Edited Transcript of AVI.J earnings conference call or presentation 11-Mar-19 10:00am GMT

Thomson Reuters StreetEvents

Q2 2019 Avi Ltd Earnings Call

Johannesburg Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Avi Ltd earnings conference call or presentation Monday, March 11, 2019 at 10:00:00am GMT

TEXT version of Transcript

Scroll to continue with content
Ad

================================================================================

Corporate Participants

================================================================================

* Owen Peter Cressey

AVI Limited - CFO & Executive Director

* Simon Leigh Crutchley

AVI Limited - CEO & Executive Director

================================================================================

Conference Call Participants

================================================================================

* Shaun Chauke

HSBC, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning, everybody, and thank you to all of you coming today on behalf of AVI and my colleagues from the business units, and also, to those of you who we can't see who's joined us on the webcast.

It's obviously our interim results. I'm going to follow the familiar format for those of you who come regularly. We'll take you through, obviously, key features and results, then Owen will take you through the group financial numbers and then performance and prospects, questions and answers.

We know that there's a big macro conference going on next door. So for those of you who chose to stay in the real world and stay with us, thank you. We have a wonderful saying in South Africa. It's a beautiful expression. It's eish, which normally means something that is a bit surprising. And certainly, for us, it was a double eish semester. It was tougher than, I guess, we've seen for some time. And certainly, I guess, the real challenge for us, like many of our peer group in South Africa, has been the challenge of meeting volume expectations in a very tough consumer environment, not entirely unsurprising, I think, for those of you who've come and listened to us in the past. I think we had been reflecting to you that it was getting more difficult.

Challenge for us, which is always important, is to find that balance between volumes, obviously, and margin. It's a very important part of how we manage AVI. We really believe that you have to try and see through those difficult seasons and protect your gross margins, more challenging than it's been for some time. But I think we did, on balance, a pretty decent job, which, obviously, I'll talk to you in more detail about when we go through each of the business units.

I think key for us has been the management of costs, with costs only up 3.1%. And that obviously does include some once-off costs, which Owen will talk about in the group results.

Operating profit, obviously down disappointingly and somewhat of a gap between, obviously, the operating profit and the gross margin, but largely to do with the volume decline and gross margin.

As always, in AVI, nice to see the strength of the cash flows. Remained very strong across the business, and that was pleasing. Notwithstanding the difficult environment, we continue to run our business for the medium term, so we continue to invest money in key parts of the portfolio where we're looking for capabilities, innovation and efficiencies.

A big part of these results that's kept our accountants busy has been dealing with some of the accounting standards, some which we've early adopted. And Owen will take you through that.

And obviously, the headline earnings number, down per share 6.2%. Some dilution because of the BEE share schemes and other staff schemes coming into that dilution, but the interim dividend remained as per policy.

Disappointing for us was to spoil our nice graph. I guess, all I can say is that it inspires us to work harder in the semester ahead. But we've still got, I think, decent metrics coming through at all levels in the business. And certainly, as I've said, it was a tough semester which, hopefully, we can be put behind us.

Return on capital remains very good. Obviously, a decline in line with the performance, but still a high return maintained, I guess, in a difficult environment, I think, underpinning the importance of the investments we've made across our businesses for many years. And the cash conversion, as I've already said, remains very strong in AVI, with a lot of the EBITDA being converted into cash.

Dividend yields, those of you who might have forgotten, please don't forget. Last year, we gave you a big check, and that special dividend obviously improving the yield based on the closing share price of June. I guess, for those of you looking for yield today, it's much better than that, obviously, at today's share price.

And as I've said already, interim dividend declared. And I guess, you're going to ask me are we going to pay another special dividend. I don't think this year. But nonetheless, the reality of our performance has been a substantial amount of our earnings over many, many years has been paid back to shareholders on a very consistent basis.

So let me give you to Owen who will take you through some of the detail.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you. All right. Good afternoon, everyone. As Simon has had, quite a busy year adjusting for new accounting standards. Let me start there. There is a lot of disclosure in the SENS document in terms of notes. And in the annexures, we've given for like-for-like financial statements.

So just a high level, I guess, impact assessment. The biggest effects by far has been the new revenue standard in terms of numbers moving around, which has had quite a -- we've reclassified a lot of selling expenses, from selling and admin costs to be -- now being netted off against revenue. That's had quite a big impact obviously on the revenue line, cost of sales and gross profit, and you'll see the GP margin impact shown here. That's neutral at an operating profit level. At operating profit level, the main impact is the new lease standard, where we now have depreciation and finance charges instead of the old straight line operating lease charge. So that's had a small positive impact on operating profit. I guess, the main take-out in headline earnings, the impact for AVI, at least, is very, very small.

So moving on to the like-for-like income statement comparisons. A pretty low revenue inflation, a consequence of a constrained environment. We've got some decreases in sales volumes and very few selling price increases in the period. Our cost of sales inflation are pretty benign. That's a consequence of our particular basket of raw materials and the exchange rates we achieved this year, most of which was hedged at the beginning of the financial year. And you'll see, then, the gross profit margin, a small decrease but pretty well protected. We'll cover that more just now.

