RFG Holdings Limited (RFG) Earnings Call Transcript & Summary

So let me say hello to everybody. Thank you so much for joining us on the call today. Pieter Hanekom and Graeme, always such a pleasure to see you all. Thank you so much for spending some time with us this afternoon. Everyone on the call, you know the drill, please raise your hand if you want to ask a question.

Pieter, over to you for some introductory comments. And maybe if you can just talk to the sales growth of your bigger divisions in regional? Just give us a little bit more color around juice, pies and the ready meals, and then, of course, the long life canned meat and canned veg and then perhaps go into international and talk about some of the issues that you're seeing there? And then I'm sure there will be a flood of questions. So over to you, Pieter, and thank you so much once again.

Yes. Thanks, about [indiscernible]. I've got Tiaan with me in the office, so a warm welcome to everybody, nice to be here. There's a couple of comments. I assume all of you did go through the trading update. I think we mentioned that we were quite happy with the performance for the first 5 months irrespective of revenue only increasing by 5.1% where the growth was achieved against the background of, as we all know, a weak domestic consumer environment with still persisting high inflation and interest rates. And I think also, I'll talk a bit later about that also from the international side, very important for us, obviously, is the inefficiencies at the ports that we keep on talking about, which obviously puts pressure on shipments. I think let's start with the -- with our regions. I think what we did see is through the quarter and [ I think myself about ] short discussion about this just before you -- all of you joined. In the first quarter meaning from October to December, trading work was quite good for us. And then suddenly just in Jan and February, I don't know what happened, but the first 2 weeks in January was absolutely dead quite. We also made mention of that in the trading update, where we did see some volume declines. But we hope to have a good March because Easter, as we might mention also an update is in March this year and last year it was in April, the first 2 weeks, not looking too bad. But let's see how the -- how it all pans out for later in the month. We did make mention of price inflation in the regional segment of 10.8%. And as I mentioned, the volume decline at 5.7%. So I think if you look at the volume decline it is just very much straight all over the categories where we saw some declines. But we closely monitor those declines as we've also previously spoken about in our sales out with an independent third-party data that we get to ensure from a market share perspective that we don't lose a lot of market share suddenly in categories where we, on the one hand, maybe where we got an issue with regards to pricing. Important for us as you will have seen, we continue to really work hard on that price/volume balance to ensure that we do recover costs. We again now saw some price increases coming through, specifically on sugar. We also made a mention in general of packaging cost that stays high. So unfortunately, there's not a lot of costs that we currently see that we see a bit of a -- that we see that costs are coming down. Although I would foresee that inflation wouldn't be at the high levels that we did see in the first 5 months, and we'll see how that pans out for the 6 months. I mentioned of the pie category. Pie is a business that continue to do well and the resilience of the fresh foods category that we operate. And 1 or 2 comments on the international side. I think these inefficiencies continue to be put pressure on us with regards to our shipments. And then there's other Red Sea and Gulf of Aden story, really caused a lot of service disruptions. And It's interesting to note, we get a lot of infra obviously from our service providers. And what we did see, I mean, if you look at that specific port between Red Sea and Gulf of Aden at the Suez Canal, that actually accounts for about 30% of containers that goes through there. So obviously, what has happened now, the service providers have stopped putting for their vessels to go through there and now they actually come down via the Cape ports. And what you would see then there is a disruption, what they see probably anything from 1 to 3 weeks due to the fact that vessels need to not go along the way. And that obviously puts more pressure on congestion and some inefficiencies at the port. For us, really important. Last year, we had a fantastic March from a shipment perspective, where we really did extremely well. We're not seeing the same this year. We've got the orders in the system. It's a matter of stuff that needs to get out. So yes, let's see how it pans out, but we are a bit worried that March from that perspective is going to be a difficult one for us. On the other hand, as [Technical Difficulty] mentioned, I hope that from a reasonable perspective that we get a bit of upliftment in March due to the Easter weekend at the end of March. So I think, and that's a couple of comments from my side, and I will gladly answer some questions.

