looking at these channels contributions to the group revenue on the right-hand side of the slide, the retail and wholesale, as well as the export channels reduced their contribution to group revenue during the year, whereas the food service and the industrial and contract manufacturing channel increased their relative contributions. We'll take a look at the income statement snapshot, starting with other income. This line item, other income, increased from ZAR 20.3 million in the prior year to ZAR 83.1 million. This was predominantly impacted by ZAR 40 million worth of insurance proceeds, which were received in respect of Denny, and that served to fund the retrenchment costs and operating expenses through to the year-end. In addition, we recorded a positive impact from lease modifications of ZAR 27 million. As I mentioned earlier, significant impact of impairments this year with pretax, that's a pretax number, impairments of ZAR 296 million in the current year and ZAR 102.6 million in the prior year. The prior year being predominantly as a result of the performance of HPC and the fair value mark to -- fair value marking of that asset, as well as the discontinuation in that year. In terms of the factors that impacted our impairments during the financial year at a group level, the group weighted average cost of capital increased from 12.5% to 13.1%, driven by the interest rate increases during the year. At the divisional level, the capacity constraint in Denny, as well as the discontinuation of flammables, as well as some lime juice lines in Cecil Vinegar drove that impairment. I already mentioned the Retailer Brands we contended with the wholesale channel challenges. As a result, the impairments processed this year amounted to ZAR 98 million in Denny, ZAR 89 million in Retailer Brands and ZAR 70 million in Cecil Vinegar. There is also an annexure to the presentation, which shares this detail. Looking at the operating expenses line, it's worth noting that the OpEx margin improved significantly on the prior year, down from 17.5% to 16.8%. Selling and distribution costs, which forms a part of this line item were up by double digits. And if one were to exclude this, operating expenses were up only 0.5%. As I mentioned earlier, normalized operating profit and EBITDA were down by 4.1% at a margin of 5.9% and 8.8%, respectively. Net finance costs remained stable on the prior year. On the funding side of the equation, our interest on term debt facilities increased by broadly 9% as a result of the increase in JIBAR, and this was compensated for by a lower cost of interest on right-of-use liabilities. Looking at the effective tax rate. We don't usually record an interest rate or an effective tax rate, which is higher than the statutory rate. This number, of course, impacted by impairments, which are not deductible for taxation purposes. If one were to exclude the effect of impairments in the current year as well as the prior year, the tax rate approximates the statutory rate of 28%, which is now moving to 27% in the current year. Moving on to our financial balance sheet and looking at the snapshot with a gearing ratio being highlighted on the top left-hand side of the slide. As I mentioned earlier, the gearing ratio increased from 1.2x to 1.6x, mainly as a result of that investment in working capital. This remains significantly lower than the 2.5x covenant of the lenders, as well as within the range of between 1x and 2x that we've communicated to the market. The interest cover was down slightly from 8.9x to 7.7x, but remains significantly above the target and lender covenants of 3.5x. We are disappointed that the return on invested capital reduced during the financial year from 12.5% to 10.4%, within the context of the weighted average cost of capital itself going up from 12.5% to 13.1%. And this is a function of both the operating profit result, which was down by 4.1%, but also the significant investment in working capital, as well as the acquisition of Cape Foods, which only took effect at the end of -- at the start of November, which saw that entity being consolidated for only 2 months of the financial year. Looking at the capital expenditure at the bottom of the slide. Total CapEx amounted to 3.3% of revenue, up from 2.8% in the prior year, but down on the 2020 ratio. In this regard, it also bears a reference that we invested in a new wrap line at Amaro Foods, which will be installed and commissioned towards the end of May. There was a significant prepayment in the FY '22 year of ZAR 76 million, which impacted our CapEx number. Spending some time on our significant capital investments since 2019 and looking at the far right 2 columns, just to clarify, the first column showing the 2022 project cost, with the last column showing the total cost since 2019, inclusive of 2022. And starting with Lancewood, our largest division, we concluded the acquisition in the prior years of the Langeberg cheese facility in Swellendam. This not only provided us with an access to a new milk procurement area, but also increased our hard cheese manufacturing capacity and lowered the conversion cost or the cost per kilogram to produce the hard cheese. Our single largest project was our upgrade to our pre-pack hard cheese facility in George. And this project is intended to remove bottlenecks, improve our efficiencies, as well as service the demand for increase -- or the increased demand for hard cheese within the market. We did experience some implementation delays, particularly on the packaging side in this division. However, it did assist us in producing that result of producing 10% more hard cheese in terms of volumes during the financial year. In Athlone, our yogurt factory, we upgraded our cleaning-in-place machinery there, which allows us to continue on our journey of producing quality yogurts. And this also assisted us in growing our market share, which I'll speak to a bit later. At Amaro Foods, our wrap facility, as I mentioned, will be commissioned in May, with commercial production