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Edited Transcript of PFG.J earnings conference call or presentation 19-Nov-18 8:00am GMT

Full Year 2018 Pioneer Food Group Ltd Earnings Call

Jul 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Pioneer Food Group Ltd earnings conference call or presentation Monday, November 19, 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

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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. I am Tertius Carstens, CEO of Pioneer Foods. Welcome to our results presentation here today. And to those of you joining us via the webcast, thank you very much. Also to all our colleagues from the various operating units listening in today, welcome. Thank you very much.

The agenda for the day is the following. I'll make a few introductory remarks, whereafter Felix Lombard will present detail on the financial performance of the business. The business executives, Riaan Heyl, for Essential Foods; Martin Neethling for Groceries; and Thushen Govender for International will then speak to the detail of each of the divisions. I'll conclude with comments on our efforts in the area of sustainability and some remarks related to short-term expectations. We look then to your questions at the end of the presentation. Thank you very much.

Suffice it to say that 2018 was indeed an interesting, exciting and challenging year for all of us, and perhaps one for the record books in some instances, I would -- as far as I'm concerned. As alluded to in our discussion about a year ago from now, we mentioned that the forecast pointed to a frail South African economy for 2018. The weakness in our economy and the negative impact on consumer demand did not only prevail, but further deepened in the second half of the year. The weak demand environment induced and later increased competitive activity, given the quest for growth from all sector participants. Such competitive activity found expression in increased competition for promotional participation and demands for price support.

Currency weakness in the latter half of the financial year also accelerated, [anticipated input cost inflation]. A year ago, we prioritized restoring the core as a strategic theme, and we are very pleased to -- with the response and performance of our key and leading categories, specifically the stellar year-on-year improvement in the performance of maize and the excellent [work delivered in long-life] fruit juice and cereals. Leading brands such as White Star, Liqui-Fruit and Weet-Bix indeed delivered.

Beverage exports into Africa proved resilient and delivered solid performance irrespective of various trading challenges across the continent. The improved availability of vine fruit in addition to higher dollar pricing supported the [step-change] recovery in the performance of the dried fruit business.

Increased competitive activity and muted demand impacted the performance of the wheat to bread value chain, resulting in a disappointing full year performance.

In the U.K., the uncertainty related to Brexit prevailed and contributed to further inflationary cost push. That said, the acquisition of Lizi made a positive and material contribution from day one. The acquisition of Wellington and Today has been concluded with integration into the Groceries division in process.

The performance of the joint venture prior to acquisition had a material negative impact on the results for the year. We clearly have a job on hand, but we are very encouraged and pleased with the improvement in operational performance, product availability and service delivery during the short period post acquisition.

Our capital investment program remains on track, with investments in Shakaskraal Bakery, Durban Mill and [White Star beverages], enabling opportunities for growth and enhanced operational efficiency. We believe we are ahead of the required capacity growth curve and could, therefore, curtail overall investment for the financial year.

Cash generation was strong again with data equity remaining very lean. This, together with our negotiated financing structure, positions us well to take on the opportunities and the challenges of the year ahead.

Herewith are our financial results in summary. Sound volume growth of 4%, marginally boosted by acquisitive contribution, was predominantly delivered by the performance in beverages, cereals, export fruit and maize.

The overall deflation reflected in the revenue growth of 3% to ZAR 20.2 billion is driven by the year-on-year deflation in maize. Adjusted operating profit is up 26% to ZAR 1.6 billion, but reflects a weaker second half performance improvement. The operating margin improved from 6.5% to 8.5%, with adjusted headline earnings per share up by 25% to ZAR 5.53.

Net cash from operating activities improved with a pleasing 25% to ZAR 2.1 billion. We are also pleased to report a full year dividend of ZAR 3.65.

Reflecting on the performance of SA Food in total, I wish to share the following with you. The data represented in the graph reflects 3 monthly year-on-year value growth for food sales into the trade by a representative basket of manufacturers. The comparative growth rate for retail [in rate] and wholesale in greens sectors are also indicated. Given the scope of participation, it is believed to be a sound proxy for the well-being of SA Food. Muted, erratic and stop-start value gain is evident from the trend indicated. Volume growth, as indicated in the table on the right hand, seems more robust, but it is off a prior year weak base.

With reference to brand performance, please note that the data presented here refers to the trade desk or the major retailer universe only and is based on sales [out from] store. Also note that the comparative share -- corporate share cannot be compared to that presented previously given the addition of large categories such as [cold sources] and frozen prepared meals, and this obviously is to accommodate our participation in these categories post the acquisition of the Wellington's and Today's brand portfolios.

The data on the right reflects full year brand value share, share point change as well as total category value growth. The marginal corporate share loss may mostly be attributed to the share regression in bread given its size and overall contribution to the basket. The regression in bread share has slowed from the half-year point, but is a reflection of both the competitive dynamics in the category as well as price restraint applied. SASKO, in fact, posted marginal price inflation in a category that posted overall price deflation. Although Weet-Bix essentially maintained share in the growing category within this trade channel, we are very pleased with its overall performance given growth in other channels such as wholesale. Liqui-Fruit surpassed the relative robust category growth trend and posted 2 percentage point share gain for the period.

I'll end my introduction here, and I'll hand over to Felix who will take us through the detail of the financial section of the presentation.

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

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Good morning, ladies and gentlemen. The group delivered growth of 4%, a good performance given the current economic conditions in most of the countries in which we operate. The revenue growth of 3% was a result of a combination of major deflation in the grain-related pricing and implementation of our market share gains in Groceries specifically. Adjusted operating profit increased by 26% whilst the operating margin improved to 8%. The dividend is maintained at ZAR 3.65 per share, and we are extremely happy with the reduction of our net debt to ZAR 442 million.

The major volume drivers were breakfast cereals at South Africa and the U.K., long-life juice as well as export fruit. 0.5% of the growth is related to acquisitions. Acquisitions accounted for 1.5% of the growth in revenue. The disconnect between the growth in volume and the growth in revenue of acquisitions is related to the fact [that Lizi's really] manufactured on the contract prior to the acquisition of the business. Lizi is mainly a profit contributor. The net and gross margin improvement was largely the result of an improved performance from the maize category.

