Libstar Holdings Limited (LBR) Earnings Call Transcript & Summary

Good afternoon, everyone. A warm welcome to this voluntary pre-close investor conference call. It is the inaugural conference call from the Libstar team as a pre-close update. Very encouraging to see over 40 individuals who have registered for this call. A warm welcome. This afternoon, what we will be doing is taking you through the pre-close update that was issued this morning. I will be using the 2 colleagues next to me to take us through certain sections as well. So I'm joined by Cornel Lodewyks, the Managing Executive of the Perishable category as well as Terri Ladbrooke, the Group CFO. For you who have joined online, thank you for doing so. You will not be able to ask a verbal question during the time that we will be speaking, but we will leave time at the end for you to raise your hand and then to be acknowledged in order to ask a verbal question. In the meantime, if you do want to submit the written question, you're welcome to do so on the screen in front of you. The period covered by this pre-close trading update is the year-to-date ended 24th of May. The reason for that is that Libstar operates in a 4-week, 4-week, 5-week pattern. So the main months ending in a 4-week pattern with the June month then being a 5-week pattern. As mentioned in the introductory comments to the update, we've mentioned that Libstar continues to execute on its 5 key value-driving initiatives that were included in the integrated report as well as our market communications previously in order to improve our cost competitiveness, earnings quality and return on invested capital. Just a reminder, in terms of those key value-driving initiatives. Firstly, to simplify the operating model and also the portfolio composition. To optimize our accountability structures to align to our new strategic direction, to grow our categories and channels through dedicated initiatives. To reduce our costs and also our operational efficiencies. And then lastly, to ensure that we are able to identify, acquire and integrate attractive categories from 2025 and beyond. We've mentioned in the introductory comments that the group is on track to finalize the simplification of its operating structures within the newly established perishables and ambient categories, which are the 2 super categories that we spoke to the market on -- at the start of 2024. I'll just ask Cornel to give us a short overview of the process undertaken in the perishable products category where that operating model is due to be implemented from the start of the second half of this year.

Thank you, Charl. Important to note is that the business units that was included in this strategic process were Lancewood, Finlar and Millennium. This strategic process started towards the end of January, quite a comprehensive process with the broad executive team, took us 5 months to complete. Basically, the starting point was building a narrative around our current reality of, call it, fact base. That fact base included historical financial numbers, our investments to date and then also category data. EBIT, net working capital [indiscernible], et cetera. We also looked at the detailed macro and micro and sector analysis. This perishable strategy was obviously fully aligned to the group's priorities. And then around the 3 themes of growth, simplification and sustainability. After the completion of this strategy, the purpose of the mission, the priorities, we started building our operating model. Changes in operating model is moving away from, call it, business unit focus to category-wise focus. And the 3 subcategories that we will report on in the future will be dairy, which is obviously the launch of business, value-added meat and convenience meals. Each subcategory will have senior category executive supported by a senior functional executive team, obviously, with clear roles and responsibilities and accountabilities. Lastly, key elements of our new operating model, It's consumer and shopping-inspired. It's brand-driven. It will be category-led, channel-focused, and there will be functional centers of excellence. And that future once for the functional execs that will be accountable across the entire perishables category. Obviously leveraging the scale of some of the bigger businesses like Lancewood and there we will use or implement share business service. So SBA, it's like a share business service and obviously, standardized best-in-class core business processes across the entire category. Implementation date where we will start executing will be on the first of July and it will take us 6 months from the first of July to the end of the year to fully execute on the strategy, but the starting point for us with a new operating model will be the first of July this year.