Okay. So let's just talk about the volume price mix split a little bit. So it sounds like pretty much across the board, you've got volumes that are flat to slightly lower in the regional business.

Yes. There's not a lot of categories that you would really see. Volume is really growing, but still volume is in most categories under pressure. We had a bit of growth in food juice and dry foods. But for the rest, actually, a bit plateaued due to going backwards, but hopefully, we'll get a bit of a pick up again in March. But that was mainly due to the Jan Feb sales volumes that the volume started to decline.

Okay. And then just on canned meat and veg. So you're indicating, of course, the base was pretty low, but you're indicating that those are doing better, but still lagging the kind of performance that you're seeing in juice pies, et cetera?

Yes. I must say I also made a mention that we had to invest replacing equipment, which we've also made mention of. So from an efficiency perspective, we're getting those benefits. Obviously, those equipment were installed now in January. And we also had a big overhaul in our bakeries plant, which also took a bit longer. That took a bit longer than we anticipated, but that's all up and running. And we hope to get some additional efficiency, operational efficiency gains within those 2 plants specifically.

Okay. And then perhaps just turning to margin because, of course, you're not talking to margin in this trading update. But you do seem to be hinting that you're doing very well from an efficiency improvement point of view, keeping costs under control. So if anything, for the first 5 months, it feels like margins might be opening up slightly. Is that kind of a fair interpretation?

Yes. I think, Anthony, March is going to be a big number. We talk a lot about it, but it's a big month for us because of Easter being a bit earlier. So let's see whether we can get a bit of a -- bit more operational efficiencies also coming through if volumes at least pick up a bit, as I said, the first 2 weeks, looking more paced. So yes, I think from a margin perspective, very important for us to ensure that we sustain at least margins and see whether there's opportunities for us with a bit of operational deliveries and some efficiency gains, equipment investments that we've made over time and deligent cost control that we can at least keep the margins where they are. And if we can get a bit more volumes going through, I think there'll be some slight expansion coming there.

Okay. Just so everyone on the call, please raise your hand if you want to ask a question. Let's just go back to international, Pieter. So I mean it sounds pretty straightforward. We know that prices have been amazing for the last couple of years. So those have softened a little bit. Your input costs are still hurting a bit in terms of your tinned cans. And then, of course, you've got the port issue. So excluding the favorable FX, I suppose no surprise at all, and now we're going into a really high base for March, no surprise that in constant currency terms, at least your sales for the first half are going to be lower than they were last year.

Yes. I think spot on with that. But on the other hand, I think we quite -- we were quite fortunate that we had a good crop this year, the quality of the food was good, which obviously helps with regards to your efficiencies within your [indiscernible] deals within your factory. We've also made some investments last year that we spoke about, that we managed to do before the season that really supported it. And I think on the other hand, we mustn't forget also, we talk a lot about the canning side. Industrial side has also been good for us. And the prices have stayed firm, which makes a big difference because, obviously, you've got a part of your canning food that you use for industrial business. And obviously, we also buy food in for the pulps and purees sales. And we must say there's been good demand for that and prices has stayed firm, which obviously also support that specific segment. So all in all, I think we're quite comfortable that we will still continue to drive that tinned cans operating margin through the cycle. I think our biggest concern, as I mentioned really is the port inefficiencies. And what I've spoken about the sort of issue at the Red Sea and the Suez Canal that's really putting pressure on shipments and that will be a really important one. And it sounds you should know what goes out now, but I can tell you they are really [Technical Difficulty] in our business, and there's a lot of containers that you [Technical Difficulty] in the next 6 months. But [Technical Difficulty] with the demand. And you might mention that price is softening a bit. Yes, they did. But I think as -- if you look at the average exchange rate, I think we're comfortable with those numbers. So it's all about the pricing looking okay. It's all about the shipments getting there now.

Okay. So I mean, not to push you too much on margins, but it sounds like you've got good margin momentum in the local business, but the base is very high in the international business, the 13% operating margin last year. So hopefully, above 10% for the full year. Obviously, we're only 5 months in, long way to go. But I mean, it would be pretty heroic to see margins anywhere close to last year, just given some of the pressures that we're talking about.

