RFG Holdings Limited (RFG) Earnings Call Transcript & Summary

Hello and welcome to everyone, and thank you for joining us in presenting the 20th set of results since the listing in 2014. We are extremely proud of the achievement and blessed to present a good set of results. A big thank you to our Board and employees for their support in delivering these numbers. Looking at the presentation outline, I will do the review of the 6 months after which Christiaan will do the financial performance. I'll take over doing the trading performance, looking at sustainability, strategy and outlook, after which we'll field questions. Please post your questions via the webcast during the presentation, after which Christiaan and myself will handle it at the end of the presentation. So if you just look at the review of the 6 months, we've seen a strong improvement in profitability despite volume pressures, where group operating profit margin exceeded our [indiscernible]% level despite some pressure on sales volumes. Margin improved by 100 basis points to 10.2%, improvement due to the focus on the revenue management. I've spoken a lot about the quality of our revenue and cost recoveries and operating efficiencies. We managed to get some operating leverage through production efficiency gains from capital investments. We do see that the consumer studies constrained in the current environment, where revenue was -- growth was mainly achieved by price inflation. We saw weak domestic consumer spending environment where the rate of volume decline slowed down relative to H1 in 2023. We saw some strong market and brand share gains in key categories and our international revenue was impacted by ongoing challenges at the Cape Town port and some softer global pricing. We saw lower debt, where our debt levels further reduced to a net debt equity ratio, which improved from 46.7% to 33.3%. If you look at our progress against targets, I think important years that we set these targets in 2022. So this is the fifth time that we're actually showing our progress to our shareholders against these targets that we've set ourselves. So if you look at the specific metrics, the first one being revenue growth, our medium-term target is GDP plus CPI plus 2%, which adds up to 7.9%. We managed to achieve 3.2%. In H1 2023, we managed 10.2%. If you look at our operating profit margin, we set ourselves a target of 10%. We managed to exceed that target, as mentioned, getting to 10.2%. In H1 2023, we had a 9.2% operating profit margin. Return on equity as our third metric where we set ourselves a target of weighted average cost of capital, plus 2%, being 15.4%. We managed to achieve 15.7% against H1 2023 of 14.1%. So I think excellent progress in 2 of the most important metrics and on the revenue growth being behind. Thank you, Christiaan Please take us through the detailed finances.

