Libstar Holdings Limited (LBR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Interim Results Presentation of Libstar Holdings Limited for the 6 months ended 30 June 2023. A special word of welcome to our Board members of the investment community, the media as well as the broader Libstar family joining us here at the Cape Town Convention Center this morning as well as the online platform. We'll start this morning's presentation with an overview of the macroeconomic as well as company-specific factors that impacted the set of results before I hand over to Terri to take us through the detailed financial and category performance. Thereafter, I will take us through the key elements of the strategic initiatives that are being launched in order to accelerate profitable growth and stakeholder returns within our portfolio. Finally, I'll close off with a few remarks on the outlook. Starting then with the executive summary and looking at the macro factors, weak South African as well as global GDP numbers have impacted household consumption expenditure and has impacted the change -- or affected a change rather in consumer behavior. In this set of results, the group reported a decline in production and sales volumes of 7%. This was owing to a discontinuation of unprofitable HPC lines, which significantly improved the GP margin of that segment, a lower production of fresh mushrooms following the Shongweni fire incident at the back end of last year as well as weaker demand for contract manufactured wet condiments, particularly in our Dickon Hall Foods facility. Finally, we also saw the full period impact of supply localization or risk mitigation strategies employed by particularly a U.S.-based customer. These factors contributed into the under recovery of manufacturing costs, which directly impacted our margins as well as our bottom line. Interest rates continue to rise and are expected to remain elevated for longer. Net finance costs, as a result, increased by ZAR 34 million. Whilst the CPI numbers appear to be moderating, food inflation remains elevated. In terms of our input costs, I mentioned the example of a 16% inflation in dairy or milk prices out of our largest business unit, Lancewood. To mitigate this, we passed pricing increases to the market, but this could only partly mitigate the impact of inflationary pressures, contributing 11% to group turnover. The impact of load-shedding remains severe, adding ZAR 45 million in direct costs. In terms of changing consumer behavior, we've continued to see a resilient performance from the food service channel, somewhat aided by load-shedding, and a greater shift to value offerings in the retail and wholesale channels that has driven an increased focus within our basket on the reformulation or renovation of products. Moving then to some highlights. Within the HPC segment, we continued our commitment to improving the business performance, delivering EBITDA over ZAR 20 million in the first half, which is in excess of the full year performance of 2022. Albeit that our service levels were somewhat impacted within the Amaro Foods division, we successfully commissioned our wrap line, and we're ready to target new food service as well as retail growth basket in the second half of the year. Our operating expenses remained well contained below inflation numbers, and we increased our focus on cash preservation by improving our cash conversion ratio through a reduction in net working capital. This slide depicts the direct impact of load shedding with the prior year first 6 months shown on the left-hand side, and this reporting period shown on the right-hand side. The darker shades of red depicting higher levels of load-shedding, just showing how severe that impact has been relative to the comparative period. As a group, we continue to invest in generation capacity, now nearly having doubled our capacity since 2021. We also invested a further ZAR 7.1 million in generation capacity, and we'll continue to do so into the second half of the year. In terms of operational costs incurred to run these generators ZAR 45.1 million cost relative to a rather modest ZAR 8.3 million. And we now expect an annual cost slightly above ZAR 100 million. Overall then, not -- in terms of the numbers, not where we want to be with revenue up 4%, volumes down 7% and a price mix contribution of 11%. The group's GP margin contracted by 2.1 percentage points to 20%, although I do note that we achieved a 19.6% average in the latter part, the second half of last year. So tracking slightly ahead of that in this first half. The other recovery of manufacturing costs directly impacted our operating profit as well as our EBITDA numbers whilst the increase in the interest bill impacted the EPS and headline earnings per share metrics. In terms of the group's gearing ratio, that increased from 1.5x to 2.1x normalized EBITDA, mainly as a function of the decline in EBITDA. And we do note that the post-period receipt of insurance proceeds following the finalization of the Denny insurance claim will reduce that number to 1.9x. In terms of interest cover, that reduced from 9.2x to 5.2x, but remains ahead of our lender covenants of 3.5x. I've noted the improvement in cash conversion mainly as a result of an increased focus on net working capital management. The group's channel performance is largely a function of the factors discussed earlier with the retail and wholesale channel delivering revenue growth of 4.8%. Volumes declined by 3.3% with a positive price mix contribution of 8.1%. We do note that excluding the discontinuation of HPC lines as well as the lower mushroom production, those volumes will increase by 1% on a like-for-like basis. Within the food service channel, we saw a modest, but growth in volume of 0.5% with a 12.6% price/mix contribution resilient performance from the food service channel, where that price mix equation is more impacted by import currency fluctuation, particularly within our retail basket. The export channel delivered revenue growth of 10% with volumes down 15.6% and a price mix contribution of 25.6%. The volume decline, as I mentioned earlier, due to the full period effect of the supply localization strategies, but also weaker demand for bulk and packaged products in the European and Japanese regions. The price/mix contribution there, driven by a weakening of the ZAR against major currencies. Within the industrial and contract manufacturing channel, revenue declined by 18% mainly driven by volumes due to weak demand for wet condiments out of Dickon Hall Foods. Looking then at the contribution to group revenue by each channel. The retail and wholesale as well as the export channels maintained their relative status. Whilst the food service channel increased its contribution by nearly 2 percentage points with the industrial and contract manufacturing channel contracting by a similar percentage. I'll hand over to Terri to take us through the detailed financial and category reviews.