Thank you. And then just to mention a few elements of applicable to the ambient product super category. In that category, we have integrated the businesses, of Khoisan Gourmet with that of Cape Herb & Spice with the Cape Foods division remaining separate for now, but also benefiting from some shared services within the dry condiments category, which is a subcategory of the ambient products category, super category. Within the wet condiment subcategory, we've started to focus on the burning platform or the underperforming divisions, focusing mainly on the retailer brands division, which has shown initial improvement in service levels as well as profitability with the team currently investigating broader integration opportunities across the wet condiments businesses of Montagu Foods, Dickon Hall Foods and Cecil Vinegar. Moving on then in terms of the update. We mentioned that our category growth initiatives that were launched in 2023 have started to yield benefits as we saw a strong performance from the dairy and wet condiment subcategories relative to the prior period. We mentioned the fact that consumer demand remains constrained, that reference being particularly applicable to the retail channel, but also within the QSR market that we serve on which I'll elaborate a bit later. Consumer demand remaining constraining in those 2 subchannels. But with the export channel outperforming in the first half benefiting from the consolidation of our sales and marketing structures in 2023. Just to elaborate on that, we've seen a stronger demand or resurgence in demand from our existing as well as new customers in the U.K., U.S. and Middle Eastern regions, where we've also benefited from conversion of leads that were generated in attending trade shows and various engagements during the 2023, particularly on the export front. Terri, maybe you can just take this one on the capital allocation front.

Sure. Thanks, Charl. So we continue to focus our capital allocation towards the lower end of our internal band of between 2% and 3% of revenue. And we are continuing to sustain our working capital movements, so our working capital is expected to remain on the high end of our revised targets. We have noted that we expect our gearing to reduce below 1.5 by the end of 2024, and we are on track with that. The H1, we are expecting to show a reduction from H1 last year, although we do note that our cash generation is focused on the second half of the year. So we do expect the H1 gearing to be higher than our year-end targets.

Thanks. Moving on then to the details around the trading update. We've reported that revenue has increased by 4.6 percentage points, where revenue growth was predominantly driven by price and mix changes of 6.3%, against the volume decline of 1.7%. One of the questions we normally get asked is your ability to drive pricing adjustments. I can comment that our pricing adjustments were passed in accordance with our preset plans in terms of timing. And in terms of ranges, we've looked at implementing between 4% and 6% in general, broadly in line with the lower inflation numbers that have started to be reported throughout the market. Maybe you can just go on to the perishables products category.

Okay. Talking about Lancewood or the dairy category, again, a strong performance out of the Lancewood unit and Charl mentioned [indiscernible], I suppose the most significant obviously subdued consumer or consumer spending. Lancewood trading volume decreased by [ 1.8% ] in the period. And that was more around 4 categories, gross value growth plus 10% of the business. Charl mentioned the fact successful implementation of pricing pieces and the margin management, a big focus basically for the entire business. And that's through price realization, but also efficiencies and what we see those early investments that we made in the last division is bearing fruits. And we can see a reduction or improvement in our conversion costs in the first part of 2024. I can maybe give an update on the Millennium Foods business as well. Value growth of 10%, volume growth of 5.5%, still benefiting of the trend on frozen meals, that subcategory within convenience meals performing well, 18% volume growth year-on-year. [ Lancewood ] business, unfortunately we lost the beef -- part of the beef volumes within the McDonald's business. Year-to-date decrease now 34% compared to the prior year, and that's the beef volumes. Although it's unfortunate that we've lost beef volumes, and we still see the beef or it subcategory within convenience or value-added meats. We do see a positive trend towards or mix change towards chicken, which is obviously a focus on growth where we see growth, and it's also margin accretive. And we do see growth both in QSR food services and retail channels.

