U.S. Markets open in 5 hrs 7 mins

Edited Transcript of RFG.J earnings conference call or presentation 19-Nov-19 7:00am GMT

Q4 2019 Rhodes Food Group Holdings Ltd Earnings Call

PAARL Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Rhodes Food Group Holdings Ltd earnings conference call or presentation Tuesday, November 19, 2019 at 7:00:00am GMT

TEXT version of Transcript

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

Corporate Participants

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

* Bruce Alan Scott Henderson

Rhodes Food Group Holdings Limited - CEO & Executive Director

* Christiaan Cornelius Schoombie

Rhodes Food Group Holdings Limited - CFO & Executive Director

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

Presentation

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [1]

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

Good morning, everybody. Thank you very much for joining us here this morning for our results presentation for the year ended September 2019. I'm going to run through the high-level review of the year and then hand over to Tiaan for the financial performance, and then I'll be back to run through the balance of the presentation.

We're pleased with the strong turnaround in performance, with operating profit up 24.9% and headline earnings 38.1% higher than last year. This has been on the back of a robust regional performance in a weak consumer environment and early signs of a recovery in the international business.

Operating profit margin was expanded, and there were no further once-off costs in the second half, and we've seen a reduction in the net debt-to-EBITDA ratio of -- from 2.7 to 2.1x.

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

Christiaan Cornelius Schoombie, Rhodes Food Group Holdings Limited - CFO & Executive Director [2]

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

Good morning, everyone. I think I'll start with what has changed in the accounting world for us over the last year. The first point is we adopted 2 new IFRS standards, the first being IFRS 9, a financial instrument. We didn't have a material impact on the results for 2019. However, we did make an additional ZAR 1.9 million provision for lifetime expected credit losses by applying the simplified methodology to calculate the expected lifetime credit loss. The adoption had no impact on the results that we reported for 2018.

Then the second one was IFRS 15, revenue from contracts with customers that gave rise to the reclassification of specifically distribution and warehouse allowances from expenses in the past to be offset against revenue in the current year. And we obviously had to reclassify the same cost in the prior year number and the value of that was ZAR 119.4 million. Apart from that, it didn't impact our results. It obviously had no impact on the net profit line.

Then in 2020 financial year, we'll adopt IFRS 16 leases standard, and we expect a material impact from that on our balance sheet. What we illustrate below is the impact had we adopted this standard in the 2019 financial year, it would have reduced our profit after tax by ZAR 1 million, it would increase the right-of-use asset on our balance sheet by around ZAR 96 million, and it would have increased the lease liabilities by ZAR 120 million. And obviously, then gave rise to higher debt-to-equity ratio in the order of 50 -- 52% versus the current 47%.

Then linked to the IFRS 15 changes, we -- the standard gave more clarity on the classification of specific expenses, specifically warehouse and distribution allowances, which made us decide to reconsider how we report our income statement, specifically. And because it turned out that the reclassification of these expenses would give rise to some distortion in our numbers and for the sake of better transparency, we decided to report our expenses in more detail, and we've now come to the point where we are starting to report our expenses by nature and not by function as in the prior years.

So we now disclose expenses mainly in 3 categories, main categories: direct manufacturing costs, which includes things like raw material cost, direct labor, et cetera; manufacturing overheads, basically overheads at plant level, the biggest items included in there would be depreciation, repairs and maintenance and some direct staff costs; selling and distribution costs, which includes warehouse and distribution, agent's commission, merchandising costs, et cetera; and then other operation -- other operating costs is the balance of our overheads. It's, i.e., the plant overheads that don't -- isn't allocated to manufacturing operating costs and, call it, head office operating cost. And this gave rise to us not reporting cost of goods sold any longer in our financials.

