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Edited Transcript of RFG.J earnings conference call or presentation 21-May-19 7:00am GMT

Q2 2019 Rhodes Food Group Holdings Ltd Earnings Call

PAARL Jun 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Rhodes Food Group Holdings Ltd earnings conference call or presentation Tuesday, May 21, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce Alan Scott Henderson

Rhodes Food Group Holdings Limited - CEO & Executive Director

* Christiaan Cornelius Schoombie

Rhodes Food Group Holdings Limited - CFO & Executive Director

* Merlin Norman

Rhodes Food Group Holdings Limited - Marketing Manager

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Conference Call Participants

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* Anthony Geard

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

* Shaun Chauke

HSBC, Research Division - Analyst

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Presentation

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

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Morning, everybody. Welcome and thanks very much for joining us here for our interim results for the period to 31 March.

We're going to stick to our usual format and I will do a high-level overview of the 6 months and then Tiaan will do the -- take us through the financial performance and then I'll run through the rest of the presentation.

We saw an improving performance with turnover at 9.3% and operating profit up by 6%, diluted HEPS up by 2.2%. We had strong regional volume growth in a low inflationary environment with continued market share gains across core product categories.

Our regional segment was impacted by once-off costs of approximately ZAR 14 million arising from the relocation of our pulps and purees operation from Wellington to the Groot Drakenstein production hub.

The international segment posted a small profit for the half, and our major 2-year capital investment program has now been completed.

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

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From my side, good morning, everyone.

We saw good general growth. Regional segment turnover grew by 8.8%, international segment by 12.3% so that gave rise to our old turnover growth of 9.3%, which realized turnover of ZAR 2.7 billion for the 6-month period.

Gross profit margin at 25% was slightly below last year's 25.3%. It was impacted by approximately ZAR 23 million lower gross profit due to lower international selling prices, which was due to adverse quality of some canned products, which, again, relates to the impact of the drought in the past 3 years.

There were once-off costs of ZAR 14 million relating to the pulps and purees relocation. In addition to that, we had the margin pressure as a result of low inflationary environment, which we've seen for the last 18 to 24 months also impacting adversely on gross profit margins. But fortunately, the above was partially offset by gains of ZAR 22 million arising from a 10.5% weakening of the South African rand against our basket of foreign currencies. And operating cost growth was contained at 5.2%.

That gave rise to an operating profit, which increased by 6% year-on-year while the margin was 6.3% versus 6.5% the prior year. And obviously, the operating margin was also impacted by the factors I just mentioned.

EBITDA increased by 7.2% while EBITDA margin was 9.1% versus 9.3% the prior year.

Net interest payments increased by ZAR 6 million or 12.1% to ZAR 58 million for the period and it's obviously on a higher net debt base, which is mainly the result of capital expenditure over the past few years, but also specifically in the second half of 2018.

That all gave rise to diluted headline earnings per share that increased by 2.2% to ZAR 0.321 per share.

Looking at the income statement turnover. Like we said, grew by 9.3% from the ZAR 2.5 billion in 2018 to the current ZAR 2.7 billion.

Gross profit increased by 8.1% to ZAR 685 million this year. Net of operating cost of ZAR 533 million, the operating profit amounted to ZAR 173 million, that's compared to the ZAR 162 million last year. Net of impairment charges and interest payments, the profit before tax amounted to ZAR 112 million versus ZAR 110 million last year, which after the provision for tax gave rise to a profit of ZAR 80 million, which is in line with the prior year.

Just in terms of weighted average number of shares in issue, it's now at just short of 262 million shares in issue and the 9 million movement on that line is the result of the conversion of the preferred shares that we had in our capital structure, which converted to ordinary shares in December.

The compound turnover growth since the first half of 2015 amounted to 20.6%. The turnover growth for the period consisted of volume growth of 6.2%, inflation of 1.3% and the impact of the weaker currency contributed 1.8% to the growth.

In terms of the segmental breakdown. What's noteworthy is that international remains basically at around ZAR 450 million to ZAR 500 million for the half, but the growth is obviously, as we've seen in the past, mainly in the regional long life segment, and then lower growth in the fresh subsegment.