Yes, I think you're right. Maybe, Tiaan is, he's been here a lot longer than I'm in this business. So I think, yes, maybe Tiaan a couple of comments from your side.

Yes, I agree it was difficult for this first 5 months and what we foresee for the next 3 weeks or the first half. I think we will be positive that are at least sustaining the margins. The international margin that we achieved last year at the time we mentioned almost cautioned against expectations in that regard. I think that was probably the top end of where it could be. So it brings us back through the cycle, 10% at average margins. We are positioned there to seek a bit longer term than just this first half. Yes, the pricing is firm. There are a few spots of weakness, but it's not that significant. And then there's always the unknown in the currency. It's been in our favor in the first 5 months as we mentioned in the update. The one important thing to consider is that closing exchange rate at the end of any reporting period, and in this case, it was in February where we closed at ZAR 19.30. So obviously, that's a lot higher than what it was in September last year. But it's [Technical Difficulty] mentioned it's very important that moment in time at the end of March as far as the margin of this international business is concerned.

Okay. Tiaan, just while we've got you and not to draw you on specific numbers, but clearly, the balance sheet has been de-gearing quite nicely over the last couple of years. So maybe a quick high-level comment on working capital and cash flows?

We had strong cash flows during these 5 months. Debt is at the end of -- where we are now lower that what it was at the end of March last year, we don't foresee any major changes to debt until the end of this half. And it's a result of [ previously ] better profitability and -- but also good [Technical Difficulty]. We always look at increase in working capital in monetary terms now and that we've managed to maintain at low single-digit levels and no reason to believe that, that won't at least carry through until the end of March. So we have strong cash flows. If that answers your question, Anthony.

Okay. No, fantastic. Another reminder to everyone on the call, if you want to ask a question, please raise your hand or put your video screen on, so we can see you. We have a question from Shaun, Shaun go ahead, please.

Thanks guys for the trading update. Just to ask, I know you speak about March Easter being a big part. I mean I thought ideally by this time, you kind of sold the stock into Easter. So you kind of get a sense of how much you've sold. Maybe if you could remind us how it works in terms of the lead times with sort of when you sell, when you recognize it with the retailers and remind us of the mix between your formal and informal channel. Because I'm assuming some of it is the retail, you'll be fine and the informal kind of that's what you're waiting for?

Thank you, Shaun. Just the way it works, obviously, if you look at your -- all your fresh foods or your short shelf life products, obviously, talking a lot about ready meals and some of the pies, obviously, those are actually more or less 3 to 5 days or 7 days, it totally depends on the shelf life of those products. So that fairly keeps on going [Technical Difficulty] and you deliver by the time. If you then talk about your regional business, it obviously also depends a lot on how much stock your retailers do have or your customers have. Some of them will have more stock than other because they've got the ability to carry. They've got more ability to stock more products. We're not uncomfortable currently with the stock levels at the DCs of our retailers. So I think we -- it's quite a cycle that, it's a weekly cycle now. And obviously, what those customers also depends on when they -- as a debt when they pay you. So in the beginning of the month probably there will be a bit more push, obviously because they pay 30 days of statement. So yes, but I think at the end of the day, all the retailers are very much [Technical Difficulty] need to ensure that they don't want to be caught short with regards to stock on shelf. I think probably what happened, there was a bit of excess stock in the trade at the end of December. And that's probably why Jan and Feb was a bit -- the volumes that didn't do well. But I think we're quite in cycle. And as I said, I think if you look at the first 2 weeks, we have really -- we've sold well and let's see how that pans out for the rest of the year, for the rest of the month. And I think, Tiaan, we made the [indiscernible] on the formal and informal [Technical Difficulty] split.

If we talk about the retail, it's more than -- in our case, more than 60% we do in retail and other side of it. The independent trade, right think maybe the question that you would like to get answered is, if you look at the independent trade we do get to those big independents. We do sell directly to them. But if you really look at the very smaller stores, we don't deliver directly to them. They go and buy as an independent wholesalers and also to wholesale where they will distribute the stock themselves to their specifically local stores because they will get credit from those independents and also they're going to buy at some of the big wholesalers.

