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Edited Transcript of PFG.J earnings conference call or presentation 21-May-18 8:00am GMT

Half Year 2018 Pioneer Food Group Ltd Earnings Presentation

Jul 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Pioneer Food Group Ltd earnings conference call or presentation Monday, May 21, 2018 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Felix Lombard

Pioneer Food Group Ltd - CFO & Executive Director

* Martin Neethling

Pioneer Food Group Ltd - Business Executive of Groceries

* Riaan Heyl

Pioneer Food Group Ltd - Business Executive of Essential Foods Division

* Tertius Alwyn Carstens

Pioneer Food Group Ltd - CEO & Executive Director

* Thushen Govender

Pioneer Food Group Ltd - Business Executive of International

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Conference Call Participants

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* Anthony Geard

Investec Bank Limited (SA), Research Division - Consumer Staples Analyst

* Anthony Clark

Vunani Securities (Pty) Ltd, Research Division - Small-Cap Analyst

* Vikhyat Sharma

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [1]

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Good morning, ladies and gentlemen. We are ready to start. Welcome to Pioneer Foods' interim results presentation. Your attendance is valued and very much appreciated. Thank you also to those -- those of you joining us on the webcast and specifically, so -- also all the Pioneer Foods colleagues joining us from the various operational units throughout the country. Thank you very much for your efforts in the first half of the year and in anticipation for your contribution during the remainder of this financial year.

I'll attend to a short introductory session, whereafter Felix will present a more detailed financial review followed by Riaan, Martin and Thushen, covering the operational activities; an outline position with commentary on our strategic progress and outlook for the immediate future. Attend -- and then attend to any questions at the end.

For those of you that don't know me, I'm Tertius Carstens. I'm the CEO of Pioneer Foods.

Pioneer Foods made sound progress with restoring the performance of core activities that underperformed in the previous year, and delivered overall positive volume growth of 4%. This -- with revenue growth impacted upon by expected but material deflation in some categories and so specifically, maize, wheat and rice.

Maize, long-life juice and cereals achieved very positive volume growth resulting in share gains in category. Maize posted a material restoration of profitability year-on-year. Bread and wheat flour performed below expectation in the face of carbohydrate substitution and increased competitive activity.

Most Power Brands improved share in South Africa for the reporting period with African beverage exports delivering results to expectation, both in terms of volume and profitability.

The Lizi's acquisition in the U.K. was successfully integrated with it making an immediate positive contribution to performance. The acquisition of the Wellington's and Today's brands from Heinz Foods South Africa was approved for implementation, pending the finalization of a few contractual matters between the parties. These commercial activities will be integrated into the groceries division under Martin's leadership, deliver each existing infrastructure and route to market capabilities.

We have on occasion shared with you data from ASK'd as a proxy for the health of the food sector in South Africa. The data here reflects the 3 monthly, year-on-year value growth of representative basket of food manufacturers sales into the trade. Suffice to say that both value and volume remained reflective of a constrained demand environment. Our EBITDA short-term volume recovery remains encouraging. Although, it is fair to say that commodity deflation is expected to impact more on the wholesale trade channel, retail channel outperformance over the term view remains clear. The red line on top is the retail channel's performance month-on-month, with a black line at the bottom, the wholesale channel.

With reference to our Power brands, please note that we are now using the Nielsen Trade Desk data, and given the wider scope of its database it's not comparable with the nominal data that we shared with you in the past.

That said, the share of most Power brands improved in the context of growing categories within the defined channel, SASKO bread and Spekko rice being the exceptions. Channel growth is on the right-hand side of the slide with the left column being the share of the specific brands expressed as value.

In summary and leading in to Felix's more detailed financial review, we are pleased to confirm that we have -- had volume growth positive of 4% for the period under discussion. Revenue declined by 3% to ZAR 9.9 billion, but noting the deflation that I made reference to across the Essential Foods product basket.

Adjusted operating profit improved by 36% to ZAR 949 million, with the operating margin expanding from 6.9% to 9.6%. Adjusted headline earnings per share improved with 26% to ZAR 0.320 per share. The difference from adjusted operating profit mainly given the performance and the adjustments associated with Heinz Foods South Africa.