starting in the second half of the year. And this gives us access to a growing market, both in retail and QSR for wraps. At Finlar Fine Foods, we commissioned a new crumbed product line and also upgraded our chicken facilities in Cape Town. At Montagu Foods, we invested in 2 new retorts, which are machines used to produce wet condiments at a total investment of ZAR 14 million. And at Dickon Hall Foods, the new customer in the industrial and contract manufacturing channel, supported us in making the investment in a new pourable sauces line. Looking at working capital, you will see a steady trend since 2019, as we contended with the impact of the COVID pandemic, as well as ongoing supply chain disruptions, particularly on the import and the export side. As a result, net working capital ended at 16% of revenue, but was reduced from the 17.4%, which we recorded in the first half of the year. As we enter the New Year and still experienced lack of stacking dates on the export side and some delays on the import side, our net working capital targets for 2023 have been revised to a range of between 14% and 16% against the previous range of 13% to 15%. Our total net working capital day is then up by 3 days to 59 days. In addition to elevated levels of inventory, our creditors' days also reduced as we lowered our purchases in Q4, given the inventory that we carried forward from the first half. Looking at the cash summary and the cash conversion ratio that I spoke to earlier, the cash conversion ratio was lower than the prior year, but significantly improved on the first half percentage. Looking at the cash flow analysis on the right-hand side of the slide, cash generated from operating activities or from operations rather, decreased slightly in line with the trading performance, but was strong at over ZAR 1 billion. Working capital changes mainly relating to our import-facing division, Rialto investing ZAR 155 million, as well as our export-facing divisions of Cape Herb & Spice and Khoisan. As I mentioned earlier, our cash cost of term debt facilities increased slightly on the prior year, in line with an increase in the funding rate. Tax paid, that number in the prior -- in the current year was reduced by a ZAR 34 million tax refund in the current year received early in January. As a result, cash generated from operating activities reduced from ZAR 786 million to ZAR 528 million. Our investment activities line item includes both our capital expenditure, which, net of the facilities, which we utilized came to about ZAR 300 million, as well as the acquisition of Cape Foods, net of the cash acquired of about ZAR 102 million. Our financing activities, which typically will include our lease payments as well as our repayment of asset-based funding facilities is lower than the prior year due to the significant repayment of some ZAR 600 million in the prior year as we refinanced our group term debt facilities. It's important to note that over ZAR 1.1 billion worth of facilities remain available to the group, both in terms of revolving credit facilities and overdrafts, with about ZAR 320 million of that relating to vehicle and asset funding facilities. Moving on then to the category performance. And starting with this slide, you'll be familiar with it. Product innovation remains a part of Libstar's DNA, and a core part of how we intend to grow and protect our market share in different categories. In terms of our Libstar brands on the right-hand side, we launched a new range of indulgent yogurts. And we've now grown our yogurt market share to 6.1%, showing a significant growth in that category. We've also continued to extend our Denny brand into new and adjacent categories. In the middle of the slide, we continue to support our retail and other trading partners in providing increased choice for consumers at different price points. As a result of this, we launched at the top left-hand side of the slide, 565 new products during the financial year. Looking at the bottom, our private label participation in the total basket of products, not Libstar's participation, the total market of private label now sits at 24.5% of total basket value, continuing to grow year-on-year. And it's important to note that Libstar participates in the key private label categories, or more than 75% of that basket value. Looking at the underlying EBITDA margin performance versus our targets that we communicated to the market. Here, I mentioned earlier that the gross profit margin impacted the category performance as well, with only the snacks and confectionery segment performing better than or improving on the 2022 target. Within the perishables category, I mentioned earlier that we experienced some delays in commissioning of our packaging lines in Lancewood, and also mentioned the inflation peaking in raw materials, being milk at over 10%. Within groceries, a strong performance in the industrial and contract manufacturing and food service, could not compensate for the export channel performance with the margin down on the prior year. Within baking and baking aids, I also mentioned the performance of Retailer Brands and our wholesale channel performance there, resulting in a decline in our baking aids category margin as a whole. Whilst the HPC category delivered an improved EBITDA margin, it still lags our target range of 5% to 8%. As we enter the New Year, many of these challenges around electricity and margin pressure remains. And as a result, we've revised our 2023 target downwards. However, we still work towards an improvement on the 2022 results. Moving then on to the detailed category performance, starting with our largest category by revenue, perishables, which contributes 51%. Category revenue increased by 14.4%, bolstered by a strong performance by Lancewood in the retail and wholesale channel, as well as by Finlar in the food service channel. You can see that at the bottom of the slide, reflecting in the volume mix. As a result of the factors mentioned before, the gross profit margin was