May 28, 2019 (Thomson StreetEvents) — Edited Transcript of Pioneer Food Group Ltd earnings conference call or presentation Monday, May 20, 2019 at 8:00:00am GMT
Good morning to everyone. It’s a beautiful day in Cape Town. We have — may — long may it last in terms of the rain. Welcome to everybody here that’s joined us. We really appreciate it. A special word of welcome, also, to our colleagues at all our operating units and manufacturing sites that’s joining us on the live streaming.
The agenda for today will cover the following: I’ll make a few opening remarks alluding to our performance and, specifically, the trading environment that we find ourselves in; whereafter, Felix will cover the financial detail; and then thereafter, Riaan, Martin and Thushen will take us through the divisional commentary; whereafter, I’ll conclude with closing remarks and then I’ll also attend to a few questions from the audience and that Johannes might capture that’s come on the Internet.
The — in a recent broader leadership session, we reflected on where we find ourselves as a business in the country and concurred that 2019 is indeed building up to a year to be remembered given economic and political uncertainty and the expectations for relatively weak economic growth in the face of the risk of inflation and heightened sector competitiveness among all participants, not just here in South Africa but wherever we compete.
Our choice is to face these realities and to navigate these with ambition but with the proper dose of pragmatism. There is no pause button. We consciously opt to hold our right of participation, to back our investments for growth and efficiency and to build on the positive bias for SA, Inc.
To date, we have experienced a local economy that stumbled from the 1-year disaster to the other. That said though, these economic vagaries and challenges are not unique to South Africa. We have also experienced how elevated labels of economic uncertainty and frailty weighs on consumer demand and on discretionary spend, be it in our neighboring countries or, more specifically, in the U.K.
Over and above this, the interruption in electricity supply was a real operational disruption and hold imminent risk through manufacturing and other — and the rest of our economy. The reality is that we and others of our scale cannot operate off the public grid. It’s just too costly. Our estimate is that the diesel generation is at least 5x more expensive, and that is for the fuel cost alone. Although with the cost, it’s positive to report that we found some protection and support in the legal system in some of the local jurisdictions where we operate to keep the lights on.
Beyond availability, municipal water pressure, or for the lack thereof rather, is an ever-increasing shortcoming that has to be managed to mitigate the impact on the cost of insurance and risk management. However, the overbearing detracted to the performance of our business year-to-date has been the inadequate recovery of input cost inflation in final product pricing, be it due to our investment in growth, administrative cost increases, such as energy, minimum wages and permitization of flexible labor, the competitive state of the trading environment, the consumers’ pursuit of value in these difficult times or our own hesitancy. Trading circumstances also induced elevated layers — levels of customer competitive intensity as witnessed specifically in increased promotional activity and price support.
That said, the ongoing and considered investment for growth enabled us to improve our basket participation in specifically top-end grocers, although it did demand a higher level of trade investment. In the face of multiple in-country challenges, be it demand variability, exchange rate vagaries or increased cross-border regulatory barriers and scrutiny, the International business proved to be resilient and posted a commendable performance for the period.
Whilst White Star maize meal volumes helped, we did experience some share loss and a material regression in profitability for the period. We’ll cover this under Riaan’s section in quite a bit of detail. The wheat-to-bread value chain delivered well on the back of capacity-enabled bread volume growth. Similarly so, product quality benefited from the renewed manufacturing technology base, and we are very confident that we’ve expanded bread availability materially during this period.
Long-life fruit juice grew its leading position given no complacency in the face of competitive threats. Product pack innovation and the ongoing renovation of our manufacturing capability further contributed to this positively. Bar maize, the brunt of price resistance was felt in the cereals category through the detriment of Weet-Bix, specifically. We also sold disproportionately more cornflakes, thereby, contributing to a disadvantaged portfolio mix. Martin will further comment on some noteworthy category dynamics in his sections.
We have completed the integration of the Wellingtons biscuit — business, and we are encouraged by the volume and share accretion of key products and brands in this portfolio as enabled by the Pioneer Foods platform. Performance, although better than the prior year, remained negative. And then on the conclusion of the Phase 2 BEE transaction in March, we repurchased and canceled 11.6 million shares.
With reference to the total SA food performance, I wish to confirm that it represents sales of a representative selection of food manufacturers into the trade, in other words, our invoicing to our customers. It is believed to be a sound proxy for the health of the food industry and indicates food value growth in total as well as in the line graphs for retail and wholesale trade channel.
Volume growth, as indicated in the table to your right, has been negative in the short term of a relatively weak base. You’ll note that the implied inflation increased in the short term with a negative volume growth indicative of resistance in the system. It must also be noted that Easter, being lighter than the prior year, also had a negative short-term effect. The data for April that we’ve just received indicates volume and value growth of 10% and 16%, respectively, for the month. The key takeouts from this is that the volume growth remains relatively weak with the inflation below what is deemed required. Growth in the wholesale channel also caught up with that in retail after a long period of lag.
With reference to the value share per brand, please again note that the data presented here reflects sales out for the retail channel only with a contribution to sales — per category for our sales different across product groups. For example, this channel represents about 35% of rate sales, wherein the case of cereals, it approximates 70%, 75%.
It is indeed pleasing that Pioneer Food’s basket participation grew incrementally year-on-year. This basket growth as well as the category performance data to the right includes private label participation.
