RCL FOODS INTERIM RESULTS MEDIA RELEASE 2018

SALIENT FEATURES

• Strong earnings growth
• Chicken recovery ahead of expectation following restructure, adverse impact on Logistics and Animal Feed in line with expectation
• Sugar margins compromised by significant imports despite strong operational performance and volume recovery post drought
• Grocery brands continue to perform well in a market showing muted growth
• Interim dividend declared of 15,0 cents per share up 50,0%

Durban, 26 February 2018: RCL FOODS, a leading African food producer, has increased headline earnings by 56.9% to R644,7 million, from R411.0 million, for the six months ended December 2017. This equates to a headline earnings per share of 74,5 cents compared to 47,6 cents per share in the prior period. An interim gross cash dividend of 15,0 cents per share (H1 2017: 10,0 cents) has been declared.

The improved results were largely driven by a strong turnaround in the chicken business. However, good rainfalls and reduced prices for most soft commodity inputs also contributed towards margin recovery across business units. A relentless focus on implementation of key category cluster strategies and reduction of cost base across all operations have underpinned the overall business results.

Despite a challenging political and economic environment, RCL FOODS’ EBITDA (pre-IAS 39) increased by 26.6% to R1 185,0 million from R935,7 million, with the associated margin improving from 7.2% to 9.3%. 

RCL FOODS manufactures a wide range of branded and private label food products, which in South Africa is distributed through its own supply chain specialist, Vector Logistics.  The company employs more than 20 000 people in operations across South Africa, Swaziland, Namibia, Botswana, and Uganda.

CEO Miles Dally said, “We have made steady progress towards our goal of a diversified food portfolio and remain confident in our strategy. More than 20 resilient brands, continuous innovation, an ability to adapt to changing market conditions and strong relationships with longstanding customers have underpinned our business in a constrained and challenging market.”

RCL FOODS initiated a new chicken business model in February 2017, which has been designed to curb commodity-driven consequential chicken categories and to provide less volatile, more consistent and sustainable returns throughout the cycle. The changes have already proven effective within a short period of time and combined with lower commodity input costs, have assisted in returning the Chicken business unit to profitability. Pre-IAS 39 EBITDA increased by 867.4% to R290,1 million (H1 2017: loss R37,8 million) and EBITDA margins improved from -0.9% to 7.7%.

The Animal Feed and Logistics units, which are suppliers to Chicken, continued to feel the impact of reduced poultry volumes. Initiatives are underway to utilise this spare capacity and reduce the negative impact on profitability.

“The impact of our changed model has been positive overall,” said Miles Dally, “With the Chicken recovery far outweighing the compromise within the Animal Feed and Logistics business units.”

Within the Groceries cluster, the RCL FOODS basket once again outperformed the rest of the market in terms of volume growth. Despite aggressive competitor activity, the RCL FOODS basket grew its volumes by 7.1% in the six months ended December 2017, versus general market growth of only 1.7% as reported by Ask’d**. Good volume and margin improvements in Grocery and Pies, as a well as a solid Speciality performance, was partially offset by a disappointing Beverages result.

Production volumes in the Sugar business unit showed a solid recovery stemming from an improved crop as the drought abated, however this was more than offset by lower industry prices due to the impact of significant import volumes. The latter was caused by a period without appropriate import tariff protection, which has since been rectified by the Department of Trade and Industry. Globally, excess sugar supply remains, exerting continued downward pressure on pricing and creating opportunities for imports to the detriment of the local industry.

The lower commodity input costs drove gains in Animal Feed and Milling, with labour challenges negatively impacting Baking.

Logistics’ result, albeit significantly down on the prior year, reflected a performance that is in line with expectations given the changes to the Chicken business model. Logistics has been pursuing additional new business and was awarded the contract for Pick ’n Pay’s frozen supply chain shortly before the end of the prior period. Vector has also been reappointed as Nando’s chosen supply chain and distribution partner. Cost containment initiatives that have been implemented during the period have resulted in reduced operational costs, despite inflationary increases in staff and related costs.

At the end of the period under review, cash on hand of R143,5 million was R30,7 million higher than the prior period despite the early repayment of the revolving credit facility component of the term-funded debt package in January 2017.

Over the last six months, RCL FOODS completed the acquisition of a 50% stake in Matzonox Proprietary Limited, a waste-to-value operation based at RCL FOODS’ Worcester chicken site, the largest of its kind in Africa. Its main operations include the processing of waste water from the chicken plant to generate electricity and to reduce effluent charges and forms part of its overall sustainability drive.

Dally said, “Driving sustainable business as a key business and social imperative has gained even more prominence, over the last few years, due to energy and water challenges in South Africa. Our ambition is to ultimately become an energy self-sufficient business and we have made good progress toward this goal in recent times.”

Capital expenditure for the period ended December 2017 was R317,8 million (2016: R403,5 million). The prior year included spend related to the upgrade of the pet food plant and finalisation of the Thekwini site expansion. A state-of the art pet food plant has been commissioned and an exciting range of products will be introduced to market in the next period. Major spend items in the current period include amounts to restore the damaged Pongola silo and the replacement of irrigation equipment in the Sugar business unit, as well as replacements of key infrastructure across the rest of the Group.

PROSPECTS

RCL FOODS has made steady progress against its six long-term strategic thrusts. It has continued to grow its brands through consistent investment and innovation, which has meant its improved, strong market share positions have been sustained. The development of tailored solutions in close cooperation with key customers continued to strengthen strategic relationships.

“Establishing a unifying culture, embedding one system and platform for doing business, as well as leveraging information technology across all businesses is continuing and has provided valuable information and insights to improve efficiencies and the way we do business,” said Miles Dally.

We are cautiously optimistic that consumer affordability has begun to improve, which should allow volumes to continue to recover from a low point. The poultry market continues to stabilise and Chicken is expected to continue its recovery. Groceries is ready to capitalise on the improved environment with a good pipeline of innovations to be rolled out over the next few months.

Despite the recent tariff implementation, sugar imports remain a threat due to global surpluses and a strengthening rand. Millbake will continue to place focus on restoring volumes, though tough trading conditions are expected to persist. Animal Feed is expected to continue to benefit from lower commodity input prices and improved volumes as the impact of AI diminishes.

Logistics’ second half of the current financial year is expected to be an improvement over the previous year, which already included the impact of reduced Chicken volumes in the period. A continued focus on cost rationalisation and maintaining an appropriate cost base, coupled with new business opportunities, will deliver a more positive outlook for the remainder of the year.

Miles Dally concluded, “We are encouraged that recent political developments have been positive and provide optimism for growth within the South African economy. However, these changes are still to fully translate into concrete plans and economic policies to revitalise our economy. The next six months are likely to remain challenging, yet we remain confident in our strategy and will continue to make steady progress towards our goal of a diversified food portfolio, focused on adding higher margin, added value products and categories.”