We'll then turn to the financial performance. The turnover grew by 8.5% to ZAR 5.4 billion, improved the efficiencies at plant level. Gave rise to a reduction in the ratio of manufacturing costs due to revenue from 67.7% in 2018 to 66.7% in 2019, that realized an additional ZAR 51 million contribution for the year. This ZAR 51 million offset the impact of cost increases in other expense line items and resulted in 90 basis points improvement in our net operating profit margin. We gained from the 7.7% depreciation in the rand exchange rate to our basket of trading currencies. Our cost grew and the main -- or one of the main areas where we're seeing significant increases is in depreciation and amortization cost, ZAR 27.5 million increase there. And then just a reminder that in the first half of the year, we incurred a once-off cost of ZAR 37 million relating to the drought and the relocation of the pulps and purees plant. There was no once-off cost in the second half. And if we look back and look at the like-for-like situation compared to how we reported in previous years, our gross profit would have been 25.8% for the year versus 24.9% in 2018.

To carry on, operating profit increased by 24.9%, and the operating margin improved to 7.2% from 6.3% in 2018. The regional margin improved by 30 basis points despite Long Life Foods growing faster than Fresh Foods. International, obviously, benefited from the weaker currency and returned to profitability in the year. EBITDA increased by 22.9%, and the EBITDA margin improved to 10.5%, 100 basis points improvement.

We received tax rebates for the capital expenditure that we incurred over the past years -- past 3 years of ZAR 10 million in 2019; and in 2018, that amounted to ZAR 8.5 million. This gave -- all of the above gave rise to diluted headline earnings per share growing by 37.8% to ZAR 0.838 per share. And based on that, we maintained our dividend policy and declared a dividend of ZAR 0.279, which represents an increase of 37.4%.

Looking at the income statement. Importantly, there, you can see the new way in which we want to report our expenses. And importantly, revenue, which grew by 8.5% to direct manufacturing cost is where we saw some gains. So that only grew by 6.9%. And like I've said, the additional contribution generated through that more than offset the increases which we see on the lines below that.

Operating income, a 20% increase and what sits in there is obviously is some of the gains we make on -- by taking out forward exchange contracts and the unrealized profits or gains on that and some once-off income-like gains on sale of assets, et cetera.

Operating profit, ZAR 392 million for the year versus ZAR 314 million the year before. Interest paid, in line with our guidance, at ZAR 117 million for the year. The profit before tax amounts to ZAR 275 million, and the provision for income tax on that amounts to ZAR 60 million. So given the rebates that we've accounted for our effective tax rate this year was just more than 21% versus 23% last year. Last year, obviously, the same rebate gave rise to a lower effective tax rate. Then diluted headline earnings per share ZAR 0.838 and our weighted average number of shares in issue has increased by 3.6%, and that's following the conversion and -- of the preference shares in December of 2018.

Our group turnover grew at a compound annual growth rate of 15.7 years (sic) [15.7%] since 2015 to 2019. And bear in mind that 2018 and 2019 numbers here are on the new IFRS 15 or by after applying the new IFRS 15 standard.

Drivers of turnover growth. Still good volume growth in the circumstances, 3.4%. Good to see price inflation combined with some mix changes. Last year, this was -- number was negative. ForEx contributed 1.5% to the growth and the acquisition of the business from RCL Foods contributed 0.7% to the turnover growth.

Then just segmental contribution to turnover. Of the new IFRS 15 reporting, international sitting at 20%. Previously, we reported it around 18%, 19%. But what's important about this slide is that the Long Life regional business now represents 48% of group turnover and Fresh only 32%, and that's got a significant impact on the overall group operating profit margin because regional Long Life yields a lower net operating profit margin than the Fresh Foods business.

Operating profit, good to see an increase in net operating profit, and similarly, an improvement in the margin. Then just a breakdown of our international revenue by various currencies that we're trading. Significant swing towards U.S. dollars now representing 61% of the international turnover, and that came at the expense of Australian dollar, which has reduced by 7%. In the bottom right-hand corner, we show the average exchange rates that we realized during the 2018 and 2019. And as we all know, the rand depreciated against all those currencies to the extent shown there.

