RFG Holdings Limited (RFG) Earnings Call Transcript & Summary

Good morning, everybody, and a warm welcome from Sunny Western Cape on the interim results presentation for the 6 months, which ended the 2nd of April 2023. Our presentation outline will follow the following sequence. We will first do a review of the 6 months, whereafter Tiaan will take us through the financial performance. Myself will then cover the trading performance. Some comments on the regional and the international segment as well as speak a bit about capital investment and then look at a bit -- make a couple of comments on the outlook and also fill some questions. Just before I start with the review of the 6 months numbers and some comments I would like to speak about. In our trading update, which covered the 5 months until February 2023, we only dealt with revenue and volumes and not profitability per se. We had a very strong March as we mention in our SENS announcements this morning, in both the regional and international segment, which boosted our performance for the 6 months. International shipments are usually strong in March as we started to ship canned peaches from the new peach crop, and our regional business also performed well in large as our customers took in stock for Easter. Our diversified business as one of our cornerstone strategic pillars really supported the overall business performance. Then looking at the review of the 6 months, a resilient regional and international sales growth, where sales growth was driven mainly by price inflation. I made mention of the strong trading performance in March in a highly competitive trading environment. The consumer still stays constrained with volume pressures and volume decline experienced in certain product categories. The ongoing impact of load shedding had a big impact on our business, with investment in backup generators over the past 7 years that did put us in good stead to be able to manage that efficiently. ZAR 37.8 million was spent in diesel costs for the first 6 months, but I must say I'm extremely proud of our people that really did exceptionally well in the very challenging manufacturing environment. I talk about operationally fit people, and I really think that our good people did extremely well in the past 6 months managing this difficulty. With the better performance, the recovery in profitability was extremely pleasing, with our regional operating profit margin increased by 260 basis points, where the recovery of high input costs in the regional markets was achieved. We had a significant turnaround in our pie category and our international operating margin increased by 770 basis points. Our good export pricing was supported by the weak rand. Our strategy stays consistent with execution being adapted to market conditions and changing market dynamics led by our 5 strategic pillars to ensure sustainable long-term growth. If we then have a look at our medium-term targets that we've set ourselves, the 3 specific metrics that we focus on, being revenue growth, operating profit margin and a return on equity. If we look at our revenue growth target of 10.2%, we managed to achieve that in the first half at 10.2%. Our operating margin goal, which is set at 10%, we managed to increase it to 9.2% from the prior year's 7%. So I think also a pleasing improvement. And from a return on equity perspective, where we strive to get to at plus 2%, which currently adds up to about 16%, where we managed to achieve 14.1%. Also very pleasing that we managed to be act and also making progress with regards to this target. Thank you. Tiaan, if you can just take us through the financial performance.