Thank you, Charl. Looking at the face of the income statement. As Charl mentioned, revenue is up 4%, with a 7% volume decline and an 11% price mix improvement. Gross profit margin reduced from 22.1% to 20%. However, as noted, it is important that this is an improvement on the H2 2022 gross profit margin of 19.6%. Other income has increased from ZAR 10.2 million to ZAR 22.3 million, driven by the ZAR 10.3 million of insurance proceeds received for the Denny fire. As detailed in our results commentary, the Denny Mushrooms insurance claim has been finalized post our interim reporting date and ZAR 109.7 million of additional insurance proceeds has been received and will be reflected in our full year results. Operating expenses have increased by 1.4% on the prior period and have been contained well below inflation. Our normalized operating profit and normalized EBITDA were down on the prior period, driven by the loss in margin, mainly from the under recovery of manufacturing costs due to reduced volumes. As mentioned earlier, the group's finance costs increased as a result of the increased JIBAR at 11.1% compared to the prior period average of 7.7%. The group's effective tax rate is lower than the statutory rate due to the finalization of prior year tax assessments, which resulted in a ZAR 13 million lower tax liability in the current period. The prior year effective tax rate was impacted by a once-off deferred tax adjustment for the change in the statutory tax rate. From a balance sheet perspective, our gearing ratio increased to 2.1x, which is slightly higher than our internal target. However, it is still below the lender covenant of below 2.5x. This was impacted by the lower operating profit margins as well as the additional debt incurred in the prior year to fund the Cape Foods acquisition. We target an improved gearing for year-end based on the traditional seasonality of trading and cash flow generation. If we include the post-period insurance claims, as discussed, this would have reduced the gearing ratio to 1.9x. Our interest cover has reduced from 9.2x to 5.2x, however, remains above the lender covenant of greater than 3.5x. Our return on invested capital has reduced further from 12.5% in the first half of the prior period to 8%. This is due to the continued impact of the higher asset base cost of Cape Foods acquisition, but has been largely impacted by the disappointing operating results of the rolling 12-month period. On the bottom left of the slide, you see that the group is focused on containing capital expenditure, which has reduced by 12.8% to ZAR 125.1 million in the current period. On the top right of the slide, you'll note that this is 2.1x the group net revenue, and it is at the lower band of our internal target of between 2% and 3%. On the bottom of the slide, on the right-hand side, we detailed the largest spend projects in the period. In Lancewood, we spent an additional ZAR 9 million on the hard cheese pre-pack capacity and utility upgrade, bringing the total project cost to date to ZAR 166.7 million. In Amaro Foods, we commissioned our new wrap line in June of this year. And while the majority of the spend was incurred in the prior period, an additional ZAR 15.8 million was incurred, bringing the total project cost to just below ZAR 92 million. And in Finlar Fine Foods, we spent an additional ZAR 14 million on line upgrades for value-added chicken and beef facilities. The group's net working capital as a percentage of revenue has decreased from 16.8% to 16% in the current period and has remained in line with our year-end revised net working capital target of between 14% and 16%. The focus has been on controlling our investment in working capital, and this has resulted in a 2-day reduction from 63 days in the comparative prior period to the current 61 days. We do note that our inventory day reduction has been muted due to the rising input cost inflation and the exchange rate weakening. Cash preservation has been a key priority for the group. As previously mentioned, our cash conversion ratio has increased from 15% in the comparative period to 58%, as can be seen in the graph on the bottom left. We aim to improve this further to year-end, surpassing our internal target of over 65%. Looking at the cash flow analysis on the right-hand side, we see that cash generated from operations has decreased from ZAR 476 million to ZAR 403 million. This has been driven by the decreased EBITDA in the period. Our working capital investment improved by ZAR 202 million with an investment of ZAR 336 million in the prior period, and it's ZAR 134 million in the current period. While our finance costs have increased due to the increased interest rates, this has resulted in an overall increase of cash generated in operating activities of ZAR 125 million compared to the ZAR 42 million of the comparative prior period. Our investment activities have reduced slightly due to the capital reduction as previously noted, and our financing activities in the prior period were impacted by the repayment of term debt facilities. Facilities of ZAR 1.2 billion remain available to the group. Moving on to our category review and starting with some product and market highlights. A few recent awards as can be seen on the top left of the slide to our largest division in the group, Lancewood. At the recent SA Dairy Champs hold in May, Lancewood remains the most awarded soft cheese manufacturer in South Africa with 23 awards as a manufacturer and 5 awards for the Lancewood brand. In the Ask Afrika Icon Brands study, Lancewood is a proud winner of the title of SA's #1 soft cheese brand. On the top right of the slide, we move to Cape Herb & Spices, smashed avo seasoning, which is the winner of a top innovative product at the Saudi Food Show earlier this year and was also included in the Private Label Manufacturing Association's Innovation Showcase held in Amsterdam. Looking at the bottom left at the private label and brand market data. Based on the latest trade intelligence private label report for formal retail, we see private label penetration continues to drive market growth with 24.8% share in