RFG Holdings Limited (RFG) Earnings Call Transcript & Summary

Good morning and welcome to all present today and thank you for attending the Results Presentation. It is a privilege for Tiaan and myself, our CFO, to present our annual results for the financial year-ending 29th September 2024. I will start with a review of our group results and thereafter, Tiaan will take us through the financial numbers. Where after, I will talk a bit about the trading and then also pick up on sustainability and talk about our capital investment and then have a look at strategy and outlook. After which, Tiaan and myself will gladly answer some questions. If I look at the numbers looking at the review for the year. The group exceeded our group operating profit margin of our target of 10% by 100 basis points to 10.6%. We benefited from a focus on profitable growth, cost recoveries and a tight expense control. We generated operating leverage through production efficiency gains from capital investment. And a strong regional performance compensated for the good, but lower international profits than the prior year. We saw some regional volume recovery in H2. We still continue to see a weak consumer environment in South Africa where after volumes recovered as sentiment improved growing by 3.2% for H2, prior year or for the year volumes were down 1.3%. We saw some good volume growth in our regional long life business in September. Volumes were under pressure in the international segment where we saw international volumes slowing down by 11.4% where we saw some softer global pricing and reduced demand for canned deciduous fruit specifically. Lower volumes due to ongoing shipment delays at the Cape Town and Durban ports were seen. If we then just quickly look at our progress against our targets. We managed to achieve our medium-term targets for operating profit margin and return on equity where we specifically look at 3 metrics: our revenue growth, operating profit margin and return on equity. Medium-term target being on revenue growth, GDP plus CPI plus 2% adding up to 6.7% where we managed to achieve 1.5% and in 2023, 8.7%. We'll talk a bit later about that. From an operating profit margin perspective, our target being 10%. We managed to exceed the target achieving a 10.6% operating profit margin after a 9.6% in 2023. Our return on equity where the target is weighted average cost of capital plus 2%, which adds up to 15.3%. We managed to achieve 15.6% against the prior year of 14.9%. Important also to note is that our Board showed some confidence in the group's profitability and cash generating ability together with the outlook for sustained earnings growth and we decided to increase the dividend payout ratio. Tiaan will give a bit of more insight into that when we look at the financial review. Thank you, Tiaan.

Good morning, everyone. Resilient regional revenue growth contributed to group revenue growing by 1.5% to ZAR 8 billion for the year. The regional revenue increased by 5.9% to ZAR 6.4 billion. And what was noteworthy, price inflation and the rate of volume decline slowed during the year and more so in the second half of the year. International revenue, on the other hand, declined by 12.5% to ZAR 1.6 billion due to lower volumes of canned fruit being exported. The group profitability improved with group operating profit increasing by 12.7% to ZAR 852 million for the year and accordingly, the operating profit margin improved by 100 basis points to 10.6% for the year. The regional segment increased its regional operating margin and that led to operating profit increasing by 28% to ZAR 675 million for the year and the margin expanding by 180 basis points to 10.6%. The margins was supported by effective sales price and margin management as well as production efficiency gains from capital investment in the business. The turnaround in load shedding resulted in diesel cost savings of ZAR 37 million for the year in the regional segment. As far as the international business is concerned although the margin declined, it's still well within our target range. The operating profit was, however, 22.8% lower at ZAR 189 million while the margin declined by 160 basis points to 11.4%. The margin was impacted by weaker pricing and lower volumes exported of deciduous fruit, but it was supported by efficiencies from the upgrade and replacement of equipment at Tulbagh fruit plant. An insurance recovery of ZAR 29 million for a claim relating to fruit losses in the prior year at the Tulbagh fruit plant is also included in the operating profit for the year. And in this case, the benefit from the reduction in load shedding contributed ZAR 7 million relative to the prior year. This is a lower number because load shedding disappeared in the second half of the year, which is after the production time for that specific plant, deciduous canning plant in Tulbagh. The net interest expense reduced by ZAR 16 million due to the lower debt levels in the business. The tax expense increased by 13.4% due to the increased profitability and the effective tax rate is down 80 basis points at 26.5% for the year. The above results gave rise to robust earnings growth. EBITDA increased by 9.5% to ZAR 1.15 billion and the margin improved by 110 basis points to 14.5%. Headline earnings increased by 18.2% to ZAR 577 million while headline earnings per share was up 18.6% at ZAR 2.222 per