On the balance sheet, total assets increased by ZAR 130 million to ZAR 4.7 billion. And on the intangible assets and goodwill line, the increase there is due to the ZAR 30 million paid for the RCL business that was allocated to intangible assets, net of, obviously, some amortization that we provide on some of those assets. For the rest, not much to highlight.

Looking at the capital and reserves side, net debt, as we will see later has obviously reduced over the year. And although we ended with a much bigger overdraft this year, it's a function of how we structure our debt in the business. And if we looking -- sorry, if we look at working capital and other ratios, net working capital days has improved to -- from 124 days last years to 119 days this year. The main driver of that is inventory, which has improved by 10 days, but it was partially offset by a 5-day reduction in creditor days. With the better results, obviously, return ratios all improving and with return on equity now at 9% versus 6.8% for the prior year.

Cash management, so operation cash flows amounted to ZAR 560 million, ZAR 65 million of that was invested in working capital. Net interest and income tax payments, ZAR 97 million and then we repaid loans of -- capital value of ZAR 238 million and CapEx and the net CapEx, net of proceeds on disposal of fixed assets amounted to ZAR 254 million, and it also includes the ZAR 30 million paid for the RCL business there.

Then just our long-term debt profile. This, obviously, excludes the bank overdraft at year-end. If you look at the 2019 bar, at year-end, long-term debt amounted to ZAR 988 million. And during the year, we've made ZAR 238 million capital repayments. And then going forward, we just show the capital repayments we'll have to make according to the various underlying agreements with the banks. 2021, there's a big bullet payment of ZAR 450 million scheduled for then. But we are able to elect whether or not we want to pay that or we want to extend all or a portion of it. Closer to the time, we'll decide about that. And then just to add that interest on all this debt is serviced quarterly.

On the debt ratios. I think we've mentioned that we've repaid some of the debt. It's lower. But more importantly debt to equity is now at 47% versus close to 54% a year ago, and debt to EBITDA has improved from 2.7 to 2.1x at the end of this year. Working capital facilities. We've got -- at year-end, we had good headroom there. This year 81% versus 97% last year. The decline there is just, like I said, a function of how we structure the debt in the business.

Then long-term loan facilities, also a decent headroom there. This year, it's 34% versus 20% last year. Our cost of debt has remained unchanged from what it's been. And then our covenants with our main bank, we give there. So also there, we've got good headroom. And over to Bruce.

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [3]

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

Thanks. All right. The regional segment grew by 8.4% to 4.334 -- sorry, ZAR 4.339 billion. Long Life growing at an incredible 9.2% and Fresh Foods at 7.3%. Operating profit grew by 11.7% to ZAR 359 million. And importantly, operating margin expanded by 30 basis points to 8.3%. Turnover growth was made up of volume growth, 3.5%, price/mix of 4.1% and acquisitive growth of 0.8%. Importantly, price/mix exceeded volume for the first time in a number of years. And you'll recall that we had once-off costs in H1, which had a dilutive effect on margin.

Long Life Foods volumes grew by 4.3% and on the back of a good balance between promotional activity and volume growth. We had good performances from canned meats, fruit juices and dry foods. Baked beans was our fastest growing category. But despite margin improvement, this still had an adverse mix effect on overall margin. Inflation averaged between 3% and 5%, and this was all recovered in price. Trading in sub-Saharan Africa remained tough, but good gains were made, and although, we still experience liquidity constraints in certain markets.

Fresh Food volumes were flat year-on-year. Ready meals remained resilient, although not showing any real growth. The pie category was stable, but we faced strong competitor activity. The increased capacity in our pie manufacturing facilities represents an opportunity for growth in the Fresh segment. And the acquisition of the protein snacking business from RCL contributed ZAR 33 million to sales in the second half.

