Food producer RCL Foods’ headline earnings decreased by 26.3% to R475-million for the six months ended December 31, 2018, compared with the R644-million reported for the six months ended December 31, 2017.

This translated to headline earnings a share of 54.8c apiece, compared with 74.5c apiece in the prior comparable period.

The company attributed the decline to significant challenges within the sugar and chicken categories, as a result of dumped imports that resulted in an oversupply and lower realised prices in the market, as well as lingering after-effects following the listeriosis crisis around April last year.

“Sugar was particularly distressed by abnormally high dumped imports, displacing local market sales, leading to an adverse sales mix. This was partially curbed by the sugar tariff increase implemented in August last year, which provides partial relief going forward,” RCL stated on Monday.

RCL declared a dividend of 15c apiece, which was unchanged from the prior period.

Revenue increased by 3.5% to R13.3-billion, compared with R12.8-billion in the prior comparable period.

Earnings before interest, taxes, depreciation and amortisation (Ebitda) were down 9.9% to R1-billion, compared with R1.2-billion in the prior comparable period; however, Ebitda excluding sugar was up 2.9%, driven by pleasing growth in groceries and good progress in the company’s millbake business.

“Our well diversified portfolio, low gearing and strong balance sheet have positioned us well in spite of the challenging trading conditions. The local economy is expected to continue to face economic headwinds and our goal of achieving a sustainable quality of earnings off a stable and diversified base remains key.

“To this end, we are pleased with the growth in the groceries and millbake categories; however, our agricultural categories continue to be impacted on by dumping” said CEO Miles Dally.

RCL CFO Rob Field explained that the challenging operating environment was worsened by record high fuel prices and increased interest rates, which placed pressure on consumers' disposable income. Despite this, however, the consumer market reported volume growth of 4.3% for the reporting period, and 3.4% excluding staples.

RCL’s groceries business achieved 23% Ebitda growth, on the back of market share gains by its Catmor, Canine Cuisine, Bobtail, Nola, Yum Yum and Ouma Rusks brands, while the millbake business had good growth in baking volumes (5%) and improved operational efficiency, leading to a 14.1% increase in Ebitda.

Meanwhile, the company said it was engaging with government to seek industry protection against dumped sugar and chicken imports to ensure a level playing field for local producers.

The company’s chicken business Ebitda for the reporting period declined by 13.7% to R250-million, at a margin of 7.3%, compared with R290-million, at a margin of 8%, in the prior comparable period. This amount includes profits on dormant farm sales of R105-million, without which chicken’s Ebitda decreased 49.9% to R145-million at a margin of 4.2%.

“Chicken imports have grown by over 25% in the period, mainly from Brazil and America, with the only partial relief to the market’s oversupply position being provided by the reduction in volumes as a result of RCL’s changed business model. Dumped imports remain a significant issue for, and component of, the local poultry market, representing over 25% of the market,” Dally noted.

The company remains confident that the revised chicken business model has positioned RCL optimally to continue to deliver a business with far less reliance on commodity cycle pricing, resulting in better sustainability and consistency in terms of profits.

Sugar production volumes increased by 12.7% to 429 466 t for the reporting period, but  Ebitda was down 69.9% to R63.5-million at an “unacceptable” margin of 2.2%.

“Reduced domestic demand and the impact of cheap dumped imports resulted in increased exports at low prices. Market estimates were that the Health Promotion Levy, or sugar tax, had reduced domestic sugar consumption by up to 10% of the annual industry production or 200 000 t/y,” said Dally.

Meanwhile, Animal Feed was adversely impacted on by higher commodity input costs (especially molasses) not recovered from the market, which resulted in an  Ebitda decline of 9.8%.

Logistics’ Ebitda declined by 16.3% to R88.5-million, mainly owing to higher costs as a result of one off-startup costs to enable the Pick n Pay contract and significant increases in the fuel price.

New business, including a long-term contract with Pick n Pay that RCL secured, will assist in mitigation post the chicken restructure.

The company said the synergised ONE RCL FOODS platform, which began four years ago, is “geared for future growth”. It includes integrated structures, systems, customer and shared service capability.

To further leverage this platform in the second half of the year, the company expects to assume responsibility for the support and outbound supply chain functions for Siqalo Foods – a 100% subsidiary of Remgro – being the spreads business that Remgro acquired from Unilever South Africa.

Sustainability initiatives, a key business and social imperative for years, progressed well and have gained further prominence due to the country’s current energy and water challenges. Cogeneration at sugar plants, waste-to-value energy production and solar power already provide 25% self-sufficiency for the company’s operations, with plans to increase this to 50% over the medium term.

“The success of our Worcester waste-to-value plant has prompted us to invest in a similar waste-to-value plant in Rustenburg in 2019, where we expect to provide 65% and 50% of the energy and water requirements respectively of the total site,” Dally pointed out.

In terms of RCL's approach to expansion in the rest of Africa, increased focus has been placed on its export efforts and potential route-to-market acquisitions, before making investments in other assets. In line with this, a 45% shareholding in L&A Logistics was acquired in October last year.

L&A is currently a leading distributor of products in the Zambian market, including brands such as Cadbury's, Dentyne, Bavaria, Divella and Liberty Foods. The acquisition provides entry into the Zambian logistics market and opportunities to grow our business further in this geography.

OUTLOOK

RCL expects trading conditions to remain challenging, owing to South Africa’s poor economic outlook. The upcoming elections are likely to result in an extended period of uncertainty, it added.

Groceries will continue to focus on strong innovation, brand investment and efficiencies to grow profitability. Additionally, RCL expects the good progress made at millbake to continue.

“The poultry market will remain depressed while the market remains oversupplied and as commodity input costs continue to rise. Animal Feed will focus on regaining lost margin and restoring profitability.  

“The short-term outlook for sugar remains challenged – the industry has significant structural issues which require resolution to ensure long-term sustainability,” said Dally.

RCL consumer division MD Scott Pitman said the company will during the current period finalise a distribution contract with Remgro's spreads business and continue to look at adapting sugar's business model, as well as the chicken business model, to operate off a higher profit base in a narrower band.

He said the company has, through the South African Poultry Association, an application with government to curb dumping.

The logistics business is well positioned to offer customers a multi-temperature (including chilled, frozen and super-frozen) route-to-market supply chain solution.

Recent strategic changes, efficiency enhancements and the anticipated assumption of support services to Siqalo Foods, demonstrate that a solid platform for growth has been built, RCL stated.

RCL has now been scaled to a size with a more diversified portfolio that ensures it can compete effectively in these challenging times, while still delivering products of quality and innovation to its vast consumer base.