Selling and admin expenses, up only 3.1% in this environment. That includes ZAR 10 million restructuring provision for Green Cross and a ZAR 29 million movement in the unrealized mark-to-market position on I&J's fuel hedges, which, again, we'll cover in some more detail later on.

So operating profit, down 6.4% on a like-for-like basis and a decrease on the operating profit margin as well.

Net financing costs for the semester, in line with last year but obviously picking up post the special dividend in October. And so for the second half, we expect it to be a fairly -- a reasonable amount higher than the finance charges last year.

Joint ventures, a bit higher. That's mostly I&J's Simplot joint venture where they had a different timing of marketing expenditure year-on-year, which is the main driver of that improvement. Underlying, I guess, operating performance and retail performance is consistent and remains tough, I guess.

Capital items. The swing is not usually material, but in this year, we have provided about ZAR 10 million impairment on Green Cross assets, in line with our plans for the business compared to last year, where we had some insurance proceeds on capital assets that were giving us a small positive win.

Tax rates have been pretty consistent for AVI. Our overall headline earnings down 5.8%. Our dilution is at a fairly consistent level, 0.6% increase on the weighted average number of shares and giving us then hedge on a like-for-like basis down 6.4%.

Looking at the split of the revenue growth. A little bit of price coming through in tea and I&J's foreign exchange, mostly the euro exports. Volume, you'll see the volume value splits through the different business units. So we've -- most of the volume decline in the footwear business is offset by a strong performance in creamer as well as some recovery in the biscuits category, which was pleasing.

Gross profit margin. Overall, pretty well protected in this environment, and a lot of that to do with our basket of raw materials and the exchange rates and having hedged a lot of that. A little bit spoiled by the low yields in biscuit factories, but that's been addressed and we don't think it's going to be an issue in the second half of the year.

Looking at where the growth in operating profit -- or the decrease in operating profit came from, sorry: Entyce, a strong performer for the semester and good performances from a profit point of view in both tea and creamer; Snackworks, some volume growth and consistent GPs apart from the yields in the Isando biscuits factory; I&J, lower utilization on the wet fleet gave us lower recovery of fixed costs, and then they also had a higher fuel price as well as including the unrealized position; Indigo, Spitz and Green Cross, all showing the effects of lower volumes in the semester notwithstanding consistent GP percentages and very well-controlled selling and admin costs.

Marketing expenditure, down year-on-year. We have deliberately put more money above the line. So we've more than compensated for that, I think, in discounting in a market that's looking for value, but been reasonably consistent in the way we support our brands.

On the cash flow statement. Again, just to start off with highlighting some of the impacts of the new accounting standards. So we no longer show operating lease payments under cash from operations. That now is shown as financing and interest payments elsewhere on the cash flow. The depreciation and amortization impact, obviously, on the right of use assets coming through. So that's a reasonable number to annualize for a full year impact. And then we now have lease liabilities long and short-term of ZAR 466 million obviously impacting our gearing ratios, increasing the net debt from 31% to 36%.

Looking at the same metrics on a like-for-like basis. Cash from operations, up 0.9%, largely a function of a smaller increase in working capital this semester compared to last year. That said, we did still increase the working capital. You can see the percentage there. And most of that is attributable to higher stock levels than we would have planned, and that's a lot to do with the second quarter sales volumes being a bit slower than we had anticipated and made provision for. Capital expenditure, picking up with some bigger spend flowing through some of the projects, which I'll take you through in a second.

Net debt, materially up. That's obviously deliberate. We wanted to increase our gearing levels, which we've done. We've maintained our dividend policy and the dividend. They're pretty much in line with the earnings for the period.

Just to show the long-term trend of capital expenditure. Obviously, our long-standing message is we continue to invest properly on our manufacturing retail operations. We see benefit in that. We've again seen it in this semester where we were able to achieve very high service levels on a significantly higher creamer demand, and that helped us. And we keep that philosophy in other parts of the business as well.

Looking at where some of the money went. We see increased cash flow starting to come through on the rooibos upgrade down in Durban. So we've broken ground there and that project is in full swing with a full-volume plant for the second half. We're coming to the end of the chocolate line upgrade at Westmead. That's in final commissioning now and it's getting to planned yields out of it. And then continued spend through the rest of the business. In I&J, we have successfully acquired a secondhand vessel, which allows us to continue accessing the [on-shore] quota and gives us some much-needed capacity after we retired some old vessels last year.

Just looking at the hedging. This is pretty consistent in terms of the levels of cover that we have in place through the rest of the year. Just remember, this is very important for our importing businesses, allowing them to manage selling prices and gross profit margins in a very, I guess, proactive way. I think important to note here, the combination of exchange rates that we have together with our basket of raw materials where, again, we have locked in a lot of pricing for the second semester, is that we think the positions we have support consistent gross profit margins as long as we have reasonable demand through the second half.

I've added a slide this period because it was more material than usual, the impact of the -- particularly, the mark-to-market positions on I&J's fuel hedges. I guess, the real message here is we hedge consistently. We can't cash flow hedges, just in terms of the accounting requirements, and so we have this volatility coming through on our income statement. In terms of the unrealized position, just for -- by example, at today's oil price, our year-end liability would have been basically 0 instead of minus ZAR 12 million. So the oil price was $53 a barrel on the 31st of December. That's the kind of variability we have with this item living in our selling and admin costs.

