U.S. Markets open in 1 hr 23 mins

Edited Transcript of RCL.J earnings conference call or presentation 2-Sep-19 9:00am GMT

Full Year 2019 RCL Foods Ltd Earnings Call

Westville Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of RCL Foods Ltd earnings conference call or presentation Monday, September 2, 2019 at 9:00:00am GMT

TEXT version of Transcript

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

Corporate Participants

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

* C. D. Creed

RCL Foods Limited - MD of Vector Logistics (Proprietary) Limited

* David Tubb;Director Commercial

* Miles Dally

RCL Foods Limited - CEO, MD & Executive Director

* Paul Cruickshank;Chief Operating Officer

* Robert H. Field

RCL Foods Limited - CFO, Financial Director & Executive Director

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

Conference Call Participants

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

* Chris Logan;Opportune Investments

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

Presentation

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

Operator [1]

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

Good day, ladies and gentlemen, and welcome to the RCL Foods Annual Results Presentation. (Operator Instructions) Please also note that this call is being recorded.

I would now like to turn the conference over to Sir Miles Dally. Please go ahead, sir.

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

Miles Dally, RCL Foods Limited - CEO, MD & Executive Director [2]

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

Good morning, everyone, and welcome to the RCL Foods results presentation for the year ended June 2019.

South Africa continues to be plagued by subdued economic growth, rising unemployment rates and declining real consumer income. And in particular, RCL Foods has been significantly impacted by the headwinds experienced industry-wide in Chicken and Sugar, and we'll unpack this during the course of today's presentation. But at the highest level, the sugar industry is in process, and the Health Promotion Levy has driven a permanent reduction in local demand. And as you saw, we took an impairment of ZAR 762-odd million in that regard. The chicken industry is also in distress with unabated imports as we've experienced for many years now. And we've also had a rise in feed cost in that industry. So those are the 2 big challenges that we'll unpack, as I say, a little bit later.

I would also like to update you on the change to our senior leadership structure. Scott Pitman, our Consumer MD, has left us. And post the strategic review, we've decided to combine the Consumer and Sugar and Milling businesses under one head. In this regard, Paul Cruickshank has been appointed the Chief Operating Officer and will manage all the business units, excluding Vector, which will continue to report directly to me. We're very excited about this change and the benefits that it will bring and it's a natural evolution in creating ONE RCL FOODS. So for the Consumer section, today, David Tubb will present in Scott's absence.

If you turn to the next page, the results for the 12 months ended June. This is just a snapshot, and clearly, Rob will go through it in some detail. But at the highest level, revenue is up 5.5% to nearly ZAR 26 billion and EBITDA down 25%. If you take out Sugar and Chicken, it's actually up 7.8%. HEPS is down 60-odd percent as it excludes the one-off profits realized on the sale of Chicken farms and cash declines due to lower profits and higher working capital investment and debt reduction. And as you'll see, we have our debt funding down 13%. So we've got a conservative gearing position, which we believe puts us in a good position going forward.

If we move on to the next slide, which is breaking it down into our various categories. This chart clearly shows the strength of our Grocery business and our strong recent performance. Certainly, I've highlighted significant challenges and volatility in the Sugar and Chicken parts of our business. And as I said, we'll unpack this in more detail.

If you turn to the next slide, which goes through each of the categories, and we'll just pick out at the highest level. Groceries continue to be driven by market share gains in key categories and volumes and gross margins. And this is in a tough market with strong competitors, so we really are pleased with that. Millbake continues its turnaround progress. Logistics was impacted by enablement costs of Pick n Pay and Siqalo Foods. And this will, however, put us in good stead in the near future as we've absorbed all of those impacts in the short term.

Chicken, we've spoken about excessive dumped imports, and that's the rising feed cycle. And in Sugar, obviously, the sugar tax accelerates a significant reduction in local industry demand. And if you look at the EBITDA margin summary, you'll see, excluding Chicken and Sugar, we're at 10.6%. So managing to hold that stable. And clearly, our ROIC is also impacted by Sugar and Chicken. And as you know, and Rob will unpack a little bit further, clearly, with the acquisition of Foodcorp based on charges that go through, so we'll also give an adjusted version of that. If you look at the EBITDA movement per category cluster, you can see the significant performance and contribution from Groceries and Millbake and then significant impacts by Chicken and Sugar.

If you go through to the next slide, which is grow through strong brands, what I'll go through now is an overview of our strategy, and we will just give you the headlines at year-end. So the growth in market share gains in our Grocery business was particularly -- particular highlights over the past 2 years and this year, in particular. We really do hold a decent portfolio of #1 brands. As you can see at the bottom, our #1 brands, Yum Yum, Nola, Bobtail, Canine Cuisine, Ouma, Mageu and Catmor. And we have a new market leader with the reentry of our Simply Chicken brand. So we're very, very strong in the mayonnaise, peanut butter and cat food categories. I'm very pleased with that performance.

If you go to the next slide, partnering with strategic customers. We once again leveraged our capabilities to provide both our retail and foodservice customers with growing and profitable portfolio of solutions. So we've seen significant volume growth with strategic customers in key categories. And in fact, this was a major contributor to the growth of our Grocery business. We've also seen solid growth in Pies and a good turnaround in Beverages. And we continue our growth with the dealer-owned brands developed for specific strategic customers.

If we go to the next slide, which is extend our leading value chain. It was a particularly busy year in our value chain. And in particular, the take-on for the shared services for the Spreads business has clearly highlighted the capability and benefit of the RCL Foods shared services structure. And this bodes well for any future acquisitions that we may make.

If you look at the very good growth that we've had on Pies, we initiated the expansion of our Pies manufacturing capacity, with an ZAR 80 million expansion plan to grow volumes into the future. And we're really excited about the way that we reignited the demand in this category. We continue with our various SAP rollouts. And this year, the Consumer division progressed well with implementation in the Speciality business unit. And as I mentioned earlier, Logistics, we successfully integrated systems and extended our value chain into our customers to execute Pick n Pay super-frozen, which is ice cream distribution, and the take-on of Siqalo Foods, which is the Remgro Spreads business.

