RCL Foods Limited (RCL) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the 2021 RCL Foods Annual Results Presentation. [Operator Instructions] Please note that this call is being recorded. I would now like to hand over to Miles Dally.

Good morning, everyone, and welcome to our results presentation. If you could move to Slide 4. I'll start there. And as in the past, we'll take you through a high-level overview from myself. Rob will take us through the financials, and then the 3 MDs will take you through their respective areas of responsibility. I mean we're really pleased with the results this year despite the very difficult trading conditions, which have been in place for at least the last 18 months. We've had COVID on top of all of that. We have a meaningful improvement in our statutory and underlying earnings. And as you'll see during the course of the presentation, we've had an excellent performance in Sugar, in fact a record performance. And the Baking business continued delivering, and we continue with our strong growth in grocery, so very pleasing. Vector has improved clearly in putting together the 2 networks, which were hampered a little bit end of last year due to COVID, but they've made great progress in that regard. And Chris will pick up on that later. We've also continued with our effective response to COVID-19, prioritizing employee safety, maintaining food supply, which is absolutely critical, supporting our communities and managing cash. It's also been a very rewarding and busy year, as you can see, under the heading of future-proofing RCL Foods portfolio. So we've completed our portfolio review, and we're going into some detail later in the presentation on that. We've got a clear foundation for our strategic thesis going forward. The stand-alone Chicken Division has been established with a dedicated structure. Very excited to say that our LIVEKINDLY Collective Africa JV is now live and gives us a fantastic opportunity to participate in the plant-based alternative market, which is really gaining traction worldwide and in South Africa. As I mentioned, great progress with Vector and cold chain integration, and Chris will pick up on some of the detail there. And we continue to make significant investments in our branded product portfolio, and you'll see that in the presentation, we've made great strides in terms of our market shares. If you can move to Slide 5. And really, these are just the highlights, and Rob will unpack, and each of the guys will unpack in a bit more detail. But we're now over ZAR 31 billion in turnover, so more food to more people more often, shown very clearly in our revenue line, up 14%, and as I mentioned, some good share gains. And our EBITDA at an underlying basis up 45%, increasingly also on a statutory basis up a similar number, so ZAR 2.4 billion and ZAR 2.5 billion, respectively. And that's flowed all the way through to our HEPS, with HEPS at just under ZAR 1.08 and the underlying HEPS at just under ZAR 1.18. I think what is really pleasing is that over the last couple of years, despite some very challenging operating environment, we've delivered on EBITDA and cash generation. Our problem is due to accounting adjustments and impairments that hasn't flowed to the bottom line. So it's really great to see the funds flowing all the way from EBITDA and through to HEPS. So if we move on to Slide 6, and I won't go through this in detail because it will be picked up later in the presentation. But just at the highest level gives you a sense of the EBITDA growth of the business unit within Groceries coming off a good base but a fantastic performance in Pet Food gaining a lot of traction and a lot of good innovation and still a lot more to come. In pet, Milling and Baking and Speciality had a really solid year, as you can see from the 34% increase in EBITDA. Sugar is a real highlight, and a lot of that is to do with our own efforts. And Paul will unpack that in more detail. So I'll leave that for him. And Chicken is the only area where we've continued with our challenges in agri, and Marthinus will take you through some of the reasons there and our plans for the future. And as mentioned, Vector up really nicely, just under ZAR 300 million, and more to come. If you go to Slide 7. So if we look at our key strategic deliverables, I've got a slide on #1, 2 and 3. So I'll leave those. But the others, #4, which is scale growth potential in Groceries and Baking, as I mentioned earlier, continued investment there, strong brands, focusing on the categories that we want to grow, and you'll see more about that later. We've definitely maximized our momentum in Sugar, the record profitability and optimized sales mix, agricultural cost efficiency, so really pleased about that. And as I mentioned, the network integration in Vector. Our team have done a really good job. So now I'll take you through points 1, 2 and 3 of the slide on each of those. If you go to Slide 8, very important to talk about. This is our strategic portfolio review, which we announced in November last year. We've been through a rigorous process as a board and as a management team, using RMB and Deloitte to assist us in this process. And we have resolved that the separation of the value-added branded foods business, which is Groceries and Baking -- essentially, we'll refer to that in the future as FMCG, from the poultry, Sugar and Logistics business will ultimately achieve a better, consistent quality of earnings. We do believe that poultry, Sugar and Logistics are great businesses in their own right. We just need to have a look at how we manage them differently. Also, we absolutely feel that we are going to grow the FMCG components of our business, and that includes acquisition activity, and we are actively engaged in that regard. And so the next phase will be, besides the growth of the FMCG, it will be an optimized path for poultry, Sugar and Logistics businesses. But we will do this in a very carefully considered manner over the next 12 to 18 months and making sure that we don't lose that unique platform that we've created in RCL Foods. And so a lot of good work has taken place and a lot more to come in this year. So as a Board, as I say, we're convinced that this is the right direction to take the business in. If we go to Slide 9. We have already achieved the standalone Chicken division. We started in January with a new senior leadership team. And in July, we had a go-live with a dedicated Chicken structure. There are still some functions that have been serviced by RCL Foods, but it is a dedicated structure within RCL reporting directly to the CEO. And we will complete the carve-out as a dedicated, separate legal entity the latter part of next year. And then we would be able to do what we think is appropriate for Chicken going forward. So a lot of good work and a lot of hard work took place in that regard. If we go to Slide 10. Really excited to say that we have finalized our JV with LIVEKINDLY Collective Africa. As you know, plant-based protein is a key strategic investment focus and something that we're really pleased to now have an opportunity to grow. Our joint venture went live in May 2021, and it's a really great joint venture in that LIVEKINDLY Collective brings their brands, their technology and intellectual property. They already own Fry's. They've got the Oumph brand. They've got LikeMeat, and they're making a number of acquisitions worldwide. We will have access to all of those, and then clearly, RCL brings its global market capability, the integrated service platform and customer relationships, so a very, very exciting JV. If you go to Slide 11. I just want to touch on a few other things, and that is doing business sustainably. That's critical for the long-term future of the business. And digital transformation is embedded as a mindset. That's core to our strategy. And just to highlight one example, we've got our Let's Talk app and ability to connect meaningfully with 13,000 of our employees already, and that's been working exceptionally well. We've done a lot of work in electricity generation. As you can see, we've supplied 160 gigawatts, including sugar co-generation and our Waste-to-Value and rooftop solar. Our Waste-to-Value electricity generation increased 182%, with the first phase of commissioning of the new Rustenburg Waste-to-Value plant, as you know, our Worcester one has been up and running successfully for some time now. And I think very importantly is our DO MORE FOUNDATION has done fantastic work over the course of the last year, and we provided 10.5 million meals to vulnerable communities and contributed directly to youth enterprise development in a number of ways. We continue to provide food and support ECD centers. And we've managed to get funding now from third parties, which is about 50% of the funding of the DO MORE FOUNDATION. So it's gained a lot of traction and a lot of credibility, so very pleased to report what we're doing in that area. I'll now hand over to Rob, our Chief Financial Officer. Thank you.

