JSE-listed consumer goods company RCL Foods continued to leverage its diverse portfolio to remain resilient during the six months ended December 31, 2020, especially as the Covid-19 pandemic continued to present hardships and challenges globally.
The company recorded a 10.5% year-on-year increase in revenue to R15.7-billion, driven mainly by higher volumes and improved prices in sugar and baking, improved milling volumes and the take-on of new principals in Vector Logistics following its acquisition of Imperial Logistics’ cold-chain logistics (ICL).
Underlying results were positive, with underlying earnings before interest, taxes, depreciation and amortisation (Ebitda) 18% higher year-on-year at more than R1.3-billion on the back of gains in sugar, baking and Vector Logistics.
While chicken was impacted on by agricultural challenges, a foundation for recovery is gaining traction and the turnaround will be accelerated under the new dedicated structure and leadership team, CEO Miles Dally said during a conference call on March 1.
Key to the pleasing overall result was strong volume performance across most segments of RCL’s diversified portfolio. Volumes and portfolio diversity have also partially countered pricing pressure driven by a significant increase in agricultural input costs during the period, stemming from global crop failures and increased demand from China.
In the context of significant pricing pressure and direct Covid-19 costs of R119.6-million, statutory Ebitda held steady, declining by 3.1% against the prior, pre-Covid-19 period which also included a R110-million gain on bargain purchase arising from the ICL acquisition.
The company has declared an interim gross cash dividend of 15c a share.
RCL has made progress against several key strategic initiatives as part of its next chapter aimed at creating a more resilient business with more sustainable quality earnings.
The consolidation of the former consumer, as well as sugar and milling divisions into a single Food division in late 2019 has yielded numerous benefits including an integrated and synergised structure, enhanced focus, improved operational efficiencies and cost savings, all of which are evident in the food division’s results, Dally noted.
To ensure a more competitive, profitable and sustainable performance within chicken, a decision was subsequently taken to establish the chicken business unit as a separate, focused division within RCL.
In parallel to this, a strategic review of the entire RCL portfolio is currently being carried out. The review, which the board announced in November 2020, is still in its early stages and will evaluate whether the collective portfolio is optimally configured to provide sustainable growth and continuous appeal to shareholders.
Rand Merchant Bank has been appointed to assist with an evaluation and review of strategic options as they relate to the composition of the underlying RCL basket.
The company said it was well positioned, with a healthy balance sheet, debt capacity and strong cash generation. It added that it remains of an acquisitive mindset and, once the desired structure has been agreed, migration and capital allocation towards that basket may potentially include acquisitions, disposals or both.
Having strategically entered the plant-based foods category through a minority shareholding in the Live Kindly collective in January 2020, RCL and the collective have agreed to establish a local joint venture – Live Kindly collective Africa – which will market, sell and distribute all the collective’s brands in South and sub-Saharan Africa.
These include the South African Fry’s Family Foods brand and the international Like Meat and Oumph! brands.
The joint venture will be finalised subject to approval by the competition authorities.
In support of its ambition, RCL continues to support and grow its diversified portfolio of branded products through clear strategies, continuous innovation and appropriate investment.
The company said the strength and recent rapid growth in its pet food category are “testament to its ability to establish profitable and well-loved brands relatively quickly”, adding that successful product extensions and innovations meanwhile “demonstrate experience in maintaining market leadership and growing market shares”.
With the pandemic leading to further reductions in discretionary spending and accelerating a shift towards more in-home consumption and greater focus on value for money, the RCL group has been positioning its brands to capitalise on related opportunities through innovation and proactive promotional strategies.
It is also leveraging its farm-to-fork capabilities and established market presence to create a platform to partner with others to broaden the range of products available to consumers, including plant-based foods.
To achieve a sustainable sugar business, RCL Foods also welcomed the signing of the Sugar Industry Master Plan by government and industry stakeholders.
The master plan seeks to increase consumption of locally produced sugar, provide adequate protection against dumping and significantly diversify the sugarcane value chain.
Vector Logistics, meanwhile, having successfully integrated the ICL assets and related employees and entered into new agreements with several previous ICL customers, is currently working to consolidate the two separate distribution networks into a single, optimised, efficient network.
Good progress has been made in the past six months despite Covid-related challenges, Dally commented.
Further, sustainability initiatives continue to play a key strategic role in securing RCL’s future and navigating the present.
The newly built Rustenburg waste-to-value plant exported its first power to the chicken plant during the period under review and is currently ramping up its energy production, reducing both energy and water demand.
The Do More Foundation has meanwhile played a critical role in supporting vulnerable communities during the pandemic, leveraging support from 147 partners across the private, public and nongovernmental sector.