If you go to the next slide, which is inspire great people. Another also very good progress here, particularly in diversity and inclusion in the organization. Employment equity candidates made up 80% of the external hires at executive level and 67% of senior internal promotions. We continue to build our leadership pipeline. More than 400 of our managers having completed our RCL Foods leadership development program. Nearly ZAR 45 million was spent on training over 10,000 employees.

If we move on to the next slide, which is expand into the rest of Africa. Sure, as you'll appreciate, Africa has proven very challenging for many SA companies. And our presence is small but focused. And as we say in the first bullet there, we've narrowed our focus to Southern Africa, paired with our ambition to grow exports. So renewed energy into our export opportunities. And we've developed a low-risk expansion strategy in Africa by acquiring only -- we're establishing new businesses to expand our current value chain. And in that regard, we acquired 45% of L&A Logistics, an FMC (sic) [FMCG] distribution operation based in Lusaka, Zambia, which is viewed as an attractive reentry into that market. And in Uganda, where we have a reasonably chicken joint venture, we've made some infrastructure investments with HMH Rainbow and are considering various investment opportunities in there. And our venture partner in Botswana, Senn Foods Logistics, performed well. And a decision was made to expand this operation. So it's a nice activity. They're also small and focused.

If you turn to the next slide, drive sustainable business. I think this is another area in which we've made really good progress. We continue to lead the transformation agenda in our Sugar operations and had 1.8 million tons of sugarcane delivered by small-scale farmers and joint ventures and land reform beneficiaries, representing nearly 1/3 of our total cane supply. Another area where we're very pleased with our progress is our waste-to-value investment in Rustenburg. That's progressed well. That should come on stream early next year. And we expect to provide 65% and 50% of the energy and water requirements, respectively, for our chicken processing site and animal feed mill. So both from a green perspective but also from a risk perspective. And these joint ventures will be profitable in their own right, so we're very pleased with that.

Also, very pleasing was an A (sic) [A-] rating for Climate Change Management (sic) [Climate Change Survey] in the 2018 Carbon Disclosure survey (sic) [Carbon Disclosure Project], coming first in the SA Food and Beverages sector. The DO MORE FOUNDATION has significantly improved our impact on our chosen project as we're able to attract partners and other stakeholders. Even our employees are contributing, which would never have happened if we just had a CSR department. So a lot of good work is taking place there. And as we touched on, our cash-generative ability and healthy gearing profile places us well to consider strategic opportunities that might be forthcoming in both the South African and African market to drive future business sustainability.

And just picking out a few on the next slide, sustainable quality of earnings and the key deliverables. Just picking out a few. In Sugar, we'll accelerate the stakeholder engagement to strive for industry-wide interventions, including a review of industry structures. The sugar industry does need, in our view, a thorough review. And internally, we'll continue with cost optimization and diversification efforts. In Chicken, we will intensify government engagement to allow for a level playing field. And while we welcome and are supportive of Minister Patel's industry master plan, reality is that dumping is dumping. We are globally competitive. Most major markets block our chicken exports. So we believe the appropriate duty should be in place while we work on this master plan. Clearly, we'll continue to drive growth in Groceries, our market share plans and brand extensions. Millbake will continue that growth, particularly driving Baking, which utilizes our flour internally, and so we'll continue in that area. Vector, as we've mentioned, has made some good gains in the Pick n Pay area and taking on the Spreads business, but clearly, there's been some short-term investments in that regard. And we'll continue with the energy and water road maps, deliver the Rustenburg waste-to-value project, which will put us in good stead in the future.

I will now hand over to Rob Field. Thank you.

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

Robert H. Field, RCL Foods Limited - CFO, Financial Director & Executive Director [3]

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

Thank you, Miles, and good morning, everyone. We'll start on Slide 15, but not spend much time there because I know that the audience is well versed with the tough consumer markets at present. The only thing perhaps to stress, which Miles had said already, is an overarching challenges that are faced by Sugar and Chicken business and specifically their industries here in South Africa. And you see that as a key theme throughout the presentation today.

Moving on to Slide 16. It's merely a summary of the key financial metrics. The only key line not covered in subsequent slides is regards to the dividend. So the Board has declared a final dividend of ZAR 0.10, which means our full year dividend of ZAR 0.25 represents a significant proportion of our HEPS. I'd really want to stress the point that there's no implicit guidance within that regarding dividend cover.

Slide 17. The EBITDA waterfall removes material once-off from the results, with the prior year one has been removed on the left and the current year one is on the right, to derive an underlying EBITDA performance for F '19 of a decline of 33% down versus the published decline of 25%. As Miles has also said, excluding Chicken and Sugar, the balance of the group has performed ahead of last year, which is a pleasing result.

Slide 18 then reconciles the 25% EBITDA decline down to the 60% headline earnings decline. And I'm just going to highlight some of the key points on there. The first being, obviously, the significant Sugar impairment that's sitting in the depreciation and amortization line. Secondly, the increase in interest costs that really is distorted by the ZAR 30-odd million costs associated with our interest rate hedge, the bulk of which is an unrealized position. Thirdly, a pleasing performance coming through from our share of profits coming from our JVs and associates, and that's largely driven by the results, the performance of RSSC, our associate in Swaziland. And lastly, on this chart, just to put some color to the tax line. Last year, we had a low tax rate, effective tax rate of 21-odd percent, benefiting from the ZAR 64 million section 12L allowance that we enjoyed. The current year is -- obviously, we're sitting with a PBT loss position, and so we have a lower effective tax rate than what could otherwise be as a more significant credit. With those 2 items that we've got listed there, we would otherwise have a credit effective tax rate of 30-odd percent, and I'll leave the detailed announcement to explain more fully those 2 line items, but they are significant in affecting our effective tax rate for the period. So it would otherwise be a bit of tax credit coming through on that line.