share. Diluted headline earnings per share increased by 17.6% to ZAR 2.187 per share. Cash flow was well managed during the year with free cash flow amounting to ZAR 545 million, which is a small decline of ZAR 22 million from the prior year. Accordingly, the free cash flow return was lower at 6.8% versus 7.2% in the prior year. Net working capital was 12% higher than the prior year due to an increase in accounts receivable in [ May ] due to the timing of the year-end versus the calendar months end of September. The increase in inventory was contained to 3.6% while capital expenditure amounted to ZAR 324 million versus ZAR 288 million in the prior year, which represents a 12.5% year-on-year increase. The debt position has improved over the year with repayments of long-term loans amounting to ZAR 218 million and the reduced net debt levels by 37.1% or ZAR 270 million to ZAR 457 million at the year-end. The net debt-to-equity ratio improved from 21.3% in the prior year to 11.9% while the net debt-to-EBITDA ratio also improved from 0.7x to 0.4x for the 2024 financial year. As Pieter has mentioned, the Board approved a more aggressive dividend payout. The dividend cover ratio reduced to 2x headline earnings per share cover from the previous 3x diluted headline earnings per share cover. This will increase the dividend payout from 33.3% currently to 50.0%. The dividend based on this increased by 79.2% to ZAR 1.111 per share, which is payable in January of next year. Group revenue since 2020 grew by a compounded annual growth rate of 8.1% to the current ZAR 8 billion. The revenue drivers for the financial year was still negative volume growth of 3.7%, price inflation of 5% and a 0.2% contribution from a weaker rand against the basket of currencies. The breakdown of revenue growth over the past 3 years show the trends in terms of volume growth and rightly negative volume growth. In 2022, the group achieved 5.5% volume growth. At the time, it was largely driven by increased exports. That turned around to negative 8.3% volume growth in 2023, which improved to negative 3.7% in the current year. As we know, price inflation is also on the decline from a high of 14.1% in '22 to the current 5%. And the impact of currency also at 3.4% contribution to revenue growth in the prior year and only 0.2% in the current year. International revenue, the basket of currencies in which the business trades remain in the same with the U.S. dollar being the biggest trading currency representing 66% of exports. The impact of ForEx movements on the international segment revenue significantly so in 2022 relative to 2021, it contributed ZAR 118 million to revenue growth; in 2023, it was ZAR 245 million compared to the ZAR 14 million in the current year. The table at the bottom right of the slide shows the average rates, which was achieved on the revenue line over the past 6 reporting periods and it's obvious the significant depreciation in the rand exchange rate, which took place basically since the second half of '22 to the second half of '23, and that started obviously and it swung towards an appreciation in the rand exchange rate in the second half of 2024. Operating profit grew at a compounded annual growth rate of 21% since 2020 that is from ZAR 402 million in 2022 to the current ZAR 864 million and the margin also improved from 6.9% to 10.8% over the period. Growth in headline earnings and dividend payments. Also headline earnings compounded annual growth rate of 26.5% and the dividend payment at 40% compounded annual growth rate over the period. Working capital: the net working capital to revenue ratio is at 24.4% for the year compared to 23.5% in the prior year and it is basically due to the impact of timing on accounts receivable and lesser extent, accounts payable and the days is at 118 days versus 115 days in the prior year. Higher inventory of canned deciduous fruit gave rise to the increase in inventory days on inventory. Free cash flow for the year amounts to ZAR 545 million like we said, but important to note that free cash flow benefited from the timing impact of our year-end. So far, that ZAR 118 million of provisional tax payments was paid on 30 September, the day after our year-end. This will again normalize in the 2025 financial year. The utilization of the free cash flow that was generated; ZAR 162 million went towards dividend payments, ZAR 75 million to expansion CapEx and ZAR 218 million towards loan repayments, ZAR 55 million towards lease repayments and ZAR 15 million to other items; which the net of it gave rise to a ZAR 20 million increase in cash on hand. The capital structure has also improved significantly over the past 5 years to the current one where the equity in the business amounts to ZAR 3.8 billion versus ZAR 457 million of debt. The breakdown of debt for the current year consists of ZAR 261 million of long-term loans versus ZAR 479 million the prior year and financial lease is ZAR 117 million versus ZAR 150 million and net bank overdrafts ZAR 79 million versus ZAR 98 million. So solid improvement in the reduction of total debt for the group. The loan repayments in line with what was previously reported. By the end of 2025, we will be left with ZAR 62 million of term debt or long-term debt. And basically by the end of '27, it will all be repaid except for a small portion of ZAR 28 million that is bank loans. Thank you, Pieter.