Operating costs were contained with a product per unit sold inflation of just under 5%. Energy and distribution costs were the major challenges on the back of fuel and electricity price increases experienced during the year.

Maize was the major contributor to the Essential Foods' operating profit performance, whilst the wheaten value chain delivered a significantly weaker performance. Groceries delivered volume growth of 15%, driven by excellent growth in breakfast cereals and long-life juice, with a comparable volume growth of 12% when the contribution of the newly acquired Heinz business is excluded. International division realized a profit growth in most categories, with the star performer being the fruit business and supported by the major immediate profit contribution from Lizi's.

I would like to highlight only 3 aspects on this slide. The difference between the share-based payment charge and the related hedge is still negative, as 100% of the mark-to-market effect on the agents are recognized whilst the liabilities [were phased] to the income statement over the expected period of the related payments. A profit was also realized with the sale of the share portfolio of our SASKO business. SASKO, these are captive, which handled the short-term insurance of the group. This will in the future be done in the operating divisions. Our tax rate is 27%, mainly as a result of the industrial project investment launch, which we qualified for in 2017.

Our food [coating] business, of which the numbers are included on the other -- under other, have done extremely well on the back of major volume growth. The Botswana business main operations were upgraded during the year, impacting the performance materially. The Namibian business struggled as a result of difficult economic circumstances. The Heinz Food SA business performance was already explained during the interim results.

Weetabix East Africa delivered acceptable performance, notwithstanding the political situation in Kenya and the liquidation of a key customer. Joint ventures in total should deliver a much improved performance in 2019.

The group released a further ZAR 280 million from working capital. The focus will be placed on further reducing inventory levels as well as further extending our accounts payable terms. Our net working capital to revenue ratio reduced to 11.9%, the lowest level over recent years.

As already highlighted, our net debt, excluding third-party B-BBEE debt, reduced to ZAR 442 million. Our cash conversion ratio improved to 67%, which is the highest ratio since 2012. During the year, the syndicated debt facilities was renegotiated and secured at very competitive rates.

Thank you. I will now hand over to Riaan Heyl. Riaan?

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

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Good morning, ladies and gentlemen. As mentioned by Tertius and Felix, Essential Foods' improved EBIT performance was laid by the strong recovery of the maize business, specifically in the first half of the fiscal. The weakened value chain underperformed in the face of increased industry capacity and a significantly more competitive landscape, whilst the balance of the portfolio delivered satisfactory results.

Limited price recovery has been evident in the second half of the year across the basket, despite exchange rate driven raw material and other input cost pressure. At our AC Nielsen traders level, all 6 major categories in which Essential Foods participate posted deflation for the 12 months. Essential Foods, however, reported lower than category deflation in 5 of these, including bread and maize through conscious pricing decisions as referred to by Tertius.

Whilst the maize category sustained strong volume growth, the second half of the fiscal saw accelerated down-trading within the category. Although the full year profit performance of bakeries remained disappointing, second half traction across a range of key metrics is encouraging.

Essential Foods achieved 2% volume growth for the period under review, with maize and rice the primary contributors. All categories, in fact, posted an improved volume performance, with bakeries ending up 1%, thanks to 5% volume growth in the final quarter. Revenue, however, reduced to 5% -- by 5% to ZAR 11.9 billion, with only bread and maize showing marginal inflation. Maize realizations were 22% lower for the year.

Operating profit increased by 14%, with the maize recovery significantly offset by the regression in wheat profitability. Although the balance of the grains portfolio continued to make a positive contribution, profit momentum was lost in the second half of the year, given accelerated input cost pressure. Whilst the operating margin only improved by 1.3 percentage points to 7.7%, the business was able to generate ZAR 1.6 billion cash from operations through the improved profitability and sound working capital management.

White maize milling for human consumption sustained its strong growth and reached an all-time high in September 2018. This has been fueled by raw material abundance following 2 strong local crops through relative value of maize meal for a large number of constrained consumers and availability of industry milling capacity. As mentioned before, we have already noted accelerated down-trading to more affordable offerings within the category as constrained consumers felt the brunt of increasing fuel and transport cost in the second half of the year.

Regional maize has benefited from this, with the category seeing sustained deflation despite the steady rise in raw material and other input costs. This disconnect is evidenced by the graph on the left, which shows the average selling price of 2.5kg super maize meal, as reported by Stats South Africa. The blue line, relative to [near] month SAFEX white maize pricing in red.

Dealer-owned brand volume contribution to Nielsen Trade Desk has increased to 34% for the 3 months ended September. Although White Star maintained its leadership position from a value share perspective, it traded at a 25% premium to the category in the final quarter of the year compared to only 11% in the corresponding prior year period. White Star reported 11% RSP deflation for the 3 months compared to the category at 25%. Volumes and profitability consequently regressed in the final quarter of the year. White Star instant porridge, however, continues to gain traction in a fast-growing category. The brand achieved Trade Desk volume leadership in the final quarter of the year and enhanced overall maize profitability.

Looking ahead, we expect maize category demand and consumer quest for value within the category to be sustained. Maize meal should maintain its relative affordability and consumer appeal, given ample raw material supply and effective other basic staples, such as rice and bread are facing similar exchange rate-driven cost pressure. Within this context, we are balancing immediate raw material and other cost pressure with volumes to restore White Star's consumer relevance; price relativity within the category will be key; increasing investment in efficiency, specifically in respect to process innovation whilst ensuring uncompromised White Star quality. We are optimizing sales mix through value addition, sustaining White Star brand support and leveraging our broader grains basket with White Star SASKO flour and Spekko Rice collectively has the market leadership position. Notwithstanding these measures, we expect a weaker EBIT contribution from maize in the first half of 2019 relative to the exceptional prior year base.