We continue to show good gains in market shares across most of our categories. In jams, we remained in our market-leading position despite a decline in our share. And for the rest of the categories, canned fruit, canned vegetables, canned meats, Long Life juices and salads, we grew our share. We grew our shares; except salads, where we were flat. And standout performance from canned meats, where we have a commanding #1 position at 80%. Those shares were as a manufacturer, so include private label.

And looking now at our brands. Again, a small decline in jam, but retaining our significant #2 position. Canned fruit growth, pineapple, significant growth, up to 65%. Canned vegetables up to 16% on the back of significant growth in the baked bean category. Canned tomato is up to 28%. And again, meat standout performance, Bull Brand in corned meat at 61% market share.

Fruit juices, very pleasing for our Rhodes brand to have achieved 18% as a strong #2 in the category that continues to show good growth. Fruit juices show 10% growth in the last 12 months, 5% value and 5% volume. Infant meals, extremely competitive environment, and we lost a percentage share point there, but remain in the strong #2 position -- or growing #2 position and well positioned. We saw a new entrant into the category under the Delish brand during the year. And in the face of this extreme competition, they bailed out during the course of the year. And subsequently, we've seen pricing recover. Salads and pickles, a small decline, and the same in gravy, where we are #2.

On to international. The international segment saw revenue growth of 8.8% to ZAR 1.074 billion. Operating profit of ZAR 37 million at 3.4% margin. Turnover growth was made up of: volumes 3%; price/mix, adverse 1.9%, back -- on the back of our drought-related quality issues in the first half; and a significant ForEx gain of 7.7%.

The segment enjoyed stronger canned fruit sales and good increases in exports of fruit cups to the United States. The drought-related problems are a thing of the past. And our operating margin strengthened due to this favorable product mix, with a move towards higher value-added products and, of course, the weaker rand.

On to new product development. It is our strategic goal to be market leader in product innovation, with our centralized group new product development capability. The key drivers for NPD within our business, our lateral extensions of brands into adjacent categories, range extensions through innovation and capitalizing on global eating and health trends. We have a specialized NPD facility in Gauteng for pies, pastries and bakery and a world-class NPD facility in Groot Drakenstein, which was opened last year. Photographs of the NPD facility in Groot Drakenstein.

And just to recap on some of the packaging innovations that we have brought to market over the last few years. We were first to market with our easy-open cans and snap-on lids, tomato paste in plastic cups, the one-step juice openings, baby food pouches and the 200 ml juice leaf pack, and these have all been very successful for us.

We've had successful entry into adjacent categories such as fruit juice and a large number of range extensions and product upgrades. And recently, a range of plant-based protein ready meals and dairy alternative products. Some of the range extensions, which have -- we brought to market in the last 12 months. New juice ranges, all performing very well, launched just ahead of this summer. Further dry foods alternatives coming under the Pakco brand and then taking some of our Fresh Food capabilities into the dry fruit -- dry food brand space by launching really to serve Bisto gravy.

We continue to develop -- private label remains an important component of our business, and we continue to develop products for our private label customers, extensive innovation on -- in Fresh Foods and dry foods for the range of South African retailers -- sorry, Long Life Foods.

On CapEx, we are certainly over the hump of the big CapEx spend of 2017 and 2018. And this year saw capital expenditure of ZAR 232 million, and we've guided for ZAR 150 million in 2020, which is a much more normalized situation, largely maintenance CapEx, but an element of expansion included in that.

Projects completed during this past year, include the relocation of the pulps and purees plant to Groot Drakenstein. The expansion of the Western Cape ready meals factory to accommodate the snacking business, that is the samosas and the protein snacks. The completion of the infrastructure and site upgrade in Groot Drakenstein, and the expansion of our warehouse at the juice plant in Wellington and ongoing development of new pineapple plantations in Eswatini.

With regards our outlook, we expect to maintain our positive growth momentum into 2020. On the regional front, we will look to drive organic growth and continue to increase our brand shares, with a focus on -- particularly on the high-potential new categories, and we'll continue to look to improve our margins.