Category value growth, as a reference to category health, is indicated in the column to the far right and is believed to be positively skewed by the retail channel growth ahead of wholesale, as discussed earlier. An analysis of category volume growth, not indicated here, confirms that low single-digit inflation across the board, bar maize, has still reported deflation for the period. Actual value shares are indicated in the left column with the percentage point value share movement in the middle.
Spekko, Liqui-Fruit and SASKO bread share gains are commendable, with White Star, SASKO flour and Weet-Bix shedding marginal share. Again, we’ll unpack some of this in far more detail in the divisional discussions.
Thank you. That’s my opening statement. I’ll give to Felix the opportunity to speak some of the detail on the financials. I’ll be back a little later. Thank you.
Good morning, ladies and gentlemen. Pioneer Foods delivered a strong top line performance for the period with revenue up 11.5% and volume growth of 2.7%. Our operating profit, however, retracted by 23% because of the following: our inability to land price increases to cover the underlying cost growth, investment in trade marketing spend ahead of revenue growth, higher operating costs growth largely for capacity creation in bakeries and logistics, and losses associated with the Wellingtons business.
Adjusted headline earnings declined by 15%. The reason for the major difference between the headline earnings and operating profit declines is because of the Heinz Foods SA losses which were concluded on a 50% basis in the equity-accounted earnings in the comparable period. Adjusted headline earnings per share also declined by 15%. The net debt position, however, improved at ZAR 215 million compared — if compared to the March 2018 position. The interim dividend will be maintained ZAR 1.05 given the strong balance sheet.
If you look at volumes, bread and long-life juice were the major contributors to the volume growth. Acquisitions added 1.4 percentage points to this growth. Sales price inflation on the existing business gained net 6.6%. The main contributors were bread, wheat milling and export fruit. The naked margin under recovery mainly relates to maize and Groceries. If you look at operating cost, excluding the newly acquired Wellingtons business, grew at 13%. Capacity building in bakeries, iteration of fuel logistics ops for the rest of the business, together with a high inflation in the respect of logistics, energy and manpower were the main contributors.
Maize and cereals delivered a major decline in operating profit, while Wellingtons made a ZAR 40 million loss. Riaan and Martin will provide greater context to the performance of these 3 ops, so I’m not going to comment further on that, except on Wellingtons where ZAR 20 million of the ZAR 40 million still refer to 2 historic items. Just to — for comparison purposes, the Wellingtons business made ZAR 150 million before tax loss on 100% basis in the comparative period. The rest of the group delivered growth of 4% in profitability.
As you can see, all divisions contributed to revenue growth, Groceries’ and International’s growth were aided by the inclusion of the newly acquired businesses. In Essential Foods, bread and rice performed well. Bread volume growth was especially pleasing. Long-life fruit juice delivered an excellent volume and profit performance in Groceries. International division performed well as a result of good profit growth delivered by the export fruit — or by export fruit as well as all business ops outside of South Africa.
I only want to highlight 2 aspects on this slide and that is that investment income includes a quantum dividend of ZAR 12.0 million received by the BEE parties, and then finance costs include interest of ZAR 19.3 million in light of the Phase 2 BEE parties. Both of these items obviously fall away now that the Phase 2 BEE scheme matured on the 15 March 2019.
If you look at the performance of joint ventures, the performance of joint ventures improved materially year-on-year. The combined entities, excluding Wellingtons, showed revenue growth of 19% with profit after tax up 28%. Bowmans and Botswana were the standout performers.
Cash profit from operating activities declined on the back of the operating performance, and the business normally invest in working capital during the first semester. This investment — or the investment are ever reduced during the period even after inclusion of the ZAR 150 million related to the acquired Wellingtons business. The net working capital ratio to revenue came in at 16%, which is an improvement on the previous 3 years.
Net debt to equity, as was already said, improved versus the previous year. The third-party BEE debt was also settled on the 15th of March and has all been now excluded.
Good morning, ladies and gentlemen. Essential Foods’ performance was characterized by a larger-than-anticipated decline in maize profitability. Raw material and other input cost inflation could not be passed on in a difficult trading environment, with the impact on the group significant given the scale of our maize participation.
Wheat milling and baking posted an improved result at the back of strong volume growth whilst pasta remained under pressure from competitively priced imports. Rice and dried vegetables delivered a strong result. The new maize crop and exchange-rate-related uncertainty with related inflation compounded by significant operating cost pressure had a significant impact on our results. Nielsen Trade Desk conversely reported only marginal category inflation with bread up 5.2%, flour up 0.6% and rice up 2%. The maize category, in fact, still showed 4% deflation for the 6-month period. Consumer pursuit for value has intensified with competition fierce at the back of available industry capacity and retailer demands for promotional support.
Essential Foods maintain sound category participation with volume growth across all categories except maize that was 5% lower. Bread and rice led the way with volume growth of 9% and 11%, respectively. Revenue increased by 10% with all categories except pasta able to post some inflation. Bakeries revenue increased by 15% with rice up 17%. Although we reported maize category inflation, this was skewed by stronger sales mix at the back of lower milling volumes and less or full or chop being sold. White Star Super Maize Meal realizations declined by 3% in order to sustain category participation despite the significant increase in raw material cost.
Operating profit declined by 25%, but the balance of the portfolio, excluding maize, posted an improved result. Wheat milling and baking expanded profit by a pleasing 10% with rice profit gains unfortunately negated by the decline in our pasta profitability. The operating margin regression is attributable to maize and the inflationary dynamics within a historically rand-per-ton grains margin environment.