Good morning, everyone. Group revenue over the period 6 months until end March 2024 increased by 3.2% to ZAR 3.9 billion. It was mainly driven by price inflation of 6.9% and was partly related by negative volume growth of 6.1%. Regional revenue increased by 5.8% while international revenue was down 8.6%. The group operating profit increased by 15.2% to ZAR 399 million on the back of improved operating profit margin of 10.2%, which as Pieter has indicated, 100 basis points better than the prior year. EBITDA increased by 14.6% to ZAR 552 million and the margin improving by 140 basis points from the prior period. Load shedding cost was ZAR 18.2 million lower than the ZAR 38 million in the prior period. The regional operating profit increased by 19.7% to ZAR 327 million, while the operating profit margin improved by 110 basis points to 10%. Continued cost recoveries and the efficiency gains across many of the plants gave rise to the improved operating profit margins. International operating profit was basically in line with the prior year at ZAR 73 million, while the margin improved by 110 basis points to 11.5%. The rand weakened by 6.7% against the basket of currencies, the group trade in the international space over this period. And the margin improvement was further benefited from the efficiency gains following capital expenditure in the Tulbagh fruit plant. That gain rise to earnings per share being 20.6% up increasing ZAR 100.5. Headline earnings increased by 20.7% to ZAR 262 million for the period, while diluted headline earnings per share increased by 20.4% to ZAR 99.80. Cash outflows from operating activities during this period was ZAR 38 million lower than the prior year, and it was driven by improved profitability and a lower investment in working capital over this period, but that was partly -- the gains from that was partly offset by the increased income tax payments to the value of ZAR 55 million in this period. During the period, the group repaid long-term loans amounting to ZAR 185 million, and net debt at the end of the period was ZAR 290 million, ZAR 4 million lower than the same time last year, and in total, ZAR 1.17 billion at the end of March this year. Capital expenditure over the 6 months amounted to ZAR 200 million versus ZAR 144 million in the corresponding period the previous year. Major areas of spend was upgrade and replacement of equipment in the meat and Tulbagh fruit plant brands. The planned capex for the year is expected to come in at ZAR 300 million. In terms of group revenue growth over the past 5 years, it grew at a compounded annual rate of 7.3%. That's also relatively high base in H1 of 2020 when the lockdown was announced and sales increased with consumers stockpiling on certain items. The drivers of revenue growth during this period, like I mentioned earlier, volumes was negative by 6.1%, mid positive mix changes and price inflation, plus the impact of a weaker rand on turnover, contributed to that increase in revenue. On this slide, just to show that since 2020, which was again impacted by the national lockdown following the Covid pandemic, revenue has increased since then in each of the reporting period and also to note that revenue is normally higher in the second half of our financial year due to the seasonality, specifically on the international side. Revenue growth drivers over the last 3 reporting periods, just to illustrate the negative volume growth has come off from a high of 8.5% in the first period of 2023. Likewise, as we see in the national CPI numbers, price inflation, net selling price inflation has also come off a high of 14.8% a year ago to the current 6.9%. And that's obviously impacted on the -- on the revenue growth during those 3 reporting periods coming off 10.2% to 3.2%. International revenue, our split of our basket of currencies, the U.S. dollar remained the biggest at 59%, followed by the euro. So those are the 2 biggest currencies in which we trade. The table to the -- in the right-hand -- top right-hand side of the page shows the impact from a weaker currency over the last 5 reporting periods. It was significant from H2 2022 to H2 2023 and below that, we can see what the average exchange rates were at a revenue line for those respective periods. Notably, that -- the rand hasn't weakened that much from H2 '23 to H1 in 2024, as it has done in period-on-period in the previous 3 reporting periods. Normalized operating profit for the first half of the financial year, so as the first half of 2020 grew by a compounded annual rate of 25.5%, and the margin has improved from 5.5% in 2020 to 10.2% in the most recent reporting period. Also here is just for the last 5 reporting periods, the improvement in operating profit from ZAR 222 million in the first half of 2022 to the current ZAR 399 million and also the margin improvement over that period from 6.5% to 10.2% currently. Diluted net earnings per share also over the 5 years since the first half of 2020, that's for the first half only, grew by a compounded annual growth rate of 33.8%. Working capital, not much has changed year-on-year to 200 basis points lower than what it was last year, but it's in line with what it was in 2022. The days -- the net days in line with the previous years, 6 days. Then just in terms of working capital seasonality, I think everybody is by now familiar with the peak that we normally get to at the end of March. Just to show since March 2022, that trend, and it is as is clear from the graph is that its inventory and again, due to the seasonality of the Tulbagh operation, where the big increase comes from or rise during the period up to the end of March, and that is obviously funded by overdraft in the main, as we can see round about in March overdraft is anything between ZAR 700 million and ZAR 800 million, but it then goes down to end just around -- by year-end last year, debt of September was ZAR 98 million. Free cash flow, cash generated ZAR 95 million in the current period versus 12 months in the prior year. That went towards interest payments, ZAR 36 million, which is ZAR 10 million lower than the prior period, and that's due to lower debt levels in the business. Income tax payments, as mentioned earlier, increased by ZAR 55 million versus the prior year and maintenance kept to a steady low, million rand more than the prior period, which gave rise with a negative free cash flow of ZAR 199 million was ZAR 207 million in the prior year. Just free cash flow utilization, as we said, it was negative ZAR 199 million. Dividends paid in January amounted to ZAR 162 million. ZAR 50 million went towards expansion, capex, loan repayments and lease payments of ZAR 39 million was made, and that gave rise to a net increase in paid overdraft of ZAR 643 million. In terms of the capital structure, the improvement in debt equity since the first half of 2022, improved, obviously, taking into account the seasonal impact at the end of March. But still in March '22, it was at 52.3% compared to 46.7% last year and currently at 33.3%. Also the net debt to EBITDA ratio at the bottom of the page, improved from 4.1% in the first half of 2022 to current 2.1x. Total debt breakdown, it's still in March -- the biggest portion of it this year and also last year was a bank overdraft to fund working capital as was illustrated in the previous graphs. But these liabilities and then the long-term debt, which is reducing each reporting period. And then finally, the bank liability repayment profile, it's -- nothing has changed since our previous results were announced, still set to be repaid by the end of the 2027 financial year. Thank you.