On International, following the good recovery in 2019, the business is well positioned to deliver further growth on the strength of our experienced international team and outstanding global relationships.

We expect to see a continued recovery in the margin in this segment, and we have the opportunity to increase our natural hedge to -- our natural hedge against rand volatility.

On the overall, we'll be looking to improve our balance sheet by generating stronger cash flows to reduce debt levels. We'll continue to focus on working capital management and containing costs in the constrained consumer environment that prevails. And we are committed to our medium-term operating margin target of 10%. And we remain open to evaluating strategic -- sorry, acquisition opportunities. Thank you. We will be happy to take any questions.

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

Questions and Answers

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [1]

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

Yes?

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

Unidentified Analyst, [2]

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

I've got a few questions, if I may. On the international piece to start with, is there any way to sort of disaggregate that margin improvement between the rand and the sort of volume or the high-value add that you kind of alluded to?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [3]

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

The rand is obviously a significant impact. And generally -- and I don't think it was too far off this year, we would benefit on the bottom line to the extent of 50% of the movement in the currency. So whatever moves in the currency will go up -- we'll go straight to the top line. That's 7.7% and half of that would come through on the bottom line after natural hedge and then in FECs.

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

Unidentified Analyst, [4]

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

And the second half price mix in international, you obviously had the oneoff costs in H1 and when it was negative. Could you give us the second half number?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [5]

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

I can't give you the second half mix. But yes, it's something we could pull out for you, if you wished. You could drop us an e-mail and we could get that for you.

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

Unidentified Analyst, [6]

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

And you mentioned the balance between volume growth and promotional activity was good. Could you just elaborate on that a little bit more around the promotional activity you're seeing from the retailers, and how you're looking to participate in that?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [7]

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

Yes, I think that, that is a very pertinent issue in our current environment. And as I said after our first half, I think we started gaining and seeing an improvement in performance already in the first half. I think, during the course of last year, we probably got that -- got some of that wrong where we overpromoted and to the extent that we didn't see any further uplift. And it was just effectively driving down price. So I think we already saw gains in the first half, and we've seen further gains this year.

So I think initially, and it's something that's prevailed across the sector, is that in the face of a softer consumer and drying up volumes, there's a tendency to use the easiest tool, and that is promotions. And it's one thing if you're using it and getting uplift. It has an adverse effect on price. But if you're using it and you're not getting an uplift and then you're having adverse price and no gains on volumes. And I think that we erred on that side in 2018, and we refined that process during the course of the year and saw further gains in the second half. So really, a lot of attention to detail on pricing relative to our competitors. And also just in terms of dealing with internal elasticity of some of the products themselves.

Just for example, a product like Bull Brand, a very, very strong brand, highly elastic and there's a point at which people will not buy canned meat, they will perhaps not buy meat. So dealing with those issues and I think that we did a much better job of that last -- this year. And hence, we saw greater gains in price than we did in volume, which was our intention.

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

Unidentified Analyst, [8]

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

Isn't that the retailers pushing the -- for you to participate in those promotions or are you going more to them when you sort of sense where you are in terms of your volume price?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [9]

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

I think there's sort of -- well, there's 2 types of promotional activity. One is a planned annual program or grid and the others, more of an ad hoc nature. And so one engages with the retailers on the planned grid. And on the ad hoc, it can be both ways. But I think in these tough times, my sense is that manufacturers have possibly looked to overpromote, as I said, certainly, in our case. I believe we did that in 2018.

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

Unidentified Analyst, [10]

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

And maybe just a final, financial one. What's your weighted average cost of capital?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [11]

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

Tiaan?

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

Christiaan Cornelius Schoombie, Rhodes Food Group Holdings Limited - CFO & Executive Director [12]

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

It's about 13.5%.

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

Unidentified Analyst, [13]

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

Just maybe a question on the second half margin in the regional business. I think you were quite, I guess, bit more conservatively focused and when we spoke to you at the first half results, and that came through quite a bit stronger certainly than I was expecting.

