RFG Holdings Limited (RFG) Earnings Call Transcript & Summary

Good morning, everybody. Bruce Henderson here, along with my colleague, Tiaan. Thank you for joining us for this presentation of our final results for the year 2020. As usual, I'll kick off with an overall overview of the year and then hand over to Tiaan for the financial analysis, and then I will be back with further information on the operational performance. Our business delivered a resilient performance in the abnormal trading environment of H2. There was a strong demand for Long Life products other than fruit juice during the lockdown. But COVID-19 results -- COVID-19 resulted in lower sales and profitability in fruit juice and pies and limited our shipments to China. The international recovery in H2 was driven by currency depreciation and strong export volume growth from July onwards, offsetting the deficit from H1. However, this performance was negatively impacted by a foreign exchange loss of ZAR 54.6 million during the year and the significantly lower sales to China. It is pleasing to report strong cash generation and reduced debt levels. Tiaan?

Good morning, everyone. Yes, for the year, group turnover grew by 8.3% to ZAR 5.9 billion, with regional turnover growing by 6.6% and international turnover by 15.5%. Improved efficiencies, that rise through direct manufacturing costs as a percentage of revenue, reducing to 65.5% versus 66.7% in 2019. The EBITDA increased by 10.3%, with the EBITDA margin improving to 10.7%. Operating margin was lower at 6.7% versus 7.2% in 2019, and this margin includes impairment losses of ZAR 10 million in 2020 and ZAR 3 million the prior year. Both the regional and international margins were down by 40 basis points. In the case of the regional segment, that was at -- margin was adversely impacted by a change in sales mix, lower juice and pie volumes during the lockdown, COVID-19-related costs and restructuring costs associated with the closing of the Pietermaritzburg operation. The international margins benefited from 14.8% depreciation of the rand against our basket of currencies, but this was negated by the ZAR 55 million ForEx loss and adverse sales mix, where product that was reduced for the Chinese market had to be sold elsewhere at significantly lower margins. Operating profits and interest paid both increased by ZAR 12.1 million following the adoption of IFRS 16 in the current -- in the 2020 financial year. Interest paid, excluding the IFRS 16 charge, reduced by 29.1%. And on the working capital side, the increase was contained to 2.6% for the year. That contributed to cash generated from operations increasing by 21.6%. Net debt, excluding lease liabilities, reduced by ZAR 238 million. And the debt-to-equity margin improved to 47% from -- sorry, from 47% to 43%. Excluding the lease liabilities, the ratio improved to 35.5%. Diluted headline earnings per share increased by 3.1% to ZAR 0.864 per share. And based on that, the Board declared a dividend of ZAR 0.288 per share, which represents a 3.2% increase on last year's dividend, and it's consistent with the 3x cover policy we've adapted in the past. To the income statement, just to point out some points here. Other operating costs 22% increase. The 2020 number includes the ZAR 55 million foreign exchange loss. That explains a big portion of that increase. Other costs included there, which increased by more than inflation, includes insurance and marketing-related costs. Other income reduced from ZAR 42 million to ZAR 13 million, but also included in the 2019 number is the ZAR 24 million gain on foreign exchange that was reported for last year. Impairment losses, ZAR 10 million relates to Pietermaritzburg restructuring. So the above gives rise to profit before tax of ZAR 297 million or a 7.9% year-on-year increase. But this year, we had tax expense, which was close to the corporate rate at 27.2% versus 21.7% last year, so that negated almost all of the gains on the profit before tax line. So profit after tax amounting to ZAR 216 million for the year, which is basically slightly up from the prior year by 0.3%. Diluted headline earnings per share amounts to ZAR 0.864 versus ZAR 0.838 per share the prior year. No change in the number of shares in issue. Turnover grew at a compounded rate of 9.1% since 2016 and the drivers of turnover growth for the year are, basically, price inflation of 4.8%, foreign expense 3.2% and 0.5% through the RCL snacking business acquisition which came through in the first half of this year and then it was -- and it's been negated by negative 0.2% volume growth, which again is largely driven by the retail segments due to the impact of the lockdown on certain parts of the business. The contribution -- segmental contribution to group turnover, as you can see a sharp decline in Fresh -- the contribution by Fresh, again, due to lockdown, it's down at -- the impact of lockdown on that segment, down to 29% from 32% the prior year. An increase in the regional Long Life to 50% and also a small increase of 21% on the international side. Operating profit. This is excluding impairment losses. This year, the number is ZAR 402 million versus ZAR 395 million last year, and the margin is 6.9% versus 7.3% calculated on net basis. The national revenue, not a significant change. U.S. dollar still the biggest at 61%. And then some things in roundabout because it's swing from euro to pound during the year. We maintained our foreign exchange hedging policy, but in the business the contributions by the natural hedge has increased due to the price of the imported content of the fruit juice packaging and cans now being directly linked to currency movements. So that reduces the need for FECs in future. Like we said, in total, the rand depreciated by 14.8% against our basket of currencies, and we mentioned the 3 biggest currencies there, 14.8% against the U.S. dollar, pound 15.5% depreciation and euro 13%. On the balance sheet, just to point out, right-of-use assets, that's under -- which is under leases ZAR 169 million. Inventory year-on-year increase of only 1.5% and account receivable 5.7% versus an 8.3% increase in turnover. On the equities and liability side of the balance sheet, again, long-term lease liabilities ZAR 155 million. Added to that, the current portion of that ZAR 42 million gives you a total of ZAR 197 million. So that's all to point out here. Working capital returns. Net working capital as a percentage of turnover down at 24.9% this year versus 26.3% the prior year. Also, an improvement in net working capital days from 119 to 116, driven largely by a reduction in inventory, partially negated by an increase in debtors and the reduction in creditor days. Returns down to the prior year. Return on equity at 8.6%, on assets the same as last year at 4.6% and on capital invested at 10.6% versus 10.9% the prior year. Cash management. Operating cash flows amount to ZAR 638 million. Net changes in working capital was increased by ZAR 36 million, ZAR 104 million went towards interest and income tax payments. CapEx amounted ZAR 160 million, ZAR 73 million paid by way of dividends and loan repayments that expanded ZAR 234 million and ZAR 27 million repayment of lease liabilities, leaving us with ZAR 4 million increase in cash for the year. Bank debt profile. This is now following the refinancing of the ZAR 450 million bullet payment that was originally due in the 2021 financial year. So now more evenly spread repayment. So the existing debt will all be repaid by the end of the 2025 financial year. Similarly, graph showing the lease debt profile, equal payments more or less, around ZAR 30 million, ZAR 31 million per annum. And existing lease liabilities will also be repaid by the end of the 2026 financial year. The next slide is the total debt profile. It's just the 2 added together. And then debt ratios. Net debt amounted to ZAR 1.124 billion at the end of the financial year, ZAR 40 million lower than the prior year. And this number includes bank overdrafts, net bank overdraft. Net debt to EBITDA 1.8x versus 2.1 the prior year. In terms of working capital facilities, following the lockdown, we switched some of our long-term facilities to short-term to have more headroom available should we need it. So at the moment, this 88% headroom available on the debt. And similarly on long-term loan facilities, we've got 25% headroom available. That's made up against a much smaller facility, should the need arrive we can switch it around again. Cost of debt, basically, the same as last year except that some of the refinancing of the bullet loan was done at a slightly more expensive cost of debt. Over to you, Bruce.