Thank you very much, Christiaan for the financial update. Looking at our trading performance, a couple of comments. If you look at our segmental revenue broken up between our regional, our international and our fresh foods business, I think what is important that we see here is the nice balance that we've got within our business and when I talk through the specific segment, you will clearly see what I'm alluding to. So if you look at our product portfolio of our brands and our private label ranges, which we sell into all our major domestic retailers, there's a split there between long-life food and fresh food and focusing on the brand being Rhodes, Bull Brand, Hinds, Magpie, Today and Mama's. If you then go towards the regional performance, you would see that the revenue increased by 5.8%. Specifically, and a very good performance from long-life food, increasing by 7.5%, fresh foods, increasing by 2.9%, but a really very good performance with the improvement in operating profit from ZAR 273 million in H1 2023 to ZAR 327 million in H1 2024. But extremely pleasing to see that we've hit the operating profit margin target of 10%, moving up from the prior year's performance of 8.9%. If we then look at the revenue and operating profit over the last 5 years, you would see a CAGR of revenue of 7.1% and operating profit of 12.4%, which I think what is an excellent performance in the current circumstances and scenarios. If we then go over to the specific metrics that gave rise to the change in revenue from this over ZAR 3 billion to ZAR 3.25 billion, you would see that mix is -- gave a rise of 1.3%. I think I've spoken a lot of times in previous presentations on the quality of our revenue, which means that we really focus extremely hard on SKU rationalization and also on the specific categories, which are more profitable than others. And I think we did a sterling job there, although volumes declined by 5.5% with price inflation of 10%. If we then go to a couple of comments on trading, looking at the categories that we operate in, obviously, fruit juice a very important category for us. And we continue our Rhodes brand to gain share in the market. Our vertical integration supports our margin, which ensures consistent supply of raw materials and also consistent quality of the product. We've also launched a new product in the nectar category, which we foresee that will drive further and future growth. With regards to canned meat, we see a [indiscernible] meals that we launched into the local and African markets. We've invested, as Christiaan has mentioned, in new canning equipment and capacity expansion that will support revenue and margin growth in the [ net ] fruit and vegetables, and we continue to drive growth, specifically in the food service category. If we then look at herbs and spices, we saw that the Hinds Spices is now the #2 brand in the category. We're extremely proud of that, where innovation will drive further growth revenue in H2. Pies and pastries, we see continued volume growth in the pie category, to-date increased our commanding market share position, and we saw some packaging upgrades to enhance our brand and the integration of the pie operations supporting the margin, really a very good acquisition for us. Looking at ready meals growth driven by ongoing product innovation, and we still continue to see the benefit of the resilience of the high income customer and consumer. Into the rest of Africa, we've seen an encouraging margin recovery in African countries, mainly due to range optimization, which I've spoken about, where we've seen sales of long-life foods grew by 2.3%, and this accounts for 11.8% of our regional long-life revenue. Just some pictures on some of the capital investment in canning equipment and also on capacity expansion, where you will see some of the filling equipment we put in as well as [indiscernible]. There you'll also see a clinger and some other equipment inside the meat factory, also some more equipment in the facility and also some [ swing trapping ] equipment that we've also invested in lately. So if you look at product innovation where ongoing newness is a key driver of sales and market share growth within our business, we've seen some lateral brand extensions into adjacent categories where we've launched the Rhodes fruit nectar range following the success of our Rhodes brand in the 100% fruit juice market. I think we've shown what we can achieve, specifically with our brand that we've launched about 8, 9 years ago with an excellent result. And I think the time was right now for us to also launch a nectar in the Rhodes brand. Fruit nectars are more affordable and competitively priced in a very competitive category and environment. Our 100% fruit juice will be relaunched in a post OpEx format in the local market, where our nectar range will be packaged in a big format to differentiate the product ranges. If you look at also range extensions through innovation, specifically in our Bull Brand facility, where we've entered into canned minced meals, we also launched Hinds Spices shaker range in H2, and we will see ongoing newness in the ready meals and pies. With regards to global health and eating trends, we are responsive to emerging global food trend where we see increasing popularity of plant-based eating and launched the plant love range of vegan products for this. If you then look at some of our product innovation, I've made mention of the -- specifically of the Rhodes nectar juice range, where the product will be launched in 200 mill, a 1-liter and 2-liter pack sizes and will support in the market. You can also see the innovation that I've mentioned specifically on Bull Brand with Bull Brand where we launched the canned minced meals range, savory of bolognaise and a [indiscernible], [indiscernible] and range extensions and then also launched pick and pie fruit nectar juice. In -- specifically in Uris, some brief -- some new ranges, specifically in mini chicken pies and also in quiches and you can also see some packaging formats in chicken broccoli, braised beef stew and then also big ranges beef lasagna and macaroni cheese. Then some product innovation, specifically in the plant love range that I've made mention for Uris And then if you look at the market shares, I think very important to note, very proud of this achievement that we've seen market share growth across all the product categories. So if you look specifically at jams, cans -- jams and canned meat and meals where we command the #1 position and then very strong #2 positions in canned fruit, canned veg and in long-life fruit juices, I am specifically proud that Rhodes is now the #1 brand in the jam category, where we managed to achieve a 30.6% share. And then you will also see in canned tomato and in corn meat being a very good #1 position. Then also Hinds Spices moves up to the #2 position in our category at a share just under 10% and you will see that we've got excellent shares in 100% fruits juice, infant meals as well as fantastic shares in retail frozen pies and in the retail frozen pastry categories without [ dates ] and also our [ Mama's ] and the pies category where we command a #1 position. If you then go -- if you go to the International segment, some comments there. Just looking at a couple of comments. We are a long-term supplier to global retail and premium branded customers, where we operate in canned fruit, fruit snacks in plastic cups, long-life fruit juice and industrial pulps and purees. And our major markets are the U.S. and Canada, United Kingdom and Europe, Asia and Australasia as well as South America. And there you can see the split between the specific countries and markets where we operate in. So if you look at our international performance, irrespective