down as well as the EBITDA margin, although this category did record a growth in EBITDA of 8.5 percentage points. As we have not yet realized the full benefits of the hard cheese packaging project, our RONA is not yet at our desired target. However, we believe we will reach that point towards the second part of this year. Within our groceries category, which comprises 31% of group revenue, the category revenue was up 8%. Whilst in the retail and wholesale channel, Montagu Foods performed strongly and Dickon Hall Foods benefited from new customers, the export channel drove most of this category's performance. At the bottom of the slide, as can be seen, the gross profit margins down, as well as the EBITDA and EBITDA margins. That volume being predominantly driven -- that positive volume being driven by the industrial and contract manufacturing and food service channels. The return on net assets was impacted, as I mentioned earlier, by the investment in working capital of ZAR 155 million in Rialto Foods. The snacks and confectionery category represents 4% of group revenue. And in this category, we recorded growth of 4.7% at a top line, driven by the retail and wholesale channel. It's important to spend a few minutes on the volume and price/mix equation at the bottom of the slide, volume growth there being driven predominantly by higher volumes of lower-margin peanut and raisin mixes, with luxury products down in terms of volumes. This would have also impacted the price/mix equation in that category. As a result of this, the gross profit margin and EBITDA margins were down on the prior year, also impacting the return on net assets. Within the baking and baking aids category, which comprises 8% of group revenue, the top line grew by 7.6%, driven by a strong performance by Amaro Foods, both within the retail and wholesale channel, as well as wraps into the food service channel. However, the performance by Retailer Brands at the bottom of the slide did have an impact on the group -- on the category EBITDA margin, as well as the absolute EBITDA performance. The return on net assets in this category impacted by that ZAR 76 million prepayment on the wrap line. Finally, the household and personal care division, ending with a revenue growth of 5%, and that's notwithstanding the volume decline that one can see at the bottom of the slide due to the discontinuation of unprofitable lines. Encouraging to see positive metrics here, gross profit margin improvement, as well as an improvement in normalized EBITDA, although very much aware that the return on net assets remains negative, and we will need to work to meet our targets in this regard. I'd like to spend a few minutes on the strategy in these tough and trying times. It's important for us to take a step back and to look at the portfolio composition of Libstar. We undertook quite a comprehensive process, which is based on the principles of value-based management. What we did is we took a look at the economic profits, both historically and in terms of projections of each one of our 17 divisions. And it's important to highlight that the top 6 divisions or the Stars drive 80% of the historical and forecast intrinsic value of this group. In terms of those divisions, you'll see their names in the middle of the slide, Lancewood, Rialto, Cape Herb & Spice, Ambassador Foods, Finlar Fine Foods and Amaro Foods. And you'll also see a few clustered businesses that we deemed to fit into this category. It's critically important that these divisions deliver on their short term, as well as their longer-term strategic objectives. And in this regard, we are sharing them with you on the right-hand side of the slide. These 6 divisions benefited most from our capital investments since 2018, over 60% of our capital investment since 2018 in these businesses. It, therefore, remains critically important for us to deliver on the economic profit targets of these larger capital projects. And I've already mentioned Lancewood, as well as Amaro Foods in that regard. The integration of Cape Foods remains a critical success factor for us, and we aim to achieve an IRR exceeding our weighted average cost of capital. The development of the export channel remains important to us. Notwithstanding the performance in the current financial year, this channel has proven resilient over a number of years. And it's not only important that we grow this channel within our existing traditional export-facing divisions such as Cape Herb & Spice, Cape Foods, et cetera, but also within other probably non-traditional export channel-facing divisions being Finlar and Amaro Foods, as well as Ambassador Foods. The protection and growth of market share will be critical for these divisions. Lancewood commanding over 26% of the natural cheese market, growing year-on-year, and we need to work towards achieving continued growth within that category through line extensions, which I'll talk to later. It also remains important for us to protect the markets that we currently reside in. In our Finlar Fine Foods division, we do expect competition to enter the market in the year ahead, particularly on the QSR side. And for that division, it therefore remains very important for us to focus on improving our mix towards the value-added chicken side, as well as developing the export side, which can compensate. Finally, it is critical that we prioritize further capital allocation to positive NPV projects in this category. And we'll look at those in the last slide of the presentation. Furthermore, it remains critically important that we unlock value from what I refer to as our rising stars. The names in the middle of the slide represent typically smaller divisions, which arguably have not yet reached the necessary scale within their particular divisions, or as a whole. Here, we've already commenced the process in terms of the implementation of a combined sales and marketing force servicing these divisions, which has been activated from the start of 2023. But we need to aggressively investigate