RCL Foods Limited (RCL) Earnings Call Transcript & Summary

[Audio Gap] of all the Board committees are present as well as our external auditors. I advise that voting on all the resolutions will be conducted by means of a poll. Such poll voting shall be conducted entirely electronically through the electronic online facility provided by the transfer secretaries of the company, being Computershare. For the purposes of a poll, I nominate the representative of the transfer secretaries present at this meeting to act as scrutineers. All the resolutions to be proposed at today's AGM have been seconded by Mr. Miles Dally, a shareholder. I thought it prudent to remind you how the electronic voting will work. To vote, simply select your voting directions from the options shown on the screen. A confirmation message will be appeared to show that your vote has been received. To change your vote, simply select another direction. If you wish to cancel your vote, please press cancel. As soon as I open the voting, voting can be performed at any time during the meeting until I close the voting on all the resolutions. At that point, your last choice will be submitted. Any shareholder or appointed proxy attending the meeting is eligible to ask questions. If you would like to ask a question, select the messaging icon on your screen to type your question. I will now open the voting on the electronic online facility, and voting can be performed at any time during the meeting until I close the voting on the resolutions. You will still be able to send messages and view the webcast while the poll is open, and I will allow any question pursuant to the motions to be discussed after I have tabled the last resolution on the agenda. We shall now proceed with the meeting. Proper Notice of the Annual General Meeting was given to the shareholders contained in the Abridged Integrated Annual Report, which has been in your possession for some time now. And I move that the Notice of the Annual General Meeting as well as the further contents that are included in the online version of the Abridged Integrated Annual Report for the year ended June 2020 be taken as read. We can now proceed to the matters which require a vote, and I will begin with our ordinary resolutions. Item 1 on the agenda is to receive and adopt the audited annual financial statements for the year ended June 2020. I move that the audited annual financial statements of the company and the group, including the Report of the Directors, Report of the Audit Committee and Independent Auditor's Report for the year June 2020 be received and adopted. Item 2 on the agenda relates to the election and reelection of directors. In accordance with the company's Memorandum of Incorporation, 1/3 of the directors retire at each general meeting. This year, the directors retiring by rotation are, as you can see on the screen: Mr. Hein Carse, Mrs. Cindy Hess, Mr. Peter Mageza, Mrs. Nhlanhla and Mr. George Steyn. Mr. Kees Kruythoff was appointed as Nonexecutive Director subsequent to the last annual general meeting. Biographical details of each of these directors are on the Abridged Integrated Annual Report on Pages 56 and 57. All of these directors are eligible and offer themselves for election or reelection. I therefore propose that Mr. Kruythoff be elected as Nonexecutive Director of the company; that Mr. Carse, Mrs. Hess, Mr. Mageza, Mrs. Nhlanhla and Mr. Steyn be reelected as Nonexecutive Directors of the company. You can now complete your voting in respect of ordinary resolutions number 2.1 to 2.6. Now we come to item #3, the reappointment of the external auditors. As nominated by the Audit Committee, I move that PricewaterhouseCoopers be reappointed as the company's auditors. In accordance with the tenure and rotation requirements, the individual registered auditor who will undertake the audit during the financial year ending June 2021 is Mr. Rodney Klute. You can now vote on this resolution as well electronically. Item 4 on the agenda relates to the members of the Audit Committee. In terms of the Companies Act, shareholders are required annually to elect an Audit Committee. The Nominations Committee has considered the reelection of each of the members of the Audit Committee and recommend their reelection. Mrs. Hess, Mr. Mageza, Mr. Msibi and Mr. Steyn, all Independent Nonexecutive Directors whose details you can find on Pages 56 to 57 of the annual report, are eligible and offer themselves for reelection. I therefore propose that they be reelected as members of the Audit Committee. You can now complete your electronic voting in terms of ordinary resolutions 4.1 to 4.4. Now we come to item #5, the general authority to place 10% of the unissued ordinary shares under the control of the directors. It is proposed that a certain portion of the company's authorized but unissued ordinary shares be placed on the control of the Board to enable the Board to issue such shares at their discretion subject to the provisions and limitations contained in the Companies Act, the MOI and JSE Listing Requirements. We propose that this general