I think we've got a question on the chat. Okay. So Minier says, with the de-gearing we've seen in the last years, are the fingers itching to do another acquisition, Pieter, in the absence of that, better dividend payout, probably a little bit premature before all the Board meetings and the like. But do you want to just give us a high-level overview of recent thinking in so far as capital allocation is concerned?

Yes. I think we've spoken a lot about capital allocation also in the past. I think we still stick to what we have said. I think from a M&A perspective, I think obviously, there's opportunity for us that we can get into earnings enhancing categories, I think it will and businesses [indiscernible] and we will look at it. We inevitably see nowadays that to get some of these transactions over the line has become more and more difficult, not only in the manufacturing space, but also in other areas because of the cost of the transaction due to the additional, number one, you're not -- it's not very easy for you to not that I'm saying it's good to consolidate plants into your own plants because there's a big issue with regards to employment of people and a sub-scheme is involved, also capital-specific investments has been expected. So one needs to be very careful when you buy a business to ensure that ZAR 1 to become ZAR 3 at the end of the day and the transaction is not really that viable. So I think one need to care to look at this. And obviously, yes, there is some opportunities. But I one must be careful to ensure that you -- that there are good opportunities. Obviously, a good example, was the pie business that we bought. We really did manage to get it for a good price, we manage to integrate that into our business up in Johannesburg, which really worked well for us and has been very beneficial to our business. So yes, we will continue to look at opportunities. I think at the end of the day, just be careful that the opportunity don't become a very expensive. I think also, if you look at our current businesses, also commented a lot of time, there's a lot of headroom or a little still in categories that we operate within, specifically dry food, juice, pie, I think there's good opportunity for us there to continue to drive our market shares and also sell specifically dry foods and juices into the rest of Africa. I think there is some -- still some good opportunities for us. And on the other hand, also, we have spent a lot of money in the last couple of years with regards to just the services and also to get the efficiency gain. I made mention of that specifically this time around on the meat plant and the [ fruit plant ] we're really reaping some benefits due to efficiency gains. Also in our ready meals part of our business, we continue to invest. Of course, that part of the business with new technology coming into play, maybe quicker cooking times as an example. So we're buying continuously to invest in that business to ensure that we stay abreast of the latest technology. So yes, capital allocation will be a very important part of our business and continue to be. Tiaan has mentioned of the cash flow and we're really diligently look at that to ensure in these difficult times to ensure that we really look at our cash flow coming in.

Right. Thanks for the question, Minier. I'm not seeing any more questions. Perhaps just one more from me, we can see load shedding the cost is half. So I mean, it's still a big problem. The fourth quarter of last year was tough again, and who knows what tomorrow will bring. But it looks like you've put all the kind of the right equipment in place, the right mechanisms to at least shield you from too much downtime in that regard, and diesel cost has come down.

Yes. We continue to focus, obviously, on solar investments. There are some more opportunities for us going forward. You would recall that we came back last year, after the second -- third week of January, we really saw an incredibly uptick in the load shedding schedules, which was really very bad. And obviously, this is a very critical time for us specifically at Tulbagh. Also made mention that we did [indiscernible] last year because of our service providers didn't have enough generator capacity available. So yes, I must say it looks a lot better and you can see it in the costs. But irrespective of that, I can tell you [Technical Difficulty], as we sit here today, one of our facilities up in [indiscernible] again, infrastructure issues in Durban with regards to supply water, and we don't have capacity to be for 5 days out of water. So yes, I think it still continues to be a struggle, and there's still a lot of inefficiencies. And as we -- as the years go on, you tend to try your best to be self-sufficient in most of the municipals [Technical Difficulty] that you can get. But yes, it's still taking time, but from -- specifically from a load shedding perspective, it's been a bit better. But yes, it's still not -- it's still there.

Shaun, you've got another question and for the benefit of anyone else. If you want to ask a question, this is your last chance to raise your hand. But go ahead, Shaun.