Operating profit, good to see that it's up on last year, albeit that the margin is slightly down on last year.

Just in terms of margins. The noteworthy is that both the gross profit and operating margins for this first half was better than last year's margins in total and the margins achieved in the second half of last year.

On the balance sheet, total assets increased by just more than ZAR 300 million to ZAR 4.9 billion. The biggest increase was on the property, plant and equipment line and obviously, again, a result of the capital expenditure program over the past few years. And then intangible assets, which is where the ZAR 30 million that was paid for the acquisition of the snacking business from RCL Foods was allocated to. So that's, in the end, net of amortization charges.

On the capital and reserves side of the balance sheet. Just in terms of debt, in the second half of last year, we converted some of the short-term borrowings, which had a bank overdraft to long-term loans and that's probably the biggest change on the balance sheet compared with the prior year period.

Working capital days, net working capital days, improved by 10 days and it arises on the inventory line where that has improved by 16 days, but was offset by an increase in debtor days of 6 days. The increase in net working capital was contained at 2.4%, which is lower than inflation. And inventory level is, in fact, 1.7% lower than the prior year.

Net working capital movement over the last 12 months, that's from March 2018 to March 2019. You can see, often the net movement is if we look at net movement over the year, inventory reduced slightly. The big increase, again, was in debtors and obviously creditors also decreased over the period -- or increased, excuse me.

Cash management for the 6 months. Operating cash flow has amounted to ZAR 248 million. Of that, ZAR 132 million was invested in net working capital. Net interest and tax payments amounted to ZAR 38 million. Just note that, that's net of tax refund of ZAR 35 million, which was received in the period. Paid a dividend of ZAR 53 million in January. Loan repayments, that's capital, ZAR 120 million. And then the investment in CapEx and the RCL acquisition combined, ZAR 159 million for the period.

In terms of our debt profile. At the end of March, we had long-term debt of ZAR 1.1 billion on the balance sheet and the profile there shows how the capital will be paid into the future. There's a big bullet payment deal in 2021. And depending on circumstances, we may decide to convert some of the short-term debt to long term later in the current financial.

In terms of ratios. Net debt-to-equity, this time around better than the same time last year, 58.9% versus 60.4%. And net debt-to-EBITDA, 5.5x versus 5.8x, so improvement there.

And in terms of facilities, just to say that for the business as is, we've got adequate facilities to fund the business in the short term to medium term. Thank you.

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

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Okay. The trading performance. Just the makeup of our segments. The regional long life now at 52%, growing more significant as a result of the more favorable growth in that segment; and international remaining below that 20% mark.

In looking at the regional segment. Firstly, good revenue growth of approximately 9% led by long life foods at 13.4% and fresh foods at approximately 2%. Gross profit margin and operating margin squeezed a little largely as a result of the once-off costs arising from the pulp operation.

The components of growth. Volume growth at 7.3% and price/mix at 1.5%. Strong volume growth in the long life side of regional at 9.2%, so about 4.2% inflation in the -- or price increases in the Long Life Foods and less in Fresh.

In Fresh Foods, we did see a little bit of deflation in some of our costs particularly around meat proteins. Very good growth in fruit juice, especially in our Rhodes brand and in the wholesale and out-of-home channels.

Dry foods continues to perform very well. We saw good recovery in canned vegetables, particularly in baked beans, which are now produced in our new facility in Krugersdorp adjacent to the meat plant.

A very strong performance from canned meat, which was pleasing off a difficult year last year.

Fresh Foods volumes were flat year-on-year.

Ready meals and pies remained resilient in these tough times, but we weren't able to deliver any growth. And Ma Baker is finally well settled.

A very tough trading environment in Sub-Saharan African and sales into Africa outside of South Africa, now amount to 10.2% of our regional long life business. That's 10.2% of that 52% we saw earlier. It had previously been up to 12%. But as the regional business has grown faster in South Africa, it's diluted. We have seen growth in Sub-Saharan Africa, but less than what we saw in South Africa.

