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Edited Transcript of AVI.J earnings conference call or presentation 9-Sep-19 10:00am GMT

Q4 2019 Avi Ltd Earnings Call

Johannesburg Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Avi Ltd earnings conference call or presentation Monday, September 9, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Owen Peter Cressey

AVI Limited - CFO & Executive Director

* Simon Leigh Crutchley

AVI Limited - CEO & Executive Director

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Conference Call Participants

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* Kgosietsile S Rahube

Citigroup Inc, Research Division - VP

* Roy Mutooni

* Shaun Chauke

HSBC, Research Division - Analyst

* Tinashe Harry Dumile Kambadza

Afrifocus Securities (Pty) Ltd., Research Division - Equity Analyst

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Presentation

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [1]

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Good morning, everybody, and welcome to AVI's annual results presentation. I have my colleagues from most of the business units with me as well. And also welcome to those who are listening in on the webcast who haven't wanted to fight Johannesburg's glorious traffic to be here today.

It's a pretty standard presentation. I'll take you through some of the key features and results. And then Owen will take you through the group financial numbers in a little more detail, the business units and then a little conversation on prospects. And then, hopefully, someone will ask -- [Rudy], I see, has just walked in, which means we will get the traditional balance sheet question.

When I looked at the document, which seems it got a bit bigger this year, I said to Owen, well, I guess we could say that it's taken as read and we could just have questions, but that might be seen as discounting, which seems to be the fashion in the modern market environment. So let me just take you through, I guess, the key features.

I think, a key thing for us, we had a tough first semester, and it was very important for us to try and build some momentum back into the second semester. Traditionally, AVI's second semester is smaller than the first, so we were pleased to do that. The environment hasn't materially improved. It's still a tough consumer environment. I don't need to tell any of you that. We saw volume constraints in many of our categories, and that made it very difficult. The most important thing we believe that we manage is to manage, I guess, volume and value. And every one of our categories obviously has a different role and a different set of challenges, but I think on balance that was pretty well done. So we protected GPs in what was a fairly tough environment.

Key for us has been the importance of managing costs for a number of years. I think, 3 or 4 years ago, we felt that the economy was slowing. And we kind of anticipated, I guess, a much tougher environment. I think the numbers speak for themselves, good management of costs. We did have some, I guess, ones-off costs going through the P&L mostly in the first semester, and we've highlighted those. Obviously, in a business that depends on volume, there's a little bit of deleverage between the top line and obviously the operating profit. And you've seen that with operating profit down 3% on a like-for-like basis. These are all like-for-like numbers when we say them because of our adoption of 3 IFRS accounting standards in the financial year.

Strong cash generation. I think a hugely important metric for AVI is our ability to generate strong cash flows even in difficult circumstances, not that we didn't continue investing in important projects in the group, spending about ZAR 472-odd million in the year on a number of important projects. Owen will take you through the accounting standards in a bit more detail; and obviously some deleverage in headline earnings, slightly higher debt levels on the year and obviously the dividend cover maintained but slightly down on the prior year because of the decline in headline earnings.

That's the history. I guess you can see the top 3 businesses, I guess, took the most pain. We obviously had the restructuring costs in the Green Cross business, which affected the footwear and apparel business, and the December challenges for Spitz. I&J slightly lower performance and Indigo slightly lower performance but strong grocery businesses notwithstanding the difficulties. Both delivered a decent number. And I think the track record speaks for itself over the last, I guess, 15 years.

CapEx. We had, I guess, in '15, '16 some money that we put into I&J's vessels. We flagged those obviously in the red, but we've sustained our rate of capital investment, albeit that it's declining because of the maturity of most of our factory environments. And you can see the depreciation number just trailing obviously the capital investment number. And we think that's a fairly sensible number as we go forward in an environment that's probably more constrained than not. Return on capital employed remains very strong. That's the reported number. It's not the like-for-like number. It's a little bit higher 27.2% ROCE on a like-for-like basis but, we still think, a very credible return in a tough environment. And cash conversion remains strong, as I've already said, despite obviously the difficulties in volumes.

Dividend yield. This is obviously the year-end share price. Obviously share price has come back a little since then, so the yield is still very good. And that excludes share buybacks. And that's the return to shareholders over the last 15 years. Around 93% of all headline earnings have been paid back to shareholders despite the investment in the business obviously over that period of time.

And let me give you to Owen.

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Owen Peter Cressey, AVI Limited - CFO & Executive Director [2]

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Thank you. Good afternoon, everyone. I'll take you through the financial results.

To start with, some boring accounting stuff: 3 new standards implemented, with effect from 1 July 2018. IFRS 9 financial instrument has had a negligible impact on our results, so you won't see the numbers featured and -- in our analysis. The revenue standard had a major impact on revenue and gross profit, and that's highlighted here. So quite a big impact on the gross profit margin percentage. And then at the operating profit line that impact is primarily the new leases standard and obviously adjusting after the financing costs; and a pretty small impact at headline earnings level, for AVI at least. We early adopted the lease standard so we get this all over in 1 year in terms of comparability. There's lots of extra information in the SENS announcement to help you unpack it. And from next year, obviously everything is IFRS like-for-like going forward. This presentation, as Simon has noted, we pretty much used like-for-like numbers, so restating FY '19 back to the same basis as FY '18.

So looking at the income statement on that basis, revenue growth of 1.2%, low growth environment obviously. We didn't need a lot of price to protect gross profit margins in this environment, for a combination of reasons. We came into the year with pretty good hedge positions, particularly on the U.S. dollar which is what a lot of our imports are denominated in. And underlying raw material prices have been reasonably stable and at good levels for most of the year. Cost control has been a feature of the year, so overall cost of sales going up only 2.4%, selling and admin up 1.7%. That's been essential to help deal with the low growth environment but not quite enough to deal with some of the volume pressures that the business has faced, particularly in the fashion brands side.