At a category level, maize milling sustained sound growth until January when the highest reported industry 12-month milling figure was reported. We, however, even seen a significant decline leading up to Easter. The disconnect between raw material cost and average retail selling prices has largely remained with some easing evident in the short term as reflected by the graph on the right. This shows near month SAFEX raw material cost, the red line, versus the every selling price of 2.5 kg super maize meal as reported by Statistics South Africa, the blue line. Although marginal inflation is becoming evident with Nielsen Trade Desk reporting category inflation for the month of February, market pricing is still not reflective of underlying input cost movements.
White Star maintained its leading value share position but lost some volume share as the brand traded at a 19% price premium to the total market during the period under review. Volume share regression was, however, halted as from the second quarter through margin sacrifice. Private label participation has subsequently stabilized at 50%.
Essential Foods milling volumes ended 12% lower for the period with softer White Star demand, load-shedding and disruption at our Aliwal North mill as we installed new technology to enhance milling efficiencies impacting negatively. Seasonal maize quality was significantly weaker with milling yields or extraction lower in order to maintain White Star’s uncompromised quality specifications. White Star Instant maize porridge, however, sustained sound growth and was the leading brand in the category in Trade Desk for the 3 months ended March. Interesting to note that the instant maize category is now larger in volume than cornflakes in this trade channel.
In aggregate, maize delivered ZAR 145 million lower operating profit compared to the strong prior year base with margin regression to retain category participation the primary contributor. The weaker extraction and lower milling figure, however, also added materially to the decline.
Looking ahead, we expect greater raw material cost stability as uncertainty in respect of the new crop dissipates. Whilst white maize imports are not expected, the crop will be later than normal with the impact on milling extractions uncertain at this stage. Our immediate focus areas are to maintain White Star’s customer and consumer relevance; drive consumer value through the introduction of new pack offerings; enhance efforts to improve milling extractions in the face of weaker quality maize, with specific reference to the technology pilot currently in process at Aliwal North, without compromising White Star quality; and to sustain brand support. Although raw material cost has eased recently, this benefit will only be realized from the final quarter of our financial year given our price procurement position.
Moving on to wheat, milling and baking. Procurement uncertainty in respect of the wheat import duty, exchange rate and import origin changes have remained, with bread finally showing some inflation. The graph on the left shows white and brown bread selling prices, as reported by Statistics South Africa over time, with average pricing in February 2019 surpassing the previous highs reported in November 2016, ending an unprecedented deflationary cycle within the category. Although wheat flour margins remained under pressure, Essential Foods’ value chain performance was supported by the reported strong bread volume growth. The business was able to improve Trade Desk volume and value share, with local and traditional volume growth ahead of the former retail. Trade Desk volume gains were achieved at inflation ahead of the category.
Baking capacity added during the past 2.5 years has been augmented with additional bread quality and distribution investments in support of the route-to-market strategy. Bakeries added 463 full-time equivalent positions compared to the prior year period, inclusive of unemployed learnerships. Whilst this has increased our fixed cost base significantly, sustained volume growth is starting to provide sound leverage. Production efficiencies and consumer complaints were also at all-time best levels during the period under review.
Looking ahead, the wheat in value chain is exposed to further input cost pressure, most notably, related to fuel and manpower, which is being passed on. The capacity and efficiency investment at Durban mill is being commissioned as we speak, with benefits that will accrue towards the end of the fiscal. Bakeries strategy execution and performance is expected to remain on track at the back of volume growth that is being sustained past the reporting period.
Moving on to the balance of the portfolio. We have seen a marginal regression in rice imports during the past 12 months with the pasta category, according to Nielsen Trade Desk, showing only 2% volume growth for the 6-month ended March. Pasta imports from duty-free origins, most notably, the EU, however, continue to grow and are up 11% in the last year, more than double in volume compared to 2016. Within this context, we have seen a significant regression in our pasta profitability as lower-priced imports set the price benchmark for our private label and #2 brand portfolio. Whilst we have retained pasta volumes, this has come at gross margin regression. Our rice business performed very well from a volume and profitability perspective, with Spekko receiving sound customer and consumer support.
Spekko was the leading brand in Trade Desk for the 3 months ended March. Dried vegetables delivered satisfactory results, although poor-quality red speckled sugar beans enabled greater participation of second-tier or regional brand offerings.
In closing, we expect the pasta business to remain under pressure, subject to exchange rate and trade protection changes with our available manufacturing capacity to leverage price, volume and margin. The rice category will remain hotly contested as we also see new entrants with retailer promotion intensity that may impact participation. Effective procurement remains key. The new red speckled sugar bean crop appears sound, although some quality concerns have been noted.
Good morning, ladies and gentlemen. That glossy TV ad as well out of the budget of the Groceries team. The grocery business within Pioneer Foods has shown strong organic and inorganic growth during the period in question. Top line growth has been driven really by juice, especially Tertius has mentioned that earlier, but juice has been a star performer, and Wellingtons added materially to our top line figures. Our defined basket share for Groceries improved by about 0.5 percentage points in value on a 6-month moving basis.
This is one part of our story, and it’s important not to lose sight of it as we move into painting a broader picture of how the business has performed. The other is the further tightening of the retail trading landscape and the increasing difficulty in passing on price increases. Inflation constraint to 5% in the portfolio, but really, much of this was mix related, and with far higher cost inflation to contend with, we saw margins narrow.
