report from the chief executive officer

 
RCL FOODS’ PASSION IS TO PROVIDE MORE FOOD TO MORE PEOPLE, MORE OFTEN

The 2015 financial year has been a momentous one for RCL FOODS, with much energy, creativity and passion going into restructuring the business and the creation of a compelling model for future growth. In all of this, the underlying theme is “more”. We want to do more with what we have in order to achieve more as a Group in the dynamic social and business environment in which we operate. We have captured this impulse in a Passion statement which we believe describes our core purpose, namely “to provide more food to more people, more often”. We believe that by nourishing people while sustaining our resources, everyone wins. Communities will be enriched, employees inspired and our customers and shareholders will enjoy the benefits.

Understanding who we are and why we exist is key to identifying the “what” and the “how” of our business, and I am pleased to see how far we have come on all fronts in the past year. Driven by our ambition to build a profitable business of scale by creating food brands that matter, we have increased our scale through strategic acquisitions and restructured our business units into a single company supported by a portfolio of compelling brands.

Our “One Company” project began with the strategic realignment of our different subsidiaries into three divisions and is currently focused on building a business based on a “one company” philosophy. The fact that we’ve seen a significant improvement in our financial performance following the restructuring is an early indicator of the achievability of our bold but realistic objective of doubling our revenue in five years, while maintaining a steady improvement in operating margin. The cost efficiencies and operational benefits that are already materialising from the new structure are further signs that we are heading in the right direction.

For more details regarding our strategic progress for 2015 and our objectives for 2016, please refer to the strategic review on here.

From our current position we can now focus on leveraging our scale, strategic partnerships and strong brands to grow our business in line with our ambition. In doing so we will pursue a strategy of maximising our core categories and accelerating growth in addedvalue offerings in South Africa, while building our core categories in the rest of Africa in anticipation of a gradual movement to higher-margin added-value offerings. Major strategic thrusts in realising our ambition will be growing and investing behind strong brands, partnering with key strategic customers, extending our leading value chain, inspiring great people, expanding into African markets and driving sustainable business.

Our growth agenda can only be delivered by investing into our future. Capital projects that position us for future growth are equally important in the delivery of our ambition. Our capital expenditure requirements increased to R756,6 million in 2015 (2014: R654,0 million), with major capital expenditure items related to projects in the Consumer division’s Grocery and Speciality business units, as well as the Molatek expansion and other growth projects in the Sugar & Milling division. We are mindful of ensuring portfolio enhancement and growth through the cycle and we will therefore maintain a regular and active investment programme.

Although South Africa and other African markets face continued challenges, we believe that the economy will recuperate over time, creating bigger and better opportunities for RCL FOODS. As an innovative and growth-minded business with a solid operational structure, we are well positioned to extract maximum opportunity from future market dynamics.

GROUP RESULTS OVERVIEW

RCL FOODS reported headline earnings from continuing operations of R964,5 million (2014: loss of R332,6 million) for the financial year ended 30 June 2015, which translated into headline earnings per share of 112,2 cents (2014: loss of 47,7 cents). The comparative period results were materially compromised by exchange losses incurred on Foodcorp Proprietary Limited’s (“Foodcorp”) historic Euro denominated debt. The Board has declared a final dividend of 22,0 cents per share.

For more details regarding our financial performance, please refer to the CFO report here.

Foodcorp experienced difficult trading conditions across all of its divisions as well as an extended period of industrial action in its Speciality division, resulting in EBITDA for the period growing at a subdued 3,1% to R743,3 million (a margin of 9,9%).

Rainbow Property Limited’s (“Rainbow”) statutory EBITDA increased by 280,0% to R773,9 million (a margin of 8,5%). The pre-IAS 39 EBITDA increased by 120,7% to R667,6 million (a significantly improved margin of 7,4% from 3,4% in the prior year), largely attributable to the implementation of the new business model. This is premised on the creation of a “smaller, more profitable” entity, which has the flexibility to increase volumes at times of improved market demand, and which delivers a range of higher-margin speciality products to key customers in the Quick Service Restaurant (“QSR”) and retail sectors. This model is transforming Rainbow from a high-volume supplier of a product along commodity lines, into a provider of niche products based on consumer demands for carefully selected customers while working as a partner on the innovation and growth of these categories.