Good morning, everyone. Revenue for the 6 months grew by 10.2% to ZAR 3.8 billion. That was driven by 9.5% growth in the regional revenue and it's 13.2% in international revenue. The current period included 26 trading weeks versus 27 weeks in the prior period. We grew operating profit, increased by 43.2% to ZAR 346 million on the back of the operating margin improvement of 220 basis points to 9.2% for the period. The current period didn't include any extraordinary events while in the prior year, there was one-off restructuring cost for the -- today acquisition included in the results, amounting to ZAR 23.6 million as well as insurance claim that was paid out for business interruption during the COVID lockdown of ZAR 43.4 million. Regional operating profit increased by 54.2% to ZAR 273 million for the period. Again, the operating margin expanded by 260 basis points to 8.9%, and it was largely driven by cost recoveries in most of the major categories, most notably through juice, ready meals, dry foods, meat and pies. The international operating profit increased by ZAR 52 million to ZAR 73 million. And again, the margin improved by 700 basis points to 10.4%. The large drivers of this improvement was firm international pricing, which out during this period, as well as the tailwinds from a weaker rand against the basket of trading currencies. EBITDA increased by 34.3%, while the margin improved by 230 basis points to 12.8%. Headline earnings increased by 37% to ZAR 217 million, and Diluted Headline earnings per share were 37.5% higher at ZAR 82.9 cents per share. In terms of the balance sheet structure, the net debt to EBIT -- net debt-to-equity ratio, rather, was improved from 52.3% in the prior year to the current 46.7%. During the period, long-term loans of ZAR 189 million was repaid in the prior period that amounted to ZAR 39 million. And net debt was ZAR 19 million lower at [indiscernible] at the end of March 2023. Capital expenditure for the period amounted to ZAR 144 million, which was ZAR 3 million down on the prior year. Group revenues grew by compounded annual growth rate of 9% since the first half of 2019. Importantly, Pieter mentioned it, volumes at the group level were down by 8.5% during this period. Price inflation amounted to 14.8%, It was the largest driver of revenue growth. The tables from the currency at the group level contributed 2.7% to the revenue growth, while acquisitive growth, first 4 months of the current period relating to Today's acquisition, contributed 2% to revenue growth. Comparison of revenue growth between the current and the prior period, again, it's clear there that the change in fortunes as far as volume growth is concerned. Last year, the business achieved 12.5% volume growth. This year, it turned around to be 8.5% negative volume growth. But again, the price inflation at 14.8% more than compensated for that. In the prior period, price inflation amounted to 10.3%. And I think at this point, it is worth noting that we did, all along during the course of the prior financial year, we mentioned that we were starting to recover cost inflation from the market. Eventually, that started to come through in this half, together with continued inflation, albeit at lower levels, and that gave rise to the relatively high price inflation this year compared to the prior year. Normalized operating profit. Over the past 4 years, the compounded annual growth rate amounts to 18.9%. And important to note, for the recent 5 years, this year's margin of 9.2% is by far the best over the 5-year comparison. Normalized operating profit, one can see that the international segment started to contribute from last year, ZAR 21 million to operating profit in the prior year, and ZAR 73 million in the current calendar year -- or financial year, rather. Compared to the prior years, we have made no contribution 0 in 2020, and loss of ZAR 44 million. At the time, that was largely driven by the revaluation loss on foreign exchange contracts. International revenue, importantly, the mix stayed relatively the same. U.S. dollars is still the largest currency in which the business trades. A swing between GBP and EUR, if you want, but still 65% of foreign revenue is U.S. dollar-denominated. And it happened that -- so happened that the rand weakened the most against the U.S. dollar during the current period. Our average U.S. dollar-rand exchange rate for the period was [ ZAR 17.5 ] compared to ZAR 15.20 the prior year, and that change -- combined with the changes in the other currencies, added ZAR 92 million to international revenue. In terms of working capital, the turnover slightly increased by 190 basis points. It's largely inflation driven. In terms of working capital days, it's exactly the same as the prior year at the net 135 days. Free cash flow, those of you that are familiar with the business, in the first half of our financial year it's always a situation where cash is utilized, [ no ] free cash flow, ZAR 207 million in the current year versus ZAR 191 million prior year. The largest contributor to the increase is CapEx, which increased by, say, ZAR 2 million year-on-year. Cash management. During the period, the business required ZAR 575 million to fund its operations, and that was funded from existing working capital facilities. During the second half of the year, it's expected that most of the ZAR 575 million will be repaid. In terms of the long-term debt profile, pretty much the same as what was reported at year-end the prior year. Current debt profile is that it will basically all be paid down by the end or shortly after the end of the 2027 financial year. Back to you, Pieter.