Electricity load shedding was extremely disruptive in the first half, especially for our fruit operations. We are backed up in almost all of our facilities, except it's only Ma Baker that doesn't have diesel backup and Swaziland, which, ironically, despite buying its power from South Africa does not have load shedding. So it's disruptive, but we were able to get by.

The acquisition of the protein snack business from RCL was completed and integrated into the Western Cape ready meals facility later in the month of March. Relatively easy form of acquisition in that we bought the product categories and these are being manufactured in our own facility. So very confident that, that is well settled and will deliver gains in the second half.

Market shares. Pleased to report that we've held our own and grown our market-leading positions and #2 positions across all categories. Done particularly well in canned meats, as I indicated earlier, fruit juices where we've held our own and salads and pickles at respectable 30%.

Looking now at brand. The previous slide was inclusive of brand and private label. This being brand only, again, holding our own or growing across all of these categories at #1 and #2 positions. Down slightly in canned tomato but retaining our #1 position.

Fruit juice at 16% as a brand, 22% as a manufacturer. Fruit juice category has been amazing. The category itself grew at 20% in value terms, which was pretty much our own growth as well, hence, maintaining the market share. And that's on the back of about the same level of growth this time last year. So not quite sure exactly what's driving that, but it certainly has exceeded our expectations.

Baby foods. The pulp in retail growing at 20%, up to 10% market share, so steady growth there. And pleased also that we are growing nicely. Our overall growth in baby foods was more than that 20% because we're growing into the wholesale channel last year as well.

And then share gains in salads and pickles -- or flat in salads and pickles, and slightly down on gravy.

Then looking at the international segment. Revenue up by 12% and gross profit margin profit increased slightly here and pleasing to be back in a profit situation, albeit very marginal. The components of the growth were made up of 2.7% volume. Price slightly down at 1% but this is net of the ZAR 23 million adverse impact that Tiaan has already mentioned. This was as a result of quality deterioration of peaches once they had been canned and it precluded us being able to sell these into our high -- into our premium markets such as Japan and China. So these landed up being off-loaded into markets like Germany and the U.S., which are at the other end of the spectrum. So that was disappointing. But overall, our normal basket did show small price increases in foreign terms and then a nice kick from the currency, 10.5% weakening year-on-year.

The deciduous fruit season has gone well this year and that's all but wrapped up, just a tiny little bit of pears that we're still finishing off and early indications of improved fruit quality. We did experience a relatively good winter last year. With having good rains on Monday, we're optimistic about this one, but obviously early days. So hopefully, that, as always, the Cape drought is behind us.

The market for industrial products has improved in terms of demand, so we are able to move stock and we've moved big ones in stock. Not yet pricing, but obviously the increase in demand is always a precursor to some -- indicator of some form of recovery.

The approximately 50% now of our industrial products are being consumed internally. In fact, a little over 50% from our pulps and purees operation at Groot Drakenstein is consumed internally, but that's diluted when I take the industrial byproducts from the pineapple operations and the deciduous canning operations that dilutes that number to just under 50%. So that's all going according to plan.

And very good progress with our fruit cups into particularly the U.S. We spent a lot of money on that operation just over 2 years ago, a big fruit cup operation in the Tulbagh plant, and that was run at a high level of utilization this year and that bodes well now for the future, too.

New products. We continue to launch new products out of our dry foods operations, which continues to perform well. Just some examples of crossover in technologies and brands, so taking dry products and putting them in cans. The dry instant Bisto product. We're very strong in traditional cook-up gravies, but we've not really been present in the instant gravy, which the other guys, Unilever and mass foods offer.

And then co-branding, the dessert offer out of Pakco, starts with a P, co-branding the dessert offer out of Pakco to Rhodes as we migrate that to Rhodes, as we see canned fruit and desserts being very allied. And then taking traditionally canned products like Bull Brand into spices and seasonings and products that are associated with proteins and meats.