Moving on to the next 2 slides, Slide 19 and 20, really, my link slides into the operational commentary section that my colleagues will follow up on. But perhaps just 2 aspects to highlight here. You can see the increased sales between segments on Slide 19, further demonstrating that was we've done consistently over the last couple of years as more internal business being enjoyed. And then as mentioned before, excluding Chicken and Sugar, on Slide 20, you can see the group's EBITDA delivery of ZAR 1.4 billion is 7.8% up on the prior year.

Slide 21 puts a bit more color on to the Sugar impairment that we've taken, and it's a very significant number of ZAR 762-odd million that we've booked. In terms of IFRS, an impairment test was necessary because of the existence of indicators of impairment, being firstly, the significant operating loss that our Sugar CGU has reported this year as well as our view that there has been a structural change in the local industry by virtue of the sugar tax removing 300,000 tons from the local market demand. For guidance sake, we have included on this slide some of the key assumptions supporting the DCF valuation that we have performed, which obviously resulted in the impairment and relates specifically, obviously, to the Sugar CGU, as defined by our business.

Slide 22, going on to the cash flow picture. Really, just 3 significant drivers here. The first, obviously, being the shortfall on the profit line is the one of the most significant contributors being the ZAR 500 million, ZAR 600 million down versus last year. The adverse working capital changes this period, I'll unpack on subsequent slides, but is significantly impacted by ZAR 345 million SASA funding that we enjoyed in the previous year and relative to this year. And then when we did our refi back in November, December last year, which we've reported to the market already, there was a ZAR 500-odd million paydown of our term debt package.

Moving on to Slide 23. A significant uptick in our working capital investments. There's lots of noise in this number, and the subsequent slide seeks to try and unpack that a bit for the audience. But essentially, over ZAR 1 billion increase is essentially the stockholding increase. We've got an underlying uptick in the feed cost driving chicken stock valuations. We also have higher chicken stocks on hand. I mentioned that the prior year had the SASA short-term funding benefit that we had on the payables side. So all in all, it's not as bad a picture as it looks on our published days, if you had to calculate, which we've included in the table here for you, various investment and working capital. Looks like it's up quite significantly. But if you look at the most significant and most important part, really, being our receivables, we always show the market the underlying, what we call debtors days, which really just picks up the trade sales and trade exposure that we have. And by virtue of numbers, which are not visible to the market, but you're well versed with the fact that Vector, obviously, we only report their revenue on a distribution revenue basis. If you restate that back on to a trade sale basis and exclude nontrade receivables from those balances, you get down to a debtors day of 38 at the end of the reporting period, which is a 3-day improvement on the prior year, so some comfort there.

So Slide 24. I'm not going to go through all the detail, but it's there for your reading in terms of some of that noise I referenced that is impacting a perspective of the balance of the trade receivables and payables balances. And if you strip out these abnormal items, if you want to call them that, you get to a deduction that our balances are reasonable in relation to the prior year.

Slide 25 builds with CapEx, and it remains a focus area for us. Relative to the group's total depreciation charge of approximately ZAR 800 million, our replacement CapEx is similar to last year, slightly down, of around ZAR 500-odd million and with higher expansion CapEx coming through this year. And we listed out the major items, so I'm not going to talk through all of them. But a project that Miles referenced that we're very excited about is that Rustenburg waste-to-value, which is ZAR 300 million of our CapEx and forward commitments. So a significant contributor to the balances referenced on that slide.

Slide 26 tries to give a bit more granular perspective of our return on invested capital. Obviously, the reported numbers are in the top section of that slide. And you can see again that if you exclude Sugar and Chicken, you get 2 results that are in line with -- similar to the prior year. The adjusted block at the bottom seeks to do 2 things: one, we've historically demonstrated to the market, which is if you exclude the intangibles component and amortization associated with the Foodcorp acquisition, so you remove that impact. And obviously, the sugar impairment this year is another significant one to remove. You get quite a different-looking underlying picture, still from a group perspective, not achieving a cost of capital reference. But if you -- underneath that, you're limiting the issues related to the Sugar and Chicken piece. And then essentially, if you're looking at Consumer, excluding Chicken, you're getting really a Groceries lens there and a very acceptable return on invested capital reference. And similarly, within the Sugar and Milling divisions, north of 20%. There you're looking at, by excluding Sugar, essentially just the Millbake and Animal Feed businesses. So just a different perspective of the same.

Lastly, and I'm not going to say a lot about our debt package. We've spoken about it at interim. Resized it to down by ZAR 500 million. So we had a very comfortable level of debt and gearing and pleasingly now at lower rates that we've been able to secure. And then the covenants. Covenants and -- despite the fact that they have, obviously, worsened and tracked against what is a full set of results this period, we've still got significant amount of headroom on those covenants. So I suggest that from that perspective, we're in good space.

I'd now like to hand over to David.

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

David Tubb;Director Commercial, [4]

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

Thank you, Rob. Good morning, everyone. I'm going to move fairly quickly through the first couple of slides, starting with Slide 30. Consumer revenue grew by 1.7% to just under ZAR 13 billion. However, our EBITDA declined by such over 13% to ZAR 854 million.

On to Slide 31. The Groceries cluster, which consists of Grocery, Beverages, Pies and Speciality, grew by 3% in revenue and 23% in EBITDA. Unfortunately, however, local oversupply and rising commodity prices has had an adverse impact on Chicken as EBITDA shrank by over 50% during the period.

On to Slide 32. Our underlying Groceries EBITDA growth up 5.1% is more in line with revenue growth. If you exclude the IFRS 9 impact on the profit on sale of the prepared farms at Speciality, Chicken statutory result was propped up by the profit on sale of surplus lands and listeriosis crisis costs incurred in the prior year, generating an underlying EBITDA of ZAR 109 million, which represents a decline of 75%.