Thank you, Tiaan. Can you just go to the trading review slides, please? Thank you very much for the comprehensive feedback on our financial numbers. Just a couple of comments. If you look at our segmental revenue broken out between long life foods, fresh foods and our international division. You would see that if you compare it to the prior year: in our regional business, prior year it was 47%, it's now 50% of our business; our fresh foods was 29% in 2023 moving up to 30%; and our international business in 2023 was 24% and is now 20%. I think it's a fair mix of our revenue. If you just look at the regional business, just a short summary there of our product offering where we offer our brands and private label ranges to all the major domestic retailers. In long life food, you can see that we operate in several categories as well as in fresh foods as mentioned there and you can see a picture of all the brands that we focus on. If you look at private label, we've continued to follow a dual strategy of growing our branded portfolio and manufacturing private label ranges for all the major retailers. You would see in the group there was not a massive change, a 2% with regards to private label. In the regional business, you can still see 58% of our business being private label business -- being branded business and then 42% being private label. And then also, you can see the split there in our regional long life foods and in our regional fresh business between branded and private label. If you look at the regional sales by channel, you can see that our retail business constitutes 57% of the revenue and our business into Africa 7% and then you can see all the others split between out of home, co-packing, wholesale and our industrial business. If you then look at our regional performance, I think a very good performance with revenue growing by 5.9% with the split between our long life foods and our fresh foods business of 6.5% and 4.9%, respectively. But I think most important to note is a 28% increase in our operating profit and also an increase in our operating profit margin moving up from 8.8% to 10.6%. If we then also look at the revenue, if you look at our compounded annual growth from 2020 being 8.3%, but more to note is the operating profit that increased on a compounded average growth rate of 16.6% from 2020 to the number of ZAR 675 million. Just looking a bit at the breakdown. You could see that volumes declined by 1.3%. mix made a 0.3% difference and price 7.5% to end at our revenue of ZAR 6.355 billion. Just a couple of comments on the categories that we operate in. If you look at fruit juice, we saw some good revenue growth in a very competitive category. We successfully launched a Rhodes fruit nectar juice range, which has been well accepted by consumers. We specifically launched the range due to the fruit nectar being a more affordable and competitively priced product in the market. And then we also relaunched our 100% fruit juice range in a prisma pack format. If you look at our fruit nectar range that is in a big pack format. So there's nice distinction between the 2 product ranges and also it's really been a good success for us, the fruit nectar launch, as the consumers know our 100% juice really well. Looking at the canned meat industry, we continue to see Bull Brand share gains. We saw some strong growth in our new canned mince meals that we launched into local and other African markets. Our new canning equipment and capacity expansion is supporting our revenue and our margin growth. And we saw again Bull Brand voted South Africa's favorite canned meat brand in the Ask Africa survey that was conducted. If you look at the canned fruit and vegetable category, we saw some market share gains in canned fruit and vegetables. We saw an improved performance from canned vegetables although we continue to see that it's a very competitive category, which was impacted by climate change with regards to a supply of raw materials. If you look at herbs and spices, one of our growth categories, our growth in the second half was boosted by the launch of our new Hinds shaker range and where we see our Hinds spices being the #2 brand in the category. Pies and pastries, continued volume growth in the pie category being a really fantastic success story for us where we saw some ongoing newness in Magpie, Mama's and Big Jack brand. We today also maintain a commanding market share position and our integration of our pie operations are supporting our margins. With regards to ready meals, continue to see some growth driven by higher levels of new product innovation and upgrades for Woolworths and we continue to see resilience of our higher income customers. Into the Rest of Africa, we followed a strategy where we rationalized our unprofitable SKUs to improve the quality of our revenue. Sales, therefore, declined slightly, but profitability improved and we foresee that we're set for good profitable sustainable growth into 2025. Just a couple of pics in the next slides with regards to product innovation. There you can see the launch of our Rhodes fruit nectar range in 200 ml, 1-liter and 2-liter pack sizes. Here is a picture of our Rhodes 100% fruit juice upgrade to the new prisma format. Then also the product innovation I made mention in the Hinds spices category where we launched the new shaker range. Then with regards to the extension of Bull Brand mince range and pack design upgrades and then we also had a limited edition heritage pack under the Bull Brand pack format. Then some innovation with regards to the pie business where we saw some range extensions of own brand and private label pies. I made mention of Big Jack, Mama's and also on the right hand side, our Woolworths