Net cash from operating activities improved 34% to ZAR 1.2 billion, and we have elected to keep the dividend same as the previous year at ZAR 1.05 per share.

I'll hand over to Felix, that will take you through some more detail on the financial side of the business. Thanks, Felix.

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Felix Lombard, Pioneer Food Group Ltd - CFO & Executive Director [2]

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Good morning, ladies and gentlemen. Good volume growth was achieved during the period under review driven by maize meal, breakfast cereals and long-life juice.

Revenue was mainly -- it was down mainly as a result of the major deflation in maize. Maize prices was circa 3% down year-on-year. Gross margins were restored, consequence of the turnaround in the maize performance. Operating cost was well-managed and increased of less than inflation on a volume-adjusted basis. Adjusted operating profit increased 36%, and our operating margin improved to 9.6%.

Essential Foods revenue was down on the back of the soft commodity deflation. Operating profit, however, was materially up after the excellent maize volume and margin performance. The wheat value chain detracted somewhat from the overall performance.

Groceries showed excellent volume growth in the 2 key categories of cereals and long-life juice. Operating profit was marginally down as a result of planned investment in price to restore lost market share.

The International business performance improved across all categories, which led to material operating profit growth, and the Lizi's business as Tertius already alluded to, contributed positively from the first month.

If you look at the adjustments, the major difference between adjusted operating profit and operating profit related to capital -- to a capital profit, which was realized on the sale of properties, was mainly property that we sold in the beginning. Interest as you can see was marginally up, and then joint venture income was down as the result of the Heinz Foods business, which I will discuss in more detail in the next slide.

The Bokomo Botswana's maize and wheat mills were upgraded during this period, leading to reduced volumes and impaired operational performance. The Heinz result was a major detractor of the once-off adjustments of certain items on the business's balance sheet. Operationally, the business also underperformed. Excluding once-off adjustments to sales, revenue would have been down 22%. The turnaround strategy that's currently being implemented, has seen positive results to date, with April the best sales months -- month in more than a year. We are confident that this business will achieve past profitability when integrated into Pioneer Foods.

Weetabix East Africa contribute -- continue to perform well, notwithstanding the challenging circumstances in Kenya.

The improved cash profit from operations is in line with the adjusted operation -- with the growth in operating profit. Investment in working capital, however, increased materially. On average, ZAR 800 million is historically invested in working capital during the first 6 months of the financial year. The investment in 2017 was exceptionally low because of the major deflation in soft commodities during that period as well as imports. In 2018, the high investment was a result of opportunity to benefit from lower maize and wheat pricing. Maize and wheat were imported during March for processing April and May 2017, whilst local maize and wheat were procured for purchasing in April and May 2018.

The net result of this is a material decrease in accounts payable as a result of payment of the local stock in March. This will normalize over the next 3 months. Debtors days improved year-on-year versus the previous year. The combination of all of this is that net cash flow from operating activities were negative for the period. There was a reduction in capital investment in existing assets. This is in line with what we -- as previously indicated and the basis business combination referred to the investment in Lizi's.

Our group net debt to equity increased to 22% as a result of the outflow related to the Lizi's acquisition, together with the increased investment in working capital as already explained. Working capital as a percentage of turnover will be at historic levels at year-end. The Heinz acquisition will however be the only major nonoperational outflow in the next 6 months.

I'll now hand over to Riaan Heyl.

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Riaan Heyl, Pioneer Food Group Ltd - Business Executive of Essential Foods Division [3]

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Thank you, Felix. Good morning, ladies and gentlemen. The trading environment in which Essential Foods operates was characterized by deflationary dynamics across all product categories, with bread also breaking away from its historic and long-term inflation in price trend during the period under review. Maize has sustained strong volume recovery with wheaten products conversely reflecting a weaker demand cycle. Pasta, however, continues to grow off a relatively low consumption base. Rice imports have remained stable with Thai offerings benefiting from competitive raw material pricing relative to that of India.