Okay, thank you. I'll give it back to Simon to go through the business units.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

If you're going to forgive me, I'm going to go through -- I'm going to read all the bullet points. I'm just going to give you, I think, some important anecdotes, which I think is more useful around some of the things that our categories faced.

I think Gaynor and her team, proud of the progress we made in Entyce. It was a decent performance, obviously underpinned by Owen's comment that we invest in capacity, and if we see an opportunity to use it, sometimes we get it. And we did. And certainly, from a creamer point of view, that came through.

What's more important, if we look at tea, though, was some of the things that I think you're seeing in the macro economy, which is, is that everybody tends to think that South Africa is having a unitary customer base. And it doesn't. And the art, as a branded producer of grocery products, is to try and find products and price points that work for the different constituencies. And we have seen, I guess, in this semester, some cycling of customers who've traded out of the higher price points and into the lower price points. And the art of this is not to go and try and take your price points of your higher-priced products down because you simply don't get the volume value reward. So in tea, it was very important, given some of the price pressure we've seen in rooibos and in some of the other tea costs, to try and find a balance between how we price our premium products and how we price our lower-priced brands. And we saw, obviously, as I've said, some movement into the lower-priced brands but without, in any way, I guess, taking the opportunity to keep the pricing right for the premium brands like Five Roses and Freshpak.

Coffee. One of the nemeses of our category has been a sustained level of aggressive discounting by competitors. We've talked about this. We talked to at the -- at the end of last financial year. Unfortunately, that's not gone away. We have been helped, obviously, by sustained low prices of raw materials, coffee beans in particular, which has given us some ability to soak up some of those pricing pressures that we've seen. And we continue to do fairly well on our affordable brands as well as in out-of-home, which has all come together to, I guess, underpin decent profitability in the coffee category notwithstanding, I guess, some of the challenges in the overall macro economy.

Creamer, as Owen said, extremely strong demand. Unfortunately, probably not all sustainable but nonetheless very strong and supportive in the semester, and obviously, strong operating growth leverage from those volume improvements in the creamer category.

These slides always give you some sense of the volume and the value, selling price effect and volume effect in the revenue line. And as you can see, in line with some of the comments we've made under the declines in volumes, but obviously, some selling price coming through, bringing some inflation into the overall category. And you can see that kind of mirrored in both tea and coffee, and then the volume gains in creamer coming through there without substantially changing the selling prices.

Market shares, not a lot of shift, obviously in line with what I've just said. In some of the premium brands, a little bit of loss of share. We [so close up]. We play the long game here, and we're prepared to give up share. We think market share -- if you take market share too seriously in the short term, it can become a vanity issue and certainly can affect the income statement quite profoundly. And on balance, we weren't disappointed with the share performance in Entyce in the semester.

Raw materials, not a particularly problematic period, as Owen reflected. Obviously, rooibos, though, continues, I guess, to show pricing pressure, albeit we think, after the last season, potentially ameliorated in the next 6 to 12 months.

Snackworks. Again, I guess, a decent performance, albeit affected by some short-term yields. One of the problems of having a busy CapEx program is the distraction that, that brings to the process environment and the commissioning of new equipment. So we certainly were affected by that in the semester. What it didn't, I guess, get in the way of was some reasonable volume growth, which was important, obviously, to the core Bakers brand. We didn't have an enormous amount of inflation. But on balance, I think the performance of the biscuit category, somewhat depressed by some of the challenges from a production perspective, that was, I guess, the thing that was disappointing for the semester in the biscuit category.

Revenue growth obviously held back, as I've said. The snacks business, again, a challenging environment, some aggressive pricing again laying its hand in this thin environment. And again, one has to try and remain sensible, and I guess, find the right balance between volume and pricing. But the profit margins in our snacking businesses remain good, and we're well positioned, I think, to benefit as the market recovers.

You see those slides showing you, I guess, the pleasing growth in biscuit volumes, but held back, I guess, because of GP decline in the biscuit category. And again, the constrained pricing in snacking holding back, I guess, selling prices, some volume gains but not overwhelmingly large.

Market shares, again, pretty decent market shares. The Bakers savory market share declined, partially attributable to a capital program, where we just put in new equipment to produce some of our savory categories; and Willards' share, by and large, the same in the semester.

Raw materials. Butter continues to be expensive. There is at least some short-term global pressure declining in the commodity because we do import a lot of the butter that we consume in our process. And we are, I guess, unique in that we still believe that it's important to put butter into biscuits. It underpins the, I guess, product intrinsics and pedigree of our Bakers brand. But in general, as Owen has said, also a fairly benign environment, some of it to do with, I guess, the hedging program that we continue to manage on a consistent basis.

I&J. Jonty and his team, not a bad performance, we think, under the circumstances. I think in general, obviously, we're still dealing with a semester where we're only benefiting, I guess, slowly from the improvement in both fishing and we won't see quota improvements until obviously the second semester, although there has been a decent increase in the quota for the calendar year '19. Still strong performance in our export markets, which is pleasing. We continue to run I&J, I think, very efficiently and effectively, well managed at a cost level. But as Owen has said, a significant fuel hedge cost, which largely took some of the shine out of I&J's performance in the semester.