of revenue going down by 8.6%, we managed to be fairly -- we managed to be flat on operating profit, but important to note that the margin, operating profit margin increased from H1 2023 of 10.4% to 11.5%. And if you also look at the CAGR of revenue over the last 5 years being 8.4% and a very good improvement from 2020 and where we are now on ZAR 73 million operating profit, as I had mentioned, similar to H1 2023. Our international performance was also driven by a bit of a change in mix, which gave us to rise to a 1.3% increase, currency supporting on 5.5% -- 6.5%, with prices softening slightly. Just a couple of comments on trading. Looking at where we made mention of the upgrade and replacement of equipment at our Talbot fruit products plant, which supported our margin expansion. We saw some improved factory efficiencies over recent deciduous fruit can -- over the recent deciduous fruit canning season. And our canning season was successfully completed with the crop yielding some high-quality fruit, obviously, also supporting some efficiency gains within the factory. Looking at currency and pricing, made mention of the softer international selling prices for canned fruit, although industrial product pricing continues to stay firm, and the rand weakness contributed ZAR 38 million to revenue growth. Very important part of our business that we continue to focus on is inventory where we saw some lower opening stock levels that impacted volumes and balanced volumes with shifting sales mix, which is an important part of our strategy. We continue to have some shipping challenges. Export shipments continue to be adversely impacted by some port congestion and inefficiencies at the Cape Town Port. We've also seen some extreme weather that Hampered exports, specifically in March 2024, and we foresee now that port delays are averaging around 3 weeks. We continue -- the continued crisis in the Middle East, obviously also put pressure on vessels that sails now around the Cape Town Port, where it's complicating the availability of containers and vessels. There's some pictures on capital investment and equipment upgrade and replacement in our food products Western Cape facility, specifically on the industrial side. That is some more equipment in the facility, some investment in generators at the fruit product Western Cape facility. Very important for us in our business is our continuous focus on sustainability. We've recently continued to target our specifically targets that we've set ourselves to support our drive towards a more sustainable business. We've appointed a head of sustainability to drive our strategy and programs to minimize the environmental impact. The person that we've appointed has got a huge experience in the fields of climate change, energy and sustainable development. We've set ourselves specifically targets on the environmental for 2024 -- 2025, sorry, across the wastewater and energy [indiscernible] and greenhouse gas emissions, and we will continue to set targets for greenhouse gas emissions as well as the other component for 2030. Our Rainfalls Alliance Certification. We recently got for canned pineapple products at Eswatini operation, recognizes global environmental, social and economic sustainability farming practices. It's the first RFG product to receive this specific certification. Looking at renewable energy, continue to focus on solar energy with solutions are now installed at 7 production facilities as well as our dairy farm, and we're planning for further installations in FY '24. Then just a couple of comments on strategy and outlook. If you look at our progress against our strategic priorities, outlined for '22 financial year. I think what is important to note is that in our annual presentation in November last year, we provided update on how the group is performing relative to the specific strategic initiatives, and we'll update them again at year-end. So if you look at the specific strategic focus areas: number one, input cost recovery to sustain margin, extremely important metric for us. I think we've achieved that and that is obviously ongoing. Then maintaining tight cost management, specifically in an environment that the consumer is under pressure and volumes are under pressure, very important metric for us to continue to ensure that we focus on this with inflation moderating. We need to capitalize on our growth momentum over recent years. Although we see that top line revenue is under pressure, we are growing ahead of the market. We will continue to invest in efficiency improvement projects in our factories. We showed some of what we're doing, and we will continue to focus on those to ensure that we can get some further operational leverage at our facilities, specifically also in the current environment that we're operating within. Then I've mentioned of the quality of our revenue execution product quality, capacity and cash flow management, very important metric for us as well. I think we've achieved a lot of that, and we'll continue to focus on it. We've completed our SKU rationalization across the portfolio, although that is something that one needs to continue to focus on with the ever-changing environment and consumer preferences. We will drive innovation through new product and category development. I made mention in -- at the presentation in November last year. But if you look at the past 18 months, I think we needed to focus on new product innovation and category development. We showed you some of the new products that we've launched and the new categories that we've entered into, and we'll continue to focus on that to get some top line growth and volumes back into our business. And then we will also continue to look at potential bolt-on acquisitions where we would evaluate target opportunities that make sense to our business and to our shareholders. Then just a couple of comments on the outlook. If you look at our regional business, we foresee that the consumer demand to remain constrained due to cost pressures. We have seen commodity price increases which will further impact our consumers' spending, specifically making mention of [ maize ]. Then volume is expected to remain under pressure in the year ahead. We don't know what's going to happen with load shedding. So renewed load shedding poses a risk in trading and could further dampen consumer confidence. Although if we can get some positiveness and continue to see the current electricity supply, it will be positive, which will be great for us. While input costs are moderating, we still see some raw material and packaging costs that remains high. There are still some pockets of raw materials that we still see continued price increases. Our group adopted an increased focus on product innovation, we will drive revenue growth and continue our drive towards brand share gains, and we will -- where we will focus on the price volume and margin to maintain our operating -- current operating profit margin of 10%. If you look at our international business, customer demand for canned fruit product continued to remain strong, and the major focus will be on export volume recovery in H2. Very important for us is we need to reduce the backlog of export shipments caused by port delays. I've made mention of the vessels being routed around Africa due to the Middle East crisis, which obviously compounds the availability of vessels and containers. I've made mention of the 3 weeks, so we're probably 3 to 4 weeks behind currently on shipments, and we will -- we are really focusing hard to get our products out and to maintain our operating profit margin of 10% through the cycle. Thank you to everybody, and happy to field -- Christiaan and myself, happy to field some questions. Thank you.