From a procurement perspective, the wheat import duty and relevant dispensations continue to create uncertainty with the significant and sudden strengthening of the rand in December last year adding to cost volatility.

As Tertius already showed you, the Trade Desk customer channel continues to outperform and also local and traditional segments.

A strong maize performance dominated the key performance indicators during the period under review. Divisional volumes ended 3% higher with maize, rice and pasta the major contributors. Bakery volumes regressed by 1% despite pleasing gains in the Gauteng region.

Revenue, however, reduced by 10% to ZAR 5.8 billion following the deflationary dynamics alluded to before. Maize realizations ending 31% high -- lower compared to the prior year. Operating profit increased by 70% with the maize performance partly offset by regression in wheat milling and bakery's profitability. The balance of the portfolio, however, performed well with the operating margin expanding by 4.5 percentage points to 9.6%.

Our normalized raw material procurement position, strong category demand, with industry milling volumes reaching all-time high in February 2018 on a rolling 12-month basis, and the strength of the White Star brand enabled sound maize volume and profit performance.

White Star also continue to lead exceptional instant maize porridge category growth, with its expansion enhancing the product mix and overall portfolio profitability of our maize business. 2-kilogram variance as reflected on screen were also recently introduced to enhance consumer value and convenience. Looking ahead, raw material availability will remain sound through large carryover stocks from the record 2017 crop and very positive new season crop expectations. The consumer value proposition of maize meal is therefore, expected to remain and will support our future performance.

As mentioned before, wheat milling and baking profitability regressed through volume and specifically, gross margin compression. Although, Gauteng bakeries recorded volume and profit growth, competition in the coastal regions intensified, with the wheaten value chain remaining exposed to import duty, origin and exchange rate procurement volatility.

Our pasta business, however, continue to perform well. Whilst we expect the competitive environment to remain, the additional KZN baking capacity that was successfully commissioned in December and fully available from April following refurbishment of existing infrastructure, will enhance our regional competitiveness. Completion of the Durban mill upgrade will also enable more effective participation in the KZN and flour market early in 2019.

In addition to these investments, our bakeries continue to enhance efficiencies and product quality, whilst accelerating efforts to expand and improve product availability.

Rice maintained its volume and profit trajectory through supply chain efficiencies and improved availability of Spekko. Volume progress was, however, constrained through Thai shipment delays and damage to our Durban distribution center in October and November last year, following excessive rain and storms. Whilst the last impact of the latter was recovered through insurance, promotional participation had to be curtailed with Spekko market share sacrificed during the period. Although, Thai and Indian origin price dynamics is expected to impact category mix, the embedded supply chain benefits and sustained investment in the Spekko brand will support future performance.

I will now hand over to Martin Neethling, Business Executive responsible for our Groceries division.

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Martin Neethling, Pioneer Food Group Ltd - Business Executive of Groceries [4]

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Good morning, ladies and gentlemen. Thank you, Riaan. I will now share with you salient features and highlights of the Groceries business for the first half of FY '18.

Overall, Groceries had a satisfactory first half. Strong volume recovery generated top line growth in core categories and translated into market share gains for some of our market leading brands. These volume gains partly offset input inflation, most acutely felt in beverages and fruits that were not fully recovered from consumers.

This intensified pursuit of value we experienced in the market placement, pricing levels remained under pressure in some cases at or about 2016 levels. The necessary consequent focus on costs, so cost of goods sold moved by a mere 1.3% on a unit basis over the same period in the prior year.

In the final analysis, margins were squeezed and portfolio mix had to be carefully managed. Pleasingly though, proactive and efficient trade investment delivered the results we sort. Our trade support as a percentage of sales after discounts has improved and will by year-end be at least 10% better than the prior year.

While the categories we compete and could not yet be described as buoyant, we observed real growth in 6 of the 10 categories we measure, with notable growth in cereals and long-life fruit juice.

