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RCL Foods leverages diverse portfolio for resilience amid ‘unprecedented hardship’ in South Africa

RCL CEO Miles Dally

RCL CEO Miles Dally

31st August 2020

By: Simone Liedtke

Creamer Media Social Media Editor & Senior Writer

     

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JSE-listed consumer goods company RCL Foods leveraged the resilience of its diverse portfolio to finish the 12 months to June 30 in a strong cash position, delivering revenue growth of 7.4% in a period of “unprecedented hardship for South African consumers and the local economy”.

Underlying headline earnings increased by 47.1% to R450.4-million, mainly driven by an improved result in the sugar earnings and a robust performance in groceries.

However, the reported headline earnings decreased by 65.4% year-on-year to R114.2-million, largely owing to the material impact of the national Covid-19 lockdown in the last quarter of the financial year.

Reported earnings a share were further distorted by a noncash impairment of more than R1.5-billion amid a deteriorating macroeconomic outlook.

With the publication of its interim results on August 31, RCL said that, with the advent of Covid-19 in South Africa, an immediate prioritisation of liquidity and a strong focus on cash preservation enabled the group to operate with sufficient cash reserves to meet all obligations during the lockdown, without the added risk or need for cash injections.

Notwithstanding its mitigation efforts, the company’s performance was materially impacted by direct Covid-19-related costs of R266.8-million. The lingering impact of the pandemic throughout the business, coupled with the deteriorating economy, resulted in a significant impairment being declared.

In a statement, RCL said its chicken and vector logistics businesses were particularly hard hit by the lockdown owing to the closure of quick service restaurants (QSRs) for almost two months, while beverages and pies were affected to a lesser extent, with volume decreases somewhat countered by increased volumes across the rest of the portfolio.

Notwithstanding the material impacts of the Covid-19 pandemic, the resilience of RCL's diverse portfolio resulted in cash generation by operations increasing by 222.7% year-on-year.

A key factor in the group’s continued growth amid the pandemic is the recent restructure of its consumer and sugar and milling divisions into a single food division with four closely aligned business units (groceries, baking, chicken and sugar) to create a platform for further synergies, optimal resource allocation and a sharper focus. 

RCL CEO Miles Dally said the new structure was “successfully embedded during the latter half of the financial year and quickly proved its worth in the focused and cohesive way in which [the company] was able to manage the Covid-19 onslaught”.

Aided by its synergised structure, the food division achieved a 6.1% increase in revenue for the period, with underlying earnings before interest, taxes, depreciation and amortisation (Ebitda) increasing 19.9%.

The reinvestment of senior talent behind key priorities is also delivering improved insight and accelerating turnaround initiatives in chicken and sugar. 

Notwithstanding the impact of the pandemic, the groceries business unit performed well and made pleasing market share gains, with pet food being the star performer. In a constrained economy, RCL’s total food staple basket grew 8.5% ahead of the industry over the 12-month period, while pet food, peanut butter and rusks all achieved volume growth.

Pies and beverages were negatively affected during the lockdown owing to restrictions on the sale of hot food under Alert Level 5, coupled with reduced ‘on-the-go’ consumption. 

In a context of fierce competitor activity, ongoing margin pressure and an oversupplied flour market, the baking business unit achieved marginally higher revenue driven by increased volumes in bread, buns and rolls, which reached record weekly bread sales of 4.9-million loaves during the lockdown.

While margin challenges in bread and milling affected baking profitability, these were offset by double-digit growth in speciality, where a more profitable sales mix, improved efficiencies and volume growth in the ambient cake and bakery lines have contributed to a promising turnaround. 

With the successful embedding of a new executive team and focused implementation of a revised strategic plan, the chicken business unit laid the foundation for a turnaround, said Dally, with agricultural efficiency being a key area of focus.

Chicken operations were severely impacted on by the closure of restaurants and fast food outlets under the lockdown, resulting in considerable revenue loss, significantly higher stock holding and an increase in associated costs.

Despite measures to reduce production volumes, a significant oversupply arose which has begun to lessen with the reopening of QSRs.

Meanwhile, the external grain-based feed business improved its performance on the prior year, with good margin improvement.