Thank you very much, Tiaan. And looking at the segmental contributions, we have what we believe to be a nicely balanced business with good stability in the segmental make up 50% in regional and regional Long Life, 29% in regional Fresh and 21% international. Starting with the trading performance on regional. Revenue was up 6.6% for the year. And that represents a significant slowdown in the second half, bearing in mind that we were in double digits after H1. Long Life continued to show good growth at 9.6% for the full year. And Fresh Foods disappointing 1.7%, primarily growth negated due to a loss of pie sales when we were under a hard lockdown. Then an improvement in operating profit and operating profit margin coming down by 40 bps. The components of turnover growth. Volume was 0.6% up; price/mix, 6.6%; and acquisitive growth at 0.6%. The volumes were adversely impacted by a slowdown -- a dramatic slowdown in juice sales during lockdown and pies. Pleasing to have seen a strong and rapid recovery in pies, but a slower recovery in juice. Just on the margin deterioration. The operating profit for 2020 is net of a once-off ZAR 7 million cost of closing the Pietermaritzburg pie operation, once-off of direct COVID costs in terms of extra PPE, transport, et cetera, for staff of approximate ZAR 5 million. And then really a significant impact in terms of the reduced margin coming from lost pie sales. So the profitability of pies year-on-year during that lockdown period deteriorated by some ZAR 30 million and juice by some ZAR 18 million. So we would have seen significantly -- a significantly better margin. But of course, on the other hand, we did benefit from very strong canned food sales during the lockdown, particularly canned veg and meat. We saw a strong demand of -- for canned foods during the lockdown, particularly in the initial stages canned veg, meat and fruit. We enjoyed an exceptionally good growth in dry fruits, supported by the relaunch of the Hinds Spices range in the first half. On the downside, we saw a sharp decline in juice volumes from the start of the lockdown. Juice sales started to recover in September and October, but we're still down on prior year by some 15% to 20%, and that's really the out-of-home portion of the market, where the foodservice channel is down -- was down during the lockdown and remains down year-on-year. Sales into the rest of Africa was particularly strong with growth of 18.8%, and this represented 10.5% of total regional sales. Fresh Foods. Ready meals performed really well throughout the lockdown. Pies declined sharply in Q3 with the government restrictions on the sale of hot food and, of course, with the reduced offtake from the convenience channel. Pie showed a very pleasing turnaround, quite rapidly, after the lifting of the restrictions. In August, we rationalized the KZN pie manufacturing operations, where we had facilities in both Pinetown and Pietermaritzburg, and we closed the Maritzburg operation and consolidated everything into Pinetown. Looking at market shares. We've continued to perform well, even in these difficult circumstances. And we are of the view that with a somewhat gloomy outlook for the consumer, that we will be able to benefit in appealing to new consumers and getting customers to try our products. And invariably, once we've achieved this, that customers stick and we can grow market share. Very pleasing performance from canned fruit, strong growth. Canned vegetables, the overall category saw very good growth, and our market share lifted to 21%, which is the highest we have been, and we still see further upside in this very large category. Canned meals, retaining our strong #1 position. Long Life fruit juices, further growth of 23%, which is very pleasing. Pickles, we remain in the #1 position. Then on the next slide, we look at shares from a brand's position, not counting private label. We retain our #2 positions in jams and canned fruit; canned pinnacle #1 position; canned vegetables as a brand growing to 18%; canned tomato, where we continue to perform really well, 33% market share; and corned meats, we remain a strong #1. Fruit juices as a brand growing to 18%, #2 position. Infant meals, baby food, really good growth from 8% last year to 11% now in -- for the 12 months to September 2020. And the pouch format continues to take share from jar and we benefit from that movement. Salads and pickles as a brand in #3 position. And gravies, growing our market share, and we believe we can reach a #1 position in that category. Moving on then to international. Revenue for the year grew by 15.5%, which was entirely on the back of the rand's depreciation. Operating profit was flat, and that obviously includes a number of swings and roundabouts. Volumes were up 1.1% year-on-year. Price/mix slightly down at 0.4%. And then the impact of ForEx, 14.8%. Unfortunately, we suffered foreign exchange losses of ZAR 55 million versus net gains of ZAR 24 million in 2019, and that represents an addition -- what was potentially an addition of 4.4% operating margin in this segment. Volume growth in the second half was strong at 12.6%, which offset the 11.5% decline in the first half, giving rise to the 1.1% gain over the year. Some shipments to destined for China, we were able to sell it to other Asian markets, which are equally profitable, but a big chunk of that product was