Libstar Holdings Limited (LBR) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to this pre-close investor conference call of Libstar Holdings Limited. We will -- my name is Charl de Villiers, I'm the Group CEO, and I'm joined by my Cornel Lodewyks Executive Director; and Terri Ladbrooke, our Group CFO. The format of today's call, we will provide some color on the trading update that was published this morning on SENS, after which we will open the floor to those listening on the call who would like to answer -- ask any questions. If you would like to write up your questions, please use the chat function. And if you would like to ask a question in person, please just raise your hand. We like identify you. Give us a second to unmute you and then you are free to go ahead and ask the question. So this pre-close update covers the 21-week period from the first of January to 31st of May 2026. Importantly, the fresh bustroom operations that were disposed of effective on the first of December last year. Those have to be excluded from the prior period to provide a like-for-like comparison of the group's continuing operations. We opened the trading update by making a few comments on the consumer environment. You may recall over the past couple of trading updates, we've referred to our defined basket within the retail channel, that is a basket of our particular products within the retail channel. And we mentioned that there was a declining value growth trend over the past couple of trading updates. Those trends continued into the current period with the value growth settling for the past number of months between 1% and 1.3% since the start of the year in our defined basket. That is indicative of a constrained consumer environment. Additionally, we mentioned the fact that manufacturing inflation has intensified, driven by the sharp increases, particularly recently by way of petroleum-linked input costs like packaging and distribution. In that context, and notwithstanding that context, the group's trading performance was below our original expectations with the group turnover increasing by 90 basis points, broadly in line with the prior period. Aside from those general inflationary pressures, which we want to put to the side, there were really two contributing factors to what our expectation -- the differential between the original expectation and the results that materialized in the first half. And those relate particularly to our Digene Foods division, which is part of our wet condiment subcategory. And then our export drive condiments business -- and just to provide some additional color on those 2 businesses, in particular, so at our Capital Markets Day and in our results presentation, we informed the market that we were in the process of consolidating our Digital Foods business for the remainder of that business into Bantek Foods, which is in the town of Bantek. That process of relocation commenced on the first of April, -- so between the first of January and the end of March, we were producing all of the lines within the Dicerna Foods Johannesburg facility. And during the month of April, we started moving certain lines, whilst other lines were still in production. At the end of April, we seized store production, and that facility was effectively closed down. So whilst production continued throughout the period that we're reporting on, the reality is that labor productivity, in particular, deteriorated significantly towards the end of that April period. That caused quite a few production disruptions, increased overtime, Works, which is possibly understandable given the fact that we were closing that facility. So when we refer to those labor challenges, it was really a function of having labor on site, but not being able to produce the efficient production numbers that we had envisaged originally from the production time allocated and leading to the incur over time as well in order to ensure service levels to our customers. In addition to that, we have, in the past, experienced some water supply disruptions in the south of Johannesburg. We do have the water tanks on site, but only enough to cover about half a shift so maybe 1 shift at MAX. For 25 consecutive shifts, we were without water, and that resulted in us into truck in water for production of wet condiments in that facility, which obviously also pushed up the cost element as well as contributed to the weaker production numbers as well. In summary then, those factors contributed to a significant under-recovery of our manufacturing expenses in that facility, aside from the fact that the trade. In other words, the demand for those contract manufactured goods were also slightly lower than expectation. To put that in context, the delta between our operating