The breakout of the mix of operating profit, I think, speaks for itself. And you can see the big block, minus ZAR 37 million, which includes, obviously, the fuel hedge and significant -- with some gain in ForEx, but not sufficient to ameliorate the fuel cost that goes through the income statement. And I've already talked about, obviously, the quota issue.

It's interesting to see, obviously, the makeup of I&J's profitability. As you can see, some recovery, obviously, in the abalone business, some of that to do, I guess, with year-end accounting numbers, which is always one of the moving feasts as we fair value the stock. Simplot performance, Owen covered off in his section. But in general, a fairly solid performance from I&J, save for the things I've just talked about.

Fishing performance, absolutely essential and pleasing to see is this improving trend. And some of that's to do with mix. We obviously had more freezer days in the period and we have higher catch rates on the freezer vessels. But in general, both that, which was a deliberate strategy a few years ago with the acquisition of the third freezer vessel, and improving catch rates, I think, speaks to an improving performance in the second semester for I&J, a key trust parameter that we can still catch and sustain those catch rates.

Sell volume increased. The art in this business is obviously to favor the most valuable market, and certainly, we obviously moved more product into international markets in the period. And that, I think, comes through fairly significantly. We've continued to lift selling prices in the domestic market, and some of that is also underpinned by sales mix in terms of what we put through the retail and foodservice system of the domestic business. I think, obviously, exchange rates, not as big a lever in the semester as we've seen in the past but nonetheless made its contribution.

Indigo, a bit like, I guess, the other grocery categories, dealing with a fairly aggressive discounting in its core business, the fragrance body spray categories, where we're market leaders. Nonetheless, what we lost, I guess, because of some price pressure in that part of the business, we did pick up in other parts of the business. Good performance from roll-ons and body lotions, which was good.

And marginal price increases, of course, important here. We have quite a fairly extensive basket of imported inflation, but obviously partially offset by discounting, in line with, I guess, our need to always find a sensible and competitive place on the shelf in every category. And I guess, ongoing efforts to widen the distribution of these brands regionally also made a good contribution in the semester.

Again, you can see volume declines, which were reasonably significant and not significant pricing. So some of the same pressure that you're seeing, but not a material change in market shares. That's the key thing here, is to try and find that sweet spot. And I think John and his team actually did a good job despite some of those pressures.

Spitz. The first semester is always massive for the Spitz business, and December itself is always a very big month. Those of you who will remember, last December -- not the one that we've just had, but the year before, we had a knock-out December. We didn't manage to annualize that. We weren't disappointed, I guess, in absolute terms. I think the demand was pretty solid in this environment, and we weren't able to anniversary the record F '18 December. Gross margins were stable. We haven't had a lot of pricing in the key portfolio here. We try to ensure that our product is as competitive as it can be, but keep in mind that we're selling expensive Italian footwear.

Certainly, if you look through the mix of stores, because we have a basket of stores across the geography of South Africa, we could see some of the LSM 6-8 pressure coming through in December for some of our consumers. And certainly, I think that is a theme that many people have talked to you about. And it certainly showed up in our business, certainly in Spitz. Didn't change very much in terms of space, but I guess, the thing to remind yourself is that the Spitz profitability, in absolute terms, remains very strong. There, you see the sales constraint, a lot of that underpinned by the December demand, which was obviously, as I've said already, challenging. And the same thing is true also for the clothing business, constraints in volume growth.

So you can see, unfortunately, that came through the December performance. It was a drag on the semester's performance. But when you look at the trading densities, obviously they declined, but they're still very, very healthy, in general, for most of the stores within the Spitz's portfolio. And the same is true for Kurt Geiger, where we continue, I guess, to, I guess, develop and build the brand and the profitability of that particular brand within the Spitz group. No material investment in space.

Green Cross, Owen touched on. We're going through a major transformation of this business, as we said in the SENS document today, we're going to close our domestic production, unfortunately, but it's the only way that we can, I guess, compete in a very, very competitive market with both product and pricing. And we're excited about some of the work that we're doing. It's obviously been a long and disappointing road for us. It's not turned out to be the opportunity that we thought it would have been as a manufacturing and retail business. We're excited about some of the things that we're going to do. A lot of that will come to market in the first semester of the next financial year. And obviously, the operating profit materially reflecting the provisions that we put into the income statement to deal with, I guess, those restructuring plans.

International. Keith and his team did a good performance. It's good to see, notwithstanding some of the constraints in the regional markets, some markets in particular still struggling like Zimbabwe, some recovery in some of our African destinations. Mozambique certainly came back to the fore in the semester. So it was nice to see, I guess, some of the top line growth underpinned then by profit growth in the semester. We continue to, I guess, see this as a meaningful opportunity for the group on a continuous basis. Those metrics simply reflect the proportion that international represents of the grocery business. And on balance, it was nice to see improved numbers on a like-for-like basis for the semester.

Okay. So what does this mean for the second semester? I think any of you who've had the chance to read the SENS document, we've had 2 months, they've not been too bad. I guess, we are hoping that we can, I guess, get some growth in the second semester. I think, if we can sustain what we've seen in the first 2 months and some of the work that we have in play, I think we've got a reasonable chance of doing that.