So coming to an operating profit decline of 3% and a drop in operating profit margin to 18.2%.

We've had higher financing costs this year in line with increasing debt levels. I'll talk to debt going forward a little bit later, but we think it should come down in FY '20, and the financing costs should be reasonably stable for next year at this sort of level.

Joint ventures. Simplot had a weak second half causing that decline. And then in terms of capital items, we have written off the remainder of the Green Cross trademark of about ZAR 100 million. And we've also impaired some of the other fixed assets in view of the restructuring process. And obviously we haven't realized all of those assets, so there will be some adjustments to those in FY '20 but, I think, pretty minor. We've obviously been fairly cautious in our approach and not wanting to take items into FY '20 from the restructuring.

The effective tax rate, pretty consistent year-on-year.

And then overall headline earnings down 4.7% and HEPS down 5.2%, with dilution in terms of shares going into the market from the share schemes, which you would have noticed over the last few years have been declining as an effect.

Looking at the H2 like-for-like income statement. This has obviously been something we've focused on a lot as after a difficult first half, having an improvement in H2. So you'll see growth in revenue and gross profit -- and in operating profit, 2.1% growth there; and pretty consistent operating profit margin. So we were pleased with that. We have had high financing costs come through in H2 and, as I've already mentioned, low profit from Simplot in the second semester, giving us on total a decline in headline earnings but not as high as in the first half.

So looking, breaking down the movement in headline earnings, a decline in operating profit. You'll see these items, I guess, come up a lot through the presentation. They're all covered in the bullet points. I guess the overriding feature has been low demand environment, so not easy to get volume growth, especially in categories where competitors have been aggressive. And then we've had these other items which are primarily in H1 and giving us the decline in H1 that we reported. I've covered the other items, I think, adequately already. We move on.

This slide here is quite busy but really just to highlight that we've seen a lot of pressure on the fashion brands side, particularly in footwear and apparel, which Simon will talk to later. So that's where we've had the most consistent, I guess, demand pressure. We have had some lower volumes in food and beverage categories but overall food and beverage pretty resilient, delivering gross and operating profit and pretty much preserving the operating profit margin for the year.

Looking at the change in revenue. So as I've mentioned already, not a lot of price needed or taken during the year, some specific areas of the business, which will be unpacked by business unit later. Volume pressure in several categories in food and beverage and in footwear and, I guess, flattered to some extent by a very good performance in creamer, with significant volume growth there benefiting from competitor supply issues which we were able to meet that demand with very high service levels because we've got ample capacity.

Gross profit margin pretty well protected, a combination of coming into the year with some good hedges and good raw material prices. I guess we do see a similar situation going into next year, where we think we're coming into the year with a decent set of hedges that will help us to protect gross profit margins in FY '20.

For the operating profit, just looking at the breakdown of that by business unit. So Entyce and Snackworks both having decent full year performance in this environment, I&J battling with some cost pressures as well as the unrealized losses on the fuel hedges and then on fashion brands mostly volume pressure impacting them.

H2, a key driver was a much stronger performance from biscuits sitting in the Snackworks business unit, helping us to lift back performance; most of the other business units performing pretty in line with H2 of last year. Just, Green Cross, we had only provided for a portion of the restructuring costs at H1, and the balance we put through in H2. So an extra 12 million coming through there.

Looking at cash flows and gearing and, firstly, just some restatements. So the cash generated by operations in the IFRS numbers is a bit flattered by taking out a major cash flow and re-disclosing it as interest paid and leases repaid. So we restate that. And the depreciation obviously includes the depreciation on the right-of-use assets, and then net debt includes the lease liabilities. That's the long- and short-term portions making up the ZAR 408.9 million, obviously having quite a big impact on the gearing from 30% to 35%.

Return on capital employed and -- a little bit better on a like-for-like basis.

So looking like-for-like the same items: cash generated by operations slightly down compared to operating profit that was 3% down; working capital up mostly due to higher stock levels at the end of the year, a combination of reasons for that. We've got some extra raw materials and mostly relating to procurement opportunities; and higher finished goods, which is mostly timing issues over the year-end and obviously, I guess, the main buildup being in footwear which we will watch closely and manage through FY '20.

Capital expenditure a bit higher than last year. If you remember, we deferred essentially -- or some of last year's project spend moved into FY '19. We'll talk through that on a more detailed slide [just now]. Depreciation starting to stabilize. We've been spending CapEx reasonably consistently for quite a long time now, so that's normalizing. Net debt, gearing up from 20% to just over 30%. We do see that coming down through FY '20. And the return on capital, you can see, down on last year but still very strong.

Dividend. Just for noting, we've been pretty consistent with our dividend policy for a while now. We think the 80% payout ratio is still appropriate and sustainable in the business going forward. Obviously, no special dividend this year, so the total dividend lower.

Just some detail on the capital projects. So this year, we've completed two. The major project on the chocolate lines at Westmead biscuits, that's commissioned and pretty much running as we want. I think there are a little bit of tweaking in FY '20 but happy with how that has gone. The rooibos expansion project, very good progress. That will be commissioned and operating during this year. I&J, picking up some reasonable spend on their fleet. And you'll see that that's building next year. We've got a 10% quota increase. We need to make sure that the fleet availability is what we need and that they can catch their full quota for the year. You'll see also on the retail side continuing to invest there. That's mostly refurbishments, not a lot of footprint growth planned at the moment.

Total capital expenditure, worth noting. So within a range of ZAR 400 million to ZAR 500 million is what we've been guiding for a while, and that's where we see it going in FY '20.