One of these is the Kingsley Holgate Foundation which delivered packs of Do More porridge and early learning resources to thousands of vulnerable young children in 2020.
RCL has joined the international initiative to halve food loss and waste in the supply chain by 2030 and has also partnered with South African suppliers to support the post-lockdown restoration of the food service industry through the #OneMealManyThanks campaign.
The newly created food division delivered a robust set of results, driven by strong performances from sugar and baking, as well as benefits related to the new synergised structure, including overhead cost savings. Underlying Ebitda increased by 26.3% to just over R1-billion, versus the comparative period, with the underlying Ebitda margin having increased by 1.2 percentage points to 10.3%.
The groceries business unit’s underlying Ebitda declined 6.5% to R301.6-million at a margin of 10.9% owing to softening second-quarter demand and the negative impact of lockdown restrictions on the pies operating unit.
Staples volumes were more resilient, and the grocery operating unit achieved pleasing profit growth through focused pricing strategies and operating efficiencies. The beverages operating unit has slowly begun to recover from lockdown-induced reductions in on-the-go-consumption and is benefiting from improved plant efficiencies and cost savings.
The baking business unit improved substantially, underpinned by strong demand and a turnaround at the Gauteng bakeries. Underlying Ebitda increased by 42.7% to R269.1-million at a margin of 9.2%.
The bread, buns and rolls category performed well, aided by a price increase to counter commodity price pressure, and the Sunbake brand has continued to steadily gain market share despite recent volume pressure.
Independent market research company Ask’d market benchmarking indicates that RCL baking sales “outperformed the industry staples basket in the six months to December 2020”, growing 5% versus the industry basket’s 3.8%.
The specialty operating unit was a key contributor, with specialty breads, increased in-home consumption and excellent innovation driving higher volumes and improved margins.
Milling performance also rallied considerably through increased efficiencies, higher pricing and better mill performance.
The sugar business unit continued to deliver improved results, with reduced sugar imports helping create a healthier supply-demand balance and an improved sales mix in favour of local sales.
Underlying Ebitda increased by 50.8% to R462.3-million, supported by higher volumes and an improved mix, while underlying margin improved 2.5 percentage points to 10.6%, aided by cost savings in agriculture and the supply chain.
Domestic demand was fueled by the large-scale distribution of Covid hampers, as well as increased home-based cooking and baking. The Molatek animal feed business managed to maintain a relatively stable performance in an extremely competitive environment.
The sugar division’s community-based joint ventures, which supply 33% of the group’s sugarcane, continued to pose funding challenges and various measures are being implemented to improve their sustainability, RCL confirmed.
Notwithstanding its delivery of many turnaround benefits in recent months, the chicken division experienced a 61.1% decline in underlying Ebitda to R85-million, at a margin of 1.7%. The division was impacted by breed-related agriculture challenges, substantial commodity price hikes and lingering impacts of the initial Covid-19 lockdown on the food service industry.
The final impact of supply chain relief measures and additional storage costs materially impacted on the division’s results by R100.7-million, the largest portion of RCL’s direct Covid-19 costs during the period.
From an industry perspective, Dally said good progress is being achieved across most pillars of the Poultry Sector Master Plan, despite the focus also required for government and producers to manage the pandemic.
Vector Logistics, meanwhile, showed pleasing growth, with underlying Ebitda having increased by 175.6% to R168-million at a margin of 11.1%. Food service volumes recovered beyond expectations with the easing of Covid-19 restrictions, and higher volumes were achieved in its retail secondary business, boosting revenue.
Results were bolstered by the take-on of several new principals post the ICL acquisition, who were included for only one month in the prior period. Progress is being made in consolidating duplicate networks post the ICL acquisition, further aiding the group’s results.
Vector’s acquisition of the digital freight matching platform, called Empty Trips, is also yielding positive early results, with a portion of internal transport business having moved onto the platform in the first phase of its rollout.
Exceptionally tough macroeconomic conditions are expected to continue amidst the economic and social fallout of the Covid-19 pandemic.
The significant commodity price surge will, moreover, require a strong emphasis on cost recoveries, which may constrain volumes, and it is against this backdrop, that Dally and the RCL group believes its food division is “well positioned with a clear strategic focus and growth aspiration”.
The sugar division is expected to continue on its more positive trajectory.
With the foundation laid for recovery in chicken, the new management team will accelerate turnaround initiatives to restore profitability.
Vector Logistics remains on track to deliver on its network integration and optimisation project, despite industry-wide margin pressure and the ongoing impact of the pandemic.