Thank you, Miles, and good morning to everybody. Miles has given the results' headlines. So I will really add some color to certain key aspects. I'm going to start on Slide 14, which is the EBITDA waterfall. And really just to highlight the elements that we've stripped out of our underlying results, this year is really only about COVID, and you can see that, that absolute impact this year was meaningfully less than the prior year impact. And that trend continues in the business. And obviously, there will continue to be some level of direct costs associated with COVID into the future, but it is a smaller number than the prior year. So this waterfall gives you an opportunity to look at our results and where the contributions are coming from in terms of that very meaningful uplift of EBITDA of 45% to 47%. Moving on to Slide 15. This mainly reconciled then that EBITDA answer through to headline earnings and underlying headline earnings. The only thing I'd like to highlight on this -- and although a small number, it's a meaningful point in terms of if you look at the reduction in the minority interest add-back, the important see-through of that is that it demonstrates that there's an improvement of the underlying sugar community-based joint ventures that we have. And their underlying profits have improved by virtue of a significant number of interventions. And that's part of the business, but that is an underlying good news. And then this chart, obviously, translates all the way through to the 171% uplift in our underlying headline earnings, clearly a good answer. Slide 16 is mainly the unadjusted figures to be complete in terms of the picture of our revenue and EBITDA. So I'll move straight on to Slide 17, which then picks up those underlying adjustments to show a better view of the performance of the business units. And really, the most significant numbers that changed by virtue of that COVID impact on this slide is the Chicken line. That is the entity, and Marthinus will share some detail there in terms of -- that's been most impacted by COVID. And then the other number, obviously, the changes in this chart is Vector's prior year, referenced by the inclusion of the gain on bargain purchase that was a feature of their results last year. So underlying results are meaningfully up, delivering a margin of 8%, overall, that you can see in terms of the stack up there. Chicken's low contribution of 1% meaningfully drags that number down from a group perspective, and that number would otherwise be in excess of 11% were Chicken excluded. Moving on to Slide 18, the cash flow reference. And so despite the impact of the pandemic and the economic environment that Miles alluded to, we sit with a very healthy cash position. So that's a pleasing picture for us to present. The movements within that cash balance during the course of this year had a very significant working capital shifting up. It's better for me to explain that on a subsequent slide. And secondly, on this chart, just the shift that you will notice in terms of our CapEx expenditure and replacement being a higher feature and component of that relative to expansion CapEx. And that really is just a feature of the trading in the past couple of years when a number of our sectors were under immense pressure. And then obviously, with our cash focus during COVID and the uncertainty associated with that meant that we were very prudent in our spend. What's happened in this year is there's been a catch-up, so a shift in terms of the weighting between replacement and expansion CapEx. And I'll also talk to that a bit further on a subsequent slide. But a pleasing free cash flow generation in the business, and obviously, a very pleasing ending balance that we were able to report. Slide 19 then unpacks the working capital analysis. And the headline has to be a takeout that our working capital remains well managed. This chart shows that although we've had a 25% uplift in the value of our working capital and net working capital, and that's shown as a 1% uplift of revenue, we know that these balances, by virtue of the underlying businesses, are an acceptable reference in terms of each of the operations. The most -- the more significant feature impacting these values this year, once again cutoff. We do explain it on this chart in terms of this year, because we use a retail calendar, cutoff was as late as the 4th of July versus last year's 28th of June. Another way to look at that is that it effectively translated to a very clean cutoff and representation of our, call it, also underlying working capital within the business. By virtue of the lateness of it means we've got almost all of the debtors' money in and paid away all of the creditors' money. So those are the balances that you see most significantly different from the prior year's report. But the see-through is always what is your quality of your underlying debtor's book. And that, we do show just in terms of that adjusted analysis and absolute days are in very favorable territory. Moving on to Slide 20. It's just further detail on the CapEx. And there's very few significant items -- well, individually significant items here. I've spoken to the shift between expansion and replacement CapEx. So the only other thing I'd like to highlight on this, which my colleagues will pick up on, is in terms of our capital commitments, you'll see the bulk of it there being represented under Baking, which is the investments we're paying out in our Baking footprint and assets. And then secondly, in Vector, which is the completion of the consolidation of the Imperial Networks and the remaining work that's been done in terms of the investment in the coastal facilities as well as, obviously, fleet, new fleet to support that. Slide 21 is how everything comes together in terms of a view of our returns. We use the return on invested capital, as I reference consistently. And obviously, a very pleasing picture to present, meaningful improvement both in the reported as well as the underlying. The underlying references not only pick up the earlier underlying adjustments that I referred to but also seeks to remove distortions that are inherent in our numbers by virtue of impairments and the intangibles associated with purchase price accounting that is required. So it really does give you a better and alternative lens to how our returns are faring. And there, you can see, from a group perspective, obviously up at 12.3% but obviously compromised by Chicken as well as Vector's absolutely low, low number but on a recovery path, but obviously nothing short of stellar performance coming out of the Food division. Slide 22 just really gives you a perspective of where our debt package is sitting. We're moving into the latter stages of that 5-year package. So we're in year 3 now. The only thing to highlight is we've got a small portion of bullet payment that will be -- need to be made during the course of this financial year. It's ZAR 110-odd million. But a pleasing finance cost picture to be able to show. Obviously, rates themselves are lower. Although on a portion of the package, we have a collar in place. So we're at the floor of that collar. But I would also offer that -- how good working capital management is contributing to a lower interest cost in the business. And I won't dwell on Slide 23, but it's just information that our debt covenants are well in hand and a pleasing picture to support a strong balance sheet to take us forward. Thank you. And I'd now like to hand over to Paul.