Is it around the promotional activity or are there specific drivers in the second half that maybe delivered margins slightly better than maybe what you were expecting in first half?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [14]

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

Yes, actually, we came up a little bit short on what we were targeting. We were targeting 8.5% for the year, and we came out at 8.3%. So it was on a -- twofold, the underlying drivers, one, cost and the efficiencies, manufacturing efficiencies, largely on the back of CapEx and the new facilities that are coming online; and then secondly, price and being a function of that promotional activity.

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

Unidentified Analyst, [15]

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

And maybe just a follow-up on baked beans. Were a lot of those gains the Rhodes brand? Or are you finding more interest in private label on the baked beans side?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [16]

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

It's all Rhodes brand. And we -- on private label, we often ask, "How do we play a private label, being with brands, et cetera?" And we try to be really selective about what private label we pack and make sure that there's -- that it's really good, sustainable business as opposed to tender-type business. And I must say private label baked beans tend to be low-quality business. We do pack for 1 or 2 retailers, relatively small volumes but where there's a very stable demand and an ongoing commitment to supply. So yes, so we steered clear of that because it's a type of commodity that if the rand is very strong, the retailer can import it quite easily or shift it around. Yes, so our growth has been all on Rhodes brand.

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

Unidentified Analyst, [17]

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

As your debt profile improves, does dividend cover change? I'm not sure what your policy is on dividend cover?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [18]

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

No, we maintaining our dividend cover policy of 3x, and I think that's largely a function of where we are as a business. The debt, we feel that we should still deleverage to an extent.

And also, we would like to position ourselves for further growth. I've alluded to evaluating decent acquisitions, which we'll continue to do. And so we feel that where we are in our stage of our development, that's the appropriate level of cover.

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

Unidentified Analyst, [19]

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

Just a comment. I noticed in the marketplace, the competition between supermarkets is tremendous. And looking at Checkers, for example, and the new card system, I noticed you were part of some of the promotions of the canned fruits and so on. Is there tremendous pressure going on? Is it increasing for discounts?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [20]

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

I don't know if it's increasing, but there's certainly tremendous pressure. But as long as I can remember, there's been pressure in consumer goods and in retail. So it's quite hard to gauge the relative pressure but for sure, it's there.

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

Unidentified Analyst, [21]

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

Okay. Maybe just to make it a bit more simplified. Can I ask then what is the impact of that rand advantage on earnings per share?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [22]

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

Of which advantage?

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

Unidentified Analyst, [23]

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

The rand.

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [24]

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

Oh. Yes. Well, that rand advantage was 7.7%. If we take that to...

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

Unidentified Analyst, [25]

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

That's ZAR 70 million on?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [26]

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

3.5% and...

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

Unidentified Analyst, [27]

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

ZAR 35 million.

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [28]

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

3.5% of the ZAR 40 million turnover. So yes, ZAR 35 million, ZAR 40 million on divided by numbers of shares. So maybe you can do the numbers.

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

Unidentified Analyst, [29]

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

Could you give us some steer, please, on how much of your business overall is private label? And then secondly, within that, from, let's say, year-to-year, how much of that private label segment is new as far as the customer perceives it? So are there new lines or repackaged, refresh, new recipe, whatever the case may be.

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [30]

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

We look at it differently per segment because I think that's probably the most relevant in terms of splitting up between private label and branded. So where it's the most relevant, I believe, is in the regional Long Life segment, which constitutes approximately 50% of our business, which is basically the grocery business. And 80% of that is our own brand and 20% private label. Then within the Fresh component, there's a much higher percentage private label, given our ready meals business. But I think that's of quite a different nature to the grocery segment. So within the Grocery segment where, as I say, it's the most relevant, we are 20% private label.