further back office as well as operational integrations. An example of that would have been the integration of Multi-Cup and Rialto in the prior year, and we need to do more of that to leverage our capabilities in these divisions. The nature of the product base of these divisions also lends itself to wholesale channel development and we'll be launching a range of products into that channel during May. Lastly, but probably most importantly, we need to address our underperforming and our marginal return units. I do want to say that some of those units on the previous slide might make their way onto this slide, but for now, there are 2. Addressing our underperforming businesses remains a critical success factor for us and delivering a sustainable result from our HPC turnaround, as well as addressing the challenges that we experienced in Denny by critically assessing our value unlocking options for these 2 businesses. In terms of the evolution of Libstar, in terms of the operating model, the portfolio composition, as well as the capital allocation strategy. If I could summarize it, it would be that we've come from a business, which has been exclusively decentralized with a diversified portfolio of both food and non-food assets where capital reinvestment has been across the board, where in the next 2 years, we will look to accelerate the clustering and integration, simplify the portfolio and prioritize our capital allocation to our top 6 divisions. The success of this strategy will be determined in the future by maintaining these 6 decentralized starts, but with more coordination in the remainder of the portfolio, with a portfolio comprising exclusively of value-added food operations, showing an improving return on invested capital. Just to spend a few minutes on our BEE strategy, share buybacks and ESG. The group has achieved a significant improvement across all levels of the BEE scorecard. However, ownership remains a challenge, and we are looking at options in this regard in consultation with all stakeholders. An improvement -- a further improvement is expected in FY 2022, as well as going forward as we make steady progress in execution of this strategy. In terms of the group's view on share buybacks, there is no immediate objective to launch a buyback program as we focus on bedding down the strategy and simplifying the portfolio. Any future buyback program will be impacted by the execution of this strategy as well as the resulting gearing ratio. In terms of the group's ESG strategy, in 2021, we embarked on this journey, and we spent a considerable amount of time defining our ESG risks. We're now in the implementation phase with dedicated resources appointed, both internally as well as externally. We're now setting the baseline to define our future targets. As I mentioned earlier, it will be important for us to align our business objectives with our ESG strategy. And as a result, we will accelerate our planned installation of solar PV panels, as well as look at water purification installations throughout the group. In conclusion, looking at the outlook, the impact of load-shedding remains severe. We've invested a further ZAR 6.3 million in generator capacity post year-end, and we are planning a further ZAR 24 million, so a total of ZAR 30 million in this financial year. That does allow us to operate at near full capacity at a stage 6 of load-shedding with some impact moving into the higher stages, which we will continue to monitor closely. Water contingency has become extremely important for us. So we do have storage capacity on most of our sites between 1 and 3 days of production. But we are investigating particularly within our larger businesses and our top 6 off-grid purification solutions. However, I do note that this has a lead time of 9 months to 12 months. Net working capitals will remain elevated in this financial year. And as such, we've revised our target to between 14% and 16% of revenue. However, we will continue to focus on deprioritizing slow-moving items as well as unprofitable lines, using both our existing ERP systems and continuing to invest in new functionality, which will assist us in our procurement as well as our manufacturing processes. As I mentioned before, the protection of margins is the single largest focus and in addition to that, obviously, the protection of cash generation. The continued management of price and volume and the channel mix will play an important role in this. We expect the retail channel to remain under pressure for most of the financial year. However, the food service channel is performing strongly and serves as an opportunity supported by the capital investment that I mentioned in Amaro Foods and other divisions. Our export channel is expected to benefit from improving export FX rates from the third quarter as well as improving recoveries. It's important to understand that these dual supply strategies or these conservative approaches by international customers also serve as an opportunity, where we're adding some volumes in the New Year in customer bases, which we didn't have access to previously. Of course, we will also continue to maintain our controllable overheads to the best of our ability below the published CPI. In terms of capital allocation, we will prioritize capital allocation to the top 6 divisions, as well as water and electricity sustainability projects. Here, you see the names on the slide, with the focus being on efficiencies, which drive margin improvement, as well as line extensions which drive market development in these businesses. So in conclusion, notwithstanding a disappointing trading result in 2022, management and the Board remains committed to a strategy, which is focused on improving our return on invested capital by focusing our efforts on developing opportunities in the top 6, simplifying our portfolio and then also clustering and integrating and creating scale within the remainder of the portfolio. Thank you. And please stay on the line to our webcast viewers for the Q&A session.