the total basket value. Private brand sales driving growth at 8.9%, ahead of national brands at 4.1%. Looking internally at Libstar's defined market and top end retail, we continue to command a significant share of the private label basket. And our private label sales are growing at 10.6% and ahead of our strong branded growth of 8.5%. Looking at the product innovation and renovation on the bottom right of the slide, we see the shift to renovation in the first half of the year aligned to the current consumer environment -- aligned to the current consumer environment where consumers are looking for value offerings, which are achieved through pack and formulation reconfigurations. New products launched in the current period were 172 products, which contributed ZAR 60 million. If we look at all new products launched since the beginning of the prior year, there were 737 products launched, which have contributed a total of ZAR 580 million. Looking at the underlying category margin performance, the under recovery of manufacturing costs driven by the decline in volumes has impacted the 2 largest categories being Perishables and Groceries. Perishables has reduced from 9.1% to 6% with Groceries reducing from 11.7% to 9.8%. Snacks & Confectionery continue to achieve their target despite a small decline. While Baking & Baking Aids largely impacted by the commissioning of the new wrap line, saw a 1% decline. HPC or Household & Personal Care saw a significant improvement from 1.1% to 5.7% to achieve their target. These margin movements will be unpacked further in the next slides. Starting with our largest category being Perishables, which contributes 51% of group revenue, we saw a 4.5% growth in revenue in this period. With retail and wholesale growth muted to 1.3% due to the Denny fire, which impacted volumes. With a strong food service performance growth of 11.8%, which was driven by Finlar Fine Foods. Volumes for the category were down 3.3%. However, if we exclude the impact of the Denny Mushrooms reduced volumes, this moves to a growth of 1%. Both Lancewood and Finlar were impacted by the under-recovery of manufacturing overheads, which led the category gross profit margin to decline by 2.5 percentage points and the EBITDA margin to decline by 3.1 percentage points. The return on net asset value declined by 4.1 percentage points to 9.5%. Given the 12-month rolling operating profit performance, we were impacted by the weakened H2 2022 performance. Moving on to Groceries. The second largest category in the group, which contributes 30% of group revenue. We saw a 4.7% growth in revenue in the period. Retail and Wholesale had a strong performance with an increase of 12.5%, which was largely driven by volumes in Montagu Foods. Exports grew by 10.9%, which was largely driven by exchange rate devaluations despite the reduced volumes in Cape Herb & Spice with the full period effect of supply localization strategies. The significant decline in industrial and contract manufacturing of 23.4% was due to the volume decline of wet condiments in Dickon Hall Foods. And the strong food service performance of 20% growth was driven by Rialto in both Foods & Packaging. Overall, volumes declined by 9.5% with Dickon Hall Foods and Cape Herb & Spice outweighing the gains of other divisions. The under-recovery of manufacturing overheads in Dickon Hall Foods are largest -- was the largest contributor to the reduced gross profit margin and EBITDA performance. The operating performance directly impacted the return on net asset value, which decreased by 2.8 percentage points to 17.3%. Snacks & Confectionery, which contributes 4% of group revenue, so a 12.7% decline in the period due to the Kellogg's Pringle manufacturing contract, which was terminated in the prior year. Excluding this and only looking at the Ambassador Foods revenue growth, there was a slight increase of 1.8%. It is worth noting the increased export performance of 27.9% growth, which was identified as a growth driver in the prior year. Volumes were impacted by the change in promotional activity in the period which was offset by changes to sales mix as well as to lower margin products. The gross margin is therefore down 12.5 percentage points. However, if we look only at Ambassador Foods, it is down 1.7 percentage points. Our EBITDA margin is down by 0.3 percentage points to 18.1%, with a return on net asset value down 3.8 percentage points to 19.9% driven by the reduced performance of H2 2022. Baking & Baking Aids, which contributes 9% to group revenue saw an increase of 10.5% on the prior period with strong retail and wholesale and food service channel performances in the largest channels of this category. This was driven largely by Amaro Foods and Cani Rusks. The volume reduction of 1.9% was driven by Amaro Foods that experienced load-shedding disruptions as well as had a factory shutdown to commission the new wrap line. Gross profit margin was up 1.1 percentage points with margin movement in both Amaro Foods and Cani Rusks. Overall, this resulted in normalized EBITDA slightly down with a reduced margin of 8.4% with the new wrap line only commissioned in June, it continues to impact the return on net assets, which decreased 2.8 percentage points to 9.5%. And lastly, in our Household & Personal Care category, which contributes 6% of group revenue, we saw growth of 2.5% with a volume decline of 10.2% due to the discontinuation of unprofitable lines. But this added to the procurement savings and production efficiencies, saw a gross profit margin increase of 2.8 percentage points to 16.2%, and a normalized EBITDA increase to ZAR 20.8 million, which is ahead of full year prior year EBITDA of ZAR 12 million. The EBITDA margin increased to 5.7%, which is within the category target. However, while seemingly counterintuitive given the improved performance, the return on asset value has decreased to negative 4.6% as it is heavily impacted by the H2 2022 performance. Given the current performance, the return on asset value is expected to improve to year-end. I'll now hand back over to Charl to take us through the strategy update and the outlook.