Lots of development on the juice front. Increased products for Woolworths. Again, really exploiting global trends towards vegetable juices, towards freshly squeezed as opposed to concentrate for Woolworths. New meat business out of Spar, which is pleasing. Private label and some new infant juices for the Shoprite group.

On the ready-meals front, especially launched for you, Robyn, all plant-based proteins. Massive global trend. Don't necessarily think it's going to be absolutely massive in South Africa, but it is certainly a trend, nonetheless, where not necessarily vegetarians, but so-called flexitarians, people eating less meat, and the whole environmental aspect of animal-based proteins. And a new range launched into Woolies with plant-based meat substitutes one could call it. Initially, pretty basic products, just the material itself but an opportunity to increase this into further value adds and ready meals.

On the CapEx front, this is coming off -- had a big spend over the last 2 years. It has taken -- it has put a strain on us as management in terms of getting these projects completed. Inevitably, a lot of them have taken longer than planned and cost us more than planned, so it's good to get those behind us. We see our CapEx, some as finishing off. There's a little bit more in the second half and then we expect that to normalize at our historic levels of about ZAR 130 million to -- yes, roundabout ZAR 130 million a year. Of the ZAR 129 million spent on the first half, ZAR 100 million of that would have been on projects and expansionary CapEx and the balance on maintenance CapEx.

So we have completed the relocation of the Boland Pulp operations to Groot Drakenstein, which is now fully fledged running, producing anything from pure apple juice to more a paste apple puree, the full range of fruit products and really a world-class facility. The expansion of the ready meals in the Western Cape has been completed. The Alibaba snacking operation, which is largely samosas and spring rolls, et cetera, those products are now being made in that factory as well as the RCL snacks, which you saw an earlier picture, the chipolata sausages, meatballs and that type of thing. Very allied to the product that we are producing in that factory. And then overall infrastructural upgrades on the Groot Drakenstein site.

Then into the second half, we're expanding our warehouse capacity at the juice plant as the volumes grow there. Ongoing development of new pineapple plantations in Eswatini and just ramping up the infrastructural upgrade at Groot Drak.

On the outlook. We are very focused on generating returns and extracting the benefits that are available as a result of our recent capital expenditure. We'll look to improve the balance sheet by generating stronger cash flows and focus on working capital management and cost containment.

On international, we expect to continue to improve operating margins in the second half.

And the quality of deciduous fruit, as I have already indicated, appears to have improved significantly.

On the regional side, we'll continue to drive organic growth and expand our market shares, especially in the new categories that we've entered recently, and improve our margins in the second half. We remain committed to that target operating margin of 10%.

Thank you very much. Happy to take any questions.

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Questions and Answers

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

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So looking forward to the second half. So you spoke about, was it ZAR 12 million-odd of relocation costs, the ZAR 23 million negative impact of the low-quality fruits, so those are 2 factors that one would have thought will be helpful in driving improved numbers into the second half. What other factors do you think will come into play that will help the second half be that much stronger than the first half?

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Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [2]

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Yes, those will obviously be significant factors. The CapEx program has been a significant factor. So not only is it demanding on management time in getting the projects finished, but with the projects having been completed, we are able to now start extracting benefits. So for example, baked beans are now coming out of that new facility and performing better than we've ever seen before. And pulps and purees, not only was the relocation and the settling has been very disruptive and we've not really been able to extract any gains. So a lot of the projects are now settled and we will extract gains. So for example, RCL is onboard in the ready-meals factory, so that itself will contribute, but there's benefit in just having increased volumes through a factory that has had flat volumes through it for the last 18 months. So yes.

And also on the regional side, we feel comfortable that we found a base with the customers and the consumers that sort of settled late last year. But I must say, it's unfortunately not a nice robust base, I think it's fairly delicate in that I think the consumers still settle down at this level and we're seeing some good growth on value propositions, such as canned meat, et cetera, but I think the consumers are still very vulnerable to any other adverse factors, such as -- whether it be fuel prices or interest rates or anything like that.

So everything else holding steady, I think we've got that base and we've indicated that we've been able to grow from that and we're happy that we've got momentum into the second half.