TSB Sugar RSA Proprietary Limited’s (“TSB”) EBITDA for the year increased by 44,6% to R505,1 million, from R349,3 million on a pro forma basis (an improved margin of 8,2%), which was largely as a result of lower imports into South Africa. Global sugar prices have remained depressed, but in South Africa TSB’s use of irrigation meant that its production was largely unaffected by the drought conditions. TSB’s operating profit was impacted by an impairment of R84,0 million relating to the greenfields Massingir project in Mozambique.

Vector Logistics Proprietary LImited’s (“Vector”) results for the period were negatively impacted by industrial action costs, resulting in EBITDA increasing by only 3,5% to R206,2 million (a margin of 10,9%).

SEGMENT REVIEWS

FOODCORP

Foodcorp’s EBITDA grew at a subdued 3,1% to R743,3 million from R721,0 million driven by weak demand, aggressive competitor activity and a seven-week strike at the Speciality division which alone had a negative profit impact of R23,0 million.

Despite a very competitive environment the Grocery division performed well, particularly in the fourth quarter, with Nola and Yum Yum achieving pleasing margins and strong market share growth to regain market share lost during the year. Efficiencies arising from the newlycommissioned Polyethylene Terephthalate (“PET”) plant which manufactures packaging in-house for both Nola and Yum Yum assisted with significant cost base reductions.

There is expected to be further growth from a range of innovative product and packaging changes that we are introducing, working closely with key partners such as Woolworths and others to ensure that we are meeting consumer demands. We have allocated additional resources to enhancing our existing product offerings, while we remain focused on various new propositions within existing brands that we are preparing to roll out to market over the coming months. These have been considered carefully following close consultation with our key strategic customers, and our marketing initiatives to bring these to market will be launched soon. The essence of this new approach has been to listen carefully to the consumers of our products, and to provide these in a better and more efficient manner. Much of this strategy is working synergistically with our chicken business where we are also focused on consumer demands and how and where these consumers want our products to be provided and distributed.

The Beverage division performed strongly with a pleasing mix enhancement from new innovation.

The Milling and Baking divisions were combined during the year in recognition of their highly integrated nature. In addition, the Pretoria and Benoni bakeries were consolidated onto the Benoni site, which translated into a decline in overall volumes but is expected to deliver operational efficiencies, lower cost and an improved product mix. Trading within these markets remains very competitive.

The Pie division experienced a difficult year having lost a key customer. A thorough review of this business has been completed by the new Consumer division management leading to a change in the leadership team. Key areas of product quality, customer intimacy and innovation are being substantially step-changed to set the Pieman’s brand on a new course for the 2016 financial year.

A fourth speciality plant was commissioned in Worcester in April 2015, which enables the supply of chilled products previously only available in other regions and will enable substantial growth in the Western Cape. This business unit relies on the growth of its key customer base, which has increased sales exponentially in recent years and is expected to continue this trend into the future.

Following lengthy deliberations at the Competition Commission and the Competition Appeal Court, the sale of the Fishing division was approved, subject to a condition that the Glenryck trademark be excluded from the transaction. The last conditions precedent were finalised on 2 February 2015. The revised purchase price for the Fishing division was R395,0 million (previously R445,0 million including the trademark). The Glenryck brand was sold to a third party post-year end.

RAINBOW

Rainbow delivered a much-improved performance for the year and posted a pre-IAS 39 EBITDA of R667,6 million (2014: R302,5 million) and a R773,9 million statutory EBITDA (2014: R203,7 million). Rainbow’s pre-IAS 39 EBITDA of 7,4%, however, remains below targeted levels.

Rainbow’s new business model of reduced exposure to commodity lines has provided the stability needed for operational efficiency and reduced cost. Despite the import tariff protection being increased, import volumes remain significant and were largely unchanged over the prior year. The combination of a better balanced market and the new business model has enabled the substantial improvement in profitability and stability.

QSR performance for the year improved, with good volume growth returning to this key area of the business. QSR is a relationship-driven business, and Rainbow was able to leverage off these strong relationships to increase its share of supply to the QSR industry.

Rainbow delivered improvements in its production mix and substantially reduced reliance on pure, high-volume low-cost “commodity” lines such as Individually Quick Frozen (“IQF”). Added-value Simply Chicken products contributed better margins due to cost efficiencies and better price management. Enhancing the retail addedvalue and QSR offering is an important focus for the business, and critical to delivering the ultimate success of the new business model. Further innovation, strategic partnering and an increased investment in marketing spend will provide the impetus for further improved margin and profitability.