In summary, our metrics look as follows. Volume sales in kilos or liters were up 11% and revenue up 9%. Strong performance in cereals and long-life juice supported our restore the core objective that we've set ourselves. When compared to 2016, a year we have used internally to benchmark our recovery, unit prices are up 5.4% on a weighted unit basis. Our long-life juice portfolio is up just over 1% and cereals as a portfolio up at 6%.

Some parts of our portfolio underperformed for several disparate internal and external market-related reasons. The ice tea and dilutables categories continue to retreat in volume and snacks, specifically, fruit suffered from higher crop-related internal inflation.

Operating margins regressed due to the aforementioned price pressure and resulting incomplete recovery of input costs. On a positive note, we have executed our second half price increase already and are optimistic regarding some margin relief in the immediate future.

On cereals, Weet-Bix is really our flagship, it's our star, and Weet-Bix's market share is up 0.3%. And the category growing just over 7% in volume and now boasts a market share of 16.2% in modern trade of total SA. South Africa's biggest and most loved cereal brand continues to perform. Pricing and promotional activity has and continues to be carefully managed for profits as the key 450 and 900 grams packs are high footfall drivers for our retails partners. Weet-Bix's additional capacity, which we completed last year, has added much needed headroom in our Atlantis plant and runs at very high levels of efficiency.

Overall, our broader breakfast portfolio has delivered a 3.2% compound average growth rate on a unit price basis since 2016, with volume gains recorded in important subcategories. I call out specifically, cornflakes, for example, that is up 30% in volume year-on-year.

The long-life juice category is up more than 17% in volume, and we reflected in an earlier slide Liqui-Fruit's market share is up 1.4% on a 6-month moving value basis. Category competition hasn't intensified in recent years. You will have heard us speaking about this in the recent past, and price point management has become a critical KPI for our demand management teams.

To illustrate, for a Liqui-Fruit 1-liter, you would have paid just ZAR 0.09 more this last summer passed than you did the prior year. Our juice manufacturing architecture has progressed well. The rebalancing of production demand between Wadeville and Ceres has improved efficiencies and Wadeville has benefited from the capital investment on that site, including new capacity in 2 liter and the prisma as per this picture.

The dilutable portfolio remains in intensive care, with dramatic plans in place to improve the brand formulation pack format mix and to enhance consumer demand. Our flagship Lipton Ice Tea brand is poised to recover lost ground given that the work on shifting production to Ceres is complete, as is the low sugar reformulations, the new bottles and related are the collateral adjustments. These are all done and we're looking forward to a good summer.

Moir's has on balance ahead -- profitable 6 month out of its new Clayville home. And the outlook for this iconic brand is positive as service levels improve and factory efficiencies start to really benefit the portfolio. Our Marmite and Bovril brands continue to perform, and are real little jewels in the count for us in this portfolio.

As mentioned before, our price increases through and as the implementation -- as is the implementation of the health promotion levy and the increase in Vet. So far, the impact of the latter 2 is being negligible, and we are optimistic that the formal will yield margin relief in the second half. Internally, our demand side focus on relative pricing, shelf health and service levels remains as intense as ever. And new innovation should contribute positively as we head into summer '18. Most notably, the repackaging of our iconic Liqui-Fruit in the all-new prisma pack on-shelf from July.

Thank you for your time. And I'd like to hand over to my colleague, Thushen Govender, who looks after our international business.

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Thushen Govender, Pioneer Food Group Ltd - Business Executive of International [5]

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Thank you, Martin. Good morning, ladies and gentlemen. I'm pleased to report solid performance across all business units within the international division. We've also experienced some good volume traction as you can see, and the profit recovery year-on-year was excellent. Nigeria and the U.K. continues to deliver in their respective markets. Notable improvement this -- for the first half was the fruit business, moving from a loss-making position in the prior year H1 to a current profit contribution. So all-in-all, good traction across all business units.

Let's move on to the consumer exports business. The consumer export business performed as per plan. We saw recovery in some of our major markets in particular Mozambique, where we've seen some signs of stability in the macro environment. You would recall we implemented a new distributor model last year as well, where we split the local and traditional channels between top-end grocer and we're beginning to see good traction there. Finding the right parties to manage our shelf in top-end grocer as well as key accounts was absolutely crucial to move towards moving the business to a more brand building and category focus.