Just some color on the hedges, quite important to have a picture of what we are going into FY '20 with. Pretty decent cover for the first half of FY '20 and the rates are decent compared to current rates. And then going into the second half of the year, obviously we will have to see where spot rates go, but we are happy with the cover book as it stands. And in combination with our basket of raw materials and the positions we have on those, we think we've got a very sound position to defend gross profit margins and profitability in FY '20, as long as demand is reasonable. And Simon will speak to the demand situation for each business in the business unit slides.

And just to wrap up, just some detail on this unrealized loss on I&J's fuel hedges. It's really the movement in FY '19 versus the movement in FY '18 that's given us this big variance. So we've ended the year with a small negative mark-to-market position. Obviously hard to call where the mark-to-market position will be relative to our hedge book at the end of each reporting period, but I -- from our side the underlying driver has been higher fuel prices, and you can see that coming through clearly. And secondly, we hedge this book pretty consistently. So we would normally target having around about 50% of it covered. So the volume of the hedge, the size of the hedge is likely to be pretty consistent at each reporting period.

I'll give you back to Simon.

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [3]

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Those numbers have obviously dulled you to sleep, so let's talk about something that will wake you up, coffee, creamer and tea, Entyce Beverages; as Owen said, we think a pretty decent performance under the circumstances. In this environment, I guess the most important thing you have in a brand portfolio is that you have brands that serve different price points, different consumer affordability issues. So on balance, in tea, I think the portfolio did good work, with the premium teas obviously under pressure, but some of the lower price points defended the black tea portfolio. Our rooibos margins were maintained. I know we've talked to you over a number of years about the increases we've seen in raw material prices. So we were pleased, despite some of the price pressures in rooibos, to hold onto, I guess, most of the volume, although we did lose some volume. And clearly in an environment like this you'd expect your affordable brands to have, I guess, a little more traction, which is what happened in the tea portfolio, but don't take that as a straight line. It's very much something that happens on the margin. And we come back to some market share slides a little later. Improved factory performance in this portfolio was encouraging; and as Owen has already talked about, good cost control from the Entyce team.

Coffee is a category we transact on all 3 tiers, premium, instant and affordable. We've had, I think, a long run of aggressive discounting. Most of you who cover, I guess, global FMCG will know that JDE and Nestlé have been straddling each other globally. And we found some of that, I guess, competitiveness in our own environment, so we've had lots of discounting, particularly in mixed instant, and that persisted through the year. And I guess the key thing that's helped a little has been this long period of very benign commodity prices in coffee, which has given us some ability to protect some of the gross margin. Our affordable brewed portfolio has performed extremely well, which helped underpin. The key thing that we're trying to tell you is that the portfolio's profitability notwithstanding these constraints remains very healthy. Creamer, Owen has said it. We had, I guess, the benefit of some competitive supply issues which gave us the opportunity in a growing category to grow, I guess, a little more than the market, which was pleasing. The key thing is that the factory was able to perform very effectively. And that volume leverage certainly added to the portfolio's profitability in creamer.

I'm not going to go through these in detail. You can read them at your leisure. Safe to say that you can see quite clearly there, aside from creamer, there were pressures clearly in tea and in coffee in terms of volumes; and selling prices obviously coming back, as discounting was necessary to protect our share. And you can see the share slide that comes up now. There's nothing really meaningful moving here; a little bit of decline, as you would expect, in the overall category. And Five Roses, which is our premium tea, trades at a significant premium to the market. And Freshpak pretty much benign. And Frisco, obviously the discounting helping us hold onto share. Trinco, our affordable black tea, gaining share. And then you can see the creamer market share gains for Ellis Brown.

Raw materials. Owen has said it, aside from the rooibos cost pressures, very little in this portfolio that's notable, obviously some decline. Black tea prices, which is an auction-based system, have come back, which has helped, but generally nothing material in the raw material portfolio for Entyce.

Snackworks, our biscuits and snacking business. As Owen said, we had a tough first semester. If you remember, we had quite a lot of big projects, and both factories wrestled in the first semester to bear down some of the manufacturing requirements after installation. And that affected our service levels and our ability to supply volumes. That came back very nicely in the second semester. Cost pressures, I think, are well managed here, pretty much the same environment as Entyce, as Owen has said, nothing too material in input cost pressures coupled to, I guess, a decent hedge book. We've got some good growth in our international business, particularly in biscuits, in the second semester as well.

The snacking portfolio, profits slightly down on the prior year, margins very strong; quite a lot of increased competitor activity in this category, something that we are very alert to and don't necessarily always follow because we know that it's a category that can quickly erode profitability if one ends up in a price war. So the profit margins here remained healthy and contributed obviously to a reasonably sustained EBIT margin in the Snackworks portfolio.

Revenue growth obviously benign, some selling price increases, but most notably, in the last few months, the fourth quarter of the financial year, we put our biscuit selling prices up 6% or 7% to recover some of the sustained cost pressures in the category. And revenue growth in snacks underpinned largely by volumes and a fairly benign selling price environment because of the aggressive competitor discounting in the category. Very little share change in the key portfolio, so I think a decent performance notwithstanding obviously the constrained consumer environment.

Raw materials, Owen has touched on that, as you can see in the year, pretty benign.

I&J, a strong performance from I&J notwithstanding some of the drivers. There's always a annualized change between quota. In the first semester, we were quota negative. In the second semester, we were quota positive. The key thing is for us to catch in the, I guess, financial year our full quota which I guess carries through to the calendar year, which was achieved, which was important. Revenue, largely flat, but we did have favorable exchange rates. And on balance, I guess that drove profitability.