Pieter, maybe if I walk through your mind a little bit here. When you think about this business, I just kind of want to see what are some of the pressing issues. So with the big one in my assessment be obviously, packaging costs, cost in terms of input cost being a little bit of a pain. Are you worried about competition? Because it seems like if you lose some of those volumes, it's fine. The efficiencies make it up in terms of recovery on the margin. Like maybe just walk me through your head in terms of how do you think about this business? What are some of the worrying issues when you think about it, what's within your control, what outside your control? Is competition relevant to the extent that it gives you headaches or it's mostly around costs?

Yes. I think obviously, we keep [Technical Difficulty] on what the competitors do. But at the end of the day, I think we're quite comfortable to say that, number one, I think we've got exceptionally high quality products, and we will not reengineer a lot of recipes overnight to ensure that we are more cost competitive. So what I'm trying to get to, I think, we really worked hard on building our brands over the last number of years. And I think our consumers are really understanding the quality of our product. And that is a very important part of our business to ensure that we keep that quality standards where it is. I think secondly, from an operational perspective, I think we've got excellent management with good experience in the categories that we operate within. And I think we really pride ourselves in our operational excellence, not only in our facilities but also executing in the trade. We've got good relationships with our trading partners, although as you can understand, it's not easy out there. So we carefully watch volumes with regards to market share. The last thing we want to do is to lose 5, 6 basis points of market share. And we know there's something that's not that we're probably not guide. We're not competitively priced for whatever reason. I do think that we are a sizable enough business and sizeable -- big enough to be able to manage a bit of a dip in volumes and we've got -- with our ability to drive cost down and to be more efficient that we can cover for that. But obviously, if volume starts to decline by 10% to 15%, it becomes sticky for the manufacturer. I don't think that that's not the case. So yes, what worries me, the volumes do worry me? But at the end of the day, as long as our market share stays intact, and we can get some growth in some of the market shares. I still think we've got a good brand, excellent quality product, well priced, that I can't [Technical Difficulty] that overnight, we will suddenly [ lose ] a lot of volumes. If competitors in categories starts to react differently, then obviously, we will have to see what the right strategy would be in those categories. I think what worries me from the international side of our business is obviously this whole port story. I mean it sounds like every time we moan about inefficiency at port. But somebody said this morning, Transnet is indeed a second [indiscernible]. What is it now? I mean there's a lot of management changes there. I think it's important for us, obviously, to stay close to the port. But yes, I think internationally, it's not easy. So that worries me. I'm not worried currently about, Mr. Tiaan has also mentioned, that pricing moves okay on industrial and on the canning side, but we need to be at the ports to ensure that we get our products out there to our customers. So yes, I think at the end of the day, also the [Technical Difficulty] supply from municipalities continue to stay a concern due to the couple of comments that I made. And then lastly, I think it's an election, but that means with election I think we haven't spoken a bit about that, but the election can put a lot of pressure on a lot of things. We saw that [Technical Difficulty] in a couple of years ago. And yes, I think we need to keep a close eye on the elections, see what happens there. And then maybe lastly is what's going to be interests rates going forward. I think probably to get the consumer to be a bit more fit and to buy a bit more, we need interest rates to come down. But I mean, as you've seen, that's not the case. And I think if you heard our government, the other day, doesn't look like it's going to happen within the next month. So inflation is obviously also still a concern. And then maybe lastly, I think we do need costs. We need to, relief on certain costs as we sit here today. I can't tell you that there's [indiscernible] costs that will stay stable.

Great. Talya, you've got your hand up, so maybe we can close out with your question.

Yes. Thank you, Anthony. So in the last set of results, I did see an increase in ROE. Your EBIT margins almost at that 10% level that for your management has been aiming for. And what I want to know is this purely because of more explicit factors like as Anthony alluded to earlier that the export prices have been high and export conditions have been better the past couple of years. And then on top of that, I suppose, COVID suppressed your pie business and your juice business, which is perhaps 2 of your biggest businesses? Is it because of just purely that? Or is it perhaps a more implicit secular trends in terms of have you been able to make batteries more efficient? Have you been able to cut costs permanently?