Great. Thanks. Moving on to the ambient product category, where we reported revenue growth of 5.3%. I've already mentioned the piece on a resurgence in interest from our foreign base of customers for -- particularly dry condiments, but also encouraging to report a recovery of demand for wet condiments out of the Dickon Hall Foods business, which predominantly services contract manufacturing customers. We also then move on to report that gross profit margins. You will recall in our post-period update after the release of our year-end results. We mentioned that in that 8-week period, the margin improvements had been sustained into the new year. So I'm very happy to also report that the gross margins have continued to be sustained above those of the first half of 2023. This is largely due to, as Cornel mentioned, price realization, on time pricing adjustments. Cost management, where obviously, we have had the benefit of a reduced load shedding relative to the prior year, which has been a welcome benefit in this period, but also maintaining our general and administrative costs below the CPI published rate for multiple years in a row now. The improvement in product basket mix Cornel mentioned beef versus chicken, improving our mix towards higher margin products and then a relentless focus on production efficiencies which also forms part of our key value-driving initiatives. Looking forward then, the group is well positioned to -- although having yielded initial results from these key value-driving initiatives to benefit in the second half of the year from the HPC divestment strategy as well as the perishables category integration that Cornel mentioned. On the HPC front, we continue to make progress. You will recall that we mentioned that the HPC division given the difference in product portfolio of check and contact them does lend itself to 2 potential separate buyers. There is a sharing of resources, so that complicates matters slightly, but we are making progress towards the conclusion of those transactions by the end of 2024. I haven't specifically mentioned Denny, but just to spend a minute or two, Denny has achieved a better operational performance, although not to the expectation of the broader portfolio. And as such, we continue to investigate strategic options for that business going forward into the second half of the year. Within the ambient product category, we continue to develop export opportunities with a strong pipeline of orders to be filled in the coming months. We still continue to experience delays in shipping and delays of or unavailability of shipping containers as well as an increase in cost of containers from the East; however, that is mitigated by a stronger-than-expected pipeline. We continue to focus on improving our customer service levels as well as targeted projects that are designed to improve our operational performance and margins on a sustainable basis. Before I open the floor to some questions, we mentioned something that you might not traditionally see in a trading update. That's a reference to our One Libstar culture program that was launched successfully in the start of the year. This is a process on which we embarked to ensure alignment around the strategy as well as the key value-driving initiatives throughout the business. We've spent most of May and June on the road, sharing the strategy, sharing the new value structure with the businesses and also ensuring that they are aware and completely aligned to our 2027 ambition. So thanks for listening. We appreciate it, and we'll open the floor to questions to the extent that we are able to answer them on this call.

Can we have a question from Nick Wilson?

I got 2 questions. And the first one relates to McDonald's. You -- and you broke up on the call at that moment, I just wanted to double-check. So basically, did you lose the McDonald's contract? Is that what actually happened? You were supplying them with meat. Sorry, I didn't hear. Sorry...

Nick, I will answer that. So we lost half of our beef volumes in McDonald's to a competitor. That process started towards the end of last year, and we're now currently at 34%, so 34% down in volume on beef within McDonald's. If you analyze that 50%. So 50% of the beef volumes lost to a competitor.

The reason for that, Nick, is that the customer being part of a multinational group has a policy of diversifying supply when a business gets to a certain stage.

Okay. And that was during the period under review that this happened.

It started at the close of -- towards the end of last year, as Cornel mentioned.

Okay. And then my second question is about Denny. Okay, obviously, you talked about divesting from the HPC business itself that you're making progress that we've got. When you said you're exploring options for Denny Mushrooms. Are you looking to offload that as well and possibly sell?

At this point in time, we are looking at all options to unlock value.

So would that mean that you haven't ruled that out?

We are looking at all options to unlock value.

I see that [ Sean Chokes ] trying to raise his hand, can if you could please unmute Sean?

Yes, I've got about 2 questions. Obviously, there are lessons learned from the experience with the type of business you guys do in terms of supply contracts, et cetera. I mean if you look at your business, there's a risk going forward. But even on the industrial side, particularly with [indiscernible] you might start to lose some volumes. And you see -- you've experienced that those lessons with the beef volumes in McDonald's. I'm very curious as to how you're planning or thinking about mitigating that risk. So that would be the first question. And then the second question [Technical Difficulty] just want to get a sense, [Technical Difficulty] in terms of hits, if I look at perishables, you were aiming at about 9 to 11, ambient at about 11 to 13. I'm assuming that excludes your corporate cost. So if you are on track on that and what the corporate cost line item is looking like as well?