Trade costs were also higher than we planned as we defended — as we invested to defend our growth in market share in certain categories and to grow in others. After 3 consecutive halves of improved return on our trade investment, we retreated somewhat during this period, although we’re confident that this is a temporary blip.
Groceries also keenly felt the effects of higher costs in our internal distribution network, both to enable better responsiveness to changing customer needs, and for the time being, at least, those costs are really uncomfortable for us to bear. But we will grow into it, and no doubt, we will read — we will reap the benefits of that investment in time to come.
Finally, the Wellingtons business is still work in progress, but it did drag within — with negative OP while the aforementioned pricing pressures that Tertius and Felix have both mentioned were most keenly felt by Weet-Bix, which materially detracted from our profitability. I’ll obviously talk more about that in a moment.
Our result headlines are as follows: Volumes are up 14% with underlying organic growth of around 5%. Revenues went to ZAR 3 billion for the first time in Groceries since International was carved out of it in 2013, up 16% but with low underlying unit inflation. The ASK’d universe, referred to by Tertius, suggested roughly 3.1% inflation in that basket as defined. We saw 3% in beverages and 1.8% in cereals. Only in smaller, less-traded categories did we move prices by materially more, and the result is the inevitable deleverage, with profits well down despite our juice business widening operation margins and growing profits.
Despite the significant turnaround in the fortunes of our Wellingtons business, Felix mentioned the ZAR 150 million in the prior equivalent period now to ZAR 40 million. And of the ZAR 40 million, ZAR 20 million still relating to hangover costs that came through later. This, needless to say, diluted our operating margins by a material 2.1 percentage points as a result.
On the cereal business, once we cashed up the half, we were flat on volume but with a very different product mix in the basket, which further softened margins. Weet-Bix sales and volume dropped 12%, half of which was attributable to modern trade. But a very, very importantly, though, sales out data of Weet-Bix showed sales continued to rise by about 6%. So from a consumer relevance point of view, from a market share point of view, Weet-Bix certainly held its own. The reticence to buy in was in part due to resistance to our ask for higher prices and in part due to active destocking from some of our retail customers, which I think we’ve spoken to you about before.
On the plus side, our Bokomo Corn Flakes business grew strongly, achieving the #1 slot in Shoprite for the first time. And ProNutro’s resurgence continued, achieving its highest share in 3 years with value plus 30% up. Ongoing brand renovation and consistent brand support has paid off. The net effect of all this was a gain in the Pioneer share — the Pioneer basket market share figures to just over 36% but with profits down just under 60%, as you saw in Felix’s slide earlier.
Beverages, on the other hand, has had a cracker 6 months. Our juice business recorded record market shares and double-digit growth translating into increased profits and wider margins. The improved — the innovation of our Liqui-Fruit pack into the premium upright Prisma format was well received, underscoring the importance of responding timeously to shifts in consumer demand.
Elsewhere in our beverage category, our Lipton Ice Tea business grew market share but in a declining category. We’ve certainly had pause to rethink the way we trade in iced tea and are engaged in discussions with our partner around how we should run this business going forward. The work in dilutables continues. We’ve again talked to you about that repeatedly over time, and the portfolio showed small but important growth. We’re reasonably recently confident we’ve turned the corner there.
The ongoing work in Fruitree has certainly yielded results as well, not only in sales but, most importantly, in terms of the product renovation and maintenance work where we’ve actively pursued lower sugar levels to beat the sugar tax, and that’s pretty much done now. Thus, the SKUs that do carry cane sugar are under the 4% threshold just about across the board.
The pics on the right are our new Ceres 200 ml pack. Look carefully, of course, because these are a great new innovation. This is a combiSmart pack. It’ll be the first in South Africa, and it will hit the shelves in the spring month.
As previously mentioned, the turnaround of our Pioneer Foods Wellingtons business continues. The business has dragged on Groceries, diluting margins, yet strongly reducing the losses recorded in the prior period. So round numbers, about ZAR 100 million. And that’s really not just as a result of cost-cutting and consolidation of head offices and the like. We’ve had a lot of other workstreams on the go, and they’ve yielded results.
The results were impacted by those claims and costs that we mentioned earlier, but we think that, that is now pretty much through the system. The improvement has been achieved by increasing the run rate. We’re up about 10% on an equivalent basis, accelerating innovation in the portfolio. We’ve really brought at very high speed some new products to the market and opened up our participation in bake-off pies. We’ve done some portfolio rationalization, made some tough calls around things we should and shouldn’t be in. And crucially, we’ve improved our procurement machine. This business was tied up into the global Heinz system, and it was — all the procurement was handled by people far away, and we had to learn very quickly how to handle it. But it’s being done, and we’ve already seen some great results flowing. Workstreams are on place to further improve efficiencies and profitability, and further distribution gains are likely on the Pioneer platform.
As far as the balance of portfolio goes, time doesn’t permit for me to spend more time telling you about these wonderful brands that we have and the dynamics of the very unrelated categories, actually. But suffice it to say that snacks and spreads managed price — the price-volume-margin trade-off particularly well, while baking and desserts category grew revenues but slightly at the expense of margins. This PVM, or price-volume-margin trade-off really sits at the hearts of our day-to-day trading challenges. We’re always smart in hindsight, but we wrestle with it every day regarding holding share, growing volumes versus the extent to which we can and can’t pull the price lever.
High vine food cost inflation which the portfolio has already felt and which, I’m sure, Thushen will talk about. Of course, that’s his gain. We’ll definitely slow at least the vine food portion of Safari down a little bit in the months to come, but we have much innovation in that portfolio. We’re growing our presence in nuts and in vines, and we think we’re going to be able to continue to grow Safari’s market share.