Wheat milling, baking and market -- baking margins remained constrained at the back of industry capacity expansion in a softer demand cycle and the inability to recover input cost, most notably fuel and labor. Bread pricing, as reported by Statistics South Africa, showed deflation for the first time ever since January 2017, as reflected by the graph on the screen whereas we have seen some price relief in September.

Wheat procurement volatility also remained significant through uncertainties related to the promulgation of the wheat import duty, import origin, cost and quality variances as well as the exchange rate.

Bakeries [has a ever] step-change operational execution in the second half of the year, with progress converting to strong volume growth, as mentioned before. Production damages are at an all-time low, bread quality [sound and] SASKO bread availability accelerated. In the month of September, SASKO bread was delivered to 6,700 more outlets than in the same period last year.

Looking ahead, we expect the competitive environment across the wheat value chain to remain with inflationary cost push evident. Although the VAT impact that legislative change in respect of flour as from 1 April 2019, will have on demand is uncertain, Pioneer Foods is well positioned to gain, given existing scale of participation and capacity. The Durbin Mill capital investment that will come onstream early in 2019 will support further bread volume growth, and lock supply chain efficiencies and enable more effective flour category participation. We also expect bakeries to sustain improved operational execution whilst enhancing efforts to improve availability and quality.

With the wheat value chain capacity investments effectively concluded, the milling and baking business is well positioned to accelerate growth and post improved results in 2019.

Moving on to the balance of the portfolio. Our pasta business reported reasonable results, although the second half of the year was impacted by an acceleration of duty-free imports and category deflation. Rice also delivered an acceptable performance despite retailer promotional frenzy within the category. Spekko restored its market share position following previously reported availability constraints in the first half of the year at the back of storm-related damage to our Durbin distribution center and shipment delays. Dried vegetables sustained its strong base.

Looking ahead, the pasta category remains attractive in terms of growth potential given relatively low per capita consumption, and we have the manufacturing capacity to participate. We also expect Spekko our growth to be sustained through its consumer-recognized quality platform and enhanced supply chain capabilities.

I now hand over to Martin Neethling, business executive responsible for the 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. It seems like just the other day, I was standing up here for the first time talking to you about Groceries, and a lot has happened in the last year. I'll try and share with you a few of the highlights and give you some idea about what lies ahead.

As we commented at the half year, the portfolio has delivered strong volume recovery in our core categories of juice and cereals, both on volume and value terms we are now ahead of our 2016 high watermark. A reengagement with our customer trading partners, a keener focus on relative pricing and smarter deployment of cooperative advertising helped unlock better returns on our total trade spend, driving the aforementioned growth.

Pricing remained under pressure, however, as the pursuit of value by consumers constrained retailer willingness to accept price increases. Net realizations are about 1.3% up on last year. Although if you look at it compared to 2016, perhaps just over 10%. Cost pressures were felt across the board, but specifically on beverages and fruit. However, we maintained GP margins year-on-year. I'll talk a little bit more about that in the moment. While there's much negativity out there regarding the health of the market, 10 of the 14 categories that we participate in and that we can read showed underlying volume growth.

As we indicated at half year, certain categories underperformed, of course, you've heard me say this before, specifically snacks, iced tea and dilutables in each case due to differing competitive and category dynamics and generating different category responses. The good news was that there was a latent demand observed on some of the acquired brands, and we have already unlocked an immediate uplift. I'll come back to that in a moment.

The portfolio posted a 15% lift in volumes, driven by cereals growth of 22% and juice by 28%. As Tertius mentioned, if we strip out the Heinz effect, it's up 12%. Our objective to restore the core has been well attended to. Revenue grew ahead of volume at 16%, with the Pioneer Foods Wellington business adding 4% and portfolio inflation of 1.3%, as I already mentioned. Operating profit lifted and turned ahead of revenue at 17% and operating profit margin widened slightly by 0.1%. It's worth noting though that the x Heinz business diluted Groceries margins by 0.6 percentage points in the figures that you see in front of you.

As mentioned, cereals had a good year, driven by Weet-Bix and cornflakes. We were especially challenged by Weet-Bix pricing. SA's most loved and #1 cereal in SA is a huge feed driver for retailers, but we managed at least to see shelf prices on average lift by about 1% on the key 450-gram pack. That's something of an indicator pack for us. With the growth in Weet-Bix as recorded, we quickly utilized the additional capacity in Atlantis, a factory that runs well and with very high levels of efficiency.

I mentioned the performance of cornflakes, now up 30%. We have 2 cornflake factories, and they're both from Saldanha, but ProNutro too performed well now at a 3-year high market share level.

On beverages, a long warm summer and an unexpected but positive effect of the sugar tax, the health promotion levy, helped lift seasonal long-life fruit juice volumes. Liquid fruit further entrenched its market leadership position, gaining 2 percentage points share value on a-12 month moving basis. And our smaller brands, Ceres and Fruitree, also gained. In fact, across their portfolio, each skewed in each channel, we saw positive lift. Similar to the price pressure point that we made already on Weet-Bix, Liqui-Fruit's 1-liter summer wholesale pricing moved a mere 0.7% year-on-year. That's ZAR 0.09 a liter.

Further development of our juice manufacturing architecture progressed well and our [wakeful] operation, particularly has responded to the CapEx invested there over the past 2 years. Further investments are planned, which will increase capacity and reduce per unit conversion cost. That puts us in the right place. It can also serve the export markets for my colleague, Thushen. Despite the category declines and dilutables, Wild Island recovered well and showed strong recovery in H2 following sharper promotional activity.

Lipton iced tea has been reformulated to remove the HPL demand completely, and increased focus from our brand principle has rallied optimism for a better summer ahead.

The Pioneer Foods Wellington portfolio was included in our business from June, as already mentioned. It assisted top line growth, but diluted operating profit as we have, out of necessity, had to clean house. The good news is the immediate uptick in volume once incorporated on to our platform. Based on Nielsen's Trade Desk 3-month moving numbers, our Today's basket lifted 14.4% against the category move of 4.5%. And our Wellington's basket lifted 26% against the defined category lift of only 1.3%. Included as part of this deal is our right to manufacture Heinz ketchup and -- for the SA market that is, and to sell imported Heinz brands, and I'm specifically here referring to HP Sauce, Lea & Perrins and John West tuna. These brands are much in demand in specialty channels and there is much latent demand, but a depleted pipeline has certainly hampered our service levels. Much management time has been invested to correct this. The upside is obvious.