Other markets that benefited us with the growth was Ghana and Zambia in particular, where we're working very closely with our distributor party -- partners in order to build our brands and drive market penetration. Unfortunately, markets like DRC and Zimbabwe continue to be a drag on the portfolio given the prevailing macro conditions and currency availability, currency deflation relative to the ZAR has really exacerbated our situation. In particular, the food portfolio, where these were big destination market for ourselves.

However, the traction gained on beverages in some of our key markets has mitigated this to a large extent. I'm also pleased to announce some green shoots in our joint venture in East Africa. We now have a dedicated pioneer team on the ground working with us to develop the beverage category in the region. The ability to leverage that local market expertise as well as management capability is absolutely phenomenal. We're beginning to see some improvement and the focus going forward will be to drive penetration in Kenya, brand building of the Ceres brand and then start working on the neighboring markets.

The volatility of the ZAR continues to make life exciting for us as you can imagine. Day in and day out, it's quite a challenge, especially, when you want to manage the right price point on-shelf to have positioned your brand appropriately. Between the time that you'd experience from order to delivery market as well as redistribution to shelf and tabletop create some challenges because the ZAR moves relative to the foreign currencies quite significantly. However, we're working through our distributors to try and get a more consistent order cycle so that we're able to hedge our currencies for those particular orders and manage price points a lot more sustainable.

Let's now turn to the fruit business. I'm pleased to report the turnaround in the vine fruit performance. We've seen a far better quality of crop in the 2018 harvest, and consequently, we have also seen an increase in prices. The global prices for Thompson in particular is at an all-time high. However, with that comes the raw material cost push, and this has been exacerbated by the competition for the SA vine crop. And the important thing to manage here is making sure before the northern hemisphere crop is harvested, we hedge our prices and contract out as much as possible of the fruit -- the vine fruit.

With regards to [Chi] fruit, we saw a decline in volumes because of the drought, apricots in particular, and this is -- will impact us going forward. However, we firmly believe with the vine fruit volumes that we've managed to procure, we'll be able to mitigate that. It's also pleasing to note that the strong global demand for SA vine fruit continues, and we're well-positioned to leverage that going forward.

Moving on to the United Kingdom. This business generated solid volume growth, in particular out of our Peterborough facility. This is where we manufacture granolas, mueslis, and porridge pots. And you would recall we moved into this facility just under 2 years ago. We have now been audited by all major retailers in the U.K. and have received very high scores. So we're well-positioned to produce products for the U.K, retailers that are servicing the rest of Western Europe. The wheat biscuit category, unfortunately, experienced some declines and in particular the core wheat biscuit range is declining in the market so much so that the market leader had to discount significantly to hold up volumes. However, we are seeing some opportunities in the value-added products with flavors, fruit inclusions and it's important that we reposition our business offering or product offering to capture that increasing demand in those subcategories. The Lizi's business as mentioned previously was seamlessly integrated and it's got quite an exciting innovation portfolio looking ahead. We've now launched one of the lowest sugar muesli -- I mean, granola products for the children in the U.K. And this is obviously of that trend of low sugar and health and wellbeing. So we're hoping to see some good traction there. And by June, we will have a breakfast drink, which is one of the fastest growing breakfast offerings on-shelf in the U.K. So the business is well-positioned for an exciting H2 and we look forward to continued solid contribution from this business.

Moving on to Nigeria. The low-risk entry strategy that we adopted is bearing fruits. We went into the markets with a -- off a low base putting the right systems, policies and management team and we believe this business is now well-positioned for the next phase of investment. In particular with regards to bread, we haven't gained much traction in this category because of the poor equipment quality that we've inherited, which is causing a bit of disruption from a supply perspective as well. We've now together with our partners in market approved the investment into a semi-automated line as well as a new facility. So we believe we're well-positioned to grow the bread offering. The sausage roll business that we acquired under the Yum Yum brand has shown phenomenal progress and has gained significant share in the Lagos market and (inaudible). This business or brand is well-positioned to enter adjacent categories under the snacking portfolio. We have also started early research or consumer research on Pioneer products that we believe are relevant for the local market, in particular around the breakfast category. And once we've completed that research, we will look at the value chain and how best to service the local market in the early days of category entry.