profit level that we expected and the actual that materialized was close to ZAR 17 million, which is a notable number in the context of our first half results in particular. The second element of underperformance in this set of results update is related to our drive condiments export business. And that was impacted largely by we referred to shipment timing. Demand out of the U.S. was quite soft in the first quarter. We started producing and ramping up production towards the end of the first quarter, but those goods have not yet shipped. So there's about ZAR 20 million to ZAR 25 million worth of goods that are being shipped in June, which would have been earmarked originally for the prior months before that. Slow orders I mentioned in the U.S., but with that picking up towards the end of the quarter. The same strengthening of the rand against particularly the U.S. dollar, which is a major export currency creating a deflationary price mix impact in that business, which also contributed to the deflationary impact in the ambient groceries category as a whole. And then also weaker demand in Australia as well as Asia. That is something that we flagged previously that has continued with lower particularly private label product sales within those regions. As a consequence of lower production numbers also absorbing quite a significant amount of overheads without concomitant sales and therefore, impacting margins within the drive condiments facility. There were some highlights in this set of results, the dairy category, condiments category, that's the poor condiments category of Montecito Finegan we done brands as well as the value-added meats categories those produced resilient top line and bottom line results. but only partially offset the drawbacks that we experienced from Digital Foods as well as the dry condiments category as a whole. Looking at channel performance. Food service was the strongest performer in the reported period with muted retail channel growth. I've already spoken to what's happening in the market and then constrained performance in exports as well as the contract manufacturing side of the group. In terms of the group revenue numbers, those were broadly in line with the prior period, with growth, as I mentioned earlier, in the core wet condiments select products, which is the business that comprises our Rialto retail and foodservice business, Ambassador Foods and Kate coastline as well as baking. That was mainly supported by foodservice channel, but also stable retail and wholesale channel demand. That was, of course, then offset by the underperformance that I mentioned previously. In terms of group headline numbers, we've published a number of 0.9% or 90 basis points growth. That includes the entire business and because a part of the Digna Foods business will be discontinued and only a part will be integrated into Montique. We also reported a number exclusive of the Digna Foods revenue with group revenue up 3.5 million percentage points. So the 3.5 percentage points tracking ahead of our defined retail basket, our retail channel sales were up about 3.2%, but still not at our original expectations. Looking at the individual super categories. Penishable products category revenue increased by 1.6%. That was driven by volume increases of and the price mix contribution, a decline, sorry, of 0.8% at price/mix contribution. So the growth in volumes came from our core dairy categories. That would be hard cheese, soft cheese and yogurt and the declines coming from our noncore part being a butter patrick, mass and juice. I've already mentioned a resilient volume growth from the value-added meats business also within the food service channel. Turning then to the ambient products category. Revenue increased by 0.2% driven by a volume increase of 1.2%, but then a deflationary price mix impact, which was driven by that currency impact in the export drive condiments operations. Strong performance is again in food service with the core wet condiments category performing better than the market in the retail channel. I already mentioned weaker sales in Australia as well as Japan as well as the lower industrial and contract manufacturing sales in Decin Foods. From a gross profit margin perspective, we mentioned the fact that -- gross profit margins were tracking between 1 and 1.5 percentage points lower than the prior period, predominantly as a consequence of the under recovery of costs in manufacturing within the Digital Foods as well as the drive condiments categories. We don't want to play in the inflationary pressures of petroleum. That, of course, did have an overall impact on the group, but to a lesser extent than the under recovery of the fixed overhead costs during this particular period. Gross profit