Pieter, the first question we have this morning is from Anthony Clark of Small Talk Daily Research. He says, thank you for the results and presentation. Anthony asks, in this highly challenging consumer environment where consumers are highly resistant to price increases, what price increases has Rhodes implemented lately, if any? And what categories are currently doing better than others?

Yes. Thank you, Anthony, for that question. We would see price increases more in -- fairly lighter price increases. We would have seen price increases in the last year. We made mention of food price inflation being north of 10%. So currently, we foresee price increases to moderate through the current levels of the inflation rate, which will be in the range and anything between 4% and 6%, I would think at this stage. But I think it will also be very category specific. I made mention of certain raw materials that we see [indiscernible] packaging cost at this stage, looking like that flat. So specific categories where we see -- we've seen a massive increase because of a shortage in orange concentrate, so that will put pressure on our product, on the juice category, specifically relating to [indiscernible] and another specific raw material that we've seen a huge increase in due to a shortage in specifically on ginger as an example, which is imported from -- mainly from Nigeria and India, where there's been a huge increase. So there will be high increases, but it will be very category specific. And we will in this environment, as you correctly noted, where consumers are under strain, we need to be extremely careful with the price increases. We've been comfortable with our operating margin that we have achieved. So obviously, we just need to continue to recover any cost boost that we foresee. But hopefully, those increases will be more in line with the current inflation levels.