Thanks, Terri. As the management team and the Board, we are acutely aware of the need to urgently address the current underperformance of the group. As such, we've undertaken a very comprehensive strategic review which has taken most of the first half of this financial year. Our objective is to deliver accelerated profitable growth and stakeholder returns. And I've noted previously that we've adopted the principles of value-based management. Our strategy remains underpinned by our existing strategic pillars shown on the right-hand side of the slide. However, we've identified key elements that are designed to improve our execution capabilities. And those are the simplification of the portfolio as well as the operating model, the growth of the group's current as well as new categories and channels and also the sustainability of our operations and cash flows. Our first strategic priority is to simplify the group's portfolio composition by reducing our exposure to underperforming businesses, either through the formalization of divestment mandates or other strategic initiatives, such as the exit or closure of non-profitable product lines and divisions. We will also continue to explore the functional as well as operational consolidation of divisions. And I must stress, this is not indicative of a centralized group structure, but rather one where we focus and create a bespoke dedicated structures within our categories and our channels. To provide some progress on these initiatives, and we'll do so going forward as well as we execute on this strategy, within the HPC segment, we remain intent of exiting the category and are in the process of formalizing adviser mandates. However, we must be aware that current market conditions are not necessarily conducive to a short-term exit, and therefore, we remain committed to the operational turnaround of the business. Having delivered a significant improvement in operating result in the first half of this year through the discontinuation of unprofitable lines, procurement savings as well as a relentless focus on production efficiencies. Within the Denny Mushrooms business, we continue to execute on value unlocking initiatives, and we'll exit the unprofitable and have exited the unprofitable Eastern Cape region from the start of June 2023, saving approximately ZAR 9.6 million in operating costs on an annual basis. As mentioned in our commentary this morning, the farming operations of the Denny Mushroom sites, means that it is quite sensitive to a continuous supply of electricity. Current market conditions, therefore, do not render the reinstatement of the Shongweni facility viable at this point in time. So our insurance proceeds will remain available for application to value-accretive projects. Our ambition is to conclude the divestment as well as other value unlocking initiatives by the close of 2024. Our second strategic priority is to actively seek ways in which to align the group's organizational structures to cater to a simplified category-led and brand-driven approach where brand driven within our context, encompasses the group's own branded as well as the private label capabilities. We will also leverage shared services where appropriate, in most instances, looking at the sales and marketing teams and back office teams as a start. We've therefore launched a group-wide integration initiative, focused on reducing our operating and our reporting complexity and improving our ability to operate and execute within our categories and channels. An example of a successful implementation is the integration of the front-end sales team of the Ambient Groceries divisions within the Groceries category, which delivered a basket beating 11.5% revenue growth in the first half of this year. We will be actively exploring similar structures, and I mentioned there, the food service channel within the Groceries category. Our 3 largest export-facing divisions will be integrated by early 2024, starting with the front and back offices and moving to the manufacturing facilities, over time as commercial factors such as the expiry of leases allow. We are actively exploring further integration opportunities across the board, including the use of shared services, again, not centralized services, shared services within the categories where we have the current expertise to ensure that we simplify our category structures and reporting. Again, our ambition is to implement these structural changes by the close of 2024. Thirdly, our strategic priority remains to continue to develop our existing channels, retail offerings comprising the significant majority of that, but also our underrepresented channels such as exports, food service and wholesale channel. Within the retail channel, we will continue to exit unprofitable lines, not only within the HPC segment, but also throughout the broader portfolio. Whilst the successful commissioning of our new wrap line at Amaro Foods, not only allows us to service an increasing demand for wraps within our existing retail customer base, but also increases our capacity to target new customers in the coming months. Within the export channel, our Cape Herb & Spice front end has been bolstered to now take the entire Libstar basket to our foreign markets. And as I mentioned earlier, we will be integrating those 3 businesses from the start of 2024. In terms of the food service channel, we continue to see a resilient performance and therefore, need to up-weight our representation in that channel by aggressively looking at integration opportunities. Lastly, we have successfully launched a range of own branded products, 3 condiments and 1 snacking product into the wholesale channel. And since June, that basket has delivered a growth in excess of the market, albeit from a very low base. Finally, these initiatives are designed and scoped to be implemented in a responsible manner, ensuring that we sustain our operations, sustain our cash flows and our business practices. In terms of our operations, recent advancements in cost as well as technological matters have ensured that we can or allowed us to accelerate our strategy to investigate alternative energy generation. We are nearing the completion of 2 viability studies at our Cape Town and Amaro Foods site and additional sites have been earmarked for viability study completion by the end of the financial year. Of course, bearing in mind that given the complexity and scope of our manufacturing operations, we will not be capable of operating entirely off grid. Another project that we are undertaking relates to the purification of water at our Lancewood, George site with the target to be 90% neutral. That is a very technical project and will be completed within 12 to 18 months of approval, which is imminent. In terms of sustainable cash flows, Terri mentioned our internal objective to increase our cash conversion ratio above the 65% internal target, and we will, therefore, further reduce our capital expenditure relative to the prior year as well as our working capital investment into the second half of the year. We are very proud to have reported an improvement of 2 levels in our B-BBEE verification scorecard and will drive further initiatives to continue this trend of improvement over the coming years. Looking at our implementation road map, our immediate priority is to reduce working capital, reduce capital investment and focus our capital allocation towards critical projects within the top 6 divisions. We will be formalizing our divestment mandates and continue to scope and quantify the costs as well as ROI on integration initiatives. Ultimately, during the course of 2024, we want to return our gearing below 1.5x and earn the right to consider share buybacks, which we acknowledge is value accretive at the current levels. As I mentioned earlier, finalizing our divestment as well as our operating model changes, with the ultimate objective to start 2025 on a simplified basis. Concluding then on a few remarks on the next 6 months. In terms of the short term, macroeconomic conditions remain challenging, lower GDP growth, higher levels of food inflation, albeit moderating at this point in time, and with no end to load-shedding in the current format. These factors are expected to continue to place pressure on consumers within our channels. However, there are some positive factors which we see developing in the next few, 6 months. Within the industrial channel, volumes have started to normalize. And we continue to see an increase in out-of-home consumption targeting new food service customers and launches in the latter part of this year. Our export channel is also expected to benefit from improving foreign currency contract rates relative to the first half. And I mentioned that our traditional profitability and cash flow generation seasonality is significantly weighted to the second part of the year. To reiterate then, in terms of our core activities and actions, cash preservation remains our single largest priority including the further reduction in working capital, reduced and focused capital allocation and the maintenance of controllable expenses. We will continue to scope our divestment and integration benefits with the theme being that of simplification, whilst developing channel-specific plans to develop our underrepresented channels with benefits to flow from the start of next year. In conclusion then, again, reiterating the theme around simplification. The group strategy remains focused on delivering accelerated profitable growth and ultimately returning improved return on capital to our shareholders. How will we do that? Through a simplified food portfolio, a simplified operating and reporting structure whilst maintaining single-point accountability as well as a simplified category channel and brand growth execution plan. Thank you, and please stay on the line to those online for our Q&A session.