Good morning, everybody, and welcome to the question-and-answer session of this morning's presentation. A special word of welcome to the guests in the audience. We are very glad that you could make it to our session. You can be posting your questions under online for the webcast team members. And then for the audience, we have got a roving mic. So should you wish to pose a question to the team, you are most welcome to just raise your hand and somebody will find you to hand you the mic. Right. Let's start by introducing the panel on the left, on my left-hand side, we've got Cornel Lodewyks. He is an Executive Director on the Libstar Board. He also is the Managing Executive for both the Lancewood and Millennium divisions. Next to him is Charl De Villiers, the Libstar CEO. On his left-hand side, we've got Paul Jibson, who is the Managing Executive for the Cape Herb & Spice division. And on his left, Mr. Tim Judge, who is the Managing Executive for Finlar Fine Foods. And right at the end, we've got Daniel Jacobs, who is the Business Development Executive for the Libstar Group. Right. All right. Let me have a look at the questions as they come through. It seems that we do have our first question. And this is aimed at yourself, Cornel. From a Lancewood perspective, how has the load-shedding impacted to your production capacity and service levels?

Thank you, Wendy. I expected the question like that, not so early there. On the positive side, if there's anything positive to say about the [indiscernible] is that our Board and our management team had the vision in prior years to allow the divisions to invest in energy generation. So to answer your question, it didn't had an impact on the service levels and capacity. It did had, however, a major impact on the conversion costs at our factories. Obviously, diesel cost and maintenance waste contributed to that. Just to put it in perspective, if you look at the cost increase and production of raw MoC at a ZAR 0.25 per liter of MoC might not sound much, but if you apply 11.5% yield on that, that it comes to around 17 to around 20 per kilogram of cheese, and we do manufacture close to 20,000 tons of product annually. So you can do the math. It's quite a big impact. And like Charl said, that the impact was towards the end of the year and quarter 4.