Thanks, Pieter. And then a second part to Anthony's question, he says, what consumer trends are you currently seeing?

Yes. Anthony, I think what we've seen -- there was a recent report on -- specifically on the protein category. I think the consumers are under massive strain with regards to wanting to get -- to buy the cheapest protein that they can get. So obviously, we would foresee that those categories will continue to grow. We're also seeing some really good growth coming from our pie category where I think a pie is still a good value offering for that specific consumer. We're seeing a lot of people that obviously has gone back to work after the -- after the Covid. And obviously, that is something that a lot of people buy when they're out of home. So I think there is some opportunity, there's some opportunity in the -- out of home markets. So yes, so those are some of the specific opportunities we foresee. I also see some opportunity for us in our juice category where we've launched the nectar range, which is a cheaper alternative to our 100% juice. And then as I might mention, the protein category is specifically where we focus on these meat meals where we foresee that there's massive opportunity to put those products in the market. And then other category also that we will continue to focus on is our spices category. We've seen that -- that we managed to get -- to be the #2 brand and with our new innovation there, I think there is some opportunity within that category as well.

Then we have a question for Christiaan, and this is from Peter Cromberg of [ Major ] Market. Is there any appetite for refinancing any of the upcoming debt maturities?

Yes. We look at the balance between loan and debt on a continuous basis and what we foresee to come in the future, I think we currently are happy with the balance that we've got and also the amortization of the long-term debt over the next 3 years. So unlikely and also an important consideration is always the cost of debt. And yes, long-term debt always come with the so-called raising fees, which often makes it more expensive than short-term debt, obviously in the short term, but it depends, it all depends on our future. But with what we know now, I think it's unlikely that we'll do so.

Thanks, Christiaan. And then a question from Chris Logan of Opportune Investments. He says, well done on achieving most of your targets. He says, can you please advise of your factory capacity utilization rate? Which he guesses, has dropped given the declining volumes.

Yes, I think you as sometimes in a manufacturing environment, we all know most important for us is to get volume gains and drive volumes within the business to give you some operational leverage. So yes, in an environment where volumes are under pressure, sometimes it can be to your benefit with regards to capital investment where you don't need to invest in equipment due to an increase in volumes. So I think, obviously, we do put in our integrated report, we put our capacity utilization per plant [ in ]. We even mention our specific percentages. So Chris, I think the comment is, yes, obviously, in most of the categories where we've seen some decline, so it will give us an opportunity. That's why it's so important for us to focus on efficiency gains, gives us a bit of an opportunity to focus our capital investment in those efficiency gains and replace some of the old equipment to ensure that we get a bit of operational leverage irrespective of volumes. But yes, I think we've got some additional capacity available due to the fact that there is some volume decline.