Good morning, everyone. My name is Wendy Van Zyl, and I'm the category and customer executive at Libstar. Thank you for joining us for the question-and-answer session as part of the results session. A warm welcome to all our guests in the audience. We really do appreciate you attending this session this morning. We also welcome all our attendees that are online. Please feel free to post your questions on the chat. We will try to get to as many of them as possible. Let me start by introducing the panel. To my left, we have Cornel Lodewyks, Executive Director at Libstar. Cornel is also the managing executive for our Lancewood and Millennium divisions; Charl De Villiers, Libstar Chief Executive Officer; Terri Ladbrooke, Libstar Chief Financial Officer; Tony Amaro, Managing Executive of Amaro Foods; Paul Jibson, our Managing Executive at Cape Herb & Spice; and then, of course, Tim Judge, our Managing Executive at Finlar Fine Foods. Before we have a look at the questions, just a note to the audience that are attending, there is a roving mic. [Operator Instructions] Right. Let's make a start. We have a question that's come in from Bruce Anderson. Where are you relocating the Denny growing facilities to, if you are not going back to Shongweni and closing the Eastern Cape operations? Charl, perhaps if you want to get that one?

The mushroom production is very regional. So at this point in time, we will not be relocating any manufacturing facilities. We continue to operate 2 manufacturing facilities, one in Phesantekraal in Cape Town, serving most of the Western Cape region and then also our Deodar facility in the Gauteng region, we will maintain our presence in those 2 regions for now.