Thank you, Cornel. And maybe just a question to add to that and then, Charl, maybe just this question to you. What is the -- it's from anonymous, sorry. What is the forecasted additional diesel cost for 2023, if load-shedding stays at its current levels?

I think the second half of the year is representative of what that run rate would be. As I mentioned in the presentation, our farming operations, Denny, as well as the largest operating division, Lancewood, being the largest consumers of diesel in the group. We are looking at procurement and doing what we can in terms of the cost of diesel prices, but the run rate is pretty much aligned to that of the second half of last year.

Okay. Thank you, Charl. Here is a question relating to the food service channel. And Tim, if I could ask you to maybe take this one. What is your view on the sustainability of the significance in the food service channel.

Wendy, over the weekend, I was reading an article that a colleague sent to me and it was, I think, in a publication, the Daily Investor regarding how consumer behavior has changed in South Africa post the pandemic. And there's definitely been an increase in eating out across all income segments and across all regions. And most of this is actually driven through the effect of load shedding. And the data source was actually an exercise that Discovery Bank conducted across their Visa platform. And it's quite exponential in terms of the spend as the country enters into level 4, 5 and 6. In fact, if you hit level 5 and 6, the data shows that South African spend close to 60% more on eating out or for that matter on ordering in. So load-shedding has definitely played a major role here. Consumers who were pressed for time, I imagine now are pressed for power. So yes, there is this growth in food service, but I think it also leads towards innovation. And definitely, in terms of looking at our category, the move towards partially cooked or fully cooked meals bodes well as consumers realign these constraints. So it's not only just in the food service component, but I think we can continue to foresee good growth as you change the consumer offering.

Thank you, Tim. Right. I just want to keep myself honest in terms of any questions in the audience. We're all good. Right. There is a question that comes through. And Paul, I think this one will be good for you. What challenges or opportunities have arisen with the acquisition of Cape Foods?

Okay. Wendy, I assume the challenges inside of Cape Foods, which Cape Foods' 70% of the business is export. So over the last 2 years or especially last year, the challenges that we experienced inside our export business is the same that Cape Foods would have experienced. And that would be a pressure on margin as well as on volume. And we can spend hours unpacking the reasons for that. And I'm happy to engage in conversations afterwards to talk through what happened to volume, what happened to price and the recovery on the plans going forward. The opportunity that sits inside the Cape Foods is one of customer base around the world. So it's extremely difficult, especially in the current times to find new customers and reputable good customers. These retailers -- relationship with the retailer internationally is something that is -- I'm not too sure you can put a [ cash ] cost to it or price to it. So Cape Foods has a great bunch of customers around the world. And credit who runs that business has been -- he's selling his dry condiments predominantly. What opportunities exist now is what the other 17 manufacturing sites inside Libstar can offer [indiscernible] customers, right? So we have this big basket of capability of -- from wet products right through to nuts, which [indiscernible] now available to him without having to invest in that capacity. So the opportunity is -- I don't want to say endless, but it feels like it's endless. And export is where we want to be. It still presents a big opportunity for us.