One small success has been the introduction of MSC John West tuna to Woolworth's. The first tuna product to carry this endorsement in South Africa. If you are not a keen observer of these things, the Marine Stewardship Council is a global endorsement recognizing sustainable and ethical harvesting techniques.

On the balance of the portfolio, and here I'm referring to Safari, and we use the Safari brand in snacks; that is fruit; and nuts; and bars; and salads; Moir's; and Maizena in baking; Marmite; Bovril; Peck's; and Redro in spreads, including jams; and Smash. We have had a mixed set of results. Fruit margins contracted due to unfavorable supply mix on tree and vine fruit, but Moir's performed well. And our savory spreads business showed real growth. A full year benefit of our manufacturing consolidation of Clayville was felt. Keen observers will remember that we moved that factory from the Cape to Gauteng about 18 months ago.

Looking ahead, as has been mentioned in different ways a few times, the tough times aren't about to ease, but we are approaching the year ahead with much positivity and optimism. Some might say a bit of naivety, but that's the way we see it. Our portfolio has some great brands in it, further expanded by the Pioneer Foods Wellington additions. We have much headroom for self-help initiatives, and we see growth in channels where we haven't traditionally been strong.

Our primary challenge will be to recover cost increases and price, that much is obvious, without losing top line momentum. And I have confidence that the team is up for this challenge.

We will intensify still further our focus on relative pricing, shelf health, and all importantly, service levels. In addition, and crucially, we will continue to drive and have our brands available in more places, developing alternative channels and improving availability in channels where we are already remains a strategic priority. We see growth in many of these places. Remember that a slight increase of availability, a mere 1% translate into real volume and market share gains for us.

On the supply side, we will continue to aggressively seek out efficiency savings and further interventions are planned. This includes focus on procurement, specifically on the big-ticket items and our suppliers and their performance. We continue to seek out and demand that we partner with the absolute very best people in the business.

I appreciate your attention, and I'm now going to hand over to Thushen.

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

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Good morning, everyone. It gives me great pleasure to present a solid set of results, which is obviously underpinned when all the stars are aligned: foreign exchange, global food pricing, quality of crop. So as you can see, it was an exceptional performance. What's also pleasing to note is Nigeria's becoming a meaningful contributor to the international portfolio, and it goes to the exceptional performance as well.

I'll now take you through the salient features of all the business hubs and touch on at the end the strategic progress that we've been making with our business.

Starting off with the consumer export business. As mentioned by Tertius earlier, we saw a good traction in our beverage portfolio, and a key aspect of this was how we look at our business and our go-to-market model. We, as a team, decided to focus. We separated the Asian markets, where we've decided we're never going to be brand leaders in the next 5 years or so and being optimistic there as well, and we're going to focus on driving market penetration and volumes out of the Asian markets. However, as you come down toward Southern Africa, given our location to market from a manufacturing base perspective, there, we need to be a lot more strategic in how we manage our markets. And there were 2 or 3 things we did differently. Firstly, a category strategy approach, having the team focused on beverages as a category and demonstrating best practice in category management and strategies underpinning that. So how do we position Ceres as the 100% leader in Southern Africa? And how do we position Fruitree as the affordable nectar proposition? It was exceptionally important for us to emulate the strategies we have in South Africa within the category as there's a halo effect of these brands in Southern Africa.

The other key aspect we addressed was looking at our distributors and their go-to-market efficiencies and assets. You wouldn't typically find a distributor that's able to deal with local and traditional channels as efficiently as modern retail. So we separated the two, allocated distributors in Southern Africa for L&T, local and traditional, and then allocated the distributor for top-end grocer where they can demonstrate best practice in merchandising point of purchase activation.

The other key thing that this brought to us was credit management risk, as opposed to having one distributor and exposed to that [distributing] market. So if our distributor hits a liquidity crisis when there's a U.S. dollar crunch, we're not going to be able to sell to him, we're going to have to hold back on sales. So by having 2 distributors, it mitigates that credit risk.

With regards to credit management, you've also seen Felix present earlier that there was a solid improvement of the debtors' book on the international portfolio, and this -- mark my words, this isn't easy to achieve. You're trying to grow sales in very risky markets, but at the same time, you're improving your debtors' days. So it took some effort. And we also have credit guarantees against most of our debtors, buying 1 or 2 listed South African retailers, which shows the quality of book has not been sacrificed for improved sales, and that's exceptionally important in these emerging markets where there's generally going to be liquidity crisis of sorts.

Moving on to East Africa. You would recall, we concluded the acquisition to the JV about 2 years ago. And when we presented this opportunity, it was not only to gain access to one of the largest or the market-leading breakfast cereal manufacturer in East Africa, but it was also to use this as a regional hub and expand into East Africa. So we now have a beverage team focused in Kenya, driving category development work around our beverages.

And I'm pleased to report over the last year, with this team in place, we managed to achieve a double-digit volume growth, and we are firmly entrenched as a #3 player in modern trade in 100% fruit juices. There's quite a bit of more work to do around this, and the team is now going to be responsible for surrounding countries around Kenya, in particular Uganda, Tanzania, Rwanda and all those East African regions.

Zimbabwe has proved challenging, as you can imagine, not dissimilar to what we experienced about 10 years ago. It was a hyperinflationary market in 2009, excessive printing of local currency. And as a result, on shelf, our products are 300% to 400% higher. We don't expect this rectifying itself over the short to medium term. However, it's important for us to work with our distributors and survive this period, survive being the term here because, ultimately, we want our brands to retain their relevance. And in time when that market does turn, it gives us a head start into growth. But as of today, I don't foresee the end of the road with regards to when that market is going to turn.