products. And then more innovation with regards to ready meals where we saw some extensive ready meal new product development and upgrade for Woolies. Then to look at our market shares, I think proud to note that we're now the #1 manufacturer in canned fruit and if you look at all our market share positions; in jams we got the #1 position, canned fruit making mention of the #1 position there, second position in canned veg, first in canned meats & meals, and second in long life fruit juices. If you then look at our brand shares: we saw Bull Brand entrenching its #1 brand position; in jams #2; canned fruit #2, canned veggies #2 and #1 in canned tomato and corned meat as I've mentioned. Then Hinds spices in the #2 position in the category: infant meals #2; spices, herbs and pepper as I made mention #2 position; also in 100% fruit juice #2; and then in retail frozen pies and in retail frozen paste category under the Today brand, we are the #1 position. If I look at the international business, just a comment on our market offering. We're the long-term supplier to global retail and premium branded customers where we operate in several categories in canned fruit, fruit snacks in plastic cups, long life fruit juices and our industrial pulps and purees and we operate in the major markets of the U.S.A. and Canada, United Kingdom and Europe, Asia and Australasia as well as South America. There you can see the revenue by region with a breakdown and comparison to the prior year, but not massive changes. If I then look a bit more granular towards our international performance. We saw a decline in revenue of 12.5% and operating profit down by ZAR 22.8 million, but still our operating margin well within our target of 7.5% to 12.5% declining from 13% to 11.4%. If you look at our revenue compounded average growth rate from 2020 being 7.4% and our operating profit at 50.3% in comparison to 2020 irrespective of the decline in our operating profit margin, as I mentioned, still well within our targeted operating margin range. Looking at the revenue breakdown. Volume being down by 11.4%, mix change of 1%, price reduction of 2.9% and currency making a 0.8% difference to get to the revenue of ZAR 1.651 billion. Couple of comments on trading in that specific segment of our business. We saw some operating and factory efficiency gains with our ongoing upgrade and the replacement of equipment at Tulbagh fruit products factory, which supported our margin. We saw some improved factory efficiencies over deciduous fruit canning season. Then looking at our pineapple harvest, which was impacted by climate changes, the ongoing drought conditions in Eswatini resulted in low pineapple yields that put pressure on fruit distribution. Planning to source some fruit to partially cover the shortfall in our production tonnage and we had some lower opening inventory levels to impact volumes in the new financial year. If you look at currency and pricing, global shortage of canned pineapple resulted in strong pricing. Softer global selling price for canned deciduous fruits are seen and industrial product pricing firm although from a canned deciduous fruit perspective in the new year, we also see some softer pricing. If you look at our inventory, lower opening stock levels of canned deciduous fruit impacted our volumes in FY 2024 where our balance of volumes with a shifting of the sales mix. Slower volumes resulted in a need to reduce inventory levels ahead of the FY 2025 canning season. We continue to have some shipping challenges where our export shipments continue to be adversely impacted by port congestion and deficiencies at domestic ports and we continue to see some port delays averaging around 3 weeks. Just a couple of comments on sustainability. We continue to align our integrated ESG strategy with the United Nations Sustainable Development Goals. You could see the 5 specific areas that we focus on and then a couple of comments. Our targets are set for 2025 across waste, water and energy consumption and greenhouse gas emissions. We will put out science based targets for greenhouse gas emissions reductions by 2030. I'm proud to announce that the Rainforest Alliance certification was received for canned pineapple products at Eswatini and RA recognizes global environmental, social and economic sustainability farming practices. Looking at a couple of comments on the renewable energy solutions where we generated 4,935 megawatts of renewable energy in 2024, 2.5x more than the prior year. We installed solar power at our Linbro Park pie factory where we've got now solar energy solutions operational at 8 production facilities as well as our dairy farm. We're also piloting battery energy storage at our fruit juice factory and we plan 2 further solar installations for 2025. We're also evaluating the thermal solar field at Groot Drakenstein to reduce our resilience on coal boilers. Couple of comments on the reduction of food waste. We are a core signatory to the National Food Loss and Waste Agreement commitment to reducing food waste by 50% by 2030 and 134 tonnes of food products were donated in 2024. Then a couple of comments on capital investments where we saw that we spent ZAR 324 million on CapEx during the year and there you can see the breakdown between maintenance CapEx, expansion CapEx and our pineapple crops. And in 2025 we foresee that we will spend ZAR 430 million, which will include ZAR 44 million for pineapple crops. Then all our production base are all well-capitalized with capacity for growth. A couple of comments on some of our major capital investment projects that we plan for FY 2025. Continue to replace and upgrade of canning equipment in Tulbagh where we will be replacing our evaporator