On a plus side, we have restored the John West pipeline, and sales and in-store presence have improved significantly. That took some time to spool up again. You’re standing in a long queue with John West and these massive factories all around the world, and it takes a while before it starts to flow through.
To wrap up, we expect retailer sensitivity to price inflation to remain at elevated levels, making tight, short-cycle price point management absolutely crucial. On Weet-Bix, in particular, we not only want to do that, of course, but we are committed to pricing stabilization. It really is the volatility in it with a very aspirational and highly traded brand that causes the difficulty in us moving prices. And our top priority here is not only lifting the run rate and the pricing but making sure that we flatten the high/lows and the tit for tat between our big retail customers, which really creates havoc with perceived price points in the market.
Our new channel focus that I’ve talked to before remains a key growth driver for Groceries, specifically in the out-of-home pharma and L&T channels. Our out-of-home business now has gone through 7%. It might seem quite small to you, but it’s important for us, and it’s business we didn’t have before. We see plenty of runway there and in other channels up — as I’ve mentioned up on the screen.
Finally, we need to execute our exciting summer innovation plan, I mentioned the 200 ml pack, that they are key developments across categories while maintaining a focus on cost management.
Good morning, ladies and gentlemen. I’m pleased to report this morning a solid set of results across the International portfolio. As you will see, volume growth hasn’t been quite as expected, and this was mainly as a result of the vine fruit performance. We ran out of crop as we came waiting for the new season to come in. However, volume regression was mitigated by the solid performance in our Nigerian sausage roll business. This was enabled to — by our route to market, which is now in place, as well as a product proposition that we have vetted down for the local market. We had a marginal regression in the U.K. volumes mainly as a result as we addressed price pack architecture to uplift profitability. As you know, in this environment, pricing inflation is very limited.
Looking at the revenue and the margins. The fruit business performed spectacularly well because of increased U.S. dollar selling prices on varietals such as Thompsons, which is a vine fruit. We have been able to contract approximately $700 per ton more than the prior year. However, food profit expansion, because of the rand regression, was mitigated because of our hedging policies in place. It was also pleasing to note that the U.K. business and the Nigerian business grew in local currency as well.
Moving on to consumer exports. Profitability held despite the tough trading conditions in our neighboring markets. This was mitigated by our focus on developing markets where we look to grow markets outside of Southern Africa. So much so that we grew volumes by 10% in these markets, which actually grew the beverage of profitability as well. However, across the portfolio, this profit growth was negated by our rand per ton contribution on maize for reasons cited by Riaan as well as the Groceries exports into Zimbabwe, which was impacted quite significantly.
As we look through the African continent, our strategic initiatives continue on market development and channel development. In particular, focusing on the modern trade as this evolves very quickly. Aspects such as shopper marketing, category management is now becoming top of mind.
So as I mentioned upfront, we had a stiller set the results out of the fruit exports business because of increasing U.S. dollar prices. This was mainly a result of the Northern Hemisphere crop in Turkey and the U.S. being shorter than expected in the 2018 year. And as a result, you saw an increase in pricing. Unfortunately, this increase set in as well during the procurement season, where we have then experienced double-digit inflation of the procurement of our vine, and Martin referred to that as well. And we’re now looking to the second half of the year. And as we saw pricing in April, the international pricing was coming off very sharply because the expectations are that the Northern Hemisphere will have a better crop in 2019.
This year as well, (inaudible) experienced a lower crop, in particular, with high-value varietals, such as currants. We yet to have the 2017 yields that we’ve seen because of the drought. And I think this year’s intake was only about 30% of the 2017 year. Western Cape was also impacted by the drought. We’re still seeing that impact in particular with regards to apricot volumes.
The U.K. delivered excellent performance across all divisions, in particular, given that they were facing double-digit inflation on the cost of wheat and oats because of the crops in Europe being lower than anticipated last year. And if you thought double-digit inflation on energy is unique to South Africa, you’re mistaken. The U.K. government implemented a levy for the maintenance and upgrade of their facilities.
So looking ahead, it’s important that we continue to drive volume growth. The breakfast category remains stagnant. However, the granola category is showing solid growth, and we have a significant share in this category with our private label and branded business. Making sure we have a high rate of innovation is also critical in this market. And as we look to consumer trends such as health and well-being, we’re looking to launch products with low sugar, high protein as well as products that support good gut health.
Convenience is also the talk of the day where consumers are looking for convenient meal solutions. Here again, we’re looking at our pack architecture to support the convenience channel.
The Nigerian economy is still not firing on all cylinders. GDP growth not back at its heydays when oil prices were at a high. And as a result, the consumers continue to pursue value. Our sausage roll product is now positioned to leverage that growth. It’s an affordable, nutritious product, and more importantly, it provides the full factor. As we look at our bread business, we’re also looking at launching smaller loaves at lower price points to enable volume growth.
And as you know, our new plant is coming online later this year, so we’re looking to volumes to fill that new capacity. The team is also focusing on building and enabling route to market to cater for these increased volumes outside — in Nigeria.