Thanks, Rob, and good morning, everybody. The Food division delivered a strong set of results for the F '21 fiscal year, with Slide 25 highlighting the exceptional performance across all business units. Of the EBITDA growth of 58% at a statutory level, the underlying performance in the upcoming slides is not too dissimilar at 53%. If you turn to Slide 26, we have highlighted some of our wins for the period. Most of these arise from a clear and focused strategy with heightened emphasis on managing costs and price in this operational and very competitive trading environment. In light of that, there are a couple of specific points that are worth calling out. COVID risk continues to be well managed in terms of both employee safety as well as minimizing disruption on our operations. Strong volume performance and market share gains are evident across most categories within grocery. Cost focus across all the business units has developed ahead of the expectation, where sugar supply chain and agricultural costs have been reduced substantially versus the prior period. With a solid turnaround in place, we have seen a pleasing improvement in the Beverages results, and new innovation in Pies has driven good volume recovery in this category in the second half of year '21. And finally, within our Baking business, it's well positioned for growth as sizable investment has been approved and a growth road map for [ GDI ] plant. Before moving on to the business units, it is worth noting that each landing page will reconcile the results to the underlying performance, including adjustment for direct costs associated with managing COVID over this period. Whilst appropriate safety measures have remained in place throughout F '21 to protect staff safety and ensure business interruption is minimized, the impact has been immaterial compared to F '20. Moving on to Slide 28. Groceries underlying EBITDA is 4.9% up on the prior year, primarily driven by strong grocery results as well as effects of higher culinary and pet demand, improved oil profitability, partially offset by margin pressure due to higher commodity prices. Heightened cost focus and volume recovery in both Beverages and Pies has also contributed to the improved Groceries results. Slide 29 talks to the culinary categories within Groceries, which has performed ahead of expectation in the period. Despite the competitive trading environment and commodity price pressure, particularly on sunflower seed, which has necessitated price increases, the category has nevertheless demonstrated pleasing profit growth. Furthermore, I know the brands continued to grow its market leadership position by more than 1% despite landing a second price increase in a very competitive environment. Yum Yum share growth was also pleasing, considering the continued presence of imported peanut butter in the market, which does not attract tariff, whereas raw peanut imports do. Albeit slow, progress has been made with [ our tech in ] alignment on peanuts and peanut butter tariffs. Focus on the culinary category for the upcoming year will be on delivering operating efficiencies and driving focused pricing strategies in order to mitigate some of the margin risks associated with high commodity prices. Slide 30 highlights a strong performance in the Pet Food category, which is reflective of our growing market share position across most brands. Within dog food, Optimizor specifically continues to outperform expectation in the co-op channel, with brand revenue now sitting at ZAR 175 million, only 2 years after it was launched. In addition, strong performance in Canine Cuisine and Bobtail in the retail channel has enabled us to offset some lost [indiscernible] brand business, which as a result of a conscious decision made not to chase volume with little or low margin. The cat food category also delivered particularly pleasing growth, with strong share gains in both Feline Cuisine and Catmor. Whilst we are confident this category will continue to deliver good growth into F '22, we need to closely monitor the impact of higher maize prices we have on margins. On Slide 31, the Pies operating unit has seen a pleasing recovery in volumes on the back of a strong promotional plan as well as the innovation, more specifically the launch of the Pieman’s Big Deal pie, which has exceeded expectation. Leading growth in the Pies market through a new innovation will continue to be a key focus area, together with cost-saving initiatives and mitigating margin risk associated with rising input costs. Our Beverage business has also seen some recovery in on-the-go consumption. And whilst this has contributed to improved results, the main reason for the turnaround can be attributed to cost savings arising from the consolidation of the UHT volumes into the fresh plant in March 2021. Moving to Slide 33. Baking's underlying performance is significantly up on the prior period, underpinned by strong demand resulting from increased in-home consumption in Speciality and an overall improvement in operating efficiency. On Slide 34, the Bread, Buns & Rolls business delivered a significantly better result, driven by much improved margin across most bakeries, coupled with the successful turnaround in operations at the Gauteng bakeries. Volumes more recently have, however, started to slow due to softer category demand and aggressive competitor activity in retail. The business has approved a sizable CapEx expansion at the Polokwane bakery and commenced a depot rollout program to chase volumes in areas of Sunbake that's currently not far. Moving to Slide 35. Speciality delivered an exceptionally strong result driven by increase in home consumption and boosted by a more favorable mix. Improved efficiency to plant consolidation will be a huge strategic focus area that will further step change Speciality's results in the next few years. The Milling performance has also improved considerably over the period, with heightened focus on efficiencies and production reliability, driving a more consistent result. Our Milling's strategic focus, which is to use more of our consistent quality flour [ in '20 ], remains a big priority for the business in F '22 and beyond. Moving to Slide 37. Sugar has produced a substantially stronger result driven by continued focus on our own controllables as well as efforts [ in '20 ] to become the most efficient operation in South Africa. Slide 38 unpacks Sugar's results in more detail. Increased in-home consumption, coupled with a shrinking industry crop, drove a more profitable mix weighted towards local sales. Although our volumes were down from the prior year, our sale benefited from the industry sales redistribution, which is an adjustment based on our production share. Our Sugar operation successfully crushed its crop. And as a result, we saw an increase in our percentage share of the industry, which is a key contributor to the improved result. Furthermore, the business unit's continued heightened focus on cost control in both agriculture and the supply chain were also major drivers behind the significantly improved performance. The double-digit increase in the international sugar price also improved export earnings over the period. Moving to Slide 39. Good progress was also made in addressing the future sustainability of Sugar's three cane-growing community-based joint ventures, although work in this area will continue to be a priority in F '22. On the sugar master plan, which aims to find a more sustainable solution to local sugar businesses, RCL is actively contributing to implementation efforts. Although task teams are regularly meeting, progress has been slower than expected. And therefore, the Competition Commission has granted SASA an extension until 30 June 2023, to enable engagements to continue. On Slide 40, Molatek delivered a relatively stable performance for the year, a significant upside seen in the last quarter due to an overall recovery in the animal feed industry, with molasses availability potentially becoming a challenge in F '22, driving improved mix and closely managing cost and become a key focus area. Moving to Slide 42, the last side of the Food division section. We have again set out the key areas from a strategic and operational perspective to focus on over the course of the next year. Whilst the division is clear on what is required to deliver on its strategic priorities, operating the business will need to closely monitor commodity pricing pressure and the impact it will have on margins in food prices with the South African consumer really under significant pressure. In light of that, reducing costs will remain a key focus area, and the business will prioritize innovation that delivers value to a cash-strapped consumer. I will now hand over to Marthinus.