authority be limited to 10% of the number of unissued shares, being just over 104 million ordinary shares. Item #6 on the agenda is an enabling resolution. It is proposed that any director of the company and/or the Company Secretary be authorized to do all such things and sign all such documents as may be necessary for or incidental to the implementation of special resolutions #1 to 3. Item #7 is related to the nonbinding advisory vote in respect of the remuneration policy. King IV recommends and the Listings Requirements require that the remuneration policy of the company be tabled for a nonbinding advisory vote by shareholders at each annual general meeting. The reason for ordinary resolution #7 is to enable the shareholders to express their views on the remuneration policy of the company. Ordinary resolution #7 is an advisory vote only, and any failure to procure the required votes to pass the nonbinding advisory vote will not have any legal consequences relating to the existing remuneration agreements. In line with principle 16, the company engages its shareholders and governance ratings agency beforehand to seek input on the policy and align principles of remuneration with shareholder returns. The Board will also take cognizance of the outcome of the voting to implement appropriate action as detailed in the company's remuneration policy. Shareholders are requested to endorse the company's remuneration policy, which is set out in the remuneration report on Pages 3 to 4, by way of a nonbinding advisory vote. I propose that the company's remuneration policy be endorsed. We can now move on to item #8, also relating to remuneration. And that King IV recommends that the implementation report on the policy be tabled for a nonbinding advisory vote by shareholders at each AGM. And the reason for that is, similar to #7, is to enable the shareholders to express their views on the implementation of the company's policy. As mentioned earlier, while the company engages its shareholders and governance ratings agency beforehand for the purpose of feedback and alignment, the Board will, however, take cognizance of the outcome of this vote as well to implement appropriate action as detailed in the implementation report in the company's remuneration policy. Shareholders are now requested to endorse the company's implementation report, which is set out in the remuneration report on Pages 4 to 7, by way of a nonbinding advisory vote. We can now move on to the special resolutions. Item #9 on the agenda deal with financial assistance in terms of sections 44 and 45 of the Companies Act. On a regular basis and in the ordinary course of business, the company provides loan financing, guarantees and other support to the related and interrelated companies and legal entities in the group. Sections 44 and 45 of the Companies Act empower the Board of a company to provide direct to indirect financial assistance to a related or interrelated company or corporation pursuant to a special resolution of the shareholders of the company adopted within the previous 2 years. The reason for and effect of special resolution #1 is to grant the directors of the company the authority to cause the company to provide financial assistance to any company or other legal entity which is related or interrelated to the company in accordance with the Companies Act. I now propose that special resolution #1 be approved and adopted. Item #10 on the agenda relates to the approval of nonexecutive directors' remuneration. Full details of the proposed fees are contained in the notice convening this meeting. And I propose that the fees remain unchanged from the approved -- when those were approved at the 2019 AGM. I now propose special resolution #2 as set out in the notice convening this meeting be approved and adopted. Move on to item #11 on the agenda. The purpose of special resolution #3 is to grant the Board a general authority to approve the repurchase by the company or its subsidiaries of its own ordinary shares on the terms and conditions and in such amount to be determined from time to time by the Board, subject to the terms of the special resolution #3 as set out in this notice. We propose that this general authority be limited so that any repurchase by the company of its own ordinary shares shall not in aggregate in any other financial year exceed 10% of the company's issued ordinary share capital of that class at the beginning of the financial year. I now propose that special resolution #3 be approved and adopted. The last item on the agenda now is to transact any other business that may be transacted at an annual general meeting. As notice have not been received of any other business, this therefore concludes the matter upon which we are required to vote. I will now allow questions pursuant to the resolutions tabled at the meeting be discussed before closing the vote that you're voting. I've received some questions, and then I'll just read them out and then we can answer on that. So I'll deal with the written questions first, and then we can take questions from the floor as well.