In closing, ladies and gentlemen, we've managed to balance our initiatives with rectifying some of the core issues we faced in the prior year, in particular trying to mitigate the currency exposure that this business has, but at the same time focusing on business development and strategic growth initiatives, which is absolutely crucial for our business. Going forward, we expect the fruit business to deliver in H2 as per plan. We want to continue the good traction we've experienced in our beverage exports, in particular around Southern Africa and East Africa leveraging our base and our hubs in East Africa to develop a branded proposition and move away from trading mentality to more category management focus. And the focus will also be on ensuring our capital investment into Nigeria is successfully commissioned and on stream for early 2019 calendar year. Thank you.

I will now hand over to Tertius.

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [6]

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Touching on what we had shared with you in November 2017 in terms of progress with broad strategic themes, I wish to confirm that all major product categories performed and improved on the prior year. The exceptions being bread and wheat flour. Our investment in productive capacity is in place and ready to respond to our own growth initiatives and improved demand. Our journey to optimize our manufacturing footprint and associated operating cost remains on track to further enhance our competitiveness. The maize business excelled and local beverages and cereals recaptured its market position, thus establishing a very sound performance platform for the immediate future. As stated before, our acquisitive growth appetite is focused on categories and all geographies, where we had a presence, inclusive of near adjacencies where existing capabilities or routes to markets can be leveraged. The Lizi's, the Wellington's and Today's acquisitions fit well into this framework and so, too, will additional African opportunities that we are exploring.

We believe and expect that the improved sentiment and political endeavor will support longer-term growth prospects in South Africa and we are planning within this frame of mind. The relatively stronger currency mitigates cost inflation and will benefit fruit manufacturing in general. That said, however, it is believed that soft commodity pricing has reached the end of the current deflationary cycle. And if one looks at the rand this morning and over the weekend, I think it's further supportive of that notion. Albeit at a slow pace, it is expected that improvement in demand in key African export markets will continue through a combination of own effort and improved trading stability. The Western Cape water supply risk remains with us with reasonable and practical measures to mitigate such risk deployed and ready. It implies, however, that the effect on some raw material pricing and availability and on the regional economy will endure into the next year. It is, however, noteworthy to mention that Pioneer Foods continues to make excellent progress with improving water efficiency across all South African businesses and not only in the Western Cape. We have also taken due cognizance of the unfortunate events relating to food safety in the South African food value chain, and they have increased our vigilance through the reviewing the robustness of our food safety and risk management systems. Looking forward into the immediate future and more specifically towards the remainder of the financial year, we expect that maize, juice and cereals will sustain an improved performance off a sound base established in the first half of the year. More robust demand in these categories in addition to continued brand investment and commercial participation will support such expectation. Bakeries is well enabled to compete given the full availability of the KZN capability and the sound progress made to-date in the Gauteng post the investment in that region. Product availability and the reach remains key to overall performance, and we are encouraged by our progress in the potential upside in the customer recruitment and management area. Export beverages and fruit performance will continue to improve in the second half given traction by distributor partners in key markets and the availability of quality dry fruit. We plan for the integration of Wellington's and Today's at speed and are convinced that it will make a positive contribution in the short term. Our leadership team is fully capacitated on the broad front, locked on and aligned to our strategic priorities. As Pioneer Foods, we expect and anticipate further improvement in performance in the second half. Thank you.

And I will take questions from the floor and from the web. We've got a microphone available, if you please will make use of that. Any questions, ladies and gentlemen? Zelda, may we have the microphone here, please? Is there one? Thanks, Anthony.

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Questions and Answers

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Anthony Geard, Investec Bank Limited (SA), Research Division - Consumer Staples Analyst [1]

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Anthony from Investec. Could you, please, tell us a little bit more about your exposure to the rising fuel price? And how concerned we should be about increasing the petrol price going into the second half and into next year?