Fuel and maintenance costs. The fuel hedge obviously comes through, but it's a noncash item and is an accounting item. We've seen positive catch rates, which I think is important. We've seen an improved size mix, and we're hoping that, that will continue to gain momentum. Our Cape Hake brand, which is a South African brand, is still relevant and still commands a premium in many of our key export markets. So in general, sound cost management, aside from some of the challenges we had in the first semester with the fleet, if you'll recall. And then I've talked about the fuel hedge already. That gives you some breakdown of the operating profit and the impact of each of the drivers. You can see the impact of ForEx, obviously, and the fuel price, I guess, were the 2 meaningful ones.

And then the profit history. I'm not going to dwell on this. I guess the important thing is to see the improvements in the abalone business, which is something we've been investing in for the last few years. And then you can see, I guess, the improving trend. Some of that is a mix effect because we've added an extra freezer vessel. And freezer vessels, on balance, had higher catch rates per sea day than the fresh fleet, but nonetheless the resource is improving, which is hugely important obviously to I&J as, I guess, the years go by. Inevitably, in an environment where we look to optimize the value of our total allowable catch, this was a year where we put more product into international markets, mostly [haulable] fish. And we can see obviously the gains in sales volumes in the export line and obviously the reduction in volumes in the domestic line. Notwithstanding that, in the Coty product business, which is where we largely compete in retail, I guess, record market shares of 54.8%, which was pleasing and growth on the prior year. So the I&J brand in SA doing well in the financial year.

Indigo brands had a tough year with respect to its core category, fragrance body sprays, a lot of competition. We saw in a constrained environment volumes declined in the category, and we also had to deal with a lot of aggressive discounting from multinationals. I guess the key thing for us is always to manage this intelligently because we're market leaders, which means that sometimes we're prepared not to follow the discounting. The key thing for us, as it is across all of our businesses, and this is a very good example of it, is that we tried carefully to manage the category so that we didn't create any undue disruption which leads to the erosion in GPs over time. We did have good innovation in this business. This business has worked hard to try and build momentum outside of the core body spray business, in both roll-ons and body care categories. So a lot of innovation in the year; and pleasing growth from those to partially offset some of the challenges in the top line, I guess, constraints for our core body pray business. Costs, again across the portfolio well managed. And we also had, I guess, excellent and growing contribution from international markets for Indigo.

Sales volumes, you can see just what I've been talking about. We weren't too disappointed with that decline because of the aggressiveness of competition. And again as Owen has said, there was no real meaningful need to change pricing aggressively because the environment and the hedges did their work. Market shares, albeit a decline, but we don't think a bad decline under the circumstances.

Now Spitz group. Challenging for this business is the reality of December. Around 40%-plus of our profitability is earned in the month of December. And I guess it's old news now, but December 2018 was a terrible December across the entire system. And the Spitz business, unfortunately, picked up the worst of that. And we saw obviously in some of our stores that are exposed to the traditional high employment environments of mining and construction not performing as they had in the past. Having said that, F '19 was the second best December that we've ever recorded. So while it didn't annualize against F '18, it still wasn't a terrible December but certainly wasn't enough, I guess, to create some of the deleverage. This business has a higher level of leverage, being a retail business, than the balance of our portfolio. We didn't use price. We were determined to try and hold prices because we felt we had sufficient GP to remain competitive. There wasn't an enormous amount of change in the space in the period of time.

Sales volumes, you can see the decline, and that was largely materially recorded in the December period. Selling prices, as I've said, Kurt Geiger clothing revenue also constrained, but not withstanding that, still gains in operating performance, which was pleasing. I'm not going to dwell on these slides. You can see the history and -- certainly in the booklet.

Green Cross. We've put a lot of work and effort into a major restructure of this business, the most important pieces of it being the integration of the business into the Spitz management team; and the closure of the factory, which allows us to develop a competitive alternative supply chain so that we can engage with competitors. You can see the revenue decline coming through. We are still seeing obviously this ongoing material change with respect to declining independent retailing in South Africa. And so we have, as time has passed, shifted more and more of the turnover in the Green Cross business to our own retail system. Any of you who visit malls will quite confidently, I'm sure, concur with me that it's hardly ever an occasion that you'll visit where you won't find one of the major big box retailers not running a 50% or a 75% sale. It's been remarkable to see this. It's habitualized consumers to buying product on sale only, which is obviously a worry. We try and avoid doing that in our businesses and based on the fact that we're trying to build a brand relationship with consumers, but nonetheless that's the environment we've traded into.

A key part of what we're doing with Green Cross is this international supply chain. So we are, over time, going to rebrand many of our doors to GX&Co, Green Cross & Co. And we've brought in 5 international brands to support our Green Cross business. All of the product that will sit in Green Cross and Co. will be essentially a mixture of our own brand, our own designs. Some of this is coming out of obviously the Spitz' Italian office's capability in terms of design. We've launched 2 GX&Co stores, and at the moment, I guess the average rate of sale for the international brands is already up to 35%, which we're very pleased with. An enormous amount of work has gone into building an international supply chain over 12 months. Like the balance of the business, costs are tightly managed, and we have begun to thrift out some of the store environments that we don't think are relevant going forward. So a lot of work was done in Green Cross to try and improve the opportunity for this business in F '20. It's going to take time to build momentum, but we were pleased with the progress, obviously not with the performance.

AVI International has had a good year, with strong gains in profitability in the year. We've seen some of the markets that really were tough in the prior year recover, notably Mozambique which you know had, had a very poor prior year. We've had good growth in the grocery categories and, as I've said already, really good growth in Indigo cosmetics brands in the region. We've had low input cost inflation, a function of, I guess, the hedges that Owen has spoken about. And we did do some very specific restructuring in Indigo to try and bring down the fixed overhead in the year. That gives you a dimension of the international portfolio and the contribution it makes to the grocery portfolio, pretty stable year-on-year, a little bit of gain, which is pleasing. This is an area which is very important to our ability to grow our brands. We continue to try and work hard at, I guess, building market share across the region where our brands -- where the [diaspora] knows our brands and where our brands are relevant.