We will, of course, continue to manage the business for the medium term. There's no value in trying to run this business in this kind of constrained environment for the short term. We don't believe in that philosophy. And so it will, I guess, continue to be an environment where we'll need to manage both volume and value intelligently.

As Owen has already said, we've got a pretty reasonable hedge book. We don't think there are any shocks for the second semester, even if there are some shocks that we can't digest, and I guess, deliver hopefully, a better second half. So much will depend, of course, as it always does, on how the market behaves. Unfortunately, we've got lots of competitors, and we still think the environment is ripe for discounting. We're holding thumbs that it's reasonable and we can make sense of it.

Rooibos pricing, we are seeing an opportunity to start decreasing prices with some of the raw material costs ameliorating. That's certainly interesting for us because we think we'll get some volumes. We don't think the creamer volumes that we saw in the first semester are going to be anniversaried. Although, I still think the demand looks reasonable as I speak. So we're a little more optimistic that we can sustain at least some volume growth. As Owen has already said, the factory issues are resolved. We're seeing good production in the new lines, and so we don't think that's a factor in the second semester. And as I've already said, we're seeing good volume growth in our export markets and if we can sustain that, they're going to come to the party.

We do have some projects, obviously, that we've got to execute well in the semester. And in a thin environment like this, if you do have production problems, obviously, they can affect the income statement. There's nowhere to hide in an environment where volumes, basically, are not going to get you out of trouble, if, in fact, you over-invest in bringing a line basically to production.

I&J, always dependent on catch rates. On balance, we've had some very good catch rates in the second semester. Those of you who rode the Argus, I'm not seeing too many [stiff] people in here, will have seen the wind blow. So the last few days weren't fantastic. And this business does depend on that, but we're certainly seeing, I think, a long-term shift in some of the declines we've seen for the last 3 or 4 years, which is encouraging. What's really good is the Cape Hake brand continues to be well regarded, and we continue to get, I guess, more demand than we have supply in some of our formats.

The quota is up 9%, which is -- I guess, is good news. And well, Owen is promising you that the fuel hedges are good news. He obviously knows something about the fuel price. But on balance, we don't think that that's going to be a big factor in the second semester.

We'll continue, as we do in all of the businesses, obviously, to look at costs and efficiencies. And I&J, really important, you get a lot from leverage if you can limit the fixed overheads. The abalone expansion and the grow out continues to demonstrate the opportunity for that particular part of I&J. And we are, I think, as we've said to you, looking at expanding that facility. There's an EIA in play and work being done to look at how we might do that. Absolutely critical is the long-term rights allocation process. I think we've done an enormous amount in I&J to catch up with the right pedigree. We're a Level 1 BE contributor, and certainly, we're working hard with our colleagues in DAFF to try and understand the framework and to put our best foot forward as that develops.

Spitz, and the key thing here is, obviously, to sustain affordable pricing. We had some incremental space growth, not huge. We've got some innovation in some of our in-cycle refurbishments. I'm not sure if any of you ever get to Eastgate, but there is the new suburban store design in there. We think a very effective design performing very well for us. We continue obviously to ask landlords to have realistic rentals in a thin market. And certainly, I think Eb and his team had done an enormously good job of getting some of our rental costs to more sensible levels.

We will continue to run this business as we do with a medium-term outlook. Personally very excited about what's coming out of our Florence design office. Any of you who've gone to Spitz and had a look at this year's winter product, I think, will see some really interesting innovation in the stores. We really are able to bring, I guess, cutting-edge design to the SA market in a way that I think is very unique to certainly what is available in SA, and we see that developing. We'll continue to do that and we'll continue to roll out and innovate. The key thing in the Spitz business is to be special, to be premium and to be relevant. There's plenty of low-priced product, and there are lots of people not investing in their brands at this stage, which we think is an opportunity.

We have a complete relaunch of the Green Cross business. We're changing both the store design, and in part, the store name. And we've got a fully, I guess, revitalized, rejuvenated slate of products coming into market in the first half of F '20. And certainly, we think that, that will give us an opportunity to build off what has been a drag for Green Cross over the last couple of years.

From a group perspective, I guess, everybody knows how tough it is out there. I'm not going to, unfortunately, make that any easier for you. We don't have any magic that allows us to change how the macro environment plays out. We continue to aggressively review our business, find smart ways of operating in a tougher environment, look at how the businesses are assembled, where we have opportunities to cut cost. And we've looked at some macro ideas, and we'll continue to do that. We're strongly of the view that, as things shift in the economy, the past is merely instructive. It's not necessarily useful. So we'll continue to look at AVI's future on that basis. The critical things to get right here are all set out in front of you. This isn't a time to be esoteric. We keep looking hard at cost efficiency, margin management, procurement, all of those things that, in a thin market, give you some leverage to the income statement if you can't get a kind of volume and revenue growth for, I guess, the foreseeable period ahead of us.

We've got some unique brands. We're lucky to have them. Key thing is to make them work hard for shareholders, and so we continue to invest in our philosophy around how you manage it. Like a set of trademarks, we're not going to take short-term decisions. The key thing here is to understand that your DCFs that you model are all underpinned by the gross margins that are underpinned by these trademarks. And that's an important part of how we must manage the business in the short term.