sold into the U.S. at significantly lower margins. The impact of that opportunity cost there approximately ZAR 25 million. We were negatively impacted by port congestion during the lockdown, but that eased from July. And we had a very strong performance of our fruit snacks, the fruit and plastic cups into the U.S., and that will continue to show growth into 2021. Looking at the new product development. We continue to innovate in the juice category and launch range extensions. Squish range growing nicely, range extensions there, particularly in vegetables and yogurt mixes, where traditionally we've been very strong in fruit. Pakco curry product extensions, very importantly, the Hinds Spice launch, which was late in the first half, early in the second half, some packaging changes as well during the course of the year following there is challenges from competitors. And very pleased to say that we've gained quick traction in this massive category. In fact, showing 4.5% market share on a short-term basis towards the end of the year. So we're excited about this launch. We started primarily in the bottom end and wholesale, but it's performing very well in retail, too. On the Fresh Food side, the trend toward plant-based proteins, both on the dairy side and meat substitutes continues to gain traction, and we're well positioned in terms of supplying our key customer with this product range. Looking at CapEx in the past year. We did review all CapEx spend as we started experiencing the COVID pandemic. It was due to be a year of less CapEx in any event, but we tightened up a little as well. Projects that continued. We have -- we commenced the installation of a new fruit juice line, so some of that spend fell into 2020 and some will fall into 2021, where we have some new customers coming on board from a private label perspective. So we needed new capacity. Obviously, with the decline, that is not as urgent, but the CapEx is underway, and we're confident that we will see a full recovery and we need this new capacity to take on the new customer. We've had ongoing upgrades and replacement of equipment in the fruit products, vegetables and pie manufacturing facilities. We've installed -- we've made significant investment into additional fire protection at 3 sites. This includes dedicated water supply systems and sprinkler systems in factories, largely as a result of pressure from insurance companies. And we have spent on our ongoing development of additional pineapple plantations in Eswatini. So a significant decline in CapEx after our big program in 2017 and 2019, a little bit of an uptick in 2021 plant, some of which will come about as a result of a further consolidation of our pie operations, where we are looking to close all Natal-based operations and consolidate everything in Gauteng. So looking forward at 2021, I've mentioned the juice -- the additional juice line, the Wellington factory. We're also building a new warehouse at that juice factory. It continues to be a product category of strategic importance to us. We will need to install an additional line in the baby food factory as we continue to grow and take market share. And then we will be upgrading our bakery facility in Linbro Park to accommodate the KZN pie volumes and further expansion in Eswatini on the pineapple plantations. Finally then, the outlook for the balance of 2021. We are in the process of rationalizing the Natal manufacturing operations. We did have imposed upon us at the time of the acquisition a condition by the Competition Commission that we could not rationalize for a period of 3 years. That period expired in April 2020, and that coincided with that dramatic downturn in pie demand. We responded by initially closing the Maritzburg operations, but we're of the view that we will be far more efficient if we manufacture all pies and pastry products across our 2 Gauteng facilities: 1 in Aeroton and 1 in Linbro Park, and we are proceeding with consultations, et cetera, in that regard. And we will also outsource the distribution of pies in KZN, where we have been doing that internally, and we'll take that to a third-party distributor. This will -- we will incur once-off costs through this restructure in the first half, but we will generate significant savings going forward. We are looking to maintain our sales momentum into the rest of Africa and a good start in the new year. Obviously, we are extremely wary of the impact and potential -- and future potential impact of the ongoing pandemic, not just on disruption of operations and also the impact that this has had on our economy and particularly the consumers. But we are, we believe, in a strong position, and we are confident that we will be able to withstand any further restrictions that may be imposed on the economy. Our broad range of product categories has really provided us resilience and we're comfortable that this will continue to be the case in 2021. We're seeing an ongoing recovery of fruit juice and have experienced a full recovery of the pie categories, and that should certainly help us in 2021. We continue to focus on organic growth and improving our margins and growing brand shares across our core categories. And we will evaluate strategic acquisition opportunities that are aligned to our existing product categories. That brings to an end of our presentation, and we're happy to take questions.