Okay. So the prospects for F '20. I think it goes without saying we're not expecting the macro environment to improve markedly. I think we're going to trade into the same difficult and constrained environment. Until such time as there is some momentum in the economy, we expect our consumers to have the same challenges that they've had. We can't run this business with a short-term approach. We have to invest capital. We have to build brands. And we're not going to take shortcuts because of the constrained environment, so we will sustain what we believe for our long-term investors is the best approach, which is a medium-term approach as we begin to learn and understand the nature of South Africa. Is it more of a structural decline? Is it a cyclical decline? Is it a combination of the two? We recognize that our customers' or some of our customers' ability to afford some of our price points is changing. We're certainly developing some interesting plans around that. We do have to continue managing price and volume thoughtfully and carefully. It is too easy to take, I guess, the short-term view and to try and build momentum against a demand environment that doesn't reward you. It isn't a rewarding demand environment from a volume point of view, and we continue and will focus on that in F '20. I think Owen has talked sufficiently about our raw material pricing and hedging. It looks reasonable at this stage, rooibos raw material. It's been raining in the Western Cape, which is good for rooibos farmers which means that we should see, I guess, for the first time, I guess, some reduction in rooibos raw material prices, which we hope will play its way back into volume gains in the category again.

We know in this environment that our competitors will remain aggressive, the multinationals that we compete against. And in AVI's case, it is multinationals that we compete against, way more than it's domestic businesses. They take a market share view of the world. They don't report their profitability in South Africa. They use global hedge books for commodity and currency, and that means that sometimes we can expect them to disrupt the categories that we trade into. We've been doing this for a long time. We think that it will continue, but we don't think we can't manage it. We're just flagging that the creamer volumes that we achieved in F '19 may not be repeated, although I must tell you that the demand remains strong as I speak. We are going to have to invest some additional money in marketing in F '20. We've got some interesting innovation and some plans, and we need to back ourselves because that's important. That's how you build, I guess, volume and velocity in our categories. And the same is true for new launches of products.

Our international business continues to grow. I think we've got opportunities. We're taking a steady medium-term approach. We do invest reasonable sums of money in building our brands' positions in these markets, but we think long term, notwithstanding that these countries have the, I guess, tendency to come and go more than we would like them to be either because of currency or political risk, that we will continue to invest behind the international business. And then as Owen has showed you, we are investing money in F '20. We still think there are opportunities for us to manage our costs effectively if we're looking for opportunities to add either capacity or efficiency wherever is necessary.

I&J. As you know, it will always depend on catch rates. We've got decent exchange rate hedges. We've had a TAC increase of 10%. I think the fishery is looking reasonable, but having said that, we will always have to, I guess, rely on the reality that this is the last of the great hunter-gatherer businesses. Extremely difficult to predict how the fishery may perform, but at this stage the signs is telling us that it's positive. We will keep looking at costs and efficiencies in I&J. This is a business that we've managed to extract a lot of efficiency from over the last 4 or 5 years. Abalone, which is an important growing investment, unfortunately is being affected by the issues in Hong Kong, which has seen its gateway into China disrupted by events that have taken place. We don't know how long this will carry on for. We're hoping that it will settle down. As you know, we achieved both the EIAs for the expansion of the business and for the moving of the cannery to the site, which is a fantastic achievement of our I&J team. And the key thing that I can tell you this morning, obviously still to be gazetted but has been announced by the minister, is that the FRAP process will be adjudicated in December 2021, which I think gives us certainty. We think the minister really understands the importance of getting this right. And so it's not going to be 2020 or the end of this year. It will be adjudicated in 2021.

The Spitz business. I guess the critical thing for this business is going to perform in December. I think we've made an enormous amount of progress in our ability to design and compete for customers. We have a very unique business here. Of course, it does depend enormously on the macro environment being supportive of the business that we have, and we've certainly invested to have a good December. We're not gloomy about it. We're seeing reasonable performance as I speak now. The critical thing will be to see the lay-by book build up between now and December, and the early indications are that there is some momentum there. We will continue to work on building an internationally capable design capability in this business. I think any of you who haven't visited the Spitz environment in the last 2 years, I think, will be fairly impressed by our growing ability to stand with the best brands in the world because of our office in Florence. We've had some new store rollouts in the last, I guess, 12 months, the new suburban design. And certainly those 2 doors that we've rolled out are trading certainly way better than the prior year, which I guess is important. And we need to continue rolling that out, as Owen has said.

Green Cross. So much will depend on the work we've done in the last 12 months. This full import model needs to mature. We need to learn how to use that to, I guess, work with the customers that we're building and developing. And we are determined to roll out our new GX&Co store design. We might modify it a bit as we go, but apart from that, we expect to see material integration benefits in the Green Cross business through the next financial year.

I'm not going to go over those in great detail. I think we represent what those of you who've covered AVI for a number of years know and appreciate. We are a brand business. We work extremely hard to sustain and build long-term relationships with consumers. We believe in product sovereignty. We believe in managing our brand portfolio to its long-term potential, which means that we won't take shortcuts. We're not going to discount aggressively in an environment to shore up, I guess, growth that we know can't be converted into decent gross profits.

We're still targeting earnings growth in this tough environment. We put together a robust budget for F '20. And so I guess, with enough of the initiatives, the efficiency, the cost effectiveness that we've built into the business, we believe that that's still a realistic possibility for us. We will continue to deploy capital into return-on-capital environments that are worthwhile. We still think return really matters in the long run, and that focus will continue to guide how we deploy capital in the business. And of course, as ever, if we develop cash flows that are strong and robust, we expect that to mature. And we see our debt levels coming down through F '20. And we'll continue to do the things that, I guess, we've spoken about, albeit boring but I think sensible, credible. And we do and will look out for acquisitions but only if they are underpinned by strong brands and our ability to add value to them over time.