Thanks, Sean. So to answer your first question, maybe you can -- should I do the second one as well? To answer your question on contract manufacturing, you mentioned the fact that it poses a risk that has always been a risk that associates with the industrial and contract manufacturing channel. I would like to argue that it's also an opportunity. On the risk front, we'd like to believe that in consolidating, particularly our wet condiments divisions, that we are able to diversify our product basket, potentially look at ways to potentially integrate our manufacturing capabilities in order to mitigate against any potential risks. We are -- we do consider ourselves to be one of the lowest cost manufacturers in the wet condiments category, which does leave some level of protection for what the likes of a customer looking to produce in-house, but that remains I would say, more of a medium-term risk than a short-term risk, although you are quite right. What's quite interesting to note, though, is that if you look at the nontraditional QSR, food service channel, excluding QSR there's a very healthy balance between your traditional restaurant trade and industrial customers. So we actually believe that industrial customers do pose an opportunity, although we obviously understand that, that will absorb some capacity that could be otherwise utilized. So it's not necessarily a first port of call, but I certainly believe that in consolidating the wet condiments divisions, we are more resilient should one of our customers decide in the medium term to manufacture in-house.

Okay. And then if I can take a stab at your second question. So looking at our target ranges, we're not going to provide forward-looking guidance on those ranges, but looking at year-to-date performance on the ambient side that are tracking within the range. On the perishable side, they are slightly behind in their range. And then if we look at our corporate costs, they're currently still maintained in line with how we've been tracking in the last few years, other than just inflationary increases. So still very well contained on the corporate cost side. We've got a question from Anthony -- a couple of questions from [ Anthony Tra. ] And so hi, Cornel, can you clarify your Lancewood growth [indiscernible]? Can you break down what products did well and which channels and how is the milk situation currently?

Good evening, Anthony. So if you look at the latest central data, when the massive on price is more in South Africa and that's nationally. It's 2.67% up versus last year. Lancewood position is also similar to our volumes last year. And our milk is sufficient to support our growth initiatives for 2024. And then your question around categories and channels, I mentioned the fact that Lancewood's volumes is down 1.8%. And those declines in volumes came from non-core categories. Top line growth just below 10%, but we saw value or we experienced volume growth out of the wholesale and export channels, also grew 5% in volume but exports 11.1% in volume. Market shares in natural cheese, basically flat similar to our levels last year. We gained market share on soft cheese. We do see positive trend within the soft cheese and cottage cheese subcategories. And that speaks towards the cheese high protein and what demand. And then again, our yogurt is still performing well, double-digit growth versus the previous year.

Another question from Anthony. You commented that the QSR channel was constrained. Can you elaborate on this? I'm aware from my work with the poultry stock there has been weak poultry.

Yes. I think I'll answer that question. Thanks, Anthony. By referring to some market data, don't quote beyond this, but the 12 months year-on-year growth out-of-home consumption according to the data that we've seen was about 14.4% last year. If you look at the trend since the start of the year, particularly on the QSR front, that has been significantly lower year-on-year. So whether that is a base effect or whether that is the impact of something else, I cannot really try to comment on. But where we do see out-of-home consumption growing this in the lives of the upper restaurant trade as well as the hospitality -- the hospitality side of the equation, whether that's a function of increased tourism. That might be the case. But within the QSR market, specifically, our data tells us that we see -- we've seen weaker growth, in fact a slight decline out of the QSR market.

Next question is from [ Dirk-Funder ]. How has Ambassador Foods and Amaro Foods had performed?

Yes. I think there's not too much to -- Thanks, Dirk. On the Ambassador Foods side, we've recently relaunched a range of confectionery that was out of market for quite some time. That will hopefully spur some growth. We're doing a lot of category work on that front. But in terms of the overall performance of Ambassador Foods, it's been relatively stable year-on-year. So no significant decline or a significant growth, which I guess is largely reflective of a relatively mature market where we're trying to introduce some newness into the coming months. On the Amaro Foods side, as I mentioned in the QSR comment, on the QSR side, we've seen very slow uptake in the wraps. That is a function of QSR, but we've seen a very healthy performance out of the retail side of that business. Cornel, maybe any updates on Saudi beef exports just in general?