On to Slide 33. Another great year for our culinary range, growing share and improving margins across the board. However, we do expect a challenging year ahead as a result of significant commodity pricing pressure across the basket.

On to Slide 34. With a market that is under pressure, the timing of our new pet food plant has reinvigorated the category. This has added differentiation, which has enabled us to hold or grow share in a declining category despite aggressive competitive pricing. A revised promotional plan and a second round of innovation is expected to deliver a strong result in F '20.

On to Slide 35. A cost-conscious obsession coupled with a clear front-end plan drove another great -- good year for Pies. This was despite the fire that destroyed our bakery in September 2018 and significantly affected our service levels for the category. The bakery rebuild is expected to be completed before the end of the calendar year. And the business has also invested in new capability and capacity in the main plant that positions us well for the upcoming financial year.

On to Slide 36. After a couple of -- extremely challenging years, the beverage business unit returned to growth in F '19. Clear tiering of our product range enabled a more refined product pricing strategy, which, together with innovation, drove a much improved result. However, the market remains under pressure, with significant focus on cost control expected to carry through into the new financial year.

On to Slide 37. The disposal of our prepared lines and exit from Bronkhorstspruit has enabled Speciality to focus on our baking capability. Consumer spending also intensified across all categories in the space, affecting volumes. And our key focus in F '20 revolves around settling the bakery business, achieving the cost savings required through consolidation of the sites and driving volume through what represents very innovation-hungry categories.

On to Slide 38. The story in Chicken is largely a repeat of the challenges we've been facing for a number of years, an oversupplied local market adversely impacted by significant imports, compounded by rising commodity prices and a deteriorating currency position. As Miles alluded to, from an industry perspective, we had been waiting on a decision on the application submitted for an increase in tariff levels, which seems to have been delayed pending outcomes of an industry master plan. Whilst we agree with this, we also continue to submit focused antidumping applications where applicable. We have, however, also had a tough year from a breed perspective, affecting our agricultural KPIs, which is a high-priority focus area in the upcoming months.

On to Slide 39. As long as the mainstream market remains volatile, we will continue to focus on growing volume in the more stable food service and added-value categories. That said, diversification of customer supplier base represents a real risk that may require another subtle shift in our business model. In the face of increased competition, the business is implementing various cost-saving initiatives and stepping up focus on the category to respond accordingly. On a positive note, however, the relaunch of our chilled processed meat range has been received extremely well by the market, and volumes are gaining traction.

Thank you very much. And I'd like to hand over to Paul Cruickshank.

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

Paul Cruickshank;Chief Operating Officer, [5]

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

Thanks, David. Good morning, everybody. I'll go quite quickly through Slide 41, just to say that it was a very challenging year for the Sugar and Milling division, with the 40% reduction in our EBITDA performance.

If you go to Slide 42, we showed the unpacking between the 3 business units. And almost all of the challenge lies in Sugar, with the ZAR 84 million EBITDA loss for F '19. This is largely driven by the sugar tax, as mentioned earlier. 16% -- nearly 16% growth for Millbake, which is a pleasing performance of a challenged base in June 2018.

Animal Feeds results, if you move on to Slide 42. Just -- 43, apologies, unpack that in just a little bit more detail as Animal Feed is a business unit in which the IFRS nonadjustment is included. And you can see a swing of nearly ZAR 30 million between 2018 and 2019 in that adjustment. So the underlying EBITDA for Animal Feed was a growth of 3.3%.

Moving on to Slide 44 and unpacking the Sugar performance. Reduced demand as a result of the sugar tax has a material impact on RCL Sugar's performance. Miles mentioned or Rob mentioned earlier the ZAR 300,000 to ZAR 400,000 -- 300,000 to 400,000-ton reduction in local sugar as a result of the sugar tax. As a consequence, if you look further down, a significant increase in the exports of local sugar actually took place.

In the current year, sugar imports reduced. However, there was an increase in movements of sugar across the border from Swaziland. And cane crop continues to recover and [climbing] in Mpumalanga. However, this increased sugar comes into a declining volume market, which exacerbates our challenge. Our focus internally will go on to Sugar -- to cost and efficiencies, particularly in agricultural space. We're working closely with industry as well as -- and government to ensure the sustainability of the -- of our Sugar business, and we'll continue to look at opportunities for further diversification.

Moving on to Slide 45, an operational review of Millbake. There's a good performance in Millbake despite the 10% increase in wheat prices, which is depicted on the chart on the right-hand side of the slide. We remain focused on delivering high-quality bread and delivering operational efficiencies and growing our market share in baking. Operational challenges at the mill did constrain our flour supply at various stages during the year and are currently being addressed. And we are looking at opportunities to extract more volume out of some of our older mills within the facility in Pretoria. Our flour quality remains exceptional and helps drive our baking performance. And that will remain a focus here going forward. There were labor challenges during the year at the facility in Pretoria, milling facility, which included a 4-day strike in March.

Moving on to Slide 46, Animal Feed. The market remains fiercely competitive in the second half of the financial year, mainly as a result of the increase in the yellow maize price, which is depicted on the chart on the right, with nearly 25% increase in [prices] from F '18 to F '19. Raw material prices remained a challenge and possibly recovering those from customers is what was a very significant challenge in Animal Feed business. It's extremely tight market with oversupply.

Internal efficiency and cost savings remained our key focus areas. Our customer and technical support differentiation remains a key enabler, which we'll continue to pursue. The Driehoek acquisition in Vaalwater, while small, performed in line with our expectations in F '19.

I'm now going to hand over to Chris.