It hasn't -- there hasn't been a big shift. There is significantly more private label on the shelf these days. I think there's more choice. I think it's extended into many more categories. But in our categories, and you can track our brand shares. And in the first slide, we show our shares as a manufacturer, including private label, and in the next 3 slides we show as a brand. And you can see that we're actually growing faster as a brand than we are as a private label producer.

So in the categories that we're in, there's quite a high degree of penetration and something like canned, jams, is probably, if I think across our categories that the highest private label penetration. But if you take corned meat, it's probably the lowest where you have this very strong brand presence. So it varies in each category.

But we haven't seen a great shift in the categories. I think that there are certain categories like sugar, possibly rice, where you've got a much higher penetration in private label. And then I think there've been tremendous extensions into new products. So what we've developed there in private label, on our Fresh Food side, there's a high element of churn. So there's always a degree of newness, but you'll find that 75% of the products are the core offer that have been there, maybe repackaged, upgraded, et cetera, and from time to time, but that remains a core offer. Then there's a degree of churn which follows trend and newness and comes and goes. And much less so in Long Life, where in some cases, we might win new business and in other cases, private label, we'll be launching into new categories, for example, some of the slide reflects soups or something, which they would not have had a private label offer on before.

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

Unidentified Company Representative, [31]

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

Bruce, I've got several questions from the webcast. Firstly, Paul Steegers from Bank of America. Can you give more color on why our Fresh Food volumes were flat in the outlook for FY '20?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [32]

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

Yes. On Fresh Foods, we have extremely high market share in ready meals. That is the biggest product range within Fresh. And so we're coming off a high base. And I think that's largely a sign of the times. I think that we are quite positive about the fact that it has been so resilient and we haven't seen any declines at all in volumes over the last 2 or 3 years, which have -- we all know, been extremely tough years.

I think that in more buoyant times, you get new entrants into that category that will start shopping high-quality ready meals, but in tough times like this, they drop out and hence, the flat volumes.

In terms of the outlook, we see potential in pies. It remains a strong category. There has been some growth in that category. There is intense competition, but it is, to an extent, a lot, too, was raised between ourselves and payments within the RCL stable, and we have increased capacity through the modernization of our Natal operation, and we feel confident that we'll see good volume growth coming through pies.

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

Unidentified Company Representative, [33]

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

Another question from Paul Steegers. Will there be more tax rebates relating to capital projects? And what is the outlook for the effective tax rate in FY '20?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [34]

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

It's difficult to answer that with any certainty because we certainly have applications in there are diminishing, as you saw the -- we're coming off that hump in CapEx and that's the basis for the rebates. But one can't speak with any certainty as to whether you're going to qualify or not or whether the funds have been exhausted. And so I think we need to be prudent in our guidance. But Tiaan, I don't know if you want to add to that. But we -- I think it would be safest to guide that we'd revert to the corporate tax rate. And there may be a windfall of a further rebate, which -- but it would be significantly less.

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

Unidentified Company Representative, [35]

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

Then we've got several questions from Shaun Chauke from HSBC. Bruce, previously you targeted to utilize the industrial products internally to about 75%. How far are you on that?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [36]

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

We were bang-on this past year. We had said that in 2019, we would target 50%, and we were slightly more than 50% in 2019. The outlook for 2020 is less than that 75%. We in the -- our outlook is probably in the high 60s. So yes, so more or less in line. It might take us a little longer to get to that 75%. It does remain our main intention to utilize as much output as possible from the pulps and purees operation to strengthen our food value-add operations, such as jam, baby food and fruit juice.

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

Unidentified Company Representative, [37]

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

You mentioned that you continue to evaluate strategic acquisition opportunities, now that all the businesses are integrated, should we expect to see such initiatives sooner? Or is a lot more focused on improving cash flows and returns over the next 2 years?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [38]

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

I think, certainly, in the next 12 months, there's a lot of focus on improving cash flows and deleveraging, and it's all about bringing that recently invested capital to a point that it's yielding the -- in terms -- the returns that we initially envisaged. We are confident that all of that is on track. The projects have all been completed. So we are more open to it in the next 12 months, and particularly, if there are some really strategic opportunities.