All right. Thanks, Paul. Good day, everyone. Right. So in terms of revenue and you can see a better picture, mostly driven by better pricing and by return to the QSR business. It was impacted by closure in the first part of the year and in the previous year. In terms of profitability, still not a good picture. Right. So underlying EBITDA 50% worse than last year, mostly impacted by the 3 challenges, well documented, avian influenza and obviously a very significant raw material input cost driving that result. Moving on to the next slide. More of the reasoning behind that performance. Just want to emphasize in terms of rejuvenating the Rainbow brand, which strides have been made in chilled processed meats, particularly the economy polony, the Rainbow brand, and also the high-end Simply Chicken brand. Moving on to the next slide and continuing the trend in terms of input price pressure, [ it's much a ] matter of raw material and the commodity cycle continuing to rally and obviously, input -- impacting on input cost. In terms of the chicken master plan, it's very much still a matter of potential that lies within that plan. We are working with government to unlock really the outcome of such a plan, and that is yet to really bear fruit. Imports have declined, but they are still significant. In terms of animal feed, on the EPOL side, again, a huge impact because of the commodity pricing side, input cost side, therefore putting pressure on external volume and obviously on profitability. Just one slide back. Right. So I think this is the most important slide I would like to just spend some time on. In essence, we've made the big decisions, and it's now a matter of allowing time to flow through that filter to impact and bring the desired results. So we have built a very strong team in a relative short space in time. We've decentralized the management focus and the way that we manage by giving it a regional focus, which integrates the elements of the value chain so that we can produce the lowest-cost chicken of the right size and in the right numbers for the right customers. The onboarding of Cargill has been significant in terms of how we procure maize given the huge impact of [ their own ] cost. If one can do that directly, you have the battle most often won. We obviously devised the 5-year recovery plan. And as I've said, it's a matter of allowing these decisions to flow through. In terms of breed, we are very far progressed in terms of interventions to address that issue. It's very significant. It results in a lot of pain down the value chain. We are not self-sufficient within the regions, and obviously, the quality of the output from the agri side is hugely affected. We will continue to sharpen the front-end, the customer and the consumer side, maximizing and optimizing the right customer and product mix. And then obviously, EPOL [ is there the ] sleeping giant, and I'm very encouraged by what we've done. We have appointed in this regard and looking forward to return of a solid performance from the feed business. I mentioned the focus on the brand. That will always continue, and so will the focus on cost and overhead management. Thank you. I'm going to hand over to Chris.