So thank you very much for listening, and I'm very happy to take questions on myself or my colleagues. I think you're going to have to get a mic if you put your hand up, okay?

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Questions and Answers

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Unidentified Analyst, [1]

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I'm from -- I'm [Foonda Zamini]. I come from [Tycoon Investments]. I'd like to know, the effects -- the xenophobic attacks, has it affected your companies in the African countries? And Pioneer Foods, the -- Pepsi bought Pioneer Foods. The rationale for Pepsi was that they're doing it to control their raw material costs so it should be more efficient. So do you think you would follow that thing? And private label, how has it affected you? Or the impact that you've seen from the customer shifting from private labels or -- yes.

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [2]

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Okay. Xenophobic attacks, no, we don't -- it had no effect in anything cross border. We've had a fair amount of disruption to our supply chains and our ability to deliver. And certainly the Spitz business, wherever they have CBD stores in the areas affected, we've seen in the last 10 days obviously a constrained trading environment, so there have been some short-term impacts. We don't think at this stage that they are long term in any way. The Pioneer acquisition by Pepsi, I can't really comment. We are a business that manages an effective supply chain. We feel we're globally as effective as any of our competitors who are multinational. We focus on it. I'm not really sure whether that would in my mind have been a credible reason to acquire it, but I guess every business has its own rationale. And your last question -- sorry...

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Unidentified Analyst, [3]

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I was asking about how has the private label affected...

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [4]

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Private label. That's everybody's favorite question. Maybe I can answer it for everybody. Clearly, consumers are constrained. And so they look for -- some consumers look for solutions where they can save money, and private label plays that role. Every category is different and some categories have much higher levels of private label. So if you take Indigo cosmetics private label penetration into Personal Care, in the categories that we trade in, is as low as 2%. So we haven't seen in the last 12 months, if that's the sort of time frame you're looking for, a material change in private label across any of our categories. What we've seen obviously in our business is people trade -- some consumers trade from Five Roses to Trinco. And I'm sure that there are categories where people will have traded into private label in other categories for similar reasons, but there's not been a massive impact in our business. It's not something we don't note, don't take seriously. We look at it all the time. We believe that the palliative to private label issues is to understand the tiering in your market and then to serve implicitly with a high level of due care with respect to quality, product provenance those consumers who are paying a premium for a branded product because there's a real reason to pay a premium. And that's our philosophy. Are we going to get the traditional balance sheet question? Are you going to aim it straight at Owen or...

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Unidentified Analyst, [5]

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I'll come to it, Mr. Crutchley. Mr. Crutchley, please allow a comment before the question. I'm referring to the gross profit, which is down 8.9%. Obviously, you anticipated that there will be difficulties during the year because you were clearly cutting expenses substantially right from the start. And it's very encouraging to see that reductions in selling and admin expenses virtually counterbalanced the reductions in gross profits, and for that you need to be congratulated.

Regarding the question, please, Mr. Crutchley: Inventories and biological assets show an increase of 15%. I'm measuring that against the reduction in revenue of 2.1%. However, in fairness, the biological assets, I would think, is the one item over which we have no control. Out of the stated value, what percentage is -- or reflects the biological assets?

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [6]

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Do you want to answer that, Jonty, or Owen? Either of you.

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Owen Peter Cressey, AVI Limited - CFO & Executive Director [7]

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So from a value point of view, the increase in abalone stock value is about ZAR 70 million year-on-year. And the majority...

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Unidentified Analyst, [8]

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Sorry. I didn't get the answer.

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Owen Peter Cressey, AVI Limited - CFO & Executive Director [9]

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So the majority -- the increase in abalone stock value is about ZAR 70 million year-on-year, and that was driven mostly by increased volumes. So the grow out of the expansion that we've been doing at Danger Point. And there is obviously a component of valuation as well coming from the exchange rate. That was about ZAR 10 million.

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Shaun Chauke, HSBC, Research Division - Analyst [10]

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Shaun Chauke from HSBC. One question. On the rebuild of the Green Cross business, is the focus still going to be more on shoes? Or we should expect an expansion into clothing fashion brands. And is the target market still around the mid market as well?

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [11]

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Only shoes. And yes, the target market is the same. Mr. (inaudible)?

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Unidentified Analyst, [12]

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(inaudible) [Congratulations]. You mentioned several times volatility in every market, whether that's goods or currencies or whatever. With the huge volatility there's been in financial markets, have you considered going for more than a 50% cover just because the danger is so much higher right now?

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [13]

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Look, the key thing that we know is that we don't like speculating our hedges -- or speculation. So the most important reason why we do this is that we know that in terms of dealing with our customers and our consumers is stability in pricing. So if we hedge consistently over a long period of time, we know that there will be leads and lags. That gives us the ability to manage pricing on a consistent basis. Sometimes, we do wake up in the morning and Owen and I often wonder whether things don't look riskier and therefore we might take a little more cover. This is a year-end view. So there are times where we might -- if the rand -- and the rand has had some extremely volatile moments which we would have stopped taking cover and on the view that in the end it's all resolved. So we try and look at this continuously, but what we try and do is run between 40% and 60%. And that's our policy, and that is something we apply to a commodity position or a currency position. Because I think, the day you begin to go further than that, you're no longer hedging. You're now bringing speculation into a business that sells packaged groceries or shoes, and I think that would be a very egregious thing for us to be doing notwithstanding that it's sometimes tempting to think like that.

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Unidentified Analyst, [14]

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Simon, just could you give us a little bit more color in terms of private label market? I'm not sure whether you guys sell rooibos and other tea into Woolies, but that's -- that brand seems to be quite strong, a noticeable segment in upper markets. Could you give us a much broader idea of penetration by private label, let's say, in Checkers and in Woolies and Pick n Pay? Or is this only in specific segments where your brand is trading at a premium relative to private label? I'm not sure whether I've got the right end of the stick there.