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

C. D. Creed, RCL Foods Limited - MD of Vector Logistics (Proprietary) Limited [6]

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

Thanks, Paul. Turning to Page 48, looking at the logistics operational review, just talking to the headlines. We see a pleasing revenue performance driven largely by the -- as Miles already said, additional volume take-on of the Pick n Pay total frozen basket including ice cream. So that's all bedded down now. And further, the Siqalo Foods take-on in the second half of the year was a big revenue enhancement for the business. And so it's somewhat offset by the loss of the Willowton business, with Siqalo Foods being Willowton's biggest competitor. They weren't happy to be in the same camp. And the loss of the Burger King business also impacted in the second half of the financial year.

Moving on to EBITDA. We see a margin decline of 5.4%. And this is driven by the significant headwinds faced in fuel, the difference between the CPI, distribution inflation and enablement costs of taking on the new business of Pick n Pay and Siqalo Foods, which we often find is an investment in the months leading up to the take-on where there's no revenue, so they impact in the year. Miles has already mentioned that -- and we also mentioned in our interim results, we've acquired a 45% stake in L&A Logistics in Zambia, and this provides an attractive reentry into the Zambian market for RCL Foods.

Turning to Page 49, a bit of a repeat of what I've already said, but -- and I think, pleasingly, here we can see the revenue performance is contrary to the market trend. And if you look to the right-hand side of Slide 49, you can see market research showing the volume growth in retail of only 0.9% versus our good growth of 10.2%

Moving on to Page 50. We have already spoken to the cost pressures. And there, you can see down at the bottom of the chart, a little graph showing 17.4% increase in fuel costs. You can also see the gap between distribution inflation and CPI. Distribution inflation nearly doubled what CPI is, to give you a feel. And I've spoken about enablement costs of the new business in the financial year.

Turning to Page 51. Logistics implemented a mitigation strategy to offset the Chicken restructure during the 2018 financial year, with focus on winning new business and cost optimization. And this has gained good momentum with the new revenue of Pick n Pay and Siqalo Foods coming on board and the implementation of our 4-hub customer aligned model. We're affirming our customer-centric mindset.

There's been significant changes in the industry, and the frozen supply chain industry has been under pressure for a period of time, resulting in the pending closure of Imperial CPG Division, which plays in our space. The closure of ID Logistics and KLL Logistics already happened. And this brings further business opportunities to Vector. And if you like, we are the last man standing in our area of the business.

And with that, I'll hand over to Miles.

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

Miles Dally, RCL Foods Limited - CEO, MD & Executive Director [7]

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

Thanks very much, Chris. If we turn to Slide 53, which is the prospects, really not much different to the summary that I gave in terms of our strategic focus areas at the end of my section. But suffice to say that Sugar expects to remain under significant pressure with the local market demand in decline, as we've spoken about. And really, we do need an urgent intervention at industry level to ensure local sustainability. You've seen our results -- you've seen (inaudible) results. But having said that, we are going to also renew our focus in F '20 on factors within our control such as cost reduction and optimization. And as Paul mentioned, we do believe there are further opportunities in agriculture.

But just going back to the industry, we do need a review of the industry. And I think that -- again, we welcome Minister Patel's industry master plan in this regard. And I think the sugar industry is quite unique in terms of the way it is structured and does need to be -- have a good look at. And similarly, we need the enabling legislation that enables us to do other things with sugar, such as cogen or biofuel. So I think that will be an important component.

Chicken, I think we've spoken to quite clearly. It really is all about dumping. And there's no reason why there shouldn't be the appropriate duties in place.

Groceries will continue with that strong focus of -- on innovation and brand investment and efficiencies. We're quite excited, as you gathered, about the prospects in that regard in spite of very constrained consumer spending. And we expect to fight back from some very strong competitors.

Millbake will continue to build on its progress. And we also see opportunity there. And Animal Feed is in a solid place. And we'll just continue to do a bit more of the same.

And as Chris has mentioned, the Logistics, we need to bed down the new business and then improve efficiencies. And I think this quite a shift has been coming for some time. And Chris mentioned the closure of Imperial Cold Logistics, so the one division. And so they, I think, create opportunities in the market in that regard.

Thank you very much. We'll now take questions. Thank you very much.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions)

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

Unidentified Company Representative, [2]

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

Good. I have quite a few on the webcast, so I'd like to start with those. Dave, you can just read the question and then provide the answer.

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

David Tubb;Director Commercial, [3]

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

Perfect. Okay. So starting with the question for myself. In our performance in Groceries, can you elaborate on what was done differently with customers to enhance volumes?

I think starting off with Grocery is obviously exceptional cost control and a focus on operational efficiencies in that space. So I think we have a number of initiatives in place there, from [blowing] our own packaging in the mayonnaise and peanut butter plants, across to crushing our own seed from an oil perspective, I think, gives us an advantage there from a cost-base perspective. But then from a front-end side of things, I return to good customer spend fundamentals, and this is something that we've been doing over the last couple of years, centered around an appropriate pricing strategy, promotional excellence and solid relationships in that space. So I think this what's step changed through the game in the Groceries patch over the last couple of years. And then a strong innovation pipeline, refreshing the category and exciting the market.

And then finally, I think, obviously, the points around money -- making money in these categories, having made money over the course of the last couple of years, our ability to reinvest into marketing plans and innovation to further stimulate growth in the categories is critical to the result that we're delivering.

And then on to the second question. What is the current contribution from wholesale and direct informal trade? Direct informal store remains relatively small for us as a business. And obviously, it is something that we are -- continue to explore through various partners. A number of initiatives that we have run over the course of the last couple of years and a few other pilots that we have in play for this next year to get directly to the informal trade. But the wholesalers do also represent an incredibly important part of our business. From a consumer perspective, we're actually sitting at about 20% of our total business, and that's ranging from 15% to 20% of our business in Chicken, up to 30-odd percent in the Groceries patch from a total contribution perspective.

So I think I've often answered the third question around all the initiatives to materially increase business from these channels. Yes, obviously, we see the informal trade as a significant area for growth from a business opportunity perspective, particularly in the areas and regions that we are under-indexed in that presence, and that certainly represents a focus area for us.