We still believe that there is an opportunity to get real earnings growth in a constrained environment. Hopefully, we'll build some of that momentum back into the second semester. And we'll certainly continue to have a philosophy that says, "If we can't find better ways of investing the money, we're going to give it back to investors who might have other opportunities."

Investing money is also important. A key part of what gives us the margins that we have is the fact that, for a long period of time, we've invested in efficiency and productivity across the group. We used that productivity in building regional market capacity, and our growing export business is enormously dependent on that efficiency and effectiveness and capacity. And we keep working hard to try and build brands regionally in markets where there may be a little more growth in the short term than in South Africa. In fact, we've started looking in some parts of the business at markets a little further afield and just regionally. But that's not to acquire assets. It's to build market leadership out of our manufacturing capability and, obviously, dependent off a slightly weaker currency.

We obviously always look at acquisition opportunities. And I guess, some people think that there might be some assets that eventually might get into trouble. I think I've said it for many years now, we're going into an environment where it's more of a winners and losers environment. Not everybody wins. And that might present as an opportunity.

Thanks very much for coming today. And certainly, myself, my colleagues are here to answer any questions you might have.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sorry, I'm going to have to get my glasses because it's a bit fuzzy in the back.

--------------------------------------------------------------------------------

Unidentified Analyst, [2]

--------------------------------------------------------------------------------

Professor [Kruger] from [Lazard Capital]. I just want to know your fuel hedge because I did some consulting recently on fuel hedging. It might be a better idea if you could just be ready to switch to gas, rather than -- it works out cheaper. Are you hedging in dollars or in rands?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, that, it's a synthetic hedge. And it's unfortunately to support Jonty's heavy furnace oil requirements for our seagoing vessels. So we don't really have the ability to use gas or any other substitute fuel. And the important part of why we hedge is to try and build consistency into our selling prices, both regionally and domestically. We're not really, unfortunately, able to try and use a physically different substitute.

--------------------------------------------------------------------------------

Unidentified Analyst, [4]

--------------------------------------------------------------------------------

Is it on rands or in dollars?

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [5]

--------------------------------------------------------------------------------

We're in dollars.

--------------------------------------------------------------------------------

Unidentified Analyst, [6]

--------------------------------------------------------------------------------

[Dave Basit], Integral Asset Management. Given our company's good cash flow and good conversion rate, why was it necessary to cut the dividend?

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [7]

--------------------------------------------------------------------------------

Well, it was simply a percentage. It wasn't a cut. It's in line with the dividend cover, which has been consistent. I don't know, Owen, if you want to comment.

--------------------------------------------------------------------------------

Unidentified Analyst, [8]

--------------------------------------------------------------------------------

If I may just interject. I mean, dividend cover is maintained, but the absolute dividend has been cut.

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [9]

--------------------------------------------------------------------------------

That's right. Well, as a function of the decline in earnings.

--------------------------------------------------------------------------------

Unidentified Analyst, [10]

--------------------------------------------------------------------------------

Yes, but as a shareholder, it's a cut.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, I'll accept your point because it's a fact. It's not a cut. It's obviously lower. But we'll agree to see it differently, I guess.

Yes, [Rudy]?

--------------------------------------------------------------------------------

Unidentified Analyst, [12]

--------------------------------------------------------------------------------

Mr. Crutchley, there's an item that appears for the first time in the balance sheet, right of use assets, ZAR 370 million. What is the nature of those assets and how is the valuation determined?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

It's part of the new accounting standards which we've early adopted. And it's the leases, effectively, of all our retail businesses, which you are now required to reflect on your balance sheet.

--------------------------------------------------------------------------------

Unidentified Analyst, [14]

--------------------------------------------------------------------------------

Okay. Remaining with the balance sheet. There are 2 items, one from current assets and one from current liabilities, that shows similar reductions of ZAR 500 million to ZAR 600 million. The first is trade and other receivables, including derivatives. And the other one is the matching trade and other payables, including derivatives. Is it the derivatives portion that's affected the reduction in values?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I'm going to let Owen answer that or perhaps even tackle it later on.

--------------------------------------------------------------------------------

Owen Peter Cressey, AVI Limited - CFO & Executive Director [16]

--------------------------------------------------------------------------------

Yes, so just very quickly, that's, together with the change in income statement classification, we've moved the provisions for selling costs from payables into accounts receivable.

--------------------------------------------------------------------------------

Unidentified Analyst, [17]

--------------------------------------------------------------------------------

And finally, if I may, please, Mr. Crutchley. I had the benefit of attending the previous presentation when the announcement was made about the special dividend. And at that time, of course, you had more than enough funds to cover it. But a quick glance at the cash flow statement may leave -- I'll stress the word may, may leave the suggestion that in order to pay for that special dividend, you had to have short-term funding of ZAR 768 million. Is there any veracity in what I've just stated or not?

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [18]

--------------------------------------------------------------------------------

No.

Sorry?

--------------------------------------------------------------------------------

Unidentified Analyst, [19]

--------------------------------------------------------------------------------

[Myron] from [Mittal Industries]. I've got 3 questions. I hope you don't mind me if I ask them one at a time.

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [20]

--------------------------------------------------------------------------------

Can you ask one at the time then?