Thanks, Marthinus, and good morning, everybody. If we move to Slide 52. At the top of the slide, our year is summarized largely in that pleasing revenue growth and significant progress with the consolidation of duplicated networks delivered an improved performance. As the first bullet point says on the headlines, pleasing revenue growth of 21.8% to ZAR 3.1 billion, driven by the ICL principals that were taken on December 2019, and this is despite the continued impact of COVID-19 on the foodservice business. The next bullet point talks to the significant progress we have made in consolidating our duplicated networks post the ICL acquisition, with enhanced -- which has enhanced our performance, with the final capacity expansion expected to be completed by March 2022. As can be seen from the chart, pleasing EBITDA improvement and underlying EBITDA margin improving to 9.2% from 4.6% in the prior year. Moving to Slide 53. And as I've said earlier, pleasing revenue growth despite continued further margin impact on our foodservice business. And if you look at the bottom-right chart, it shows the new principals taken on in December '19 as a result of our customer line strategy. And the bottom-left chart shows the foodservice and retail customers that Vector represents for their end-to-end frozen supply chain. And this revenue growth in retail helps to mitigate the impact of COVID-19 on our foodservice business, confirming the benefit of driving our diversified revenue base. Moving to Slide 54. As I've said previously, there's been significant progress made to date in consolidating the acquired ICL network with the Vector network. We are now busy with Phase 3 of the project plan, as depicted in the chart at the bottom of the page. Despite delays due to COVID-19 impacts, we expect to be completed by March 2022. With the final synergized network, once bedded down, we'll continue to unlock synergies and build a sustainable model into the future. Turning to Page 55. We see Vector Logistics going beyond, which is Vector's brand positioning, with the pillars of innovation and collaboration as our focus. The first bullet point talks to innovation and our continued journey of digital transformation with the introduction of an online ordering portal and Vicky the Vector Bot to improve our customer service and experience. Further to this journey, we have also introduced the use of artificial intelligence to automate repetitive tasks, particularly in the finance area. In the next bullet point, although our joint venture partners, Senn Foods Logistics in Botswana and L&A Logistics in Zambia, have been impacted by COVID-19, they continue to drive positive contribution to our business, enhancing our reach into Africa. Further to this, we have increased our shareholding in L&A Logistics to a controlling share of 85% from February 2021, and we have started at the future prospects of this business. In closing, and as I've said a couple of times already, once our final synergized network is bedded down, it will have a sustainable model into the future. And on this basis, we remain positive in our outlook despite the impact of the continued pandemic and the customer store closures due to the recent civil unrest. Thank you. And with that, I hand back to Miles.