margins in the perishable category itself increased year-on-year. That was supported by a favorable mix change in dairy, in particular, stable milk pricing and then also production efficiencies within the dairy subcategory as well as value-added meats. That was then partly offset by lower margins in convenience meals driven by higher promotional spend in that subcategory. Gross profit margins in the ambience category, those declined year-on-year, where margins expanded in core web condiments supported by improved utilization also of some of those lines that have been incorporated into the Monteque Foods side and cost controls, that was more than offset by the material under recovery within the Decimal Foods and Diconiments businesses. In terms of controllable expenses, manufacturing expenses -- operating expenses rather than -- those increased below 4%. Recently Published CPI is 4.5%, but below 4% increases, reflecting disciplined cost management of controllable expenses. In terms of an update on our 2 major capital projects that we spoke to at the Capital Markets Day, I'm pleased to report that both of those have progressed in accordance broadly with our costs as well as our timing estimates with the completion of our Monteque Foods integration at the back end of July production commencing at the start of August, and then the Caburbanspice integration of various blending and packing sites as well as a warehouse into a single site, completing at the back end of May 2027. From a balance sheet and cash generation perspective, notwithstanding the weaker trading that I referred to earlier, our cash flows have remained resilient. We have continued to allocate capital in a focused manner and also have been managing our net working capital as best as we can, which included further reduction of our bulk tea inventories, which is a category, which contributed to net working capital improvement in 2025 as well. In terms of our key balance sheet ratios, our gearing ratio then improving from 1.6 to 1.3, and then also our interest cover ratio improving from 5.9 to 7.9x reflecting the improved working capital situation as well as resilient cash generation from the remaining operations. I'm pleased to report in terms of our objective to exit our underperforming and household and personal care categories that -- we have reached -- we have entered into a binding agreement to dispose of our Vacante Gral property in the Western Cape. That property transfer is expected to take place early H2, so not in this half, but it will further contribute to the strengthening of the group's already strong balance sheet position, whilst discussions in relation to the disposal of contact remain ongoing, and we are making progress, albeit slower than was expected. We've continued our share repurchase program. To date, we've utilized ZAR 43.3 million to repurchase 9.4 million shares at an average price of around $59 per share. And it is our intention to continue that share purchase program during the closed financial period, which we will enter on the first of July until the date on which we publish our interim results. Although this was a 4-month, 5-month period in which we didn't trade in accordance with plan. We have accelerated our mitigating actions, including targeted pricing adjustments. So you might ask what is the quantum of those pricing adjustments. And I would respond to that on average pricing adjustments of between 3% and 5% in order to compensate for existing and known inflation pressures, but also focusing on our labor efficiency whilst accelerating the initiatives that are currently underway, such as the cap of inspire site consolidation in order to ensure that we remain competitive. So although in Phase III outlook remains elevated in the short term, short to medium term, we do expect an improved H2 performance. Why? Because that is transitioning also our weighting in terms of trade towards this -- in terms of seasonality, towards the second part of the year. The paying taken on the Decinal Foods side in terms of the first 4 months of the year, that pain has now -- it will not be repeated. We look forward to commencing our production on time and within our cost estimates from the start of -- from July. And then also continuing our processes around integration and cost savings, which are ongoing programs. So in a nutshell, not happy with how the first 5 months have band out, but we have taken action in terms of pricing as well as interventions and also looking forward to not repeating some of the first 5 months unexpected costs. With that, I'll open the floor to any questions. I can already see 1 or 2, and I'll ask Terri to moderate that for us. I think we will deal with them one by one. Thank you very much for listening.