Yes, I think it's a bit of a combination of all of them maybe Tiaan may be comment on the EBIT.

Yes. Look, it's the big lever for the improvement on ROE was the increased profitability. And as managing working capital better than before. So you've got this assets in the business, so to speak. But underlying that is, I think, like Pieter has said, all of the above, on the international, again, the big change was the fundamental change in international pricing for canned peaches in particular when the Greece had the crop failure 3 years ago, and obviously, that helped us to open up more profitable markets. Because that was an entry for us being able to supply canned peaches to those buyers where Greece couldn't supply. Then yes, and speaking about it, our regional long life business. We were under margin period for long. With improved efficiencies being able to recover the high cost inflation we faced that all helped to improve margins in that business. When the inflation started to rise, [indiscernible] months ago, initially, we had big pushback from our customers which delayed our ability to recover those increases from [Technical Difficulty] in our '22 financial year report. So last year, that started to move our pricing and that [Technical Difficulty] to improve the regional margins, which one can see in the margins. But then yes, international, I've spoken about the change the currency is always a factor. And I think in particular so last year when we achieved that 13% operating margin, if you look at the numbers. A lot of it, thanks to a currency windfall, weaker currency -- impact of the weaker currency windfall. And that's why we've always [indiscernible] just a lot of people to it because we also know that the currency can go the other way, but hopefully not as such big moves, but that's why we believe that 10% is a realistic margin for that business as well.

Great. Pieter. Okay. Fantastic. And then [ Labeco ] is sneaking in with a question as well.

So I just have a quick one. So I mean, in the recent presentation, you mentioned that they've been very little in terms of capital investment from the food manufacturers in the country over the past few years. So I was just wondering if -- because of that, if you are seeing any opportunities maybe a few product lines that are maybe being neglected by a few of the canned players where you think it will need to grow? Or I mean, we mentioned some of the risks that you're currently facing, I think, Transnet being the most recent one or a diverse risk just make it very difficult to justify and any capacity expansion at this point in time?

Yes. I think, [ Labeco ], a good question. And actually asked a lot in the -- I mean I talked to people with regards to manufacturers capacity availability. I think one thing that's really important is that you need to have -- if you manufacture something, it needs to be a profitable business guys at the end of the day. And if you make your [indiscernible] all of us on the pressure from a return perspective and if the return is really just not there due to the fact that: number one, we are extremely proud of the quality of the products that we manufacture. And to ensure that you keep consistent high quality products in shelf, touch wood, our biggest risk is food safety. And it's incredibly expensive to put a food-safe manufacturing facility together, which includes, obviously, world class equipment, which most of it we actually imported. If I think about all our facilities, there's limited equipment that we buy from the local South African market due to the fact that indeed these speed aligned that can ensure that you consistently get your quality product out there. So to make the story , the answer actually showed if it doesn't make sense for you to invest in [indiscernible] where there's not enough margin available, I don't think your shareholders are going to be happy with it. And that is the big one that one needs to understand. It's easy to say, there's not -- they're not investing enough. But maybe as soon as the exchange rate changes or it becomes cheaper, it's import then some people without the import [indiscernible] what are you doing with your business, you're probably got to cut your price again. So I think, yes, I think one needs to be careful just to invest for the sake of investing. I think we make cuts when we invest and decide how we allocate our capital. So it's a big part of our capital allocation strategy is to ensure to invest in categories where we do see we can make a return, a fair return at the end of the day for our shareholders.

And I think on that note, I think we can draw the call to a close. And Pieter, Tiaan, thank you so much. And for those of us that are coming out to see the operations on Thursday. We're looking forward to seeing some of these high-quality businesses that produce nutritious tasty safe food. And yes, thank you so much again for your time, and thanks, everyone, for joining us on the call today. Really appreciate it. Thank you.

Thanks a lot. Thank you everybody for the time. We appreciate it.

Thank you so much. Bye.

Bye.

Thanks. Bye.