--------------------------------------------------------------------------------

Unidentified Analyst, [21]

--------------------------------------------------------------------------------

Yes, I'm going to ask them one at a time. Firstly, the Black Friday phenomenon, how much discounting do you do on your food side as well as on your split side? I mean, do you do any? Or how does AVI look at the Black Friday trading time?

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [22]

--------------------------------------------------------------------------------

All of my colleagues know that I think Black Friday is one of the daftest things that anybody participates in. All it does -- and certainly, this December was sunk by Black Friday because you sell a whole lot of product at a massive discount that then ends up in people's pantries, and then you don't sell it in December when people are full of good cheer and want to have a happy Christmas. So you mustn't get me on the subject. So in AVI, my colleagues know that if you're going to do anything in Black Friday, it's probably not going to get you basically into the top tier for bonuses. So we don't do an enormous amount of Black Friday. We do nothing in Spitz despite the fact that we, funnily enough, sell quite a lot of full-priced product on Black Friday because people think that maybe we are selling something at a lower price. But we definitely never do. I don't believe that it makes sense. And so certainly, from an AVI point of view, we did a little bit because, obviously, our retail partners want us to show up. Interestingly enough, Black Friday was not good for the Black Friday promotions either this year in a meaningful way. It certainly went into different parts of the system. It certainly didn't find its way meaningfully into grocery. And I think if you talk to a lot of other people who own FMCG brands, they'll probably tell you the same. But it's not a smart thing for us to be doing as a system, in my view.

--------------------------------------------------------------------------------

Unidentified Analyst, [23]

--------------------------------------------------------------------------------

The second question is a leading question. Do you contribute -- as a food producer, do you contribute to the ASK database?

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [24]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [25]

--------------------------------------------------------------------------------

Okay. I know you don't like to talk about the period post the results period, so I won't ask you how AVI is doing. But given that you have visibility of the ASK database, how is the industry looking like? So generally unfavorable?

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [26]

--------------------------------------------------------------------------------

Well, our state is confidential. I can't obviously comment on the ASK data. It's confidential to those who participate as suppliers of the data. In our business, on a sell-in basis, because, obviously, the ASK data is sell-in data, I mean, we're not feeling too bad about Jan and Feb. In some parts of our business, we've seen slight improvement. But it's -- certainly for the semester, we've got 4 months to go. But certainly, if what we've seen in the first 2 months is sustained, it's not fantastic but it's not terrible. It's better than perhaps we've hoped for on balance, reasonably, moderately from an AVI point of view. I'm certainly not commenting about retail partners and our competitors and colleagues in the industry.

--------------------------------------------------------------------------------

Unidentified Analyst, [27]

--------------------------------------------------------------------------------

The last bit is a little cheeky, but I hope you don't mind.

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [28]

--------------------------------------------------------------------------------

So you're getting cheekier and cheekier.

--------------------------------------------------------------------------------

Unidentified Analyst, [29]

--------------------------------------------------------------------------------

Cheekier and cheekier by the minute.

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [30]

--------------------------------------------------------------------------------

All right, that's your last question then.

--------------------------------------------------------------------------------

Unidentified Analyst, [31]

--------------------------------------------------------------------------------

I mean, you don't look a day older than 45, Mr. Crutchley, but I must --

--------------------------------------------------------------------------------

Owen Peter Cressey, AVI Limited - CFO & Executive Director [32]

--------------------------------------------------------------------------------

I'm an old man, I promise.

--------------------------------------------------------------------------------

Unidentified Analyst, [33]

--------------------------------------------------------------------------------

I just checked the annual report. I know exactly how old you are. I'm a big fan of older CEOs, if I can put it that way, and I'm very glad you're running this ship, right? You get -- people forget that you get cycles. And we're currently having a cycle even the best businesses suffer, right?

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [34]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [35]

--------------------------------------------------------------------------------

And it's good for AVI to have someone like you running the ship because, the best way I can put it is, I suppose, Charlie Munger's quote, Warren Buffet's Vice Chairman. And he was talking about mistresses, actually, so it's getting cheeky now. And he says, "If you're in the market for a mistress, you're looking for a mistress, try and get an older one because they're so much more grateful about [this]." I didn't say that, he said that. So but -- the problem with the younger CEOs is that they're so impression -- a bit like younger mistresses, I suppose, so much more impressionable, right? And then they believe anything they hear from any adviser, any consultant. And they want to try out newfangled ideas, when business like AVI, they -- actually, the oldfangled ideas work just as well. And so what I want to say is just keep doing what you're doing, and the oldfangled ideas work brilliantly for AVI as well.

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [36]

--------------------------------------------------------------------------------

Thank you, thank you. That doesn't mean I'm in the market for a mistress, by the way.

Yes?

--------------------------------------------------------------------------------

Shaun Chauke, HSBC, Research Division - Analyst [37]

--------------------------------------------------------------------------------

Shaun Chauke from HSBC. So I've got 2 questions. And the first one is I acknowledge the weight and contribution of each business and the different margin strategies, et cetera, that they've got an impact in terms of the overall performance. Now ideally, what would be the right level of mix between volume and price in order to maintain margins, all other factors equal?