Thanks, Chris. And if we go to Slide 57, which is the prospects. Certainly, the pandemic and the impact of social unrest is putting a strain on the economy. What we're happy to report is that RCL Foods has got into a real rhythm in managing to operate through these difficult environments. And I think that's good news for the future, but we must not underestimate the impact of this on consumers and the economy generally. Clearly, you heard about the commodity price rally, and that's something we're going to have to navigate through but adding further pressure again to the constrained consumer. As you've seen, our Groceries and Baking business is going to be well positioned. We've got a strong focus and innovation pipeline with lots of growth aspirations. And I really believe the team have built a lot of momentum there, and we'll continue to see gains in that area. And as Paul touched on, with Sugar, we really have focused on the controllable factors and we will continue to do that during the course of the next few years. So we're very comfortable about where our Sugar business is. And we have a new Chicken management team in place. And as Marthinus has said, we will look at accelerating those cost savings and growth initiatives, and we've got a dedicated team with a regional model, and so we're looking forward to that being resolved. And as Marthinus also mentioned, we have some clear plans in what we're going to do next with the breed. And as Chris has touched on, the network is largely integrated. Now it's been a great work and will unlock additional margins in that regard because obviously, there's a lot of cost associated with the integration. And I think that we really are moving into the next phase, ZAR 9 billion of sustainable, consistent quality of earnings, and probably a very important part of that is the appointment of Paul as CEO and designate -- and Paul will take over from me on the 1st of December. And I must say he's a very popular choice, and he has a long history in RCL. He's worked in many parts of the businesses, and we're very comfortable. And I'm certainly grateful to be able hand over from -- my tenure over the last 18 years to Paul. So Paul, all the best to you. Really look forward to you continuing off this great set of results. So on that, I'm going to hand over now for questions. Thank you very much.