Looking ahead, I spelt out the challenges with vine fruit. We saw U.S. dollar prices coming off as we procured high-value crops. So we’ll have to manage that carefully. We don’t expect the challenges in neighboring markets to go away so the focus in our development markets will continue in consumer exports. Labor costs, also a big issue in the U.K. The government has implemented a minimum wage of GBP 9.50 by the end of 2020 so we’ll have to look to mitigate this cost push. We’re relooking at our manufacturing architecture in our Peterborough facility and automating parts of our line. We’ll also contemplate side consolidation by the end of this year.
Thank you very much, Thushen. As alluded to earlier, I’ll touch on a few strategic focus areas in my closing session and then also share a few thoughts on the immediate outlook. We have previously alluded to profitable growth as a strategic ambition. And given the conversation today, it’s important to provide you with some insight into our continuing commitment to stay the course, to diligently build competencies and to strengthen the base because, as I said earlier, we retained a positive bias even in today’s challenging circumstances.
Finding and building alternative routes to market remains a key driver for growth in existing markets. And to this effect, it is indeed positive to note the enhancement of bread availability, as enabled through the investments that we’ve made in recent times. So too, investment in the route-to-market capability and, therefore, the strengthening in the expansion in the local and traditional customer base.
In Thushen’s world, the growth of export long-life fruit juice in markets beyond those neighboring South Africa is extremely positive for us. As we said, volumes in these markets grew with 10%, and we obviously plan to build on this. Long-life fruit juice pack format innovation through, specifically the 1-liter Liqui-Fruit Prisma pack, found excellent consumer support, and our innovation lineup for summer includes further work in this space with a 200 ml pack that Martin referred to. We are confident and believe that we will make a similar positive impact on consumer choice and preference.
In the maize milling segment, White Star Instant porridge is indeed a value-add in terms, not only of its contribution to our maize milling business, but also to the expansion of Pioneer Foods’ stature and presence in the breakfast hour.
Demand management with reference to better price management and efficient trade support and investment remain a priority for us. Operating cost growth, as driven by fuel, distribution cost and investment in manpower, remain large cost buckets and an operational challenge requiring the deployment of deeper scrutiny and mitigation.
Bakeries and Groceries delivered very well in the process efficiency or conversion cost space with the investment in our major distribution hubs in Cape Town, Johannesburg and Durban nearing completion. The expectation is that these distribution centers will enable us to build on our in-house distribution capability and also speak to some of the demands that our customers place on us in terms of service delivery.
We have onboarded the business-led implementation partners for our SAP project and are finalizing the required cloud computing strategy and our approach to training and internal change management to ensure the successful simulation and deployment of this enhanced technology platform.
We remained active in pursuing opportunities to grow the business through appropriate acquisitions, but prudence in pricing and a patient approach remain paramount. And then we eagerly await the additional baking capacity in Lagos to be commissioned later this year.
Borrowing from a published interview with the CEO of one of our major customers, I concur and wish to paraphrase or shorten expectations as playing into the wind, given that there is no hiding from the current weak midterm growth expectations and our structural and sociopolitical challenges. We do take comfort from the conclusion of our election and urge and support the government to fix what has to be fixed with vigor and conviction.
Our growth bias remains top of mind and top of our agenda, and it guides our decision-making and strategic direction. But we accept that input cost mitigation and better price management is critical and cannot be wished away. We treasure our leadership position in maize given the importance of the category in South African food basket and bank with confidence on the resilience of the White Star brand. We expect a sound traction in the wheat-to-bread value chain as well as the beverage category, enabled by our recent investments to continue.
In the international market, the expectation is for softer dollar-based fruit pricing whilst the weak economic reality in nearby countries is expected to endure for now, with specific reference to Zimbabwe, perhaps.
The Wellingtons journey continues, and whilst key product volume and share gains are celebrated, there’s more work to be done to return the business to profitability. We plan to maintain our current rate of capital investment with a focus on incremental growth, enhanced efficiency and operational risk management. The internal work being done on our desired value state and operating culture is indeed inspiring and, perhaps intuitively difficult in these times, but it’s actually now needed more than ever.
The confirmation of our desired leadership behaviors in support of our value state is important to reinforce and enhance operational and organizational capability, its resilience and, ultimately, performance. Over and above, this is also an expression of our commitment to our purpose and organizational care.
It’s Anthony from Investec. Can I talk a little bit about some of your market shares? So if I remember correctly from the presentation, you said that White Star Instant is now bigger than your corn flakes business, and yet your corn flakes business enjoyed volume growth of 27% or something like that. So does that mean that, that business, your White Star Instant, is now #1 in that category?
Okay. My answer to that before you continue the question. Thanks, Anthony. The reference to that observation is the fact that in the breakfast category within top-end retail. In volume, Instant maize is larger than the corn flakes segment, not in value, in volume. So it doesn’t speak to share. It just speaks to the relevance of that relatively new product category within breakfast. It’s grown by 50-odd percent for a number of years now at category level and has now surpassed corn flakes as another participant in that category in volume contribution.
That is correct. According to the Nielsen’s data, for the 3 months running up until the end of March, Spekko held — as a brand, held the brand leadership position.
And then just on Weet-Bix. If you can just clarify. So the depletion rate at the customer level was up 6%, but the extent of the destocking was such that your actual volume movement for the half was down 6% so that’s, that 12% gap.
That’s correct. Yes, yes. It’s important that we put that in — make it clear for the audience to understand. Sales out of top-end grocers for Weet-Bix for the period, for the 6 months, grew by 6% in volume. And as you correctly confirmed, our sales into the trade for that same period was down 6% in volume. So the stock depletion in the system, clearly. Obviously, that’s not sustainable on the long-term trend in our view.