Sure. We did receive a question from Nick Wilson at the beginning of the call. I do believe we have covered most of it, but I will read through a use case. So Nick says Libstar team. You mentioned labor challenges and water shortages in your trading update I was hoping to get more color on this, what were the specific labor challenges and what did they relate was this to do with the integration of Decinal Foods. -- what were the water shortages about, which area and why? Was this related to failing municipal water infrastructure. And if so aware, if these are municipal related challenges is that stop considering moving any facilities because of this. So the 2 main themes here are the first 1 around labor challenges, which shares cover and relating to the closure of Dickon Hall Foods. So not in terms of the integration of the 2 sites, but specifically to the closure of the Dickon Hall Foods -- and then secondly, our water shortages, again, also in Dickon Hall, which is in the south of Jove,that was specific to the area and 2 municipal-related at us. As we are closing that site, the risk there is rising.

So just in terms of further mitigation, there is a major water reuse project, which is currently underway within our launch with George facility. We aim to be very close to water neutral once the various phases of those projects have been concluded and that reduces our reliance on municipal infrastructure. It has been a perpetually difficult site for us, that 1 in the south of Johannesburg, in particular. And we haven't had the magnitude of water supply disruptions in any of our other sites thus far. So that hopefully bodes well for work to come.

So just a reminder, if you do have a question, you just added to the chart or you raise your hand. And currently, you have no further questions. Dirk, I see you , if you could please just ask the questions.

Okay. Great. Thanks. Can you hear me? Fantastic. Yes, thanks for the update. Just 2 questions from my side. There were 2 divisions that I think were struggling a bit last year, and apologies if you mentioned it specifically, but how are things going at Amara Foods and it was one other.

So Amara Foods has had a a strong top line performance in the year, driven predominantly by foodservice but also retail. Although from a margin perspective, we haven't tracked completely on plan. We have improved our overall performance relative to the prior year in that business. Within the Ambassador Foods business, the good news is that we have been able to produce and sell and service the market appropriately for the entire period that we've reported on. Sales have been slower than anticipated and that has had an impact on margins with that business tracking broadly in line with the prior year relative to an expectation that we would be quite considerably above the prior year. There's a lot of newness coming in that category in the second half of the year, which we hope will reinvigorate some of the interest in that category.

Okay. And in that category, specifically, Charlie, if I remember correctly, it was actually the second half last year that was quite weak in terms of profit.

Correct.

Thank you, Dave. We have a follow-on question from Nick. Just a follow-up question. So the south of Jovan facility is being completely closed that this is going to remove water is tissue from equation. So that removes the orders for digital feeds. That site is being closed. We do have other operations in Johannesburg and close to that site. However, they are less dependent on water as Signal Foods was in the -- then we have a couple of questions from Anthony Clark, shall kind of asked why value-added meats did so well? Did you push the button on expansion. May we ask that 1 before we continue could ask.

Okay, yes. So the answer is, Anthony, and no, we have not pushed any buttons on capacity expansion. We've been able to utilize our capacity in terms of our braking efficiencies slightly better, but it doesn't remove the longer-term I think, consideration around capacity expansion. So that category, particularly coated chicken remains a category that grows ahead of other market categories. And as a result of that as well as being able to produce more efficiently, we have been able to produce an improved result relative to the prior period. The consideration around capacity moving forward. That remains firmly a part of what we will be considering in the next half of the year.

Great. And then the second question from Anthony has given where the Develing sale is in the new airport, did you get a good price for the site -- and so we believe we made the right decision for the business and to price. The consideration to take into account that the site was in an agricultural survey in there and not in the industrial areas. So there is a big process to go for us to be able to benefit from that new development. However, we are expecting an after-tax profit on sale in a region of EUR 50 million from the sand.

And that's profit on top of book value. So the proceeds being higher than that.

And then we've got a first from Craig. We can unmute Craig to ask this question.

Confirm you can hear me as well. Just to explore the targeted pricing adjustments a bit more shale that you mentioned. Is this -- I don't imagine it's across the all the categories is obviously in certain areas where you've been able to achieve that in the past. Is the trading update indicative of where you've been able to pass through price, i.e., in perishable, but basically in core dairy -- or have you been able to do it in other segments, just to get a sense of how you're able to pass that on?

Yes. I think 1 shouldn't read too much into into the perishable versus ambient category performance this year because the devil is certainly in the detail of the underlying performances. When you strip out Dickon Hall Foods, as I mentioned earlier, the ambient category grew revenue by 5.9% so that would definitely not be indicative of a category in which that would have not been fully volume-driven. -- so to speak. So I think the reality of the math is that there's always a lag effect in terms of us absorbing cost initially and the timing taken to pass that on. We have actioned that, but we've actioned that within the balance of reasonable possibility within the the environment in which we operate. So it's not a one-size-fits-all approach, and we've -- it is more broad-based, I would say, with varying degrees of possibility throughout the category, depending on the dynamics of that particular gap.

That's great. We have another question from Turk. .

Yes. Sorry, just a follow-up, maybe to give Cornell to speak. Maybe just an update on milk supply and foot and mouth more broadly. And then I've got a follow-up on. .