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [2]

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No. It is indeed -- it's indeed an inflationary driver. In terms of the cost of distribution food in all the -- fuel in all the major contracts are about 40%, 45% of the actual cost and it's normally a variable if it increases at these levels. So it will feed into the cost of distribution and warehousing of our food products. We've taken some of that into account, at least in some of the pricing cycles that we've taken to market. But with the exchange rate as it is today, will add further pressure. [Irina]?

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Unidentified Analyst, [3]

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[Irina from Ford]. Just 3 questions. The first one on bread. You guys have had quite a lot of capacity in the last 3 years. And yet if one looks at the Nielsen data, your market share has come down. Perhaps, you can just comment on why do you think that is. The second one is there has been a fair amount of investment that you've made, the Future Life, the Kenyan venture, et cetera. Are you getting the type of returns that you expected? And the third one is I see that your BE (sic) [BEE] deal is coming to an end. Perhaps, maybe you can just give us some more color on that.

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [4]

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The first one is with reference to market share in bread. The share that we -- where we can read it and that the share with the market is the one in the formal Trade Desk, which is the retail, which is about 35% of total bread sold in South Africa. We're coming into this relatively deflationary cycle on bread, which Riaan has alluded to in October, November and December proactively opted not to participate in a number of promotional activity in that trade channel. Our focus to a large extent is aligned to what we do in the local and traditional market. With that, the regression of share being a consequence of that. Your second question related to our investment, sorry, do you want to follow-up on that?

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Unidentified Analyst, [5]

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In the last 3 years, you would have expected given the capacity additions that you have made, that your share should have gone up and it hasn't. So perhaps, you can just comment on, is it something about the competitiveness of your bread, the pricing architecture? Why do you think that it hasn't gained the traction? Or at least just looking at the data point, it doesn't seem to have gained the traction that one would have expected.

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [6]

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Thanks, [Irina]. Overall, apart from the regression in our volume and share in the last 6 months, we've been very confident and very comfortable with what we've achieved. So that's sort of where we are from the bread perspective. Our investments to-date specifically in Gauteng has delivered positive volume growth and profitability. Riaan has alluded to the competitive state of affairs in the coastal regions, us adding capacity so too our competitors and that has impacted the market in the short term. What has played into that as well is the reference I have made into the carbohydrate switching between products, maize being the beneficiary of that and we believe bread to a certain extent being on the negative cycle of that equation. Your further question was relating to the investments made in specifically Future Life and you mentioned Weetabix East Africa. Those specific 2 examples, very, very happy with what we've achieved and the performance of those businesses and the future expectations of both of them. Thushen made light reference to the team in Kenya throughout all these election stuff in Kenya they've hold this -- their position. They actually grew volume in that market, so they did an excellent job. So we're very happy with those investments, Irina . The fact that we are acquiring the share enhances because we think we can do a better job. You might reference to our BEE shareholding, the Phase 2 one, in particular, that's expiring in the end of March of 2019 and we have commenced a process to review our options. There's nothing in detail that I can share at this point in time.

Any further questions from the floor?

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Anthony Clark, Vunani Securities (Pty) Ltd, Research Division - Small-Cap Analyst [7]

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Anthony from Vunani. Two questions for me, please. The Heinz deal that you've done, it's been a very patchy performer even when (inaudible) had their joint venture back in the day. So now that really performed to expectations no matter who's owned it. What makes you think that you taking it over, given the categories that they operated, which are very competitive in jam -- sorry, in sauces, pies, et cetera, et cetera, and some of the stock outages we've seen in the supermarkets that you can do a better job currently. And the second point is on hedging. You mentioned the maize price and I agree on the deflationary aspect has ended. Given you had a huge hedging mess up last year, what have you done this year to lock yourselves in? As an example, at Astral, they've locked their entire [feeds] in until the beginning of 2019 at below ZAR 2,000 a ton. So what are you currently doing at Pioneer?