Would you like to comment on that? But in essence, yes, because that is definitely not a sustainable trend. It accelerated from January onwards to March. Obviously, some effect would have been the buy-in last year for Easter that might be a qualifier in this context. But we’re very confident that, that trend should reverse itself over time. What is very important for us is to recognize that there’s no consumer that walked away from the brand, if you’re able to understand. So that’s the important thing for us.
Sorry. Just on your cost containment. When I go through the numbers, it looks like on the raw ingredient, it was up quite a lot. But below the line, between the GP and the operating line, it was still up 15%. Can you maybe talk for that line?
Yes. I’ll talk off the cuff, and then Felix can assist if it gets a bit granular. Indicated in — on the slide in front of you, it’s up 17% in nominal value. Excluding the businesses that went in the base, the Wellingtons being the largest contributor to that, it was — year-on-year, it was up 13% in total. Felix, am I quoting those numbers correctly?
If you unpack that in further detail, it’s mostly related to manpower and distribution cost. The biggest portion of manpower cost is the investments that we’ve made in bakeries. Remember, we’ve added another bakery in Shakaskraal, another plant, started with 3 shifts. And so we did in Aeroton and over and above that. And that is really behind our growth — our volume growth is the enablement of our distribution system.
We effectively net added about 70 additional routes over the period. Now that’s roughly translated to about 270 people, driver plus the 1 or 2 and then an assistant, so mainly associated with the investments that we’ve made in bakeries. On manpower, again, Felix, you’re welcome to interrupt me. But if you exclude bakeries investment, our manpower cost is up 8.5% roughly in total. And obviously, you must exclude Wellingtons from the base.
Distribution and the energy-related component, that was a major detractor. Yes, we’ve invested in infrastructure, in our distribution centers. That is not fully utilized yet, the major ones that I referred to. But fuel was up like something like 19% in total. And fuel in the distribution world carries about a 55% to a 45% contribution rate to the rate of distribution. Just to give you an ending total number through our third-party distribution fleet on the grain side and through our — plus our bakery fleet, we drive more than 80 million kilometers a year to transport our goods.
Shaun Chauke from HSBC. Two questions. So the first one, on the volume gains of 9% that you got from bread, how much of that would you say comes through the informal market?
Okay. To give you the average contribution of our informal market, it’s about 65% to our volume. Our average rate, as you correctly quote, is 9% up year-on-year. It’s definitely skewed towards growth in the local and traditional markets. So it’s up more than double digits in local and traditional market from a volume perspective.
And the second question would be, of the sort of the rate of innovation that you guys have obviously brought in on the shelves, how much as a percentage of revenue would you say that is?
To be honest with you, Shaun, I can’t quite give you that number off the cuff. We will meet each other, and I’ll give you some granular detail if you don’t mind. You would have noted from my text and some of the narratives to that, our innovation rate is incremental, very selective, and we back the horses that we think that can win.
It’s [Dirk] from [Cohesive Asset Management]. Just on Wellingtons, obviously, a big improvement in the loss. Could you maybe just unpack what that — what the ZAR 20 million legacy costs are? And what kind of margin would you be aiming for in this business?
Well, let’s talk about the immediate issues, and those are the legacy cost and where we stand with them. Most of that was related to third-party distribution. The Heinz business of the past outsourced its frozen as well as its ambient distribution and sales, and most of those legacy cost was related to those. Now those parties also managed the data on behalf of the business. We will, obviously still look forward — going forward, run an outsourced frozen distribution infrastructure. But we’ve already in-sourced the ambient part to run with the supergroup basket that we have in the Groceries part of the business, and we’ve taken the databook onboard on the ambient side.
No. It was inefficiencies of the past and claims that arose from actions in the time before we took over.
Well, first of all, we must get it to breakeven, and that is our short-term target. If I must really pronounce on where we aim for that. If we go from 5% to 8%, it’s probably a range that we will, in the short term, be very comfortable with just to get it back to that because of the frozen component that’s in there. Johannes?
I’ve got 2 questions, and I’ll ask them one at a time, if I may. The first one, you said you’ve got 70 additional routes enabling distribution in the bread business. What — just ballpark, what percent of those routes are in Gauteng? Plus for the 2 the additional ones.
Yes. I’m looking at Riaan here across the table. He confirms there’s about half of that additional net growth in routes are in Gauteng. I wish to add that we’re very comfortable with the volume growth that is accrued post the investment that we’ve made in Gauteng.
And these additional routes in Gauteng, are they to serve the top-end grocers or more to serve the local and informal traders? I presume it’s been happening.
It’s a general statement for the bakery business. Our ambition for growth is skewed towards local and traditional. The same applies to the Gauteng market, specifically. But although we were relatively underrepresented in Gauteng in the past, it wasn’t necessarily so in the top-end grocer channel. So obviously, the route-to-market initiatives are all focused at local and traditional to a large extent.
And you think you’re doing well in terms of market share gains there. So my next question is about — you have — the previous CEO who used to get very excited about what he called super brands. He used to make — maybe of the super brands, right? And he used to call it wheat bakers and White Star super brands. Now they are good brands, but the fact that they seem to have — super brands, you don’t expect them to underperform to the rate that they seem to have underperformed this time around. Given this sort of environment and given this sort of brand power, I mean, I’m just trying to understand him. He used to have a long-term EBIT margin between 12% and 15%. And on the side, he would say that maybe at the top end of that guidance. Are you guys still comfortable with this kind of growth — EBIT margin given what he’s done and given the state of your brands — brand power?