where we brought the expenditure forward from 2027 and we foresee that products to be completed in 2026. Some installation of an additional fruit juice line in Wellington after good growth that we see and that product is scheduled for completion in FY 2026 before the peak season next year. Then we're going to do some relocation of the bottling plant from our dry goods facility Pakco in KZN to Bethlehem. We will also upgrade our effluent treatment plant at Groot Drakenstein and we'll increase water storage capacity at Aeroton and continue our annual replacement of our pineapple plantations in Eswatini. Then a couple of comments on our strategy and outlook, looking at our strategic focus areas for 2024 and our progress against these priorities. We specifically focus on those strategic focus areas. Input cost recovery to sustain margins. Maintaining tight cost management. Capitalize on our growth momentum of recent years. Invest in efficiency improvement projects in our factories. Looking at our quality of our revenue, execution, product quality, capacity and cash flow management. Complete SKU rationalization across the portfolio, which we managed to achieve, but although it is an ongoing exercise to ensure that unprofitable SKUs are taken out of the business. I made specific comment to that in our Africa market. We will continue to drive innovation through new product and category development. I showed you some of the pictures of the new products and ranges and pack formats that we launched. And then we will continue to identify potential bolt-on acquisitions. We did evaluate some opportunities, but we didn't see any suitable acquisition targets. Then with regards to 2025, our strategy is to be the supplier of choice for fresh, frozen and long life meal solution in selected markets. If you look at our group strategy, we continue to focus on our 5 strategic pillars and we continue to ensure that we deliver and are measured against our 3 medium-term targets. We will continue to drive revenue growth with focus on fruit juice, dry goods, pies and ready meals and we'll continue to do innovation through new product development. Also an increase in innovation in the protein meals category and we will also continue to maximize opportunities in fruit cups to drive organic growth in our international business. We will continue to enhance profitability by further focusing on factory efficiencies and that will be supported by our capital investment program. And also our vertical integration in our regional business has been a good value-add. Then we'll continue to look at expansion opportunities where we will evaluate new product categories like we did with the fruit juice nectar range launch and we will continue to look at any opportunity for potential bolt-on acquisitions. Then a couple of comments on our outlook. Looking at the regional segment, our revenue growth to be supported by our trading momentum from Q4 FY 2024 into the new year. We saw some good growth in September and that continued into October. Continue to innovate with regards to new products to increase our brand shares. Improving consumer confidence is seen in the short term and we hope to get recovery in consumer spending in the next 12 to 18 months to support revenue growth. We will continue to maintain our regional operating profit margin at our target of 10% by focusing on our price, volume and margin management and are improving operating efficiencies in our facilities and in our business. Then from an International segment perspective, we are confident that we can maintain our operating profit margin within the 7.5% to 12.5% target range. We do foresee headwinds from stronger exchange rate and lower global pricing specifically in the deciduous fruit canning division and also in the industrial market. Impact of lower pineapple volumes due to the drought in Eswatini. But irrespective of that, we will focus on price volume and margin management and foresee further efficiency gains due to capital upgrade and replacement at our Tulbagh facility. Thank you very much. That's Tiaan and myself's presentation for today. And you're welcome to field some questions and we will answer them gladly. Thank you very much.

Pieter, at this stage, we haven't had any questions asked on the webcast. The question facility has been open since the start of the presentation. So maybe let's just give it a minute and see if anybody has got any questions they'd like to post. First question here is from Stuart Bradbury from Nedbank. Is there a plan to launch fruit cups in the SA market targeting the high LSM channel?

Thank you for that comment, Stuart. We have launched some of our fruit cups as private label. I think Tiaan, you can maybe help me whether we've tried it actually many years ago and he's nodding his head so I would have thought so, but that was before my time. But maybe, Tiaan, a couple of comments in that regard from yourself.

Yes, I can't remember exactly how many years ago, but it was at the time when we started with the fruit cup production in Eswatini. We launched it in the South African market as well as fruit in plastic jars. We had that capability as well in Eswatini at the time. But the product unfortunately proved itself too expensive for the South African market and the newness. South Africans are used to carrying fruit. The new concept was just not well accepted. And so we discontinued it and, as Pieter is saying, today it's basically limited to private label for high-end retailers.

Pieter, no further questions on the webcast. If there are any questions, investors are welcome to ask them via the e-mail facility on the RFG website.

Thank you very much, Graeme, and thank you for everybody for attending.