Thank you, Miles. [Operator Instructions] We have a question from [ L.B. Salliers ].

Can you hear me?

We can.

Yes. We can.

Congrats on a significant better set of results. It's encouraging. I look forward to the separation of the poultry and Sugar and Logistics entities. Can you -- firstly, I'll ask a series of questions and you can answer them one by one. Do you foresee, as the second part, benefit with these businesses separated out? And by separation, do you foresee a separate listing for each of them? That's the one question. My next question is regarding the recurring nature of COVID and other costs, which are, I guess, causing the adjusted portion of your earnings. Are you able to foresee a scenario where you have no adjusted earnings or no -- none of these costs [ redacted ] from your results? I saw an interesting tweet the other day by somebody that went and looked at all the 10-K results of the major companies in the U.S. And it was interesting which companies stood out when they used the word adjusted or how many times they used the word adjusted in the earnings results or in the 10-K reports. And then there's a clear trend there that companies that didn't perform the best kind of used the word adjusted the least. That's my next question. And then just a final question. I see you made a key strategic investment focus, the plant-based proteins and foods. That's a very interesting area for me, and I was wondering -- I've noticed and I might have seen it late -- the latest result of Beyond food in the U.S. Their growth has kind of slowed, and they've got a lot of new competitors that they have to contend with. Given your focus in this area and I guess your investments into this field, have you looked at the recent trends and fast growth, it seems, of lab-based proteins and meats? I mean I've been reading a lot about it, and it seems it's a fascinating area and that there's lots focus there. And I mean people can't even taste the difference between egg-white protein or lab-based chicken meat anymore. Just your comments in that regard as we look into that. And if not, if your competitors are.

Right. [ L.B. ], it's Miles Dally here. Thanks for those questions. Regarding this first one, which is the time period and the separate listings, what we have said is that we're going to bulk up the FMCG part of our business. We are actively looking at acquisitions in that regard, and we're saying what we will -- we've resolved that we will have a separate Chicken, Sugar and Logistics business. What we're now going to do over the next while is decide how best we bring that to life. There are a number of options, whether it's separate listings, whether it's joint ventures, whether it's disposal, whether it remains as it is, separate within RCL Foods but just managed differently. So over the next year, we will feed back to the market in each of those, and there may be different solutions for each of them. Regarding the recurring nature of the COVID cost and adjustments, fully agree with you. And that's why I said it at the outset, really pleased that our strategy and underlying results are very, very close, and our adjustments are actually quite small. We probably won't make an adjustment for COVID next year. Last year, it was a significant number, and that's why we highlighted and just to be a comparator. As you'll see, the COVID number is not massive this year, and a lot of it is in Chicken quite frankly. So we probably won't see an adjustment in that regard. And I certainly agree with you, the fewer adjustments, the better, but we do show both just to give the market an understanding of what our statutory and adjusted results are. And any adjustments, we'll be very transparent about what those adjustments are. We certainly don't just do adjusted earnings, as I agree with you. That would be inappropriate. Yes. Plant-based, if you take one step back, we're actually talking about alternative protein. And agree with you 100%, there's a number of opportunities in alternative protein. Soya was the first. Plant-based is one. And then following that is the lab protein. So ultimately, we are focusing very much in plant-based. And we have Oumph, Fry's. So we have soya. And the LIVEKINDLY IP sits very much in plant-based, the yellow pea. I have tasted chicken that's from a yellow pea. And you can't tell at all the difference or see the difference. You can with soya, obviously. So at the moment, our efforts and energies will be focused on plant-based. But yes, if you look at the big category, you've got to assess alternative protein, and that doesn't mean in the future, we wouldn't look at other areas within the alternative protein sector. Thank you.