Over the past 3 or 4 years since this division has been created, we've seen various barriers to trade on the African continent. And until the AU gets that intra-Africa trade right, we're going to continue to see it. A few years back, they banned the imports of juices into Nigeria. In Angola, the duties went up to as high as 50%. In Kenya, we're dealing with duties as high as 30%. And on top of that, every time we send an order through into Kenya, we have to get the local Kenyan authorities to print us stickers that gets couriered to South Africa on the line we apply the sticker to every unit that we produce and then export the product. And in Zambia particular as well, over the past 12 months, we've seen them ban the importation of maize-related products out of South Africa. They were looking at different formulation levels, different specs, not that our product was nutritionally different in any way, but it's another form of a trade barrier. However, what's important is, you demonstrate the ability to have a flexible manufacturing chain, to interpret the legislation efficiently and to be able to put a product in market that's compliant. And over the past few years, we have demonstrated this capability. It's important to be fleet-footed with regards to that.

On the supply chain, over the past year, we've leveraged group muscle with Pioneer Food's logistics services, and we were able to mitigate the increase on our logistic costs to below inflation by utilizing the group suppliers as well as rates that the group benefits from. Going forward, we hope to do a very similar thing with sea freight for our products exported into Asia. We deal with many freight forwarders for importation as well, and it's important to see if we can align those rates and leverage group muscle once more.

This is just a few pics of the through line campaigns we have in Southern Africa as we call our strategic markets, trying to build the brand presence as well as drive consumption and recruitment of new consumers. And as you can see, there's a category approach developing as well with our breakfast cereals, where we want Bokomo to be positioned as the premium breakfast cereal and then leveraging off the essentials team's instant White Star product and drive that as an affordable breakfast proposition into Southern Africa.

Moving on to the fruit business.

It's important to make the point right up front, and I have stressed on this previously, that the fiscal that we present is not necessarily aligned with the fruit business in terms of the harvest period, because we harvest in South Africa between January and March. And then more importantly, global pricing is really set by the U.S. and the Turkish crop, and they harvest around August and September. So it's important to get those variables right. So as Tertius mentioned, we benefited from exceptionally good U.S. dollar pricing, because the U.S. was about 100,000 tons short in the prior year, and they generally produce about 330,000-odd tons, and they were at 200,000 tons in August 2017.

So as you can imagine, as we went into procurement, we acquired the stock, and we benefited in the second half from this high U.S. dollar prices.

In the current year, what we've seen that the U.S. hasn't really regained its 300,000 tons plus output, they're around 250,000 tons. However, we also see that Turkey is below the 300,000-ton threshold. So now in the August-September period, we've seen another movement in the U.S. dollar prices. You may think immediately, it's a good thing, not necessarily, because I'm going into the harvest season in South Africa, and I'm going to have to procure off the back of this very high pricing. So it's important to get that balance right, making sure I deal with the competitive tensions in South Africa to procure the crop, not driving too high or bullish prices and then selling each at the appropriate level to realize a decent profit. So those factors need to be aligned very carefully.

The other thing that we've seen is Greece has been short on currants. And including SA, in fact, the [fleet and (inaudible)] region is generally where we harvest our currants due to the drought, we -- it's about 2,000 tons in the past year that we've harvested. This is generally about 4,000 tons plus.

The drought also impacted tree fruit, and in particular, apricots. This is the main tree fruit product that we export. And as a result, we've seen better pricing, however, lower output in terms of volumes because of the crop being harvested.

When you procure from a farmer, I just wanted to make the point, you don't just selectively choose the fruit you want. The farmer generally grows a whole basket of fruits, and you'll have to procure basket from him. If you want the apricots, you're going to have to take some peaches and pears and other factors -- and other fruit. However, the peaches and pears quantity is far exceeds the apricot quantity, and we don't have a market locally as well as internationally for that quantity. So over time, we've been working with the farmers, firstly, [to dry these fruits first , it is July] in that supply and demand, but also working in international markets to develop the demand for peaches and pears, so that over time, we can continue to grow the output from the SA agri sector.

We had a hedging policy in place which mitigates -- or we do have a hedging policy in place which mitigates risk quite significantly. When we procure the crop from the farmer, because it's dollar-based pricing, we cover the entire procurement amount for what we plan to export in (inaudible) South Africa. So from harvest to harvest, we'll have a hedge in place. What it does do is limit the downside, but it also limits the upside. So even though the rate may wander off a bit, we still aren't able to benefit from that full rate of depreciation.

Thank you. Moving on.

The United Kingdom had a pleasing year as well with the acquisition of Lizi's. We still -- seen decline in the breakfast cereal category of around 1.5%. But within this category, the opportunities for more functional-type breakfast cereals, high-protein, low sugar, and we believe we're well-positioned to take advantage of these pockets of growth we're finding within the category.

With our Lizi's acquisition, we now hold about 15% of the markets in granolas in the U.K., and this is also growing because of our private label share that's being manufactured in the Peterborough facility. With regards to the fruit bowl, which is predominately -- or historically was predominantly focused at targeting kids, we hold a 21% share in kids' fruits snacking in the U.K. We're a significant number #2 player. However, that category has also seen some decline because there hasn't been, in my view, including ourselves, appropriate communication around the relative healthier benefit of this product.

It's not as good as eating obviously a fresh fruit, but it's far better than eating a candy bar. And it's important for us to call out those cues to the shopper and express what that product nutritional benefits are. So in the past year, we've relooked at the brand architecture, firstly, to target a broad audience, not only kids moving into teens, young adults, but at the same times, call out that nutritional benefits on the packaging. And as you all know, pricing in the U.K. it is quite difficult to get price increases. And as a result, we've had to relook at our price pack architecture to improve profitability.

With Lizi's, we've had a good year, as Felix mentioned, fully integrated into our business. And there was a strong focus on an innovation and renovation strategy to make sure that the brand remains relevant. On the go consumption for breakfast cereals, it's going quite nicely. And as you can see, we've launched the Lizi's drink, which is in market. And we've also relaunched our kids granola product. And by relaunching it here again, making sure there's appropriate shopper cues on the nutritional benefits as well as the brand architecture being aligned to the mother brand.