Yes. We're working effectively towards expanding our presence in the UAE and the Saudi region by engaging with our client base. We've quoted customers. Unfortunately, this process will take a bit longer. We're also working the NPD initiatives. I would say the constraint at this stage is more shelf life, and we're working with our customer to extend shelf life because that's normally the one barrier but we will also now part of our new perishables strategy is we will allocate dedicated resources to support our initiatives in those regions.

So we got a question from Sumil Seeraj. Can you indicate which division is benefiting from the export volume? Is it a recovery in CHS? Would this be new or existing customers driving these volumes?

Sumil, yes, indeed, it's not only Cape Herb & Spice, it's also Cape Foods, the division as well as Khoisan. So as an aggregate subcategory, we have seen as I used to work resurgence in demand. It is both in new and existing customers. So we have -- as an example, a new listing in Tesco, U.K., where we've had repeat orders, but also in our existing customer base where we've launched -- last year, we won an award for our chili flakes under the Cape Herb & Spice brand. We've launched both that in a private label and branded offering in an existing customer. So we are seeing a broad improvement in demand, be it in the existing customer base as well as in new customers. I referred to the conversion of leads out of trade shows that we attended last year. There's a retail customer in the Philippines that attended a trade show last year, and we shipped the first -- we received the first order for a container last week whilst we were on the roadshow. So that shows that these things do take some time to convert, but we are seeing some positive momentum on that front.

Okay. Then I had another question from [ Tumi. ] Given the strong H2 profit performance last year, how should we think about the momentum coming through into this H1 period to June? What is the cash generation line year-to-date, given the targeted debt levels by year-end, should we see lower interest costs this year? You take the first part, I'll take the second.

So Tumi, yes, indeed, if you recall, we had a very strong second half of the year, and that makes it more difficult by implication to outperform. We are still aiming or our ambition is still to outperform the second half of last year, predominantly as you would expect, in the fourth quarter of the year, which will be the critical one for us. So that's why we are quite hesitant on this call sitting here in middle of June to make a prediction around how the end of the year is going to turn out. But in terms of trajectory, you are quite right. We are up against a stronger H2 of last year.

And then on the cash generation front, so year-to-date, we've have seen very strong cash generation in comparison to last year. And on the interest front. So we were hoping to see maybe more significant interest or reduction in interest with an earlier interest rate reduction. Having not seen that, just in line with your question, we are expecting to see slightly lower than last year's interest to year-end. Any further questions? Let's give them a couple of minutes.

Okay. It doesn't look like -- if you leave Sean to keep asking questions, we're going to be here until tomorrow.

One last question from my side. So Charl, when you look at the portfolio, I just got -- I just want to get a sense of it. Obviously, this is a lot of smaller businesses in terms of consolidation, some invest on consolidation, on distribution, some maybe on manufacturing. Is there opportunity to still dispose more? Because there's a lot of businesses within your portfolio. What makes the most sense? If you had to keep 2, 3 businesses, don't imagine accretive here and not to try and consolidate 8 different businesses. How would you think about that?

I'll answer you slightly practically because I think -- well, I know I'm not in a position now to say too much. But there are some of the smaller divisions to which you refer, where we'll be taking some decisive action by the time that we see you on 10th of September. That will speak to the fact that we will not necessarily continue to participate in smaller, let's call it, fringe categories that aren't value accretive. Our first port of call is obviously to try to dispose. But if that doesn't yield the necessary result, we would need to make some bolder decisions. And I think we've reached that point in 1 or 2 instances. So we'll share that with you when we are able to do so. And with that -- this concludes -- this concludes the first official pre-close conference call. Thank you, everyone, for joining. We appreciate it. And we look forward to engaging you from the 10th of September when we release our results. Thanks for joining me.