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [38]

--------------------------------------------------------------------------------

The number we report to you is what I call an ugly amalgam. Every brand, every category basically has its own economics. So some of our businesses have much more volume-sensitive P&Ls and others have more value-sensitive P&Ls. And the art of this is to take each one of those and manage them as effectively as you can. And of course, so much of what you do depends on what your competitors are doing because it would be lovely if we owned the market, but we don't. So we don't have -- what you see here is the by-product, basically, of those outcomes. It's not us targeting a number. It's simply not like that. It is simply the average of all the outcomes across all the many brands and categories that we do business in. But my colleagues know that the important part of owning a brand is to manage optimally that brand's opportunity to make money in a difficult market. And that's how we build our philosophy, and that's how we eventually report back to shareholders.

--------------------------------------------------------------------------------

Shaun Chauke, HSBC, Research Division - Analyst [39]

--------------------------------------------------------------------------------

We've seen a strong performance in this results for the biscuits category, particularly given that volumes have been challenged over the past 3 years. Now versus last year, what's the market share shift you've seen in private label on the category? And how much of that percentage would you say was cyclical?

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [40]

--------------------------------------------------------------------------------

Well, I think we've always said that one of the cyclical realities of market share for private label is the exchange rate. So when the exchange rate is a little bit basically overbought, there is more opportunity to import product from those markets around the world who might have surplus capacity and be looking to sell it into a market like SA. And then when the rand weakens, a lot of it gets shut out quite quickly because it's no longer going to be at the right price. So we've seen a cyclical decline of private label in the last 6 to 12 months. We look at private label in a very formal way on a continuous basis in AVI across every category. We could tell you everything about every private label brand in South Africa. In fact, we go so far as to test it against our peer group products, our own brands, to ensure that the volume value that we offer consumers is worth it. That's massively important. So in biscuits itself, it's been sideways probably. Savory, because of some of our own production issues, there's been a slight gain in private label share, but that's because of the new line work that was done for Provita, in particular, in the semester, but nothing meaningful. There's not been any real change in private label in our categories in general in the last 6 months.

Sorry?

--------------------------------------------------------------------------------

Unidentified Analyst, [41]

--------------------------------------------------------------------------------

[Ian Good] (inaudible). Thank you in advance for answering a question that Myron asked. That was about Black Friday. And it does appear that you're confirming it's simply cannibalizing potential future sales. However, it seemed that there was a bit of disappointment about the rest of the normal holiday December rush of sales that one has. If -- was that an indication that, perhaps, the retail consumer market is just leveling out where it is and you've got to get used to that? That if you're not going to get this first, then you're maybe not going to get the ongoing steady rise, which you've been used to?

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [42]

--------------------------------------------------------------------------------

Look, there's no doubt that Black Friday, in my view, contributed to December's performance. But I mean, that's, I guess, to forget that the macro environment has deteriorated. Lots of people lost their jobs in 2018. There's inflation in key areas of the economy: fuel price, transport. So I guess, when people got to December, there was less money in aggregate. The other thing that a lot of people will tell you is that December's trading patterns are shifting. So Christmas used to loom large and early. And frankly, in most of our lives, Christmas is becoming about the last week of December. So that is also, I think, at a macro level, a shift. And I'm not sure Decembers are ever going to show up as being quite the things that they used to be perhaps 15 years ago in retailing. Some of the cyclical changes that you see over a career in a business like AVI demonstrates ongoing shift in the way consumers actually spend their money and what they spend it on at different times of year. Easter used to be a much bigger period. It actually is becoming smaller. So these things are shifting. So December was disappointing. I think it surprised nearly everybody who was well stocked for December, was that, simply, there was not the same demand that people anticipated. And it probably had any number of reasons, Black Friday being certainly one of the contributors, as does the macro environment.

--------------------------------------------------------------------------------

Unidentified Analyst, [43]

--------------------------------------------------------------------------------

And let's get it straight, so is the restrained outlook for the sector.

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [44]

--------------------------------------------------------------------------------

I think -- well, as I always say, if you're in the consumer business, it doesn't matter how clever you are, doesn't -- how much innovation you've got. The reality is, is that you can only grow if your economy grows. You simply can't create growth out of fresh air. And the important thing is to be sober about that. That's why, I think, 2 or 3 years ago in AVI, our view was if the country wasn't going to be run differently, we were going to end up with a more constrained consumer environment, which is why we started cutting costs 3 years ago. I think people often accuse me of being negative, but in my view, my discussion with my colleagues was that it was realistic rather than negative. And I guess, for as long as the macro environment is constrained, yes, that's, I guess, where we are.

--------------------------------------------------------------------------------

Unidentified Analyst, [45]

--------------------------------------------------------------------------------

Congratulations on your strategy.

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [46]

--------------------------------------------------------------------------------

Thank you.

Sorry?

--------------------------------------------------------------------------------

Shaun Chauke, HSBC, Research Division - Analyst [47]

--------------------------------------------------------------------------------

Once again, Shaun Chauke. With a focus to reducing the cost base and improving the operational effectiveness looking forward, can you give us a sense of how much cost savings you expect in H2?

--------------------------------------------------------------------------------

Simon Leigh Crutchley, AVI Limited - CEO & Executive Director [48]

--------------------------------------------------------------------------------

No, I can't. That would be a forecast, and I am in the JSE's building.

Are there any other questions? Well, if not, thank you very much for coming. And there is, I guess, something to eat outside after having to listen to me. Thank you.

What to Read Next