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Shaun Chauke, HSBC, Research Division - Analyst [3]

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Shaun Chauke from HSBC. With regards to the CapEx and the integration of the businesses now coming to an end, can you give us an indication of now that everything is in the base, how much cost savings would you extract from these businesses going forward?

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Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [4]

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That's difficult to talk in general terms across the entire business. But we've certainly had, we believe a very clear plan in terms of what we've been looking to execute. There has no doubt been a few kinks in the pipe along the way. I'm happy that we've shaken most of those out and they've come through in the form of once-off costs that we had to report over probably the last 3 reporting periods. I think the easiest way for me to answer that, Shaun, is that we've always spoken about generating returns and having hurdle returns of between 18% and 25% and we expect to generate those on the new capital expenditure. Obviously, that doesn't kick from day 1, but some of those projects have now been completed for 12 months, some of them for longer, for example, the fruit cup lines have been completed for 18, 24 months. So those will all come in over the next 5 years. And the impact of that increased expenditure, combined with reduced profitability, has had a very, very dilutionary effect on our returns and we expect to see a recovery of those back into the kind of guidance we've given. I think that's the easiest way for me to answer your question.

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Shaun Chauke, HSBC, Research Division - Analyst [5]

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And the second one is given that you're increasing obviously the pineapple farm in terms of the plantation, how is that going to help in terms of reducing some of your costs into your business? And which markets would you look to grow in, given that you already have about 61% market share in SA?

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Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [6]

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That's a good point. We've got the other 40 still that we can -- no, it's -- international is very much a mature business for us. It's largely canned fruit. We are recognized as a global player in canned fruit and that's a fact. We will produce a quality product and we market that across the world. It is, however, mature in our business. It has been diluted since we listed probably from around about 35% of our business down to 17%, 18% now. So we don't expect to see significant volume growth in that segment. We've always guided that we would be looking for low single digits, 2%, 3% volume growth, 2%, 3% foreign inflation and then whatever happens with the currency happens with the currency. So we see the pineapple playing into that growth.

On the deciduous side, it's not that we're looking to grow the tonnage that we process. It's more to add more value. So we can grow revenue of the same tonnage. For example, by sort of packing into cans, packing into fruit cups, you've got a significantly greater value add.

So yes, on the regional market, I think we're pretty much saturated in terms of market share in pineapple. The balance will already probably about 30%, 40% -- about 30% of our pineapple is exported. We will grow the regional market, but the balance will feed into that international market. We've got a very well-established route-to-market and we're very confident that we can, through our existing distribution channels, place into that additional pineapple. Yes, [Tek].

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Unidentified Analyst, [7]

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Just a question on Ma Baker. It sounds like it's -- you said it's settled down. Where are margins in that business? Are they where you want them to be? Maybe just an update there.

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Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [8]

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Yes. Yes, that I could possibly have mentioned in answering Anthony's question, because I think there's a lot of upside there. It's certainly settled. Our volumes have come off. We definitely lost a bit of business there through our troubles. But we're very, very happy from an operational perspective and now it's just about growing the business. So while GP margins are fine, operating margins are thin and those can be expanded through volume growth.

The pine market continues to do well in the current terms. I think our opposition has done a really good job in the last 18 months or so and we saw tremendous growth up to that point. It's been fairly flat since then. And I think that there's definitely an opportunity for us now to sort of relaunch an initiative to take additional market share.

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Unidentified Analyst, [9]

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And then maybe just an update on the baby food business and the competitive dynamic there.

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Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [10]

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Yes. Baby food continues to progress well. We launched a new sort of subcategory by adding dairy to the food products, a yogurt and fruit mix. I think that was late last year, Merlin, was it?

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Merlin Norman, Rhodes Food Group Holdings Limited - Marketing Manager [11]

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[It's unwatched].