Question 3 -- 4. Is the sugar industry looking at higher tariffs? What progress on electricity and ethanol? And what are the other diversification initiatives for RCL Sugar? I'm going to hand it over to Paul.

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

Paul Cruickshank;Chief Operating Officer, [4]

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

Thanks, David. So yes, as Miles mentioned, we -- the industry has been in conversation with government around additional tariffs. An additional tariff test has triggered based on the sustained low international price. We are now waiting government to collect that tariff, which is in the order of ZAR 700 a ton. And that process usually takes between 4 to 6 weeks. But that process will be in play.

Just with regard to the electricity and ethanol. Yes, again, these conversations are taking place with government. And government support is required for both cogen and ethanol. Ethanol requires a legislation around blending as well as a subsidy to make it viable. And the same with clarity on cogeneration is also required. So yes, those conversations are taking place, but no clarity as of yet with government. And those are the main focus areas from our perspective on diversification in RCL Sugar.

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

Unidentified Company Representative, [5]

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

David, if we can do question 5. And then I'd like to go back to the audio to just check with Chris.

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

David Tubb;Director Commercial, [6]

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

Yes. So then question 5, when could tariffs on Chicken increase as bird flu subsided in the EU and despite antidumping tariffs on the EU. Are we seeing a greater flow of EU imports into South Africa again?

I think it's safe to say that we were also clearly surprised by the announcement from last week regarding the tariffs in place on hold, particularly given positive progress that we thought we've made in that space. However, I think the reality is, is that the Minister is stuck between a rock and a hard place in that space. So we are meeting as an industry in the course of the next couple of days in order to prep for our inputs into a master plan workshop with the Minister before the end of the month. As Miles stated, we still believe that tariffs and antidumping duties are necessary in the short term. Bird flu has subsided in the EU at the moment. That's predominantly around the fact that they're going through the summer season at the moment, so you will see that, that would pick up potentially towards the end of the year. But I think the reality is we remain challenged by the level of imports irrespective of the source of imports. And the flow does seem to change around from one source to the other depending on where applications are being successfully put. So it's a constant game that we're playing in this space.

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

Unidentified Company Representative, [7]

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

Chris, back to you on the audio. Any questions?

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

Operator [8]

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

We have no questions at the moment.

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

Unidentified Company Representative, [9]

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

Okay. We'll continue on the webcast. There's quite a few things to those questions from Jiten.

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

Robert H. Field, RCL Foods Limited - CFO, Financial Director & Executive Director [10]

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

It's Rob here, and there's some more. Jiten is asking as to whether there are any further tax credits coming in the year.

Obviously, the reference that we had that significant section 12L incentive last year. So the response is we continue to pursue. Though a specific initiative path is unlikely to be anything near as material as that in the future, but there are some remaining opportunities.

Your next question, Jiten, was what is the total investment in waste-to-value plant to date? Specifically how the benefits accrue and to which businesses? What is the intended payback period?

So the market will recall that we invested in the first plant in Worcester abattoir in the Cape. And that was in the order of ZAR 110 million investment. And it was -- that definitely proved the opportunity. And very quickly, on the back of that demonstrated benefit, we invested in a much more significant, which I mentioned, ZAR 300 million at our bigger abattoir in Rustenburg, which will come on stream at the end of this calendar year. Miles mentioned the extent to which debt facilities and its adjoining feed mill will enjoy the benefit of power and water supply. By virtue of that investment, it's likely expanded technology to include both wastewater and chicken litter. So again, we're very excited about the prospects for that venture. I'm not going to quote the specific payback periods other than to lead you that we very quickly followed up the first investment with the second knowing how beneficial it was as well as, as Miles mentioned, again, supplying or giving us reliability of supply of key services into that site. So yes, that's probably sufficient.

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

Miles Dally, RCL Foods Limited - CEO, MD & Executive Director [11]

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

Okay. So I'm going to try and cover probably question 8 and question 10 at the same time. Question 8 from Jiten. What particular changes could take place to Chicken business in light of customer supply diversification? And question 10 from David Fraser of Peregrine Capital. A question on Chicken, if I may. Historically, given your high exposure to QSR, where your major customer has a cost-plus model, your margins have been somewhat protected in higher input price periods. Is the cost model still in place? And if so, why did this fail to protect margins, particularly in your H2 period?

I think starting off there, I mean, I think, obviously, as I've said in the investor presentation, we've made no secret of the fact that we've, over the last couple of years, attempted to minimize our exposure to the more volatile retail market and drive growth through the added value and particularly, the food solutions, foodservice space. I'd like to use the words rather than cost plus. It's focusing on a sustainable margin through partner engagement. Obviously, what we've done over the course of the last couple of years is to try and maximize the volume of birds that we have within the bell curve applicable to the food solutions space, and we haven't absolutely grown absolute volume that much over the course of the last couple of years. As the QSR and food solutions business has become more attractive to competitors, it's become increasingly difficult to hold on to 100% share in that space. And that has -- some of our competitors have spare capacity in their bell curve, which has enabled them to target it at fairly aggressive pricing. And it's also come at a time when some of our QSR partners are looking to diversify their supply base and challenging our dominance in that sector. We're not talking about a wholesale shift away from this whatsoever. I think our bread and butter and our engine room still remains in QSR and food solutions. However, we are going to need to look at a strategic review of the business. But it is fairly early to be looking at the detail, but suffice to say, we will need to look at growth options again in order to dilute costs potentially as well as making sure that we have an appropriate representation across our entire customer base.

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

Unidentified Company Representative, [12]

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

Good. Can we just check on the audio one more time?

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

Operator [13]

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

Of course. We have a question from Chris Logan of Opportune.