Thank you, Charl. We also have another question from Bruce online. Is there a risk that you are over innovating? Maybe Cornel, if you would like to get that one?

As a consumer-centric group, I mean, category growth is essential as a key update to our strategy, and that's what we do well as a team. And when innovation forms part of growing categories, getting consumers excited or getting consumers into the category. So I would almost call it frugal innovation. We talk a lot about frugality but quick one, but also important to grow the categories to innovate, but also to rationalize, like Charl mentioned, in our efforts to create value.

Thank you, Cornel. We have another question that's come in directed at Amaro Foods. Tony, perhaps if you could share your thoughts and insights on the expansion of your newly commissioned wrap plant and what that means for your division?

So the upgrade has allowed us to increase our capacity by 148%, which is substantial. It was delayed due to COVID. Fortunately, it's now taken place. We've already had a roadshow with current and new customers, which has been very successful, and we've already signed 1 new customer. So for us, it's very positive.

Thank you, Tony. Our next question, I think, Paul, this one is for you. Can you expand or elaborate on the areas of growth opportunities within the export environment given the current market conditions.

Thanks, Wendy. Yes, I can. I guess if you look at the world map, not all markets are equal. So we're finding post-COVID some markets are still a little bit sluggish. Mainland, Europe, for instance, and Japan in particular. However, that being said, we still have a customer base that extends past 20 years. The customers are still with us. They're still talking to us and they're looking for newness and opportunistic ways of growing volume. Other areas in the world is seeing some real positive signs in North America. And the big one that I think is on everyone's radar is the Middle East. We're seeing a big opportunity not only for retail, but also in food service in these areas. And we need to participate actively to take -- to pick up these opportunities. The broader Libstar basket is giving us more opportunities for growth. We're even exporting bread now, right, into the Middle East. So we're starting to see signs. And I think we've got to play proactively in this market. We have to be there. Like I said, we have the customers. They're long serving customers. It's now just unlocking the value.

Thank you, Paul. Another question clarification, please, on this question. For this period, are your gearing ratios and covenants based on a rolling 12-month EBITDA or 2x the first half H1 '23 EBITDA?

They're done on a rolling 12-month calculation, Wendy.

Okay. Thank you, Terri. Right. Any questions perhaps from the audience? Here we go.

Muneer Ahmed from Denker Capital. Charl, thanks a lot for the strategic review update. Just -- and maybe the question is a little bit open ended in a way. A lot of the issues highlighted as part of the strategic review are probably the same issues, which we've been speaking about for the last 3 or 4 years. So maybe you can just give us a little bit of color on what you're going to do differently this time now that you've sort of officially done a strategic review? Because like I said, you've known a lot of the issues, for example, at Denny, the HPC business, which has been on the blocks for probably the last couple of years as well. And then to add on to that, so just in terms of the pace at which things are moving, and again, maybe I'm simplifying things here. But if there are still loss-making businesses operating within the group, why is it taking such a long time to sort of make a decision in closing down or divesting from those businesses here? Maybe a bit of color on those 2 issues.

