JSE-listed consumer packaged goods company Libstar will simplify its portfolio composition by reducing exposure to underperforming business units, formalising divestment mandates or other strategic alternatives, including the exit or closure of nonprofitable product lines and divisions.

The group will also pursue functional and/or operational consolidation of product lines and divisions as part of its updated strategy to deliver accelerated, profitable growth and stakeholder returns, Libstar Group CEO Charl de Villiers said in a presentation of the group's results on September 12.

The strategic update follows a comprehensive review of Libstar’s portfolio composition and operating model, as well as its category and channel participation, he added.

In the six months to June 30, Libstar saw revenue grow by 4%, but normalised earnings before interest, taxes, depreciation and amortisation (Ebitda) decreased by 18.3%, mainly owing to a decline in volumes of 7%.

The volume decline is attributable to weaker consumer and customer demand in the group’s retail, export and industrial channels, as well as the discontinuation of unprofitable lines in the household and personal products portfolio.

Further, Libstar's interest-bearing debt-to-normalised Ebitda gearing ratio increased to 2.1-times, up from 1.5-times in the first half of the 2022 financial year, mainly owing to the decline in normalised Ebitda, he said.

Gross profit margin declined to 20% from 22.1% in the first half of 2022, however, this was a slight improvement on the margin of 19.5% in second half of the 2022 financial year.

The margin reduction in the six-month period under review was mainly owing to the under-recovery of overhead costs resulting from lower volume sales. Input cost inflation also remained elevated throughout the half-year across all categories. Gross profit declined by 5.6%, he added.

GROUP STRATEGY
"As part of simplifying the group's operating model, we will change the organisational design, accountability and reporting structures to a simplified, category-led and brand-driven approach, including our own-branded and private label capabilities.

"We will also leverage shared business services where appropriate, such as sales and marketing consolidation and back-office consolidation," De Villiers said.

Libstar’s portfolio currently comprises five product categories; 18 business units; 12 sales, marketing and operational teams; and 17 back-office teams. The top six divisions of the group contribute more than 80% of the group’s value.

"Management is actively scoping and quantifying initiatives designed to reduce reporting and operating complexity in a manner that leverages existing group resources. These structural changes are intended to improve Libstar’s category and channel strategy execution through the establishment of dedicated category and channel leadership teams," he noted.

The successful integration of Multicup and Rialto food service businesses has been instrumental to the growth of the Group’s food service channel in the six-month period, he illustrated.

Additionally, Libstar will actively reduce its exposure to unprofitable product lines, non-food categories and marginal return businesses.

"The strategic intent to dispose of the household and personal care products division remains and the group is in the process of formalising the appropriate adviser mandates.

"However, we recognise that market conditions may not be conducive to a short-term exit of the business. The group has therefore focused its efforts on the operational turnaround of the business," he said.

The successful execution of value-accretive initiatives, including the discontinuation of unprofitable product lines, improved procurement practices as well as relentless focus on production efficiencies, have contributed to a significantly improved operating result for the household and personal care products division.

"The division achieved normalised Ebitda during the half-year of R21-million, which is well ahead of its 2022 full year performance of R12-million," he highlighted.

Similarly, Libstar will close the unprofitable Eastern Cape distribution channel for its Denny Mushrooms business in the second half of the year, which will reduce operating costs by about R9.6-million a year.

"Further, current market and operating conditions, most notably the dependency of farming operations on stable electricity supply, are not conducive to the reinstatement of the Shongweni facility.

"Therefore, the group will retain the R109.7-million proceeds from the insurance claim following a fire at the facility in the first half of 2022 for application to value-accretive opportunities," De Villiers said.

Meanwhile, while Libstar continues to make progress in the execution of its broad-based black economic empowerment and environmental, social and governance strategic imperatives, management’s immediate priority remains the protection of the group’s cash flows by reducing net working capital and capital expenditure, while executing its strategic initiatives.

"Our ambition is to implement the divestment and structural changes by the close of the 2024 financial year. Libstar will also focus its efforts on reducing the interest-bearing debt to normalised Ebitda gearing ratio to 1.5-times," said De Villiers.

Meanwhile, in terms of sustainability, the technical scope, implementation timeframe and cost of alternative energy generation has historically made solar photovoltaic (PV) and battery storage installations unfeasible for most of the group’s complex production facilities.

"Improvements in technology and pricing have, however, provided more viable and accessible solutions. As such, the Group has accelerated its strategy to investigate alternative energy sources and is nearing the completion of technical and financial viability studies pertaining to solar PV installations at two Cape Town manufacturing sites of Amaro Foods," he highlighted.

Libstar’s production requirements preclude it from operating entirely off the grid, but various solar and non-solar options have been and continue to be investigated.

Additional sites have been earmarked for alternative energy viability studies by the end of the financial year.

Libstar is further scoping an offgrid water purification solution at its Lancewood George facility, with an aim to be 90% water neutral. The project is expected to be completed within a timeframe of 12 to 18 months following approval, he added.