The first question is from Chris Logan with the reelection of the nonexec -- and it relates to the reelection of the nonexecutive directors. Are the nonexecutive directors concerned about the very poor performance of RCL and the very poor returns on capital and equity since 2013? And then the follow-on, which we probably can deal, and what plans exist to turn things around? And then I also got some questions on the remuneration. I sent in written questions, which I sent to the Company Secretary, and I'll also read them out and answer them as well. I think in terms of the nonexecutive concern about the very poor performance of RCL, I think we've got very concerned on the performance of the Chicken business, a certain structural thing in our Chicken business that we're very worried about and we're really addressing that as we speak at this very moment. And the 2 main -- the main thing that we're dealing with at this point is the breed performance, as explained in our results. The Cobb breed is really -- we've got some issues with it, but we're sorting it out. Unfortunately, and Miles, maybe you can elaborate on that, to do that, it's not an overnight solution, a silver bullet solution. So it's a thing that will take time in the supply chain of that, but there are definitely plans of turning that around. Miles, do you want to just elaborate on the breed issue quickly?

Yes. Good morning, Mr. Chairman, and morning to all the shareholders. As the Chairman has mentioned, breed is around a 2-year process, and this is a problem and a challenge that we face via Tyson international where we have the Cobb breed. And so this is an international challenge that they have and something that's most unfortunate. But we are very close to them, working with them. But as the Chairman said, it unfortunately will take some time to turn around. We are also investigating the principle of having more than one breed within our operation because over the years certainly that I've been with the old Rainbow and now RCL Foods, we see that each of the 2 main breeds in the world tend to gain leadership over the other. This is the first time that Cobb has experienced such a major challenge. Thank you.

If we just turn to the Sugar business, I think 2 years ago, we had a terrible drought, and that actually had a huge return issue on the Sugar business. I think things are turning nicely around in the Sugar business with pricing a lot better in the local market and local market demand a lot better. Unfortunately, certain things in the sugar industry, pricing is really outside your control. So as I always say, that is not always a business the greatest to be involved in. But if your selling prices are most of the time outside your control, that makes things very difficult to actually -- the only thing that you can focus on is your input cost and we're the lowest cost producer and the most efficient producer in the South African market. But at least for the time being, the performance is much, much improved on the Sugar business. Miles, I don't know if you want to add anything to that?

No, I think that's well said, Mr. Chairman. I think things are looking up for sugar, generally. It has been a tough couple of years with the drought and then, of course, the local market with the tax levy by the government and 300,000 tons disappearing out of the system. But yes, things are certainly looking more positive on the macro front. And as you mentioned, we are the low-cost producer in South Africa.

Okay. Then just if we go to Vector, I think we all know what Vector is. We just bought the Imperial cold storage business, so the implementation of that was always going to have effect on the business of taking over a loss-making business. So that was a challenging year for Vector, but we knew what we were buying into. Unfortunately, in terms of the COVID, some of the integration plans were delayed, but things are looking up now that it's most likely on Level 1. A lot of these things can actually be implemented now, so we're expecting a lot better results from Vector going forward. On the grocery side of the business, I think that has performed well. So if we look at it going forward, we're also quite confident of the performance of that business. If we then move to the questions in terms of the remuneration. And I'm going to read and also coming regard from Chris on the remuneration side. And he said -- he talks about the drop in the market price and the market price going down to quite low, in the [ 30% ] discount with NAV. And he said Remgro shares also have been negatively affected by RCL performance. And then he raised questions about at the Remgro results presentation that I made some comments on the company, which I've actually just repeated some of them now. And would the Chairman kindly confirm that [ far-ranging ] change are possible to RCL and why some progress being made in assessing options. I can confirm unequivocally that, yes, we are making progress, and there will be some changes happening going forward because we are not happy with the performance, especially on the chicken side, and we're looking at that very closely. Then the second question related to remuneration. Practice historically misaligned with value creation change. And he talks -- then he asked the question, over the last 5 years, executive directors achieved a 19% increase. So that's effectively a 3.6% increase on an annual basis in their salaries, which is he asked a question about that. So I think the 3.6% increase is not significant. I think it is actually below inflation in terms of the executive directors' increase. He then talks about the nonexecutive directors' increase, which are salaries as nonexecutives has increased over the last 5 years by 85%. I think that is a little bit -- the number, you can't just take as an absolute number because we have appointed a few nonexecutive directors. If you take that out of consideration, the actual increase for nonexecutive directors is actually 13.1% in total, if you take the 85%. But if you take -- if you just actually [ skew that completely ], so I can just go through in the -- of course, he can't -- he's not comparing apples with apples. So the increase in 2016 was 7%, then 6% in 2017; in 2018, 6%; in 2019, 5.5%. So it's all been modest increases, and this year, we're proposing a 0% increase on the nonexecutive. We've also now changed in terms of how we will calculate the bonus schemes or long-term schemes we're introducing, which is very similar to, as Chris, as you always [ found it ], the EVA scheme. We actually will be looking at the return on invested capital. And clearly, the investment hurdle rates that we're looking will obviously equate to cost of capital, and it will be turned around the cost of capital number. And that is really relates as well, as you said, to economic value added model. So we're really moving into that direction, and we agree with you totally that, that is, over the long term, that is the way to move. We should just be -- in terms of investment decisions and things like that, what we must also just take into consideration that in the first 2 to 3 years, some of these change might not be cash flow positive/negative. But we must ensure as a Board that over the long term, they're EVA positive and that they actually add economic value into that -- onto that. Okay. So I think that's more or less the question from Chris. I'm going to allow Chris now to come in and maybe just if you can just conclude, if you just -- if I've answered all your questions, perhaps you can make sure that we address them because I didn't want to read them out because that will take the whole morning and we've got a long Board meeting today. So Chris, if I missed anything on your answer, maybe you can just come in now. [ Andre ], if you can allow Chris to come in on the call?