Bruce, questions from the webcast. The first one comes from Paul Steegers from Bank of America. Can you please give an outlook for volume growth across your divisions for the coming year and the outlook for operating margins?

Yes. Paul, well, volume growth has been elusive in this last half. We've seen certain categories have been very strong, such as dry foods and canned products. But as the market has normalized, so that any artificial lift that we've seen in those categories has come off, but then there's been the recovery in juice and pies. So we anticipate that volume growth will be muted in the next 12 months and probably low-single digits. These, we expect to come from further growth into Africa and new categories where we still have low market shares, so from market share gains. With regards to margin, we -- on a normalized basis, where we strip out the impact of the lockdown on pies and juices and also the uplift we saw in canned veg, we would have seen good gains on margins instead of a deterioration. So we are anticipating a recovery in margins. Unfortunately, in the first half, that's likely to be negated by once-off costs from the restructure in KZN. But in the second half, we anticipate a strong recovery, and again, on a comparative basis with second half 2020, once looking at a low base. So we are expecting a margin recovery, but we don't expect that to go all the way to our 10% guidance, which we feel confident we would have been at had it not been for the setback we experienced in 2020, but we'll go some way to closing that gap.

Bruce, then there's a follow-up question from Paul. Please, can you highlight what your gross margin was in FY 2020? And what the key impacts were during the year?

Tiaan, do you want to take that?