Thanks, Muneer. I think it's absolute fair comment. I don't want to spend too much time on why things didn't happen in the past. But if I were to comment on what is changing, I think to give you an example, export development has always been strategic initiative that we've spoken to the market about. And in that instance, it was all about having a bespoke work, a dedicated structure. So as I mentioned, actually employing the structure, creating the structure, segmenting your market segmenting, how you're going to approach this, there's an actual plan that underpins what we will be targeting. Your next question will be, but how quickly is that being executed? That's also a fair question. Often, our closure discussions are based on commercial factors. We have long leases at our -- we've traditionally followed a leasing versus an owning model. Those commercial factors will typically dictate how quickly we can execute on these strategies. The key differentiator, I think, is that as a group and as a management team within the group, we have acknowledged the need to change. And I think we've started the process of identifying, I call it, single-point accountability, 1 boss -- 1 boss to drive these critical initiatives. And that for me is what we are doing differently amongst others.

Thank you, Charl. Anybody else from the audience?

Murray Moore from Alet Fund Managers. Charl, I've asked you a number of times about buybacks over the years. Maybe you can just mention what's changed, how the thinking has changed?

Thank you. We expected that question. I think from a starting to apply the principles of value-based management and going through that and spending time with the gentleman that's well known to you in this audience, it's become apparent that we need to look at a more focused capital allocation approach. I think that if one looks at the current depressed valuation metrics being applied to the food sector in general, we must believe that there is an opportunity to unlock some value through a repurchase program. What has transpired over time is this increasing gearing ratio. And one thing we've always said is that we won't compromise the sustainability of the group in terms of cash flows in order to facilitate the repurchase program. So from our perspective, our immediate priority is to earn the right to consider the buyback and may that happen quicker than we hope.

Thank you, Charl. If you don't mind, I think, I see the next question would also be suitable for you on online. What would be the time line to see results for the strategic review? And when can we see an improvement in group profits and return on invested capital?

Very valid question, which is difficult to answer. I think, one must be realistic about what we are implementing here. It is quite significant. If one looks at the portfolio, excluding the impact of an HPC business and Denny business, you immediately unlock 1.5 percentage points at the gross margin level and nearly 1% at the EBITDA margin level. So your ability to deliver that depending on your ability to execute on particularly our divestment mandate. So as we mentioned in the presentation, the next 6 to 12 months is really about implementing these changes. Again, doing so in a responsible and a phased manner with benefits to start to flow from 2024. But ultimately, I think the hard deadline for us is the start of 2025.

Thank you, Charl. Another online question. I'm not just -- there's somebody from the audience. Sorry, I will.

Just had a follow-up on the buyback thing. A reason why you wouldn't do it in the past was liquidity. Maybe you can just make a comment on the liquidity aspect when thinking about buybacks.

I think we've had this debate on numerous occasions. It's well documented that we operate at a ZAR 2.3 billion, ZAR 2.5 billion market capitalization with declining liquidity within the JSE market with a significant shareholder. And let's say, 3 or 4 shareholders holding the majority of the shares. It has, in the past, been a consideration to not necessarily further reduce your liquidity in the market by launching a repurchase program. I think given the total market and the total lack of liquidity it would be our primary responsibility to stakeholders to unlock value through a repurchase program.

Sorry, sorry, one more. Just on the big shareholder access, any new news there?

No new news.

Thank you, Charl. Anything else from the floor, the audience? Right. Sorry, nevermind. Okay.

I'll ask you a gentle question. When we -- maybe 6 months ago, you were quite excited after the President's visit to Saudi Arabia and the potential for expansion of your exports into veterinary. I remember speaking to Tim about the potential for chicken and Paul regarding herbs and spices. We see that beef has suddenly taken off. Chicken has been left by the sidelines, amongst other things. Can you give us an update from your perspective what the hell is going on with the exports to that region, because it could potentially be a nice little clicker for you. And I need to try and cheer Tim up, who looks very dejected there.