The audio -- there's no audio integration to this call, Chair.

Okay. So he can't do that. Okay. Then I'll just carry on. Then there's a question from [ Shane Watkins ] to me. I say I'm Chairman of RCL, and [ I -- Remgro has ] complete absolute control of RCL, can make any changes at RCL without even consulting the other shareholders. I think that's not the [ style ] we do. I think just to be straight on that, that's not how we -- sorry, can everybody see those questions on their screen of all the shareholders? [ Andre ], I don't have to read it out?

Everybody can see them, Chair.

Okay. That makes things sort of a lot easier. Sorry about that. So I think [ if we must speak ], the way that Remgro manages underlying companies, especially if they're listed, we don't do a unilateral or like autocratic distributions. We actually consult. We appoint nonexecutive directors. We don't even control the Board. And if we just make unilateral decision without completing with the other directors, I think that's -- from a corporate governance point, that's not the way we operate. Ourselves is the worst-performing food share on the JSE. We've admitted that. And I think that really relates to, clearly, to our chicken operations, which I've addressed quite comprehensively, me and Miles, in terms of our Chicken business. And if you pull it back, it straight go back to some of the breed issue. And my question is just why does Remgro not take actions when you have absolute control? I think I've addressed that, and we're actually putting a lot of attention to that. And please explain your apparent lack of action in addressing RCL's underperformance. And I think let's just agree to differ that we're actually doing things there as we speak. Then we're going to [ Abraham Cilliers. As ] chairman of the remuneration, but what a challenging result from the [ limited ] liquidity of the RCL Food shares. Peter, can -- Peter, do you want to answer that question? I think that's really addressed to you directly as Chairman of the Remuneration Committee.

Thank you, Chairman. Yes, what we meant by that was that if you look at the amount of actual shares traded on the JSE of RCL, it's a minimal number because of the shares that are being held, not being traded by the shareholders. So that's really what we meant, and as a result, it obviously has an impact on the pricing of the shares on the JSE. That's the background to that, Chairman. I hope that explains it.