“We remain confident in our plans to restore margins to acceptable levels once the demand curve normalises, and we are hopeful that this will be supported through effective implementation of the Poultry Sector Master Plan which aims to stimulate local demand, boost exports and protect the local industry against dumping through trade measures,” the company said.

The sugar business unit, which includes the molasses-based Molatek Animal Feed business, delivered a significant improvement in profitability, albeit off a low base, with lower import volumes and increased local retail demand enabling a shift towards higher-priced local sales.

The weaker exchange rate shielded the business against some of the decline in the international sugar price. Molatek's results were impacted on by the substitution of molasses for cheaper energy product, coupled with a reduction in demand post the lockdown.

“We have continued to focus on improving the competitiveness of our sugar business, with the ambition of being the lowest cost producer in South Africa. We have progressed well against our strategy of becoming more operationally efficient and reducing our cost base in sugar agriculture, while optimising and improving our mix,” noted Dally.  

Against this backdrop, RCL has commissioned a commercial study into potential diversification opportunities. This aligns with the intent of the new Sugar Industry Master Plan to ensure sustainability by diversifying the value chain into ethanol fuel and other cane-derived products, as well as suitable alternative crops. 

For the group’s Vector Logistics division, the current financial period has been a watershed year. Siqalo Foods was successfully taken on in the first half of the year and the cold chain business of Imperial Logistics South Africa (ICL) was acquired in the second half, driving revenue and earnings growth.

The ICL transaction aligns with Vector Logistics’ long-term customer-centric strategy and positions it to become the largest frozen logistics player in South Africa, and the ICL assets and employees were successfully onboarded and new agreements with several previous ICL customers were entered into during the period; however, consolidation of duplicated networks was delayed owing to Covid-19.

This delay and the increase in costs associated with the ICL take-on contributed to a decline in Vector Logistics’ underlying performance; however, RCL said the greatest impact was the two-month shutdown of its Customer Secondary Distribution (CSD) business owing to the closure of most of the food service industry during the  lockdown. 

Further, the company has positioned itself to support global growth in plant-based foods through its acquisition of a minority shareholding in the LIVEKINDLY co in January.

The new Swiss-based company, whose portfolio includes the well-known Fry Family Food, will partner with RCL to sell plant-based meat alternatives through its well-established platform. The partnership is also considering ways to extend the opportunity into the rest of Africa.

“The investment represents a dollar-based, global opportunity for RCL to grow its operations by including the targeted category of plant-based alternatives. This will allow us to augment our core chicken protein offering, providing consumers with more choice and ultimately providing a widely affordable and sustainable protein alternative for a diverse and growing population,” said Dally. 

Also contributing to RCL’s resilience is its commitment to becoming an energy self-sufficient, waste-wise and waste-free business.

Its newly-completed R330-million waste-to-value plant in Rustenburg produced its first power in June, and will increase the group’s energy self-sufficiency by about 22% once fully commissioned.

Water-saving initiatives continue to be implemented in the business, and the company has joined the South Africa Plastics Pact as part of its commitment to becoming waste-free.  

Looking ahead, RCL says it expects tough economic conditions to continue, and that it will continue placing considerable pressure on consumers.

“Our primary focus for 2021 will be to reset our operations for growth and complete our portfolio review to lay the foundation for a future-ready portfolio shape that accommodates the post-Covid-19 environment,” Dally noted.

He added that the impact of Covid-19 would continue to be felt in the chicken business unit for the first half of the 2021 financial year, owing to its significant stock holding levels and the knock-on revenue impacts of its supply chain relief measures.

However, the company’s progress with internal strategic initiatives, the confirmation of a higher import tariff and projected lower maize pricing all point to improving resilience in this part of the business.

While it remains to be seen whether the revised import tariffs will be effective in stemming the flood of dumped chicken imports, import volumes have already reduced, supported by the devaluation of the rand, RCL added.

Additionally, another price increase in South African sugar is imminent, which the company said should have a further positive impact on its sugar operations.

The group intends to continue with its sugar diversification plans and pursue resolution of funding challenges in its community-based joint ventures. 

Groceries will shift its short-term focus towards a value proposition for consumers and will continue to drive investment in its brands and efficiencies to drive volume and profit growth. Meanwhile, Vector Logistics should benefit from increased volumes from Siqalo Foods and ICL customers, as well as significant cost reductions post its network synergisation. 

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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