RCL FOODS has reported that headline earnings for the six months ended December 2018 decreased by 26.3% to R475,1 million (December 2017: R644,7 million). The decline was largely a result of significant challenges within the Sugar and Chicken categories due to dumped imports which resulted in oversupply and lower realised prices. 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 2018, which provides partial relief going forward. Revenue for the first half of the financial year was up 3.5% to R13,3 billion (December 2017: R12,8 billion). EBITDA was down 9.9% to R1 082,2 million (December 2017: R1 201,0 million), and headline earnings per share were down 26.4% to 54,8 cents (December 2017: 74,5 cents). EBITDA excluding Sugar however was up 2.9%, driven by pleasing growth in Groceries and good progress in Millbake. Cash generated by operations moved up to R697,5 million (December 2017: R99,7 million), driven by lower working capital requirements.
“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 by dumping” said RCL FOODS CEO Miles Dally.
The company said that, despite the difficult trading environment, pleasing gains were made in certain categories, particularly Groceries which is performing exceptionally well, and Millbake which is showing a steady improvement.
Groceries, comprising Grocery, Beverages, Pies and Speciality, delivered a double-digit growth in EBITDA, benefiting from volume and margin increases, and market share gains in several categories. “We have entrenched a strong grocery portfolio with leading brands, which is generating solid results. We continue to grow our brands through consistent investment and innovation, which has sustained and grown market share positions. The performance of Groceries is testament to the success of this focus.” said Miles Dally.
Millbake turn-around progressed well with good growth in baking volumes and improved operational efficiency translating to EBITDA growth of 14.1%. The continued impact of dumped sugar and chicken dragged down the performance of the agricultural categories. “Economic conditions in the specific markets we operate within, were further impacted by dumped sugar and chicken imports and the lingering after-effects of the listeriosis crisis”. The company said it is engaging with government to seek industry protection against dumped sugar and chicken imports to ensure a level playing field for local producers.
Chicken’s EBITDA for the six months to December 2018 disappointingly declined 13.7% to R250,3 million at a margin of 7.3% (December 2017: R290,1 million at a margin of 8.0%). This includes profits on dormant farm sales of R105,0 million, excluding which Chicken’s EBITDA declined 49.9% to R145,3 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 FOODS’ changed business model. Dumped imports remain a significant issue for, and component of, the local poultry market, representing over 25% of the market” the company said.
“We remain comfortable that the revised Chicken business model has positioned RCL FOODS 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 tons for the six months to December 2018, 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 tons per annum. Animal Feed was adversely impacted by higher commodity input costs (especially molasses) not recovered from the market which resulted in an EBITDA decline of 9.8%.
Logistics’ EBITDA declined 16.3% to R88,5 million due mainly to higher costs as a result of once offstartup 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, 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 H2 we anticipate assuming responsibility for the support and outbound supply chain functions for Siqalo Foods, (100% subsidiary of Remgro Limited), being the Spreads business Remgro acquired from Unilever South Africa.
Sustainability initiatives, a key business and social imperative for years, progressed well and has gained further prominence due to the country’s current energy and water challenges. Co-generation at sugar plants, waste-to-value energy production and solar power already provide 25% selfsufficiency 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-tovalue plant in Rustenburg in 2019, where we expect to provide 65% and 50% of the energy and water requirements respectively of the total site.
RCL FOODS said it is pleased to be considered leaders in climate change mitigation. As one of the top 100 companies on the JSE, we have taken part in the Carbon Disclosure Project for a number of years, achieving an A- score for the second year running despite a stricter scoring system being implemented– ahead of both our sector and the Africa region (B- average).
We expect trading conditions to remain challenging due to South Africa’s poor economic outlook. The upcoming elections are likely to result in an extended period of uncertainty.
Groceries will continue to focus on strong innovation, brand investment and efficiencies to grow profitability. We expect the good progress made at Millbake to continue.
The poultry market will remain depressed whilst 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 short-term outlook for Sugar remains challenged with the overhang of high levels of imported sugar still impacting the local market, despite the implementation of tariffs that are offering some level of protection for the industry. The sugar industry has significant structural issues which require resolution to ensure long-term sustainability.
The Logistics division is well positioned to offer customers a multi-temperature (including chilled, frozen and super-frozen) route-to-market supply chain solution. The new business won during the period under review will assist in the mitigation plan post the Chicken restructure.
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. The Group 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. Additionally, it has paved the way for RCL FOODS to capture lucrative product, services and growth opportunities that are continually presented to the business.