Thank you. Yes, as I think as Peter has explained it clearly, I mean, if you look at the trading on the shares of RCL Foods, I mean, it's so limited because of the Remgro shareholding in that shares. Then there's a question from [ Shane ] on the sold their shares in an incentive scheme to Remgro. Why was this option of selling to Remgro not offered to all shareholders equally? It actually was offered to all shareholders equally with the company was going to buy back so that all shareholders could actually share in it all equally, but the other shareholders voted that down in that [ share ]. So they -- actually, Remgro did not vote on that. So all the other shareholders actually declined to actually take up that offer that RCL buys it back. We also made it quite explicit in that announcement that if I wasn't going to buy back -- the company is not buying back so that all shareholders could share in it, Remgro was going to buy that back. So that's totally transparent, and it was offered to all the shareholders via the buyback. I think at that point in time when we did that announcement, I think nobody could foresee COVID and know what was going to happen on the COVID side. So we didn't anticipate a drop in the share price of [ 50% ] lower and [ current being ] that a big portion of the chicken operations, in turn, was going to be closed for a significant period of time in the year under review. Obviously, that also contributed significantly to the chicken performance, as we all know. Then there's a question on the remuneration policy disclosure. The remuneration policy is poorly disclosed and does not [ provide ] the level of disclosure required. There's limited information on the variable remuneration and no details on the metrics, weighting, performance level, even the vesting periods. The SAR and ESOP schemes are not subject to performance measures. Maybe, Peter, you can just comment on that from a RemCom?

Sorry. I'm on mute. Chairman, the information we provided does comply with the best practice. And if [ Mr. Mcobe ] requires more information, I think we will engage with him to find out what more we need to disclose. I thought we have done that. The metrics and the weightings, performance levels and vesting periods, we have not disclosed the detail of that. As you know, remuneration is something that is private and personal. The SAR and ESOP schemes are not subject to performance measures. That is not correct, and I think there's more detail that we can provide to [ Mr. Mcobe ] if he requires that.

And then, Peter, second question from [ Abraham Cilliers ], also ask you about why no, just why we don't disclose this current year. I mean I suppose that relates now to the 2021 financials, why we're not disclosing those in this annual report which will apply for the current year. We're not voting on that. Remember, we're voting on 2021. So shareholders not actually could express an opinion on the 2021 performance measures. It's only in the 2020 performance measures.

That's correct, Chairman. Thank you. Well put.

Yes. But I think -- so for next year, we will be -- we will disclose what they were. And when you have to vote on it, so you can see exactly what we've put into place. But it's fair enough to say that we're moving towards the EVA model, return on invested capital model in those -- for the new measures that we apply. Miles, I'm going to delegate the next question to you, the COVID pandemic and the impact on the results. And then I'll briefly, me and Peter, can talk about the effect on that on the remuneration targets and incentives.

Thanks, Mr. Chairman. Yes, as I think all of us appreciate, the COVID impact was significant both in terms of impact on people's livelihoods and in terms of business operations. And I can say that during Level 5 was an incredible challenge for the organization. We had to move 23,000 people around the country. And as you'll appreciate, we are an essential service. And we're very proud that we continued to feed South Africa. That was the rallying call following on from the President. And we had 3 main focus areas. And the first was to keep our people safe, the second was to feed South Africa and the third was to manage cash and liquidity. And we're very pleased with the way we did that. We, unfortunately, had some fatalities. But by and large, we managed to keep the operations going. And as you'll see from our results, we generated ZAR 2.5 billion in cash in this financial year, and we ended with ZAR 1 billion of cash in the bank. And our operations, quite frankly, didn't miss a beat. Having said that, there were significant impacts in on-costs, particularly in terms of keeping our people safe. We had our own fleet of taxis to move our people around. As you will appreciate, when you've got to take 1,500 people to a shift -- 1 chicken shift, and we're running 3 shifts a day, it's a significant operational challenge, and obviously, the additional PPE that was required. So that was about ZAR 200-odd million. And then the big impact on our results was the switching of, overnight, of the quick service restaurants. As you know, we supply the bulk of KFC and Nando's and 100% of Chicken Licken. And so suddenly, we were sitting with a significant amount of stock that those people couldn't take, and we had to carry that stock over this period. And then, of course, we had 40% of our chickens coming at us that didn't have a home. And so we had to find a new home for those in the retail outlet. So it was a particularly challenging time. I think as far as the longer-term impact of COVID goes, it's still very much with us, as I think we're all aware. And so we're continuing with the same Level 5 lockdown methodology of operating. We haven't changed that at all. So the on-costs are still there. And clearly, if you look at the impairments that we took in our business, that was also as a result of a future look to say that the terminal growth rates need to be lowered and there's far greater sovereign risk in the country. And we took -- so obviously, our weighted average cost of capital went up. So those were the big impacts on our financial results this year.