Thank you, Paul. Yes. Sorry.

Yes. Sure. Murray Moore from Aylett Fund Managers. So the HPC division clearly had a tough time. I don't think I've ever seen a discontinued operation become a continued operation again. You guys have been wanting to sell that for ages now. Andries used to say that it's a loss leader for you guys to go to the retailers with, to sell your other products to them. Maybe you can just expand on how you're thinking about the business? Are you still looking to sell it? It's clearly had an impact on your return on invested capital as well, margins, et cetera?

Okay. Charl?

Expecting that question. Thank you, Murray. And a very valid one. I think we need to face certain realities. And the first reality is some of the operational matters that are under our control that we could focus on to improve the actual result within that division. We've spoken for quite some time around margin pressure. And I think through particularly Daniel's involvement, we've been driving margin improvement incrementally in that division since the start of last year. And it's good to see that gaining some momentum. And as I sit here, I think there is still legs in that journey of improving the margin. As I said in the presentation, at the end of the day, we need to ask ourselves what Libstar is. And Libstar is a value-added food producer. But as easy as it is to say that, we have to evaluate all strategic options. And at the moment, we are focusing on the operational level, improving that. And I think we see good traction on that front. But we will continue to look at all strategic options, be that organic or inorganic.

Thank you, Charl.

Just a second one.

Sure.

Just on margin targets, you guys brought it down basically across the board, except for snacking for 2023. Are these also long term, you bringing it down long term as well? Or you expecting it to -- just 2023 is going to be a tough time?

So if I could take that one. I think one would be a very brave person in the current circumstances to put a long-term target on a slide show. So based on the feedback from investors, we focused on this year's targets. And I would like to believe that we will work our way towards our longer-term margin targets in the years thereafter.

Okay. Thank you, Charl. I have another question. Cornel, if you don't mind me putting it to you, are you able to pass through some price increases due to higher diesel costs? And what are the kinds of conversations around price increases that we are having with retailers and customers alike?

At the moment, like Charl mentioned, margin -- the protection of margin is obviously a key factor or a key enabler for us to reach our targets. Unfortunately, we do find ourselves in an inflationary environment. So price realization, I mean to have price increases, obviously, it's crucial. Just maybe a point on the previous question as well. I must remember that the impact on load-shedding -- [ boarder ] load-shedding, obviously, the inflation on [indiscernible], but that happened towards the latter part of the year. And obviously, price realization doesn't -- it's not a real time, doesn't have a real-time effect. So as we sit here, we're recovering those increases with our trading partners. So we've got -- actually recovering now from that. But I suppose it's a collaborative approach with our trading partners more than ever. And we do that by working closely with them. Private label is a key enabler to their strategy, and we support that. But it's all about innovation, renovation, giving our shoppers and consumers products at different price points, different uses occasions and different formats. I suppose that will be our focus, obviously, price realization and then continue all of that category to go ahead and [ work through team ] to go ahead and implement that.

Great. Thank you, Cornel. Any other questions from the audience? No? There is a question. Yes, Charl, I think this one will be for you. What further risks of write-downs of past goodwill paid, specifically what valuation metrics have determined the fair values of these remaining investments?

Valid question. If one looks at those 3 slides in terms of the strategy, the risk is determined by this year's performance, as well as our view on the future. We, as a management team and as a Board, try to be realistic but conservative when we set these, when we make these calculations. But, however, as much as I would like to promise that this cannot happen, it is a function of the circumstances and our view on the future. If one were to look at risk, I think we've mitigated as most as we can. However, within that last slide within that HPC and Denny slide, I think there is where further risk could reside, should we not be able to execute on our strategy.