Thank you, Miles. We're going to move across to our Q&A tab, where we've got a few questions loading here. The first one being -- and I'm going to read the question asked. You spoke about future growth, Baking plan, how many tons are you adding? And what does this mean for competition in the province? I'm going to hand over to Paul Cruickshank.

Thanks, [ Karen ]. So we've added the extra mile in the Polokwane bakery and, I'm going to say, reorganized our depot plans so that we put the depots in appropriate areas based on the location of that investment. It was -- there were a number of reasons why Polokwane was chosen, which doesn't necessarily mean all the growth will come in that area. And we have already opened some depots in the eastern part of Free State and in some parts of KZN. And we'll continue to use our existing footprint to move bread into those areas and, as I mentioned, targeting places or reach that Sunbake doesn't currently play in. So that's what it is in terms of the Baking plan.

Thank you, Paul. Moving across to another question. Could you also please comment on the sustainability of the recovery in the Sugar business?

So I think this contextualizes F '21, and Miles mentioned upfront it was a record result for Sugar. So we will continue [ actually ] to focus on what we can control. I mentioned crushing our crop is absolutely critical in Sugar. You've got to get the basics right. We'll obviously extract what we can from our cane, and we'll continue our cost reduction or cost control program. One of the big impacts in Sugar in the F '21 year was the swing -- or improved local demand, so a swing between export sales and local. And we have continued to see strong demand in the early months of F '22. So I haven't seen a fall off yet in terms of demand. So if it stays like that, that will help the F '22 results. Industry redistribution, based on production share, is obviously critical. The full extent of that and the impact of the unrest in KZN, at this stage, is unknown, and we're busy working through that in the industry. And over the next couple of months, we'll have more clarity as to the impact of the [ asset in ] KZN and the ability of the KZN-based [ management ] to crush their crop and also any crop destruction that did take place. So we don't quite have those numbers of impacts yet. Our sugar crop is expected to be down on the prior year. There were a number of factors which affected that. So whilst we see F '22 still being a good Sugar performance, it is unlikely to meet the performance of F '21 and get to a more normalized result for what we would call a commodity category.

Thank you, Paul. And we've got 2 questions from [ Curtis Salliers ] from All Weather Capital. The first one, Vector Logistics team is very well placed to continue to gain market share. Is this a function of weak competitors, superior service by Vector or something else? Handing over to Chris Creed.

Thanks, [ Curtis ]. If you remember, there was a consolidation in the market, and Vector acquired the Imperial business in December 2019 -- sorry, the cold logistics business. So there was a consolidation in the market. We did gain market share. And yes, we would certainly like to think our reputation is for good service levels. So that's something we do strive for.

Thank you, Chris. The second question from [ Curtis ] is, secondly on your Baking division, can you please remind us on your hedging practices and when the hedges will roll over?

Yes. So we take a different view on Baking, depending on what we see at the time. So we are well positioned currently heading into the last quarter of the calendar year 2021. And we obviously don't publish that, but yes, we do -- we apply our own hedging practices and not necessarily just a standard practice based on what we see as the market read at any point in time. But we're comfortable with where we're positioned for now despite the fact in the last few weeks, the wheat price has moved up quite significantly.

Thanks, Paul. Our next question, does bulking up the FMCG business includes the Spreads business? Or are you looking at outside opportunities? Really needs to be substantial. Otherwise, you risk being a small medium cap with a small free-float.

Yes, a good question, and I agree with your sentiment, and that's why we say we're actively pursuing opportunities to bulk up our FMCG business. And at this point, I can't comment on which categories or which companies, but we are actively looking and take your point that we need to ensure that we have sufficient scale within FMCG. Thank you.

Thank you, Miles. Our next question, good set of results, well done. Can you please explain under sales in Sugar volumes as if you're explaining it to a 6-year-old?

I'm going to do my best. That's always a tricky question, and we do spend a lot of time on this discussion. But essentially, this is to balance off the industry volume. And as you know, as we've said, the volume, the revenue generated through Sugar is distributed based on production share. So under sales will be -- if your competitors have sold more volume than you have in the local market, there is a rebalancing exercise which is done, and then that portion of the revenue is distributed appropriately between the different producers.