Well, I can, as recently as yesterday, we had Dr. Jessica, who's the state vet who visit the Finlar premises. So there was an original delegation which was in June, where Finlar was the only protein manufacturing facility that was actually visited by this delegation. So the delegation visited all of the major beef suppliers and it did visit some of the chicken suppliers. But we were the only actual manufacturing facility that was visited by them. And then there were questions that were raised and then Dr. Jessica came through yesterday, and so clean bill of health has been given in that regard. If we talk to our beef suppliers, they're actually -- there's been no movement on that end, okay? So whilst announcements have been made publicly by the State President in the recent BRICS forum, that pull-through hasn't come through yet, but it still remains an enormous opportunity for the -- particularly the beef sector. For our side, we're optimistic. Probably the biggest development that we've had in the last 6 months since we last spoke to you, is the activation of fully cooked product into both retail and into the QSR sector. So the fully cooked product gives us your ability to export. And we see good opportunity there, particularly on the chicken component. There are complications, hurdles that we need to overcome, and that's just regarding Halal associated certifications and ESMA approval, but we're very well placed, further downstream into our supply chain where we work actively with our designated suppliers so that we can actually take their raw material in process through our Halal facility and then export. So, no, not dejected at all. I'm actually quite optimistic.

The rest into Saudi. So from an ambient value-added product, there's a lot of traction coming out of the Middle East with Saudi Arabia or the Kingdom of Saudi Arabia being one of the key regions that we need to be in. We are picking up -- we are attending as many shows as they are in the region. We've picked up 3 customers in the last 18 months in that region. And I think with the plans of expansion or the plans of investment into that region that is going to be a big growth driver for our exports and our exports ambition.

Another question.

Yes. Thanks, Charl. And before asking a question, I can just say express some empathy. It's a brutal environment you find yourself with load-shedding and interest rates and no growth and everything. But just picking up on 2 key themes. We found a lot of food companies struggling. And obviously, you guys are struggling with very low margins. How do you view possibly merging with other players, because maybe there's a story of one in one equaling 3. That would be the first question. And then the second question, just something I raised at the AGM, and I think you were going to chat about it, the strategic review, having more skin in the game, on the executive side.

Thank you, Chris. From a -- sorry, I forgot the first question. Merger, merger. Apologies. I think the message that we would like to send as a Board is that we are open to exploring all options that are available to unlock stakeholder value. They must be plausible and they must meet that criteria. So in the past, I think, we have publicly said that consolidation within the food sector does and can make logical sense. However, we, as a management team, do not necessarily control the discussions at different levels. So as a management team, we are focusing on this, but should the opportunity arise, the Board will look at all options that are available to unlock stakeholder value. To answer your second question, that remains a point of discussion at the Board level. We do recognize that previously, our initiatives to implement a share scheme failed owing to the -- not meeting the criteria. We have looked at things like minimum shareholding criteria, which typically apply to much larger organizations, not necessary to the smaller ones. And then again, to use your own defense against you the matter of liquidity also can potentially come into play. So to be honest, no immediate answer to that question. But I think it is a point that we would like to look at maybe solving for in our next round of reporting.

Thank you, Charl. Any other questions will be from the audience? There's been another question online. Charl, and maybe this one also will be good for you. In your top 5 to 6 businesses, in terms of contribution to operating profits, can you talk through whether the founders are still running the business? Or has there been a transition of management? I'm just trying to get an insight as to the involvement of the regional founders of the business in the group's operations.

Good. I think, I'll try and answer that question not only in respect of our top 6, but in terms of the broader portfolio. This organization was started in 2005 as a buy-and-build strategy founded by entrepreneurs, that was the Libstar of 2005. Over time, those shareholders have also -- those founders and they have also -- it's now how many 17, 18 years later. So they have also moved on. So we have seen a transition in management teams in some of our businesses, natural [ paper ] roll and Cecil Vinegar retired. However, we still have the stewards like a ball gypsum, like an Amaro sitting on the stage with us. So I think as much as one values the significant input of the original founders, it was also as a function of time, but also as a function of the evolution of the business model of Libstar necessary to introduce new management teams. And I think that's a testament to our succession strategy and the plans that we have in that regard.

Thank you, Charl. There's another question online. It's from an anonymous attendee. On the local front, large retailers have indicated the desire to target lower LSM consumer in the medium and long term. Is Libstar seeing an opportunity to capture this consumer, where it does seem you are under indexed? I will answer the question. I think we -- as Libstar and participating in a total brand solution portfolio, we have the ability to actually partner with our retailers as they drive their own strategies, we are buying larger value-added company where we add value to products. But taking the current economic conditions into plan also how the trading landscape has changed where we obviously have capability and capacity, we will always endeavor to participate where we are under-indexed to the level of supporting our customers. There doesn't seem to be any more online questions. I'm not sure if there's anything else from the audience. Okay. Right. Then that will conclude the question-and-answer session. We'd like to thank you for your time and your participation, the audience attending as well as the online attendees. Thank you, and enjoy the rest of your day.