Thank you, Charl. Sorry, while we've got you talking, there's another question, which I think will be for you. Wouldn't it add more shareholder value if share buybacks were conducted instead of making dividend payments.

That is a very -- again, a very good question. I think from a Board perspective and through our consultation with various stakeholders, Libstar has been viewed as a yield asset to an extent in addition to being a growth asset, which arguably has not happened in the past number of years. So for that reason, I think it's been important to us as a management and a team and a Board to show that the cash generation remains healthy within the group and that we can pay that dividend. Share buybacks is a question that we always receive, and I think there are differing views around the table. So happy to have that discussion, I think, in a different forum.

Right. Thank you, Charl. There's also been a question that's come in, just basically adding on to the Cape Foods acquisition. A question that states, can we expect more acquisitions in the near future? Charl, I'm not sure if you want to take that one.

Yes. I think one can never rule that out in terms of smaller bolt-on acquisitions in complementary categories. But I would like to say that at the moment, our main and primary focus is on bedding down the acquisition of Cape Foods and focusing on the strategy that we showed here. So I think although acquisitions may be considered, our primary focus is not on that.

Thank you, Charl. There doesn't seem to be any additional questions coming in online perhaps. Okay. Thank you.

I seem to be the only one asking here. Guys, just on exports, maybe we can chat about the -- so you mentioned overseas customers, near-shoring suppliers but then also, you've had issues at the ports and freight costs and all of those sorts of things. Kind of what's the makeup of nearshoring versus you guys struggling? And what's the long-term impact of lack of service levels from you guys to those export customers and potentially they not coming back to you?

Okay. That's my question. I'm glad it's been asked because it's a real risk. So look, if you just look at the logistics from Cape Town to West Coast U.S.A., it's traditionally in a perfect environment, it's 8 weeks transit, if you're not transshipping anyway. With the supply disruptions, retailers have looked at onshoring or shortening the supply chain to make sure that they've got KVI products online. So that's a risk that exists, I would imagine in the past and it will exist going forward, whether shipping smooths itself out. At the moment, we're still experiencing shortage and availability of vessels out of Cape Town. And that's outside of the wind bound ports that we used to. So the risk has always been there for us for the last 20 years. I think it's a real risk. We have looked at -- obviously, our customer relationship is very important, and it's something that we've had for a very long time. So the options are -- we are either holding stock. So when Charl referred to investment in stock, that was investment in finished stock for our customers to stock holding in foreign countries that comes out of cost. But these are the options that we're looking at to mitigate these risks. We also supply a basket of products that is not always possible to get from a local manufacturer. So we don't just play in a commodity-based environment of salt and paper grinders, but we do a whole category of review. The bigger our baskets with Libstar, the less options our customers have, but it is a real risk and we need to manage this risk.

And maybe just on the food -- I mean, sorry, the chicken producers struggles with load-shedding and all of that stuff, has there been any major impact on Finlar as a result of that?

No. We've got an extensive network of fully approved10:24 PM 3/16/2023 suppliers. So on the one hand, we've got the Woolworths accredited suppliers. And on the other hand, we've got McDonalds accredited suppliers. And all of those are subject to extensive audits, which all lead towards continuity of supply. So we haven't had any disruptions affect us in that regard. No.

And then maybe just last one on Cape Foods. You guys spent ZAR 120 million. What do you guys expect to make in profit this year, return on investment.

My new auditor is sitting right behind you. So what I'm going to say to you is that there's a disclosure in the financials, which tells you that it made a contribution in 2 months of ZAR 26 million with a ZAR 2.5 million profit before tax for those 2 months. And that's all I can unfortunately say.

Thank you, Charl. Right. I can't seem to see any additional questions coming in online. Are there any -- perhaps any other additional questions from the audience? Right. Then that concludes the question-and-answer session. Thank you for your time, and enjoy the rest of your day. Thank you to the panel.