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [8]

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Let's start with the maize, on that specific question. We're keeping to our normal and traditional procurement cycle. We stated to the market that we're normally 3 to 4 months long in terms of the pricing cycle and that's where we are, Anthony. Our price translation from raw material to input costs is not the same as it would be in feed, for example. So we're taking less of a risk in that perspective. Then with reference to why we can -- we think we can do a better job in the Heinz business, and this referred to the brands of Today's, in the Wellington side of the business, we are firmly of the view that, that business scale is insufficient to give it sufficient capability to perform in a South African market. Putting it into [Martin's] structure will be seamless from our point of view and we can leverage that existing relationship and route to market. We're quite clear that we can do a better job and very confident of it. What I must give credit to is over the recent years that the Heinz team has bulked the Wellington's brand, specifically in the tomato sauce segment to a position that we can definitely work with. They've done a great job there.

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Unidentified Analyst, [9]

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[Jake] from Kagiso Asset Management. Just a question on long-life fruit juice, mostly some good volume gains there. Are we -- are margins structurally lower in this division or are there ways or levers you've got to, to get those back up to historical levels?

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [10]

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No, I don't believe they're structurally lower. We're definitely in a category where there is more competitive forces than were they 3, 4 years ago. So -- but I don't think they're structurally lower. The Liqui-Fruit brand is saturated. It's something that we can work at. We are confident that we can carry our price premium over our competing brands as we stand here today. So we can work at that. I'm comfortable with that. Martin, would you concur?

Are there any questions from the web, perhaps?

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Unidentified Company Representative, [11]

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We have a question on the wheat value chain. If you want to just comment on further changes or comments on the wheat value chain and profit expectations for the second half.

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [12]

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Yes. I think, first of all, to recognize that the wheat value chain and to remind you, in that we include wheat milling. We make reference in that to the baking part of the business as well as pasta. It's a significant contributor to Pioneer Foods and the stature of our business and that will remain as such. The -- under the performance through our expectation and specifically wheat flour is derived from what happened in bread because we sell a lot of that internally as well. And we believe to some of the other points here, that the changes aren't necessarily structurally in the bread market. It's a relative competitiveness to a very, very, very cost-effective food source being maize at this point in time. It's expected to endure for some time because we don't see major inflation apart from perhaps rand-derived or internationally dollar-term-derived in local available maize. But we're comfortable that, that is a big part of our business and we give you the appropriate attention and the investments behind it.

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Unidentified Company Representative, [13]

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And any comments on profit recovery in the second half to the extent that you can?

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [14]

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Yes. Sure. We expect the run rate to improve, but I would stand with [Johannes] and not make a prediction on category performance specifically.

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Unidentified Company Representative, [15]

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And then any questions from the conference call, if you can just check, please?

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Operator [16]

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Yes. We have a question from Vik Sharma of Morgan Stanley.

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Vikhyat Sharma, Morgan Stanley, Research Division - Equity Analyst [17]

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More in terms of competition mostly at (inaudible) given that more money on wheat milling side as well within the Gauteng region, right? And on the wheat milling, clearly, there is an overcapacity in the industry. I think -- I just wanted to understand the reasoning behind that wheat milling expansion, especially in the Gauteng area.

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [18]

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Vik, let's just refer to investment in Gauteng that was solely related to bread and baking capacity and that's come on stream very successfully about 1 year ago now. The investment that we're making in wheat milling is at our Durban mill. So one of the reasons that we do that is that we require the capacity to support our bread business in that region. And an additional point is on the import parity line. So it's the more milling capacity on the wheat side that you can have near a coastal area the more beneficial it should be to your business because we don't expect the local availability of wheat in the long term or the medium term to be sufficient. So we always tried on the import parity mechanism. We've rationalized our wheat milling footprint to 5 mills, which we operate now and then we believe that's the minimum that we require to service our baking footprint in the country.

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Operator [19]

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There are no questions on the line.

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Unidentified Company Representative, [20]

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We can conclude. Thanks, Tertius.

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [21]

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Thank you, ladies and gentlemen. Please join us for a cup of tea or coffee afterwards. Your attendance was really appreciated. Thank you.