Thank you very much, Tiaan. Looking at our specific segments that we operate within. We can clearly see that our well-diversified business, where we compete in many different categories, has put us in a very good strategic position with regards to selling these different products to different markets and also to different consumers. After specifically the difficult COVID period, we again saw the importance of having a diversified product portfolio. If you look at our segmental revenue, as I made mention, 19% of our revenue is linked to our international business, our regional business being the rest of it, split between Long Life and Fresh Foods, which are very consistent to the prior year. If you look at our diversified brand portfolio that I've made mentioned, the acquisition that we've made and commented on specifically the Today business is well integrated. And if we look at the pie and pastry category, it's a good category for us and the category where we're doing extremely well, and supports our strategy of having a diversified brand portfolio. Private label stays a very important part of our business and is of high strategic importance. We've increased our group private label contribution to 51% against the prior year of 50%. And the reason for that is the higher growth in the international revenue relative to regional. As you all know, our international business is mostly close to 100% private label. What is very important for our customers in that specific category is the high-quality, specifically features that we grow in the South African market. And that obviously ensures that we will keep those -- that business in the market. We also do value-added fruit cups, specifically into the Americas, which obviously support that strategy. If we then look at load shedding, the specific importance of this slide is to highlight, again, the impact that load shedding has had on many areas of our business. Sometimes people think about load shedding just with regards to electricity, but I think important to manage the whole value chain within the constraints of load shedding. We also need to work with your customers and your suppliers, which we see as business partners. But I think we're well equip to handle higher stages of load shedding, and I've made some comments on specifically what we've done with our investment. I think the fact that we started with the investment 7 years ago, really supported us in these difficult times. From a cost impact perspective, obviously, ZAR 2 million average weekly diesel cost for operating these generators. But it doesn't end there, we've got traditional generator servicing, maintenance and part. And also, we invested ZAR 16 million on new and replacement generators in 2023. We will also do further investments in 2024 to ensure that we're proactive in this regard. Very important part also is the whole renewable energy solutions that we're focusing on, where we've got solar power used to supplement electricity supplies, where we've got several installations already operating. A further -- a couple of them planned and then also some new plan for 2024, and they're all facilitated through PPA, power purchase agreement, and not funded through capital investment. And there's just a couple of [ pics ] on some solar installations. If I then move on to the regional performance. As mentioned previously, our strategy obviously was to recover the price inflation. Very important in this category is to ensure that we price our products with a cleaner market. I think we did a good job to get the balance right between price volume and margin, focusing also heavily on operational efficiencies, which within the other SKU rationalizations; logistic efficiencies, like backhauling; procurement discussions with suppliers to ensure that we get just-in-time supply; obviously, taken also by using our group synergies that's available to procure at better pricing. So if you look at our revenue increased by 9.5%. In total, Long Life Foods, 8.2%, Fresh Foods 11.8%, but the most important one for us is the excellent progress that we made on our operating profit margin by increasing it from 6.3% to 8.9%, moving very close to our target of 10%. Main drivers of revenue, as Tiaan has also mentioned, decline in volumes, but the price inflation was the reason for the increase in revenue. Look at some of the specific categories that we operate within, you would recall that we continue to focus on -- specifically on fruit juice and our dry goods business, spices business as growth engines for our business. Excellent revenue growth through market share gains were achieved in the fruit juice category, and it was the main driver of the revenue growth in Long Life Foods. I think also very important for us is the integrated pulps and purees business, where we manufacture the pulps and purees for our juice plant and also for our baby food plant. And that vertical integration, the strategy around that, really worked exceptionally well in the COVID period, where we had consistent supply of raw materials with a limited interruption and also, currently, where we can put a huge lid on costs and ensure that we've got a competitive advantage, specifically supported by that integrated pulps and purees business of ours. Canned fruit and vegetables still stays a challenging category for us, with high raw material and packaging costs. And we clearly need relief on cost as packaging, specifically, becomes extremely expensive in this category. Obviously, also a huge pressure on the raw materials with climate change, not only in South Africa but internationally, where we see indifferent weather patterns. So we continue to see some pressure on volumes in canned goods and also some weak consumer demand, as well as some competitor activity. With regards to canned meat, I think a good improvement on our profitability from recovery of high meat input costs and stronger sales growth, and we've invested in new equipment, which will be operational in 2024. Herbs and spices, we continue to make good progress there. Good market share growth, and it will be -- and we continue to drive revenue growth within that category. If you then look at ready meals, a resilient performance in the constrained consumer environment. But I think most important is the resilient customer base that we've got with sustained profitability. One of our star performance, our pie category, where we had strong volume and margin recovery, and we foresee that there is some good opportunity for us with some good growth prospects available. Turnaround supported by a successful integration of the Today business, and where we store Today margin in