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

Chris Logan;Opportune Investments, [14]

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

Yes. If we could just look at Page 26, which breaks out your return on invested capital. If you look at the adjusted numbers, I mean, it sort of stands out that you earn good returns or very good returns in Consumer and then in Milling, if you exclude Sugar. But year in and year out, these good returns are diluted, but Sugar and Chicken. And of course, it poses the question, is the group correctly structured being amalgam of Sugar, Chicken and Consumer and Milling? I don't know of any other companies structured like this. It's a bit of a mishmash of agriculture, which demands a specific culture, and in Consumer and branding, where you're very good. And the share price seems to say that it's the same share price as it was in 2006 and even 1993, if you go all the way back. So perhaps, you could just say, do you still stand by your current structure? That would be the first question.

And then you're talking potentially about biofuel and ethanol, which should require heavy CapEx, I guess. How would you see investors relating to a big spend on sugar on those biofuel and ethanol?

And then just the last question. If the group was in a focused form where you're strong consumer and brands, do you think there's a chance a player like Pepsi would have made a bid for you rather than Pioneer Foods?

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

Miles Dally, RCL Foods Limited - CEO, MD & Executive Director [15]

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

It's Miles. Thanks for the question. A good question. It's Miles here. I think that just going to the -- to your first point, I think constantly we review our portfolio. I think that irrespective of how we structured, Chicken and Sugar are in crisis, and that's I don't think anything specific to do with RCL Foods. You could argue the point about focus, but we believe that we bring the focus. But what we also bring is the shared services capability and a very, very strong front-end relationship with our key trading partners because of the size of the basket that we have. Having said that, we are, as David said, in Chicken, and as Paul has mentioned, in Sugar, we are reviewing those portfolios in terms of the contribution that they make and how we manage them, whether there is anything we could do differently. And having said all of that, with our Board, we constantly review the portfolio that we have. And we've said many times that we would like to get a greater branded portfolio because, as you say, we have an opportunity to leverage that and we have a skill set in order to leverage that. But at the moment, Chicken and Sugar have been, until some of the crisis, in particular, in Sugar, probably an ongoing area in Chicken, hit the operating performance.

So the last point about Pepsi. I'm not sure that, that would have necessarily made any difference in terms of their strategy versus what we do. And so I think that that's difficult to comment on. And the point about -- your second point, which was the CapEx necessary, we would concur with that. We're just suggesting that Sugar does require to be -- I think worldwide Sugar has alternate areas in energy as opposed to just sugar. I think worldwide sugar is oversupplied. And we know that there are health concerns in that area. And so energy is a very logical alternative. How one's structure is ever fund there is a good point and one will have to look at that appropriately. Thank you.

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

Unidentified Company Representative, [16]

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

Good. Any more on the audio?

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

Operator [17]

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

No further questions on the conference call.

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

Unidentified Company Representative, [18]

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

I'm going to ask Paul to take 2 questions that have come through on the webcast.

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

Paul Cruickshank;Chief Operating Officer, [19]

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

Thank you. So the first question from Jiten was what was sugar production for the year? Could production fall back by design given the market conditions and the structural challenges? And to what production level?

So just to give a sense, and this is the industry season, which runs to the end of March 2019. Local production for all sugar players was 2.2 million tons for this year, which is probably, if you look through historical averages and cut through the [prices], it's pretty much a normal production year.

The question about could it fall by design. Miles have mentioned earlier that the way in which the industry act is constructed, this extremely difficult. And certainly, the act [impacts] these players to put production into the system, which we would acknowledge goes completely counter to the current challenge which the industry faces. And that is why we would need guidance from government and price working with SASA to either find alternatives for sugar, hence, the cogen and ethanol conversation with governments, or what will happen is that over time the structural change impact will be a slower beat and will take longer to take effect.

The production -- just to give you a sense of the production levels, so local consumption of sugar is sitting at about 1.2 million tons. And the earlier reference to the 300,000 to 400,000 tons, which the sugar tax impact has had, obviously, calculates all that number.

And the second question to do a sugar from [Justin]. Can you give us an idea of the scalability of the Sugar operation? Could the business operate efficiently and maintain low-cost units at a lower level of production?

The answer to that is we are fairly close to capacity of production in Sugar. As per my answer to the previous question, how the act is configured drives production through the system, so there isn't additional scalability or significant additional scalability. And sugar is a very highly -- high-cost, fixed-cost-orientated business. So it is very difficult to take volume out and run at a low production cost. So I hope that answers the second question.

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

Unidentified Company Representative, [20]

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

Thanks. Chris Creed, if you'd like to do the next two?

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

C. D. Creed, RCL Foods Limited - MD of Vector Logistics (Proprietary) Limited [21]

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

Yes. Give me a few here. Okay. Thank you. Jiten asks how much was the take-on cost in logistics? Will these be reoccurring, but more than offset when the new business full contributes to the new financial year?

So the take-on cost was significant, I'll say that, and not reoccurring. And the new business will contribute positively, both Pick n Pay and Siqalo in the new financial year.

[Stephen Herberts] asks, are you interested in taking over the Shoprite cold chain contract from Imperial? And if so, why do you think you can make this profitable contract when Imperial struggled?

There's 2 similar questions to that, from [Anton Smith] and [Victoria Lambert], which say, are you expecting a material increase in the volume of Vector due to the closure of Imperial cold storage? And which retail food producer logistics contract have you taken over from Imperial Consumer Foods division?

So to answer those related questions as one, yes, we are very interested in taking over any business that Imperial was doing, whether it be with Shoprite or with the principals. We are in discussions. Nothing is confirmed at this stage, but there are ongoing discussions at the moment, both with Shoprite and with interested principals -- potential principals or customers, if you like.

And why would we think we could do it profitably? Well, the -- as we said in our notes, we've moved our network to a customer-centric model, which we've been doing for a number of years now. We've done that successfully with Pick n Pay. We were recently awarded the partnership with Massmart Group to partner with them to do their frozen supply chain consolidation. And in the Shoprite space, if we manage to get the Imperial business, then we'll consolidate it with our existing volumes. And their customer model pretty much like we've done like Pick n Pay. So that then helps drive the efficiencies, and it's a sustainable supply chain solution.

