The operational improvements implemented across JSE-listed RCL Foods’ different businesses over the past year are expected to continue to contribute positively to the company’s earnings performance in an environment where economic conditions remain challenging.

“The weak state of the South African economy and the devaluation of the rand means a sustainable improvement in consumer spending is unlikely in the near future. The lower oil price will temper inflationary pressure and contribute to lower fuel and oil derivative input costs,” RCL Foods advised in its results for the six months ended December 31.

Despite tough trading conditions, RCL Foods had made significant progress against its strategic goals in the six months ending December 31, continuing to leverage opportunities and synergies across the group while structuring and focusing the businesses for growth and improved profitability, said RCL Foods CEO Miles Dally.

A subsidiary of investment holding company Remgro, RCL Foods reported a significant increase in its headline earnings from continuing operations from R27.4-million to R601.6-million, or 70c a share, for the six months ended December 31.

The group’s revenue for the period under review increased by 38.8% to R12-billion, largely owing to the inclusion of six months of TSB’s results and improved performance by chicken processor and marketer Rainbow. RCL Foods’ headline earnings before interest, taxes, depreciation and amoritisation (Ebitda) increased by 73.7% from R688.3-million to R1 195.5-million, with the associated margin increasing from 7.9% to 9.9%.

Headline earnings from continuing operations of R601.6-million increased significantly over the previous comparative period largely owing to the improved performance of Rainbow, the inclusion of sugar producer TSB and the replacement of euro bonds with a rand-based debt package, which eliminated the unfavourable mark-to-market impact, the company explained.

The second half of the financial year was a seasonally lower profit period, stated RCL Foods, especially in terms of Rainbow, which enjoyed its peak trading in December, and TSB, which had dealt with the three-month-off crop from January to March.

DIVISIONAL PERFORMANCE
Foodcorp had a disappointing trading performance for the six months under review, with consumer demand slowing further and a seven-week strike at the Speciality division that incurred substantial costs.

However, the Grocery division performed well despite a “very competitive environment” with the Nola and Yum Yum brands achieving pleasing margins as a result of efficiencies arising from the newly commissioned polyethylene terephthalate plant.

“The management changes and focus on the Baking division has pleasingly translated into an improved performance with the full benefit expected in the second six months of the financial year,” noted RCL Foods.

Foodcorp’s Ebitda decreased by 8.5% to R344.3-million, which was relative to the comparable year-ago period, translating into a margin of 9.1%.

Rainbow’s Ebitda, however, improved to R463.2-million, up 142.1% from the previous period owing largely to better supply and/or demand balance in the local market and, importantly, its new business model, which was currently delivering more consistent, profitable results.

“This was achieved by aligning bird volume with profitable demand, strong growth across the quick service restaurant customer base and a reduced reliance on pure commodity lines, including individually quick frozen, resulting in a significant improvement in the production mix and margins,” advised RCL Foods.

But, the industry remained exposed to the two critical challenges, namely, imports and the dumping of leg quarters in the local market, and the injection cap proposed by government. The group said both could “have a significant impact on the sustainability of the poultry industry”.

Alternatively, TSB was benefiting from the updated sugar tariff implemented in April, which had caused a significant decrease in sugar imports and contributed to increased sales volumes in the domestic market.

The sugar and milling company delivered an Ebitda of R290.7-million at a margin of 9% for the period under review.

During the six months to December 31, TSB also increased its sugar production by 10% to 450 000 t of raw sugar and its feed operation Molatek increased sales by 22% to 171 000 t, owing to an expansion project which had been commissioned during the 2014 financial year.

RCL highlighted that TSB’s use of irrigation resulted in its production being largely unaffected by the drought that was currently affecting the balance of the local sugar industry, adding that the sugar producer had sufficient irrigation resources for the forthcoming sugar season.

Distribution business Vector’s results for the period were negatively impacted by industrial action costs, which resulted in Ebitda decreasing by 11% to R110.5-million.

However, the division grew revenue by 14.6% through the introduction of second sales and merchandising structure, a new customer in Sea Harvest, growth in volumes in the foodservice industry and an increase in Burger King’s store footprint.

“The trading outlook for Vector is largely positive with continued customer secondary distribution and new customer growth anticipated,” added RCL Foods.

Meanwhile, the Competition Appeal Court approved the acquisition by Oceana of Foodcorp’s fishing interests. The last conditions precedent were finalised on February 2 and the sale would be reflected in the second six months of the 2015 financial year.

RCL Foods also added that the proposed sale of the Glenryck brand to a third party was well advanced.

CORPORATE TRANSACTIONS
During the financial year ended June 30, 2014, RCL Foods concluded significant corporate transactions, “certain of which had a material impact” on the results for the financial year and the six-month period ended December 31, 2013.

As a result of the material impact, RCL Foods on Wednesday published pro forma results for the comparative period that aimed to provide shareholders with a better understanding of the underlying operational performance of the group.

The corporate transactions included the 100% acquisition of the issued ordinary shares in TSB from TSB Holdings and the restructuring of the existing black economic-empowerment (BEE) notional vendor financed shareholding and the implementation of a new BEE scheme. RCL Foods also raised R790.2-million in a pro rata minority share offer and redeemed 10% of Foodcorp's euro-denominated senior secured notes in November 2013 and the remaining 90% in April 2014 through cash and new rand-based debt.

The company further acquired the remaining 35.82% minority interest in Foodcorp in two transactions from Foodcorp management on July 1, 2013, and investment advisers Capitau on September 6, 2013, for a collective R520.7-million.  

The pro forma results, which, RCL Foods highlighted, were supported by a reporting accountants report, assumed that all corporate activity was effectively concluded on June 30, 2013. This allowed RCL Foods to incorporate in its interim period ended December 31, 2013, 100% of Foodcorp’s results, six months of TSB’s results and a normalised funding cost line by assuming rand-based debt – which had removed the impact of foreign currency losses and the bond redemption. The interim results were also permitted to include the recurring IFRS 2 charge relating to the new BEE scheme and exclusion of the charge relating to the old scheme, new shares to be in issue for the full six months and the transaction costs associated with the corporate activity to be excluded.

“By normalising the impact of the corporate transactions, the group’s profit attributable to equity holders of the company for the six months ended December 31, 2013, improves from a published profit of R13.1-million (earnings a share from continuing operations 4.8c) to a pro forma profit of R384.6-million with an earnings a share of 46.7c from continuing operations,” RCL Foods explained.

Dally emphasised that the company was building an African food business of scale in line with its ambition, with compelling brands and a sustainable value chain that delivered to consumer and customer needs, noting that “our people are the key driver of this journey and we are assembling a powerful leadership team to deliver on this ambition”.