line with the rest of the pie. With regards to Africa, it's a challenging environment currently, specifically due to the cost to trade there. And the specific cost I would like to made mention is distribution costs, which put pressure on profitability. Our sales of our Long Life Foods into Africa grew by 6.7% and it accounts currently for 12.5% of regional Long Life sales. But we still see it as a good growth opportunity, but we need to ensure that it's a profitable -- our profitability needs to improve. If you then look at market shares, I think most important to say that we've maintained our market share positions in all the categories, although we struggled with negative volume growth. But I think if you look at the last 3 months, the latest information that we've got that we're doing better than the market, although we also had some operational challenges due to raw and packaging supply, specifically related to load shedding. But I think important that we maintained our market share, and we haven't seen any material changes there. If you then look at the brand shares, I think, obviously, important for us there is to continue to focus on our juices and herbs and spices category, where we continue to see some share. Obviously, there's a lot of new competitors also entering in different categories. But I think our competitive advantage is that we really execute well in trade, and obviously, with the juice and herbs and spice increases in brand share. From a product innovation perspective, in a constrained consumer environment, we need to be incredibly strategic with regards to launching new products. But it still continues to be a very important part of our business and will drive some of our future growth. You see strong extensions in the Hinds range, some Today packaging upgrade, launching of some new products under the Rhodes brand and also some new packaging formats. From a private label perspective, also some new products that we've launched for Woolworths, for Shoprite, as well as for Pick n Pay where we have big market shares. If I look at our International segment, I think a really good performance. We're moving -- getting to our operating profit margin target of the 10.4%, exceeding that by 0.4%. I think very important strategically going forward, we still feel extremely confident that we can make that 10% operating margin through the cycle. We will continue to diversify our revenue into different market segments. Our pricing is obviously critical in that market. We have seen also increase in cost in the international market, which gives us good confidence that our pricing will stay firm. Obviously, we need to, in this business, ensure that we've got -- we pack the optimal volumes and to ensure that we've got a continued focus on our working capital. And also, I think important is, currently, we see good demand for the -- for industrial pricing and that for demand of the products and the pricing stays firm, which meant that, that part of our business also is currently performing well. We're not worried about the volume declines that we experienced as we packed more products in the prior year due to the green crop failure that we've spoken about. So we've just normalized volumes again. So if I look at the trading environment, obviously, a big tailwind from a currency perspective, where the rand weakened 14.4% against trading currencies, which resulted in a revenue uplift of ZAR 92 million. I made comment on the industrial products, which continues -- demand continues to be strong and good pricing, where we've really done well. I made a comment on the production levels that has normalized. And then we will continue to increase pineapple production following the completion of the development of our new plantations, where we will reach full capacity in 2024. Also, critical in our business is our control and managing of our capital. Returns obviously, is very important to us. We will continue to stay tight on managing capital spend. Keep a close focus on -- to ensure that we maintain our facilities, which is critically important to continue to drive operational efficiencies, and we are very proud of our plan. And obviously, looking at when we decide to spend CapEx, we are very strict on the returns that we expect. We planned capital investment of ZAR 280 million for the financial year of [ '23 ], of which capacity expansion plays a big role with regards to revenues specifically. It's more efficiency gains that we continue to achieve in our fruit juice factory, we're going to spend on equipment, which will drive our growth. And then our meat products facility, which will be a combination of efficiency gains and growth that we foresee in the protein category. Eswatini, we also will continue with the expansion of our pineapple plantations, and that will be -- that will ensure that we continue our growth in that part of our business. And then we will continue, as I made mention, to replace and to buy some new generators to focus on business continuity. If we then -- just a couple of comments on the outlook. We foresee the trading environment to continue to stay challenging, but we're confident that we can continue to strive towards making progress to our medium-term targets that we have set ourselves. Some comments on the regional business. We will maintain our focus on price and volume management to continue to strengthen margins. Price inflation, to continue with the weakening exchange rate and global input cost pressures. And the constrained consumer will continue to put pressure on volumes. On the international side, pricing and demand for canned food and our industrial products, we expect that to be -- to maintain, although we will ship lower volumes as production reduced to historic levels. If you then just look at our medium-term targets, where I think we've really made excellent progress. We will continue to drive revenue by focusing on growth categories, our fruit juice, dry goods, pineapples and pies. We will strengthen our regional margin by maintaining the balance between price and volume. I made mention we need to be priced correctly. I think we've got fantastic, high-quality products priced at a competitive price. We would continue to maintain our 10% international margin to the cycle, and we'll continue to focus on improving our return on equity, which will be supported by stringent cost management, recovering of cost increases and improve our regional margin to get to 10%. And then our efficient cash flow management, to reduce interest charge would be a focus area for us as well. Thank you. And I would like Tiaan and myself would answer any questions that is posted.