So I think -- sorry, there's one other question from [Devon Govender], who asks addition of Siqalo business to the Vector's compromised margin had an overall negative impact. Is that the value add to all shareholders as it seemed to only benefit growth Remgro?

So both Pick n Pay and Siqalo Foods, new business take-on -- comes with some take-on costs, which, as I said, hits us in the financial year. And we would look to -- both of these new business revenue streams to be profitable in the new financial year.

With that, I'll hand over to Paul.

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

Unidentified Company Representative, [22]

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

Or David.

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

C. D. Creed, RCL Foods Limited - MD of Vector Logistics (Proprietary) Limited [23]

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

Sorry. David.

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

David Tubb;Director Commercial, [24]

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

Okay. So I've got a couple here. So maybe starting with one from Jiten again. What in particular happened with breeding in chicken? And could problems flow through to next year?

And what we established during the course of the 2019 financial year is that there was a gap in our genetics of the COBB birds supply through to us, something that took a while, but eventually, the COBB acknowledged that there was a problem there, affecting the number of eggs that we are producing per hen and ultimately their hatchability. There's still an area that we are incredibly focused on, both internally from an agric management perspective as well as with our partner in COBB. But it is not going to be something that is going to be fixed overnight, that's for sure.

Another question from [Quivis Zazir]. Taking the market share performance of the Groceries categories, how is private label market share growth looking? And are you taking share from branded or private-label competitors?

I'm also going to take this opportunity to answer the question from [Munier Ahmed], which is, going forward, how will you balance between maintaining strong brands versus benefiting from the growth in private labels, i.e., partnering with retailers?

I think we've previously referenced that the private label represents a relatively small part of our total basket, between 10% to 15%, varying by category. However, we do enjoy fantastic relationships across our retail partners. And we'll continue to drive private label where appropriate. But doing our business through brands we control ourselves remain on prominent importance. However, if you look at shares, we're generally growing share from our branded range, if anything, competition in the private label space is hotting up. For example, in peanut butter, we've been challenged by imports from cheap sources in the private label space, but we continue to focus in delivering as best where appropriate.

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

Unidentified Company Representative, [25]

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

One last check on the audio, please, Chris.

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

Operator [26]

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

There's no questions on the conference call.

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

Unidentified Company Representative, [27]

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

Okay. We continue with the webcast.

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

Miles Dally, RCL Foods Limited - CEO, MD & Executive Director [28]

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

Okay. So there is a few more for me here. So I think we've often answered the when do you expect the ITAC tariff announcement? I think we've spoken through that already.

The next question that I have here is, which Grocery categories saw the most aggressive pricing strategies? This is from [Anton Smith]. I think, obviously, for us, margin comes first. However, you do need to start with a pricing strategy depending on our position in the market, whether you're a strong #1 or an aspiring #2. A good example in that space is Pieman's, where we've always been a solid #1 at a price premium that we've traditionally tried to carry over some of our competitors there, we've decided over the last couple of years was too high. We then went into a space of a number of cost-saving initiatives in order to be able to fund some front-end plans in Pieman's, which has enabled us to deliver our pricing strategy and some growth in that space, which has done well. And then I think in some of the other Grocery categories, whether it's the mayonnaise, paste or peanut butter, it's back to brilliant basics in that world as well, making sure that you've got a pricing strategy dependent on where you set as your market status, and then attacking the promotional plans accordingly.

The next question here. To what extent at all were your Grocery volumes impacted by stockholding movement by retail partners, i.e., was there any restocking benefit? I must aware -- I must admit, I'm not aware of any of this happening. The bulk of our growth is a result of what we've done through our own initiatives.

Any other question here that I'll answer in that space. Does the chicken industry need to consider cutting back on supply to balance the market again?

And this is obviously what we did a number of years ago through our cutting down of Hammarsdale to a single shift. I think one of the things that we've realized in the process of this over the last couple of years, that if you're not growing volume, you end up in an environment where you don't get the values -- significant increases in our cost base, whether it's electricity, water, labor cost increases, along those lines. So we will need to look at it very carefully before we look at cutting volume again in the Chicken space from our perspective.

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

Robert H. Field, RCL Foods Limited - CFO, Financial Director & Executive Director [29]

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

Yes. I've got a question on Sugar from [Zayid]. Do you think consolidation is likely in the sugar industry given the evolving structural industry dynamics taking place?

The honest answer is we do not know if consolidation will happen. What we do think is that there is a permanent structural change in demand, and we need less sugar in South Africa. That is what is required. But not sure if that will come from consolidation or a change in food prices within SASA linked to the government assistance we spoke to earlier.

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

Unidentified Company Representative, [30]

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

And that completes the questions on the webcast. I think, Miles, over to you.

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

Miles Dally, RCL Foods Limited - CEO, MD & Executive Director [31]

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

Maybe just one last check if there are any other questions online?

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

Operator [32]

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

No further questions on the conference call.

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

Miles Dally, RCL Foods Limited - CEO, MD & Executive Director [33]

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

Okay. Sorry. Just having a look here. There's one here that Dave could -- how many levers do you have to expect -- further expand Groceries margin?

I think we've already demonstrated the ability to do that in a number of areas. And I think that there's still opportunity. So we're very pleased with the progress we're making. And then might have a lot of margin improvement can come not only from the cost side of the business, but also from the mix side. So driving a different, more profitable mix, and those are all the areas we'll be looking at, particularly when we look at innovation. So hopefully, that answers that question.

And then just to thank you and say it's been a really challenging year, as you can see from our results. We really are trying to make major differences in the chicken and sugar industries playing a role that we can play as a major player in those 2 categories. And we're very excited about the balance of our portfolio in terms of the growth and profit and return opportunities for shareholders.

Thank you very much.

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

Operator [34]

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

Thank you very much, ladies and gentlemen. That then concludes this conference call. And you may now disconnect your lines.