In response to your question, I confirm with my colleague of the past. In terms of those brands and the stature, we’ve got the absolute conviction that they are power brands and that they will endure. We are in circumstances now where holding your ground is sometimes to be celebrated, and that’s what we’re really attaining to. It’s extremely tough trading conditions out there. And Weet-Bix has held its ground, so did White Star in — at the price premium of 20%. I would be reluctant to give short-term margin guidance on that for the moment. If we can hold the ground on our major brands and marginally continue to improve on them, I will be very satisfied in the short term.
But does the long-term margin guidance from the previous year exist? Or that’s [achieved here now] but it doesn’t exist for you guys?
If you look at cereals as a category on a long-term trend, we’re very comfortable that we compete with our peers in — even on the International basis from a margin percentage point of view. And over time, even into where we are today. Maize is a profitable business for us, and it should be able to hold a decent margin as well.
Yes. Private label in the categories that we currently participate in constitutes about 24% of the total category basis. It has grown very incrementally in — of late. Maize has stabilized in the short-term at around 30%. Other categories that have got a high exposure is tuna, for example, where we compete with John West, so is pasta. And Riaan made a lot of commentary attributed to that.
We do participate in private label, where it — on our rules of engagement, that suits us to a certain extent, where we can contribute to price laddering in a category or where we have the capacity to do so. We have to date, not invest at greenfields behind private label, and it’s highly unlikely that we will do something like that. But private label is not going away, as you obviously all know, and we will selectively participate.
Then we’ve got from a finance point of view. We’ve got a question on outlook for CapEx and for finance costs for the coming year.
Okay. We have said before and as of today, we hold that view that our run rate for capital investment into ongoing business renovation and incremental growth, excluding any acquisitive opportunities, will be around about ZAR 750 million per annum, a round figure. Our interest expenses or — is about — what’s the value?
ZAR 195 million, but you can deduct ZAR 42 million for the BEE deal. So I’ll say around ZAR 150 million.
Yes. Perhaps just to confirm what Felix has said, currently reflecting about ZAR 190 million interest expenses annualized. But after the phase 2 BEE deal, there should be a ZAR 42 million credit to that on a like-for-like basis.
And we’ve got some questions on maize. When is the maize price increases going to cycle in the market.
Well, the reality is that if we just reflect on the first half, maize pricing for the 6 months to March on the prior year as a raw material, were up roughly about 40%. But they were deflation in the category as Riaan has clearly alluded to. Even White Star at the 20% premium had 4% or 3% deflation.
Subsequently to where we are, we have seen with more certainty from the new crop that maize pricing has actually come down slightly. Now you know that we run at about a 3-month holding rate. So we will see some of that benefit coming through the system in our quarter 4.
We’ve got a question on Wellingtons. When do we expect a turnaround to be complete? And what’s behind this?
Well, from a practical point of view, we’ve completed the integration into our systems from an administrative point of view, from an operational point of view, from a distribution point of view. We have accrued volume and market share in some of the key categories that we are responsible for. And we see that progress to continue going forward. Our first effort is to break even in that business. As you’ve seen, we’ve made a ZAR 41 million loss for the first half. I don’t see us wiping that out in the second half, but we will continue to make sound progress.
And then we’ve got a question on the investments in the mill in Durban, Shakaskraal. When there is excess milling capacity in the country, are there any planned closures by the industry or by the competition that you’re aware of?
I’m not aware of any competitor actions in that space. The Durban investment for us is premised on 2 very important things. The first of all is to support our bread capacity growth in KZN. If we don’t invest for more milling capacity, we won’t be able to sustain that beyond the investments that we’ve made. And then second to that, there is also an efficiency play because we will mill more wheat at the coast then. As you know, wheat is traded on the import parity into South Africa. And service at KZN end markets, specifically, better because that’s currently done on a pack format basis from our inland law.
Then just a follow-on question on the added capacity. When does management expect that to add to the margins of milling and wheat chain?
Well, from the fourth quarter onwards, we will see some of that benefit is coming into the system in terms of the efficiency play will be immediate because we will be able to pack and — mill and pack for no toll in KZN or in Durban, and we will grow with our bread volume growth in KZN as well.
Just a follow-on question on the Heinz historical performance. The question relates to what extent are you able to clarify that you’ve been able to fix that and that ongoing — the residual of the business is now lean to perform.
Yes. We’re absolutely confident that we’ve resolved all the administrative matters relating to third-party distribution, debt collection and so forth as was alluded to earlier. So that’s totally in hand. We’ve stepped up production volumes and efficiency. We’ve attended to procurement at a very detailed level. We’ve ratcheted up and resurrected the John West supply chain. That is all third-party internationally sourced, so it’s a commercial job in hand now.
And then just the last question is from — relating to selling price inflation for the full year. What is your outlook? And then any more price increases that you expect for the remainder of the year?
Well, we’ve seen price inflation on our like-for-like basket. And yes, 7%, that was not enough. There is more to accrue as we speak. We’ve passed on more bread pricing recently to the tune of an additional 5 percentage points. Some of the work that Martin has done on the grocery side, that is gaining traction as we speak. To refill that pipeline on Weet-Bix that we referred to will be at new prices. So there will be more inflation in the second half.
Thank you very much, ladies and gentlemen. Your time and attendance is appreciated. Please enjoy a cup of tea with us. Thank you.
Post time: May-28-2019