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [15]

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So I can tell you that private label moving annual total of volumes in rooibos tea is 1.6% of the market at the moment. So that's rooibos. And obviously every category is different, and some categories have higher levels and some have negligible levels. And each retailer has a different philosophy and a different level of penetration. And a lot of it often is underpinned by -- and you see quite a lot of stochastic shifts in the volume of private label, depending on the exchange rate, because a lot of the private label supply is satisfied by imports. And you get periods where imports are shut up because they're no longer competitive because the thesis of private label is -- largely is that it should be cheaper. So it's a moving target. Woolworths represents obviously a remarkably resilient and robust place for private label at high prices. I mean Woolworths doesn't discount its private label products. They tend to trade either at the same or as the premium brands' price points; very different to what Shoprite would do with private label trying to serve a different customer need, a different product experience. But in general, private label is not high in most of our categories. There are 1 or 2 categories where it's changed, if you take 5-year averages. And the one that's probably growing the most, and it's largely in one retailer, is sweet biscuits in Shoprite. That has not really changed in the last 2 years with the same sort of share. Probably it's a function of the rand having become a lot weaker in that cycle.

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Kgosietsile S Rahube, Citigroup Inc, Research Division - VP [16]

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Simon, my name is Kgosie.

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [17]

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Kgosie...

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Kgosietsile S Rahube, Citigroup Inc, Research Division - VP [18]

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I'm right here.

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [19]

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There you are...

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Kgosietsile S Rahube, Citigroup Inc, Research Division - VP [20]

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There -- just in terms of your cost-containment initiatives, I think it's a really good performance, but your costs grew by 1.7%. Can you just maybe give us just a bit of a deep dive in terms of what have you done last year? And I think also you're talking about ongoing focus on cost reduction. What can you still do in the near term?

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [21]

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Look, we have for a long time believed that -- with a declining demand environment that we needed to manage our costs. And I guess the natural reality of the basket of costs across the businesses includes people of -- both in the factory environment, people at the center of procurement initiatives obviously provide and underpin savings. It would be wrong to suggest that there have been any magical silver bullet. It's an ongoing sustained focus across every cost that we have in the company, and there are some parts of the business that are more people intensive. Others aren't as people -- so it's energy, water reduction. All of these things have played a role across our business in the last few years. And sometimes, we've had to restructure parts of the business, to take out groups of people, but that's not been a feature of 2019's financial year. It's materially a feature of probably 2017, 2018. Are there things that we can still do? There always are. It gets harder to do, obviously, because you've got to be careful that you don't cut away the meat when you cut away the fat. There's not a lot of fat in AVI. We're structured to be a business that grows, although we have partially restructured our business to be a business that defends. There are some opportunities to deploy capital which would create more automation in some of our process environments which we're looking at. We've always taken the view that, if we can find capital return-rich ways of taking people from the processes through automation, we would have considered it. It's always a difficult thing to do in a social society like South Africa where there's lots of unemployment. So these are things that we also take into account because we have many stakeholders in our business, not just shareholders, but we will continue to look. And it's really about managing those costs effectively over the medium term, but we still think there are ways of keeping our costs contained. And inflation has its own way of eating away at real money, so I guess the money illusion is helpful if you can hold your nominal, I guess, costs at the levels you're seeing in real money that's substantially lower. And that's our philosophy. There aren't lots of big, unfortunately, bananas low down on the tree any longer. We'd like that to be the case, but we've been working at this for too long, unfortunately.

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Unidentified Analyst, [22]

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Simon, [Myron] from Metal Industries. Very nice performance on the costs side. It's really very impressive. If I can just add to Kgosie's question: On the people side, the people -- salary bonuses, I mean, incentives and so on, how much was the increase in people costs in this year? And I know, sort of businesses like Spitz, you have incentives. So that flexes with the revenue, but just generally can you give us some guidance as to how much did people costs go up?

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [23]

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So one of the things that has changed because of the change in labor law has been the making of -- permanent of temp people. It's a big project in our business. So some of the year-on-year comparisons are distorted by that because we would have previously not reported some of those people costs in the same way. So that's changing. In general I think we've managed people costs lower in real money but in some instances not necessarily as low in nominal money, but it's a huge area of focus because we've got a huge payroll. And managing your people costs is one of the real levers that you have in a slower demand environment, so it's played a role. I can't give you obviously a number now because we'd have to go through each of the businesses, and each one of them had a different opportunity in the year to manage their people costs.

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Unidentified Analyst, [24]

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The second question is you never shy from spending marketing money because it's such a good branded business, right? How did that change year-on-year as well, marketing to revenue?

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [25]

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Well, you'll see the slide. What we certainly knew this year, when you're building a medium-term philosophy around brands, your above-the-line money, whether it's going into digital or into traditional commercial television engagement, is always what I'd call medium-term strategic marketing where you underpin your brand saliency. In this environment, we chose to take some of that money -- and I use the word "some" because it's important that that's what's understood. And we took some of that money and we've put it into promotional support so that the sales teams in the face of aggressive competition had some short-term ability to trade against obviously a constrained environment and a competitive environment. That's not something that we would do, I guess, year in and year out, which is why we've said that in F '20 we don't anticipate anniversary-ing that thought process. But it's all set out in those slides, if you have a look at the back of the presentation.

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Unidentified Analyst, [26]

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And the final question is just a quick one on innovation. In last couple of results, you mentioned (inaudible), and that was quite a nice innovation. What sort of innovation is in the pipeline that you can talk about? I mean...

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [27]

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Well, not that I'm going to say anything...