We don't disclose that anymore, but you can, if you go to our [indiscernible] find the detail there. I can't recall the number offhand, but there was an improvement. If you look at it at a high level, our gross margins improved across the business. But obviously, the ZAR 55 million loss from -- this is negated all of that in the International segment. And then there were once-off costs that also negated a large portion of it in the regional segment.

Thanks, Tiaan. Then the question from Peter Cromberge from Mergermarket. How does RFG plan to fund its ZAR 250 million CapEx for 2021? And what bolt-on deals is RFG interested in?

The funding will -- our preference by far is to fund it through cash generated in the business, combined with new debt that we will be looking to raise. And then on the second part of the question was -- Graeme, which...

Bolt-on acquisitions.

Bolt-on acquisitions.

Yes. Very much in line with our core categories, as guided in the presentation. So it's not that we would be totally averse to an acquisition, which would take us into a new category, but that would really need to be quite chunky and an attractive product category for us. Other than that and where we would be more proactive, it would be looking to expand categories that we are already in, particularly some of the newer categories where we have relatively lower market shares.

Another question from Prinolan Pillay of ABSA. What are the one-off costs expected from the Natal closure? And what is the expected annual savings going forward? And from when do you expect to realize these?

Yes. We're in the process of undergoing that change right now. So it's somewhat of a moving target. The one-off costs in the range, there will be some asset write-downs in the closure, which will have -- which will be a noncash effect, but we have 4 properties in -- we have 2 properties in Pietermaritzburg, one of which was impaired when we closed that, and we have 2 properties in Pinetown. Now it's not a great time to be selling a property, and we certainly are not wanting to hold on and incur security costs, et cetera. So we anticipate that we will probably take an impairment of those certain bits of plant and equipment. So probably an asset write-down in the tune of ZAR 20 million. And then there could be once-off costs in terms of achieving the restructure, retrenchment costs, et cetera, of almost the same. We think that we should be able to -- that should be paid back during the course of the year, so in other words, potential savings of that amount in the year. However, we will be incurring the costs in H1 and seeing the benefits really over from Q3. So there will be a negative impact in the financial year. But it certainly does leave us with a very, very well-structured efficient pie and bakery business.

Bruce, then there's a question from Boipelo Rabothata from Investec Securities. Would it be possible to please give some granularity on pies, juice in China on a month-to-month basis regarding the recovery progression?

Yes. Well, it was in April -- yes, so March, we saw a little bit of uplift towards just anticipation of lockdown. And then April, May, June, so all in Q3. And yes, so April, May, June is the worst of it. Pies started recovering in July -- late July, was correct. And as I said, over that period, we had an adverse impact year-on-year of a negative ZAR 30 million on operating profit within the pie business. Now that's not taking any growth. Bear in mind that Fresh Foods was -- and pies was showing double-digit growth in H1. But just from a like-for-like point of view, there was a deterioration in operating profit of ZAR 30 million in pies. Started recovering late July and then probably ran at about 10% to 15% down on prior year, more like 10% through until about September. Juice, good boost just before lockdown in March, which would have been reflected in H1 results. And then about a 50% decline into April, and that continued for quite some time. I would say by August, we would have been showing maybe 40% down. September was a much better month, where we were probably 20% down. And now we're running at about 15% to 20% down on juice. And pies is pretty much back to normal. I hope that answers the question, Boipelo.

And a follow-up from Boipelo. Can you speak to the market share losses for canned meat?

Canned meat, we benefited last year enormously when our competitor was out of the market altogether. And so there has been some recovery. Our competitor, the meat division of target brands, has been back in the market. So they regained some of their lost market share. But net-net, we remain in a stronger position than prior to that problem.

And then Bruce, there's a question from Tinashe Kambadza from Afrifocus Securities also on market share. Despite maintaining #1 positions in canned meats and meals, and also #1 positions in canned pineapple and corned meat in your branches, it looks like there was some market share lost. Please shed some light on this.

On the canned meat, I think I would have answered that already. And then on pineapple, bear in mind that we are -- we produce brand and private label, and we are the only supplier of canned pineapple in the country. So any market share loss would be a movement from brand to private label over the period. And that does tend to fluctuate somewhat year-on-year depending on promotional activity, product innovation, et cetera. But it's not a market share loss, it's more of a brand share loss.

Then we have a question from [indiscernible] of Merchants Investment Managers. Congratulations on the growth despite many headwinds. How much is foodservice as a percentage of group sales? And have you been able to start sending shipments to China again?