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Bruce Alan Scott Henderson, Rhodes Food Group Holdings Limited - CEO & Executive Director [12]

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Only now. It seems like that was November or December. So we just launched the dairy mixture, which is a significant portion of baby food as a category. So yes, we've grown our market shares further, still at relatively low level of utilization in our plant. Although the plant has been -- the equipment has been done on a modular basis, so we built the big infrastructure for the long term, but we will now need to start looking at putting in additional equipment. So that's a good sign. It has been a very competitive landscape, probably the most out of all the categories in terms of -- one of the most, in terms of the competitor really reacting to our presence. And the migration from jar to pouch continues rapidly, despite the biggest player in jars seeming to be promoting that like crazy and trying to breathe some life into what I believe, inevitably, will move across to pouch. So we remain confident in that category.

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Unidentified Analyst, [13]

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Do you see any opportunity in private label for you in that category? Was the road in brand too big for you?

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

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There's very high minimum order quantities with regards packaging and traditionally private label has not done well in baby. So you can go from sugar, on the one end, where you get 90% private label penetration, to baby food or personal care stuff, which comes through the lowest. So yes, I mean we're not close-minded to it, but I think it's a way off. So I think certain retailers' brands have lend themselves better than others toward baby food.

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Unidentified Analyst, [15]

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And how cost competitive are you in that business? Just thinking maybe internationally you could do it for a pretty decent...

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

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It's quite a common pack format. It dominates the world now. So it might be. We're looking at a few opportunities, some of which might be big, but our focus is very much on the region, where we can a build sustainable brand presence. That's where our focus is.

We're very competitive on the raw material perspective, which is quite significant. We're less competitive than the market leader on packaging, because we buy in preformed packaging, the market leader forms off-the-reel. Both have their advantages, preformed is very advantageous for shorter runs, bigger range. And then off-the-reel is fantastic if you're producing 3 SKUs and you're running each of them for a week. But we're not there yet.

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Unidentified Company Representative, [17]

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Bruce, we've got a number of questions on the webcast. I'll start with a question from Jiten from Avior. Nicely improving results. I'm hopeful for a great H2. Can you please talk to the rising private label trend and give further color on your strategy to participate?

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

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Yes. I don't -- I'm not sure to what extent it really is rising. I think it's certainly much more prevalent in terms of strategy. It's growing, but I don't think there's great shakes there yet. If you look at the difference between our market shares and our brand shares, there's no significant movement where our market share is growing tremendously and our brand share is coming off. In other words, we're packing more private label as opposed to our brand. It's always been a very important part of our business. We actually started as private-label packers for the international market, originally for the big U.K. multiples and we still pack for them and for Canadian, U.S., Australian, European retailers. And we always have for the South African retailers.

In terms of participation, I think it's about being selective. You don't want to pack everything for everybody. I think there's very much a place for private label in the big volume KPIs, but there's also still a huge place for brands, particularly in Africa and South Africa, where there's tremendous brand loyalty.

So I think we've got a nice balance between our own brands, which are the most significant portion of our regional business and private label, and as that develops, we certainly work with our customers to offer them solutions. And we find that by packing the brand and the private label, it does gives us more influence over a category. So we will continue with that strategy.

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Unidentified Company Representative, [19]

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And then some questions from Talia at Absolute Capital. What was the cost associated with moving to diesel-powered generators in your factories in this year?

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

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I can't give you a rand value, but as a rule of thumb, diesel-generated power is anything from 3 to 4x more expensive than grid power. So you pick up that cost, direct cost, of diesel. Fortunately, at most of our operations, power is not high on the ranking as a direct input. It's most significant on our Fresh Foods operations, where refrigeration is your main driver as opposed to coal-based steam. So there is the direct cost of the diesel itself, 3 or 4x. Then obviously, there's massive cost in disruption.

So as much as there might be load shedding scheduled for 3:00, if it goes off at half past 2 and you've got a whole lot cookers full of canned fruit and it's half cooked, then it's just a disaster when you're running a high seasonal thing like that. So it's disruptive. And that's expensive. That type of disruption, probably ZAR 2 million, ZAR 3 million over a fruit season in terms of losing product and then the diesel cost over and above that.

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Unidentified Company Representative, [21]

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And a follow-up question. What specific product supported the jump in international sales growth in the last month? Is it likely to impact the H2 performance?