The now close to between 75%, 78% of our pharma farms has been vaccinated. So no real issues in our capital markets, they are also I mentioned the way that was, I call it our biggest risk earlier in the year or, I guess, a, I suppose the increasing fuel cost on Montano primate tanners and distribution costs -- so that was our biggest focus to recover some of that. So we went to market with a second price increase, but it's a continuous process. So margin protection and improvement was a key focus for us this year where working capital cash flow last year was a big focus for us.

And maybe just a follow-up. I mean, with feed prices so low, is there a chance normal prices actually go down? Is the deflation potential? -- in the summer season, when obviously, there's more flow. .

I doubt it. It's still early when commodity price and feed pricing still low, obviously, increasing fertilizer cost obviously to the crisis in the Middle East. We don't expect pricing to come down, but it will be stable. Remember, we also had very wet conditions in the Southern Cape Ranor where our rates towards the end of this year, early next year, price increases impact of online and so forth, but stable pricing for the remainder of the year. .

Okay. And were your facilities okay, given the bad weather in George and silane?

Yes, when you had that we win in as -- 1 of the DC doors, just minor. We were actually very lucky that at 1 of our sites like a small damage in the DC, but it was a door at level, but nothing severe.

Okay. And then just a last question for me on just on Kuvan, maybe you can update us just on the U.S. tariff situation and how that's kind of played out, tailwind headwind relative to your expectations? .

The reality is that there is a theoretical site to it. There's a tariff refund structure and is the reality of whether it has really panned out that we've been able to mechanically affect that, which hasn't yet been the guide. So at this point in time, it's fairly neutral, Dirk, to where we stood previously.

Thank you, Dirk. And then we have another hand, I believe this is Sumil Seeraj. Sunil, if you could perhaps ask a question on the chart because I don't need to hear you. While we wait for you, I'm just going to move to a question from Samantha and the chat. Question regarding the decline in export of dry condiments in certain regions. -- maybe a continuing factor from FY '25. Any further detail on this? Are there broader shifts to highlight?

Yes. Samantha, I think that's a fair comment. We mentioned that particularly in the private label space, there are annual tenders in which we participate. Some of those tenders in particular, in private label in the Australian region were not renewed. That over and above the fact that where we are supplying that region, the demand remains perpetually, if I could use that word, soft. That that has been slightly weaker than expected. What we didn't expect is that we usually have quite a bit of promotional promotional participation in the first quarter in the U.S., which didn't transpire to the extent that we expected. And as a consequence, the U.S. was also soft. So having the double whammy was, I guess, the surprise as opposed to knowing which tenders were not going to renew. From a structural perspective, no structural shifts aside from the fact that with a currency that remains as strong as it currently is, that does place pressure on margin in an already competitive category.

Great. Thank you, Sunil, for adding your fast the chart. We know that your microphone is not working. Your question is on Dickon Hall Foods. Does the current trading account for the loss of the significant contract manufacturing customer.

Sunil, that is correct. So when we quote a 0.9% revenue growth that is after the loss of certain revenues from April. So for the month of April and May. -- when we quote a number that excludes Dickon Hall Foods in totality, for the first 5 months, revenue increased by 3.5%. So very important to note that we are expecting softer revenue growth from a group perspective as a pure consequence of that, and that's why we show both numbers so that you can draw conclusions from that.

Great. Another follow up from Sumil is just furthermore which group revenue growth is the actual revenue growth number reported. That's I'm guessing it's the 0.96.

So total group like-for-like 0.9%. Excluding Dickon Hall Foods, which is all contract manufacturing, that is 3.5%.

Right. Great. Thank you, everyone. I don't see any further hands raised or any additional questions coming through. But thank you very much for all the questions over.

Thank you, everyone, for joining me. I appreciate it, and we will see you when we publish our results on or about the 8th of September of this year. Thank you very much, and have a good afternoon.