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Unidentified Analyst, [28]

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Or that's been -- that you've already brought to market at least.

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [29]

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Well, you're going to get a goody bag at the back. You will see some of it, okay? I mean we've got a pretty, I guess, rich basket of small innovations, but they will come together in aggregate across the businesses, I guess, to help underpin. But a good innovation in John's Indigo business, Gaynor's Entyce and Snackworks. There's been good innovation in the year. It's a tough environment to innovate into. The most important thing is that they're useful things for consumers, so we've been trying to do things that, I guess, are relevant. We've got some very interesting work coming through in F '20 across a lot of the businesses, and I guess that's what we can talk about at the half year.

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Tinashe Harry Dumile Kambadza, Afrifocus Securities (Pty) Ltd., Research Division - Equity Analyst [30]

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Simon, Tinashe Kambadza from Afrifocus Securities. Just a few questions from my side just in terms of your prospects. So the first one, obviously, aggressive discounting from competitors is expected to continue, I'll say, in the short to medium term. So I'm just wondering if you can maybe shed some lights for us in terms of -- I'm wondering in the context of how much pressure on your premiums has actually come through due to what we're seeing in the context of aggressive discounting, maybe...

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [31]

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How much pressure on our...

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Tinashe Harry Dumile Kambadza, Afrifocus Securities (Pty) Ltd., Research Division - Equity Analyst [32]

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On what you call -- on premiums on your branded products, like...

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [33]

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Oh, our branded premiums (inaudible).

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Tinashe Harry Dumile Kambadza, Afrifocus Securities (Pty) Ltd., Research Division - Equity Analyst [34]

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I don't know if you could... yes, if you can maybe quantify that to a certain extent, and how that has gotten obviously quite bad at -- as in maybe in the last 2 or 3 years. I don't know if you can shed more lights on that, firstly.

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [35]

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We're not -- I guess GPs have been fairly stable. On Rudy's question, GPs have come down 8% in the year. There are a lot of reasons for that. Keep in mind we've got a lot of leverage in this business. So one of the challenges even in factory environments, you've got what I call fixed variable costs. Not all costs are variable, and some are fixed. And therefore, if your volumes decline, it does affect a portion of your GP. What we try and do is bifurcate our brand portfolios between the selling prices of our premium products with very, very, I guess, rich data analysts. In AVI, we look at price indexing all the time on a continuous basis. Even I do every day, as my colleagues know all too well. I'm fascinated by the broadsheets. I'm pretty knowledgeable about what's on promotion. And so we are very fussy about managing value and volume. And that's something that we've seen obviously at times be quite challenging for the teams where we've had a very aggressive price point by a competitor and we've chosen to basically hold our ground so we've not actually discounted. But we know that in the end we will face volume declines. The art of this is, as I keep saying, to play the medium-term game. You can -- around the world people have blown up categories and they never recover. So we certainly had periods where our price indexes have been under siege, but in general I guess the numbers speak for themselves over a long period of time. We don't panic. We try and remain sensible. We've been in a tougher environment in F '19 than we have for some time, but on balance I'm pretty able to say that most of our price indexes on our price premiums are still valid. And we're still trading at the right price points. I think that's fair to say, Gaynor.

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Tinashe Harry Dumile Kambadza, Afrifocus Securities (Pty) Ltd., Research Division - Equity Analyst [36]

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Yes. Second question, just in terms of I think it might actually be following on to that. In the context of your investment in marketing, can you speak to which categories you're actually looking to do that? I don't know if you can actually...

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [37]

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Invest money...

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Tinashe Harry Dumile Kambadza, Afrifocus Securities (Pty) Ltd., Research Division - Equity Analyst [38]

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Yes...

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [39]

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It will be in Indigo, it will be in Entyce, it'll be in Snackworks and it'll partially be in the Spitz group as well. So those are the areas that certainly have got budgets that basically carry higher marketing investments for F '20.

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Tinashe Harry Dumile Kambadza, Afrifocus Securities (Pty) Ltd., Research Division - Equity Analyst [40]

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Okay. Then my last question. You noted that there were some growth, I think, in Mozambique, DRC, notable growth in those markets. I'm just -- out of interest, what is actually driving that? And what is expected to continue driving that if that's going to happen in the [future]?

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [41]

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It's just a function of distribution and penetration. Then it's a function of the macro economics in each of those markets. And Mozambique has had a decent recovery. We still have Keith getting good volume growth in Mozambique. We've had some recoveries in the DRC. And it's a function of the, I guess, hard work that's going into finding the right formats, the right products. Indigo has got a rich basket of innovation coming into those markets, different sizes in F '20, but the other thing that's obviously always important, what's the underlying economics in each of those markets. And those 2 markets, certainly in F '19, recovered with respect to consumer demand in general, and we benefited, in addition to the innovations that we would have launched because of that.

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Roy Mutooni, [42]

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My name Roy from ABAM. I just wanted you to elaborate a little bit more about the progress you made in creamers. I know you said it may not be repeated into the next year, but considering that you have the capacity and who knows what happens to the competitor, what do you see happening there? How much of that do you think you can hold onto?

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Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [43]

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I'm not going to say it here. That's for sure. We'd like to hold onto it all, I guess. And we have, I guess, a strong brand in that category. We've got good distribution. We've got all the rightsized formats. And so we'd certainly be targeting, I guess, to hold onto as much of it as possible, but unlike multinationals, we're not going to target the market share. We're going to target the profit. So if in the end we find that there's aggressive discounting, the important thing is not to just actually participate in the category to defend the share at the expense of the P&L. So hard to call at this stage. The volumes still look encouraging, but there's a lot of financial year ahead of us, 10 months to go.

Thank you very much. I think that's the last question. I appreciate your attendance. Thank you for coming. And don't forget your goody bag. You'll get the innovation.