And for the first time in the last few months, we've seen 1 or 2 meaningful opportunities where there had been very little sort of deal flow up until then. So I think it's a question of being a little more open to it. But frankly speaking, I think we've still got some work to do in terms of bringing these big projects to full fruition.

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

Unidentified Company Representative, [39]

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

Another question from Shaun. What was the overall growth category you saw in fruit juices since the implementation of sugar tax?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [40]

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

Its grown wildfire. If I remember correctly, for the 12 months to March, it was -- it grew at 20% volume and value. In fact, I think value was slightly less because there had been deflation. And into the 12 months now to September, it was 10% value, which was 5% volume and 5% price. So the growth has slowed, but we continue to see growth.

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

Unidentified Company Representative, [41]

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

On the classification of expenses, if this breakdown was still classified under function, will other operating expenses be the only item not included in cost of sales?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [42]

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

It's correct, Tiaan?

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

Christiaan Cornelius Schoombie, Rhodes Food Group Holdings Limited - CFO & Executive Director [43]

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

(inaudible) selling and distribution. It's also not classified as cost of sales. So not all of it. We disclosed some of it. Specifically again, the warehouse and distribution costs should go, strictly speaking, to cost of sales. So that's currently sitting in selling and distribution in outlet -- expense line. So there will be a split of that line, but the rest will all sit in operational cost.

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

Unidentified Company Representative, [44]

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

And then a question from [Talia at Absa]. It was stated that cost pressure, 3% to 5% has been fully recovered through price. What is the cost pressure going into FY '20? And do you believe you could take further price increases across your portfolio?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [45]

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

Yes. Cost pressure seem to be much the same. We haven't seen any uplift. There's no -- there's -- in our inputs, there's no peculiarities right now. So we image -- we envisage that would be -- that sort of inflation rate would prevail on our inputs. And so we are confident that we can recover that in the market. But obviously, the market remains very tight. So yes, it remains challenging, but we will certainly be looking to recover full costs.

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

Unidentified Company Representative, [46]

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

And then 2 questions from Katleho Moeketsi from Afrifocus. You earlier spoke about the balance between promotions and volumes. Can you please speak more about your marketing and advertising strategy. What are you doing differently compared to your competitors?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [47]

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

Our marketing manager says we're doing less. We continue to be prudent in our spend and we really, really strive to be effective in that to use it very strategically. So I think we've carried on much the same as what we've done. We are not big spenders on marketing, but I do believe that our team do an extremely effective job. So we'll continue to do what we have done.

It does come -- it does become a bit more challenging when one has this spread that's spent over an increasing brand stable. But I think we're doing enough for now.

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

Unidentified Company Representative, [48]

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

Another question from Katleho. What have you discovered in terms of customer preferences in this tough economic climate?

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [49]

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

Yes. It's -- I think to some extent, there's opportunity in the tough for us in some of the grocery goods. I think in the -- I've mentioned already, in the Fresh Foods segment, it's curtailing growth, for sure. But in Long Life, there is a willingness, I believe, amongst consumers to try an alternative brand, and in many instances, we are challengers. And we're very confident in our product quality and packaging. And we really look for opportunity to induce trial. And if we know that if we get a consumer to try our product that we get a very high percentage that stick. So I think the tough times do present that opportunity.

So for example, products like meat, corned meat, where it's not necessarily at face value, a massive value proposition. But if you take into account the need for lack of refrigeration required and reduced electricity and preparing it and in hard-pressed times, these will become significant factors. So yes, so there are some baked beans growing. So there are preferences for a holistic value proposition in terms of time, energy and product.

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

Unidentified Company Representative, [50]

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

Thanks, Bruce. No further questions from the web.

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

Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [51]

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

That's it then. Thank you very much. Please join us for a cup of tea or coffee and a snack. Thank you.