Nigeria, probably just 2 points to make here. We really had a good year from our Yum Yum sausage roll business. The brand's well entrenched in market and growing. However, we continue to have challenges in our bread portfolio because of the manufacturing platform. And as you all know, we anticipate the new line being commissioned in H2. So we're looking forward to resurrecting the bread business as that line gets commissioned.

In conclusion, the few points that I'd like to make is, the portfolio will always be exposed to the vagaries with regards to foreign exchange, the fruit crop pricing, the fruit crop quantity or harvest. So it's important to look beyond that and understand what are the sustainable strategic initiatives we're putting into place for the medium to long term. 3 years ago, the U.K. had a private label business that was exposed to the vagaries of the U.K. retailers. We now have via 2 acquisitions, Fruit Bowl and Lizi's, we have a branded business that contributes about 20% to the portfolio.

In Nigeria, we acquired a business about 4 years back that was loss-making. This business has turned around, generating profit, and we're about to install new equipment. We established the East African harvest, as you know, and we've also now commenced work on a new market entry with an international JV partner, and hopefully, if that progresses, I'll be able to tell you more in H2.

Going forward, we will continue to focus on developing our Southern African expansion and market development as well as we will continue to keep our fingers crossed for that fruit pricing and the harvesting early Jan and Feb.

Thank you for your time.

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

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Thank you, Thushen.

Back to sustainability. Sustainability is a broad subject and the business responsibility, and it's a key enabler of our strategic intent, and we are proud to share some detail on our flagship projects with you.

Together with the Department of Basic Education, we are involved in a program that provides a daily breakfast meal to 26,000 learners from 29 schools across 6 provinces. Now schools are selected in cooperation with the department from within the communities where we operate. From an enterprise and supplier development point of view, we have for some time now been involved with 4 majority black-owned farms. They produce wheat, dried fruit and vine fruit. And we gladly procure some of this produce every year. Recently, we also assisted with the establishment of 7 independent distribution contractors, specifically in the bakery environment. We provided ZAR 21 million in loan financing, and they created 191 new job opportunities. Our total loan book surprising --- supporting enterprise development at the moment stands at ZAR 44 million.

The Pioneer Foods Education & Community Trust also currently supports 55 nursery students and various community projects in the areas where we operate. We recently enrolled 252 unemployed learners onto structured learnership and apprenticeship programs, and we hope to absorb as many as possible into full-time employment on completion of these programs.

For a third year in a row, the group has reduced nominal and per unit produced water consumption, given investment in water saving and conservation through awareness, training and monitoring. As an example, we have during the last 2 years, reduced the volume of water required to produce a liter of beverage 26%. Our work and efforts in this space will continue.

Our overall ambition remains to profitably grow and expand the business of Pioneer Foods. The exploration of alternative routes to market over and above those traditionally served, both in the local and export market geographies, carefully selected innovation and a step-up in performance of some of our smaller categories will have to deliver above market growth.

In the quest to continue to enhance competitiveness, our fixation with operating cost discipline and process efficiency will remain an operational imperative. The remodeling of our distribution and logistics network for groceries and grain products has been completed through the establishment of 3 regional distribution hubs, these being in Cape Town, Johannesburg and Durban. Our capability in sales and operational planning will also be further enhanced in support of customer service delivery. We have also embarked on a project to refresh our current SAP ERP system, with the view to ensure its technical future readiness and to enhance the footwork and the efficiency of our operating model.

Acquisitive growth remains a priority, but it is clear from recent experiences that price expectations remain a challenge.

In support of our expansion in Africa, we have triggered the investment in new baking capacity in Lagos, Nigeria, and we are progressing well with similar opportunities elsewhere on the continent.

Looking forward into the short and medium term, we believe that it is likely that South African consumer spending growth will remain subdued. The consumer is behest to economic growth in the end of the day and employment, so we are, through a certain extent, exposed to that. And therefore, we expect a muted trading and demand environment in the next trading year.

Input cost inflation, as alluded to during the operational discussions, is a reality, and we'll have to be smart and agile to recover these. We anticipate at scale in maize, a large and growing food staple category within which brands matter. Competitiveness will remain elevated, but we'll continue to back the White Star brand and the category-leading growth of White Star instant porridge. The volume traction in our bread business during the last few months is indeed encouraging, and we plan for this trend to be sustained. Although early, the expectations for another sound local vine fruit crop is positive in addition to the expectation that dollar pricing will remain relatively high. Our intent is to continue to support the positive performance of the long life fruit juice business through the ongoing investment in the renewal and upgrading of our manufacturing infrastructure. Back format innovation will also be supported by these investments.

As noted earlier, we are encouraged with the short-term operational step-up in the Wellington's business, but accept that we have some work to do to deliver a successful turnaround. Excluding any acquisitive opportunities that might arise, we plan to have another year of prudent and measured capital investment, focused on growth and efficiency of the existing business.

Having said all this, it remains of paramount importance that we continue to ensure the consumer relevance of our brands and that we actively participate [and trade]. We have the desire, the capability and the means to take Pioneer Foods from strength to strength. Thank you very much.

That concludes the formal part of the presentation. If there are any questions, we'll gladly attend to those.

Johannes, would you assist as soon as possible.

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Questions and Answers

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Unidentified Company Representative, [1]

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Use the mic please if you want to ask a question.

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Anthony Geard, Investec Bank Limited (SA), Research Division - Consumer Staples Analyst [2]

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Anthony Geard from Investec. So firstly, just on the positive side, Martin, can you perhaps give us a little bit more color as to just how exactly you were able to achieve this quite extraordinary volume growth in cereals? A little bit of more detail on the competitive landscape. You spoke to taking share in the broader market as opposed to just modern retail. Just but -- how the competitive dynamics are playing out there? And also, in long-life fruit juice as well. And then if it's okay, I'll follow up with a question to Riaan afterwards.