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

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Probably the most significant growth would have been our fruit cups, which were produced and shipped largely at February, March, and there are shipments also into the second half. So that's probably the most significant change in the nature of the business versus the prior year.

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Unidentified Company Representative, [23]

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Question from Victoria Lambert, Bank of America Merrill Lynch. What percentage does private label contribute to revenue in H1 '19?

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

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I'll always answer that by looking at each of the segments. So in regional long life, which is 52% of our business, private label is between -- sorry, branded, our own brands, are between 75% and 80% of that regional long life business. And then in Fresh Foods, it's much more significantly private. Ready meals is essentially private label entirely. And then pies, probably 70% branded, but it's not really a branded product, because as much as we sell it to the retailer in a Magpie box, it gets baked off and lands up in the oven maybe with a Magpie tag, maybe with a retailer's tag or a full court tag. So really, I think the most relevant segment for that sort of ratio measurement is the regional long life, where we sit at about 75% to 80% branded.

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Unidentified Company Representative, [25]

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And a follow-up question from Victoria. What percentage does fuel contribute to Rhodes' distribution costs?

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

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Distribution costs in terms of revenue, probably distribution and redistribution, 5% of revenue -- 5%, 6% of revenue and what percentage of that is fuel, I couldn't tell you. That would be as per -- what it would be for normal, but that's distribution cost for us. And there is a fuel surcharge that's associated with our distribution, but essentially, we're using third-party distributors and the cost makeup of that is their problem.

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Unidentified Company Representative, [27]

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Then some questions from -- more questions from Jiten from Avior. Canned fish and value-added meals growing nicely through promotions and marketing. Is there a risk that volumes will be muted for your canned meat products?

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

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This is canned fish and canned meals growing nicely. Yes. That has been a trend, and canned meats have grown tremendously in this first half. So that's been pleasing for us and we've been able to -- so last year, it wasn't as though volumes were under pressure, but pricing was under pressure last year. It was really difficult. I think a lot of it had to do with that psychological ZAR 20 price point that we got to. And also there's definitely -- we're definitely influenced by the pricing of other products like canned fish and that seems to be more expensive at the moment. Canned meals, we fortunately, dominate that category at the moment with Bull Brand and Gold Dish brand, Gold Dish having come out of Pakco and also seen very good growth. And that's anything from meatballs to Vienna sausages to any type of -- chicken biryani in a can. So all of those categories have been growing.

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Unidentified Company Representative, [29]

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Question from Daniel Isaacs from 36ONE Asset Management. One of your competitors mentioned a significant increase in promotion and incentive campaigns to move volume. A quantum of this increase significantly affected their operating profit. You seem to have had a decent translation from top line to operating profit. How did you avoid such a significant increase in promotional and incentive activity to still achieve a decent result?

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

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We paid it last year. No. I think it's a very valid point and it did become expensive to do business. And I did make the comment at last year's results that I felt that we had possibly got on the wrong side of the pricing-volume equation last year. And that was the result, it diluted margins. This year, I think that we've -- whether it's a learning curve or what, but I think that we've got the balance better and, hence, the better translation from top line to operating profit.

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Unidentified Company Representative, [31]

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Another question from Jiten. Is there a potential for a BEE deal with Rhodes?

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

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Certainly, our BEE scorecard remains important to us and we continue to drive progress in that regard. We did slip significantly with the new rules in place, where we came down from a Level 4 down to Level 8. So we've got a very clear plan in place to get back to a Level 4. However, there's no specifics with regards an ownership deal on the table.

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Unidentified Company Representative, [33]

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Two questions from Aeon Investment Management. What are your target growth revenue rates and operating margins for the next 2 to 3 years? And are there any other new categories that you intend to introduce to your portfolio?

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

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Our guided targets for growth have always been approximately -- revenue growth of approximately 15%. We did curtail that guidance down to around 10% when things took a turn for the worse in the macro environment and that's really what we've been striving for. We, in terms of margin, it's very much -- we've guided historically 10% to 12%, and with the deterioration in our margins more recently, we've guided to get back to at least that 10%. We certainly are striving to achieve that in the second half. It'll obviously be diluted by the performance in the first half. And I have also previously mentioned that it is our objective to get back to that minimum operating margin of 10% during the course of next year.