Thanks, Pieter. The first questions come from Shaun Chauke from Nedbank, and I'll ask them as 4 separate questions. Shaun says, I know you highlighted that you spend around ZAR 2 million weekly for diesel costs, is this equal to a stage 6 load shedding? And what would be the incremental cost if we move to higher stages, for example, Stage 8?

Yes. Thank you for that question. That would probably be in a region of 5 to a 6. So my first quick comment would be probably about a 10% increase in additional costs, dependent on, obviously, which stage we go towards. I think the important one there is the cost is one thing, and that's in our business. I think most important, what we need to ensure that we must manage the whole value chain, and that includes from a supplier to a customer perspective, but that will probably be our cost.

The next question from Shaun, "What has been the cost push increase you experienced across the raw materials and packaging costs? And how well are you hedged for the next 6 months, given the current rand levels?"

Yes. I think on the -- from a cost push perspective, anything from 5% to 12.5%, dependent on which specific raw or packaging material you talk about, we're operating such a vast -- many categories, but that probably is anything from 5% to 12.5%. And maybe, Tiaan, any comments from your side?

Yes. On the international side, we've got a hedge of about equal to, say, expected revenue in the second half to 30% of that.

Right. Then the third question from Shaun is, "In the international business, how much do you expect price inflation and the weakening of the rand to offset lower volumes in H2?"

Yes, I think not an easy one to answer. But we feel confident that we will keep to that operating margin of the 10%, as we've made mention, through the cycle. I think it will cover for a big chunk of the less volumes that we will ship in the next 6 months. Tiaan, if you've got anything to add.

Yes. Well, with [indiscernible] at the moment, there's probably more upside. But volumes, we say it will come down. And that's over a 12-month period relative to last year, but it will go back to probably the same levels that we had up until 2021 on an annual basis. So there's always a very big movement in the spread over the 2 halves within any financial year. And that's why we always guide that we managed it over the 12-month period. A month like March, for example, we had very good shipments and that can really swing it either way.

Then there's a question from Ray Stan for Tiaan, "How much do you expect inventory to reduce in H2? And what is your liquidity headroom?"

So we've got -- in terms of the last bit of the question, we've got lots of headroom. And in terms of the stock, we expect it to come down to, relatively speaking, the same levels as what it was in 2022. Whether that's -- if you want to express it as a ratio relative to turnover, it should be in the same ballpark.

Thanks, Tiaan. And then a question from Vik Sharma at RMB Morgan Stanley. Vik asks, "With the regional segment margin improvement seems to have been driven by a recovery in the pie category. How sustainable is this recovery? And does the H2 2022 base also being depressed for the pie category? And overall sustainability of the regional segment margin in the light of guided volume pressure, and further price increases that Rhodes is planning or has put through to recover cost pressures in H2 '23.