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Martin Neethling, Pioneer Food Group Ltd - Business Executive of Groceries [3]

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Thank you, Anthony. I think that the few important points to make around the focus on restoring the core in both those 2 categories is, first and foremost, the appreciation that even market leaders are, to a large extent, price takers. I think for observers sometimes outside the dynamics of consumer good categories, we have this naïve idea, we can set the price and price and volume are neatly calibrated, and if you want to sell a little bit less at an equally high price, all you do is pull the one lever and the other one responds. It's not like that. Demand is lumpy. And we are intermediated in the sense that we have big retailers that stand between us and Mom. So the big thing for us is to make sure that we manage that trade investment very, very carefully. We spend an enormous amount with our big retail customers. In the last 20 years, that has been the most significant shift that's taking place if you're an observer of these things. Our brand investments have dropped and trade investments have risen. And we appreciated the fact that we had great brand assets here, but we needed to get more out of that trade investment, so really, that was our focus, to make sure that per key account, per promotional slot, we were getting bang for our buck. It's fine to invest, but you got to get returns on that investment. And we really spent a lot of time focusing on the relative price that we needed to be on to get most out of the promotional slot that the retailer would play ball with us. You may have heard a big competitor of ours meeting about this just the other day saying they had dropped the price and they got no response. Well, that's the point. So you need to make sure that when you're investing and you get your promotional slot, that you get the most out of it. So relative pricing, where the promotional slot is. And, of course, then make sure that you service that key account very well. Again, it's an easy observation from the outside. But when you promote your products with a retailer, say Black Friday this week, you create enormous shocks into your system, tremendous shocks. And to be able to buffer yourself, to be able to service and fully exploit the demand opportunity that you create, needs quite a lot of stuff to be in line. So really, it's a story of getting back to basics. We needed to get a lot of things really honed in both those 2 very big categories. And for the most part, we managed to do that, and those brands responded. In both cases, there were competitive activities and competitive responses that varied. In cereals, of course, Kellogg's have got their own story and Jungle are on their own mission. That wasn't really an issue for us. In juice, it was a little bit different because we have had a disruptive competitor, as you know. But I guess we met fire with fire. We got the slots, we promoted hard, and we feel comfortable that we've at least, to some extent, curtailed that competitive threat.

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Anthony Geard, Investec Bank Limited (SA), Research Division - Consumer Staples Analyst [4]

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Have you seen some of the smaller producers in both categories fall by the wayside or lose significant share?

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Martin Neethling, Pioneer Food Group Ltd - Business Executive of Groceries [5]

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Yes, there has -- there have been lots of casualties. And a lot of the smaller players have been -- have sort of retreated to the fringes. You may have noticed that even as recently as 18 months ago, there were quite a few imported lines in business like Shoprite. Those have largely disappeared. Yes, they have been replaced by some other things, but it's been a very dynamic environment, where there's been lots of losers as well as the winners.

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

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If I may, Anthony, just briefly comment on what you're saying. We really went about proactively participate, and then we -- you must have the discipline to gear up the supply chain, and the sales force and the team behind that. So we proactively plan to trade and then deliver those results.

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Anthony Geard, Investec Bank Limited (SA), Research Division - Consumer Staples Analyst [7]

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I just want to -- to Riaan, I'd just like to understand the down trading a little bit more in maize. So has that been from super into special? Or is it because we're seeing lower priced super opportunities, of instance, we're hearing about in [poly] super. And just what's going on in that? And has that down trading only accelerated with the increase in the price of maize? And then, secondly, just a little bit of an update on El Niño. We're hearing that the Japanese are now saying El Niño is here. What is your sense for the next season?

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Riaan Heyl, Pioneer Food Group Ltd - Business Executive of Essential Foods Division [8]

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Thank. Thanks, Anthony. Now the consumer is staying within the super maize meal spectrum, so it's not a down trade to special. It's a super play, and it's purely price driven. The acceleration we referred to has been noted specifically since May onwards, so I made reference to the fact that, obviously, consumers feel the brunt of rising fuel cost in the form of transport. If you use a taxi or alternative transport medium, your fare doesn't go from ZAR 15 to ZAR 16, it goes from ZAR 15 to ZAR 20. So to quote you some reference pricing if you look Gauteng, super maize meal availability at this point in time, a cheaper offering, sells for ZAR 44.95. And you would see White Star today at ZAR 72.95. So it's a trade within that super maize meal spectrum. And it's driven by the state of the consumer generally in South Africa.

With reference to the new crop outlook, yes, it appears as if rain is on the radar, but the reality is that South Africa has ample supply intentions to go on and the new season looks solid. And as a consequence, we don't see significant inflation provided the rand stays relatively stable. We don't see an availability issue in the next 12 months within the white maize category.

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [9]

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The pricing, as you know, is -- it is export parity roughly, so it follows rand-dollar movements, and also, the international corn pricing to a good extent.

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Unidentified Company Representative, [10]

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Anything else on the floor? I guess let's just open the lines to the conference call. Any questions from the conference call?

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Operator [11]

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There are no questions from the line, sir.

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Unidentified Company Representative, [12]

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We've got 2 questions from the webcast. The first comes from Victoria Lambert. She's at Merrill Lynch. She's asking, have sales trends improved in October? From which categories, if so? And then she's got a follow-up on more color on the Heinz South Africa, the operational issues, and are they being addressed. And then I'll pose the others.

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [13]

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To Victoria's question, we remain rather restrained in terms of our expectation, to be very honest with you. We've seen very positive trends in our bakery business, specifically. And as you would anticipate, this is our peak trading season, so we are also encouraged with a big category so far on Martin's side of the business, maintaining their stature and their place in the market. So those are the major movements on the positive side for us, bread and then breakfast cereals as well as long-life fruit juice store.

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Unidentified Company Representative, [14]

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And just Heinz operational issues.