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Unidentified Company Representative, [35]

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Another question from Jiten. Please, can you give us a feel for the cadence of retailer promotional activity? Is it less frequent, but deeper in price discounts? Are the retailers receptive to price increases above the levels achieved in H1 '19 and will also be a tailwind for RFG in H2 '19?

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

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Well, we have had some price increases late in the first half, so that should provide a bit of relief on margin.

Yes. With regards frequency, I don't -- first, perhaps let's look at the extent of discounting. I don't think it's any deeper than normal. I think that, as I said earlier, last year, I think that we overpromoted to our detriment. So I think that's really in the hands of the suppliers.

And with regards pricing and discount frequency, there are sort of conflicting pressures on the retailer. On the one hand, they've got to drive revenue and get the right footfall and promotions are, therefore, important. But on the other hand, it's all about profitability as well. So everyone wants to get a fair price and it boils down to what the consumer is willing to pay. And that's -- last year, where we suffered with meat, is that we just couldn't get a price point that the consumer was willing to pick the product up for. And we seem to be fine on that now.

So it's not necessarily so much pushback from the retailers, it's about finding the right price on shelf, which will work for the consumers, and likewise, on promotional frequency. That's it from Jiten. Yes. Anthony?

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Anthony Geard, Investec Bank Limited (SA), Research Division - Consumer Staples Analyst [37]

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Bruce, old Anthony, compared to young Anthony. On the Libstar AGM yesterday, they mentioned that their pull through to Woolworths so far this year has been quite positive, with product innovation and new categories really pushing their volumes to that company. Can I just ask how your Woolworths business is doing so far this year?

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

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Difficult for me to comment on a specific customer.

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Anthony Geard, Investec Bank Limited (SA), Research Division - Consumer Staples Analyst [39]

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They did yesterday.

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

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Yes. So look, I mean you can look at our various categories and read into that what you need to. We supply a range of products to Woolies. We do, do some Long Life. I understand that Libstar would do a lot more long life than we do and we do more perishable. So I think that within the Woolies results, you see varying growth rates. So areas where traditionally they've been under -- have under penetration or under-indexed, they are able to accelerate growth. In areas where they are well over-indexed and have historically overperformed, there's been less opportunity for growth. But we have reported that our ready meals volumes have been stable, but flat, with low inflation.

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Anthony Geard, Investec Bank Limited (SA), Research Division - Consumer Staples Analyst [41]

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Then a second follow-on just on your gearing, you're at 59%. Yes, it's trending down in the next couple of years, but very large bullet coming in 2021. Can you just talk about your gearing and your ultimate plans for that, because at 59%, the current environment and the current markets, debt isn't exactly popular with investors.

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

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Look, we have quite a high degree of seasonality to our debt, where we use a large portion of short-term debt to fund the working of the deciduous crop. So mid-year, our gearing is at its worst. Tiaan has given a nice profile in terms of existing debt. We've always guided that we wouldn't want to exceed 50%, unless it was for a short term for an opportunistic acquisition or something. We've also guided that, ideally, we'd be more comfortable -- or Tiaan would be more comfortable at 30%. I'm not uncomfortable at 50%. But that's a sort of level Tiaan, that we've historically guided from a debt/equity perspective. As a ceiling, we've also guided 2x EBITDA as a ceiling and we'd like to see it come down.

But I think it's also very much a function of where we are at any particular time and we've had very specific plans in terms of growth and acquisitions, which really stimulated our listing 5 years ago and we've continued with those plans. And now I think it's very appropriate for a bit of consolidation and improving returns, which, by definition, should see that gearing come down.

But we would not be opposed. We're still a relatively small player. We would not be opposed to pushing it up at the right time of our lives, but it's certainly not that now.

Very good. Thank you, everybody. I believe there'll be tea and coffee outside. Thank you.