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [15]

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On the Heinz side, you would have noted, obviously, in this first half, as we reported, poor performance of the business prior to acquisition. For us, it's really a recovery exercise, so our focus is to make sure that the operational execution is in place, that the supply chain for imported goods for raw materials are well geared and the customer team has done an excellent job to get us back on track in terms of the demand side. So we're quite positive with the brand, such as Wellington's and then Today's stepping up into that space. We've got some more work to do, no question about it, but we're fairly encouraged with the progress to date.

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Unidentified Company Representative, [16]

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She then wants to have a bit more guidance on capital expenditure for fiscal '19 and the areas that you want to focus on.

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [17]

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Yes. For fiscal '19, our target, as -- if I need to give you a number, is around ZAR 750 million, roughly, in terms of capital cash flow for the year. Major focus is, obviously -- a chunk of that is for maintaining our current asset base, completion of the projects such as Durban mall that is currently undergoing construction. And then in the beverage space, we're installing and replacing some of the equipment in terms of packing and so forth. So we've got a fleet of equipment, then we will continuously enhance the capability. So mostly focused on internal and existing business.

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Unidentified Company Representative, [18]

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Then we move on to Thaule Masemola at ABSA Capital. He's got a question on investment criteria on acquisitions, if you want to -- just want to give some color there.

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [19]

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To Thaule's question, our focus in terms of investment criteria, we obviously need to beat our WACC with a good few percentage points in the circumstances that we trade in today, and we will make sure that, that those criterias are the minimum entry points. Obviously, it must be enhancing and there must be synergies that we can take out of the portfolio, but those are the major criteria that we look at.

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Unidentified Company Representative, [20]

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Okay. And then he also refers to revenue contribution from acquisitions. Do you want to (inaudible)?

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

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Yes. To [go to Thaule, where he is], it's 1.5%, so it's around ZAR 300 million of the revenue contribution.

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Unidentified Company Representative, [22]

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Okay. Then we move [on Standard], we've got a question from (inaudible) she's asking what the ZAR volatility in the period, and -- which is your basket currency. Are you better off or worse than you were in last year?

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [23]

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Yes. That's always a challenging one to answer. We don't ask Thushen what he wishes for in terms of currency movements. But the group is in general is exposed to import cost effect of a weakening currency. That's sort of the general comment that we have. Relating to that, with few opportunities here and there in terms of the export business that might gain on a weakening currency.

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Unidentified Company Representative, [24]

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Okay. We move on to a question from Mergence Investment Managers, we've got Lulama Qongqo. He's or she's saying good morning, thank you for the positive results. What is the like-for-like operating profit growth at the international business? Secondly, you seem to be having great performance in the international segment and you mentioned opportunities to improve profitability. Do you think that the stars will continue to align until you reach your 20 -- well she says 2015 EBIT margins that's what she's referring back to, and then what is the target of sustainable margin in the segment. Thushen, to you please.

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [25]

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I was wondering when that one would come. Like-for-like EBIT growth, it's Nigeria that you have to exclude.

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Martin Neethling, Pioneer Food Group Ltd - Business Executive of Groceries [26]

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And Lizi's.

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Unidentified Company Representative, [27]

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It's still close to a 100%, Thushen.

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Thushen Govender, Pioneer Food Group Ltd - Business Executive of International [28]

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Obviously, because of the fruit recovery, there was a loss in the prior year, good recovery out of Mozambique as well, which has helped the beverages grow, and the latter part of the question, with regards to 2015 profitability, there was a few planets and stars aligned on that one. It's important to understand as well the fruit dynamic going into 2015, I had cheaper crop from the 2014 year, as mentioned earlier on the alignment of the fiscal and the harvest period. The other important driver there if you look to the Mozambique currency versus the ZAR. We're trading around MT 4.56 now. Going back 2015, 2016, that was around MT 2.60 to MT 3. So the purchasing power in one of our largest markets has obviously deteriorated. And then one also has to consider Brexit, the impact on the U.K. business. Back in the day, we were trading about ZAR 22, ZAR 24 to the rand, now it's obviously ZAR 17 to ZAR 18, so that's impacted the business as well as the profitability in the U.K. because of the import inflation with products that are dollar based or euro based. That's added about GBP 2 million of additional cost to the bottom line, which we're trying to recover, as mentioned, by cost efficiencies as well as pricing up in the market. Did that cover the answer?

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [29]

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And then to respond to the margin question, our absolute ambition remains to get the group back to a 10% operating margin in the medium term. The question of when -- [your next question will be], when is medium term, it will take some time for us to get there, but we believe it's absolutely, practically and technically possible for us to reach that target again. What you must understand as well is that we've got the ambition to grow this business and this group. So we will be adding new stuff that will require work to be done on them, but we -- our ambition is to have a larger Pioneer Foods in time.

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Unidentified Company Representative, [30]

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And then the last question is from (inaudible) at HSBC. He's referring to the level of discounts we've seen over the past 6 months. And overall, how much volume gain do you need to offset the price discounts to sustain the level of growth?

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [31]

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Obviously, the volume growth that you require for discount is very, very category specific. Bread is far more accommodating than some of our other categories, for example. And although we might [close] calculations, it's not an exact science, Johannes.

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Unidentified Company Representative, [32]

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Thank you. That concludes the questions session.

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [33]

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Thank you. There was a question here from the floor?

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Unidentified Analyst, [34]

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Sorry. Just (inaudible)

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Unidentified Company Representative, [35]

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Just wait for the micros, please.

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Unidentified Analyst, [36]

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Just on your M&A, I think you said prices are still very expensive. And so the public markets, the listed market prices have [derated], but there's an anomaly by the sound of it in the private market. Is that right?

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [37]

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Yes. Well, that's true. but I think I'm generalizing, but I think that, to a certain extent, we'll hold on for the best years of the economy. And given the pipeline that we're always working on, we've got 1 or 2 opportunities always on the desk, we see that as a reality.

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Unidentified Company Representative, [38]

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Thank you.

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Tertius Alwyn Carstens, Pioneer Food Group Ltd - CEO & Executive Director [39]

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Thank you, ladies and gentlemen, and thank you very much for joining us. There will be a cup of tea or coffee outside. Please join us. Thank you.