Overall operating costs were well contained, with exceptional key performance indicator (KPI) results throughout the financial year. Feed prices remained volatile and fairly high relative to long-term historic levels. Total feed costs (R/ton) increased by 2,5% year-on-year, and were mostly impacted by the rand that weakened by 14,1% over the corresponding period as well as a decision to invest in the feed ration to drive performance.

The recent decision by government to allow the import of 65 000 tons of bone-in chicken portions from the United States, free of anti-dumping duty, is a serious threat to the stability of the poultry industry and the retention of jobs. Whilst the industry concedes that this decision was based on a broader imperative for the nation – and national interest is paramount – the industry threat is considerable and discussions are underway on how best to mitigate these risks.

Rainbow supports the concept of a brining injection cap as well as the introduction of new legislation to ensure a level playing field that will ultimately protect consumers. The Department of Agriculture, Forestry and Fisheries, continues to investigate the appropriate injection level of, and monitoring process for the cap. Rainbow looks forward to a speedy resolution, as both the industry and the consumer requires urgent clarification on this important issue.

Rainbow experienced intermittent work stoppages during the year as a result of labour disruptions, which impacted efficiencies, but successfully concluded a one-year wage settlement.

Power interruptions were problematic and added to the cost base, as additional shifts were required to meet production targets. There is, however, a close working relationship with Eskom to ensure plant reliability and acceptable operating schedules. Cost increases have also come about due to enlarged maintenance teams to address the serious need to maintain deteriorating infrastructure in the areas in which we operate.

Rainbow’s business model of reducing bird volumes to match profitable demand freed up feed milling capacity. A renewed focus on external feed sales by the Animal Feed team was able to take advantage of this opportunity, with external feed sales growing significantly over the prior year.

TSB

TSB’s results have been included for a full year for the first time following its acquisition on 1 January 2014. TSB delivered a pleasing performance following better local prices and increased volumes after the reversal of last year’s high level of sugar imports – the result of the sugar tariff introduced during the year under review. TSB’s EBITDA for the year was R505,1 million, with a margin of 8,2%.

Globally, sugar prices are severely depressed, which impacted the local industry’s exports to some degree. In South Africa, drought conditions have resulted in lower sugar production. TSB’s use of irrigation largely protects it from drought conditions during the first year of a drought.

Better milling conditions and improved cane supply led to an increase in TSB’s volumes to a record 702 000 tons of raw sugar produced compared to 598 382 tons i the comparative year. New areas were harvested, which contributed to the increased production volumes, albeit at slightly lower yields. Molatek sales (TSB’s animal feed operation) increased due to the commissioning of the expansion project during the 2014 financial year.

Synergies were realised in TSB from focused Group-led sourcing initiatives, as well as route-to-market benefits following the decision for Vector to start merchandising TSB products nationally. This is a management focus area for the year ahead, and additional synergies and benefits are expected. Product and packaging innovations are also a significant feature for the coming year with sweeteners, new confectionary and speciality sugar products (specifically icing and castor sugars) being brought to market.

An amount of R84,0 million (no taxation impact) relating to work-in-progress spend for Massingir, the proposed greenfields sugar project in Mozambique, has been impaired in the current year, as a suitable funding structure, that reduces the risk to the Group within the mandate set by the board of directors, had not been obtained.

In a unique transaction last year, TSB sold approximately 12 000 hectares of productive agricultural land to communities to settle the Tenbosch and Matsamo land claims, which were lodged by local communities through government’s land restitution programme. TSB also formed Akwandze Agricultural Finance, in partnership with its cane growers and the Land Bank, to finance emerging sugar cane farmers. The success of this financing model has led to it now being considered for the Rainbow business.

TSB is constantly investigating ways to improve the way energy is delivered. Over the last two years, through cogeneration at sugar mills, electricity has been successfully exported to the Eskom grid. Power disruptions had more of an adverse effect on the milling and baking divisions due to operational downtime. This is being mitigated to some degree by scheduling maintenance programmes during times of power disruptions.

VECTOR

Vector has faced a challenging year, with its customers operating in a constrained retail environment. Overall volumes were relatively flat, although there was some respite as a result of growth in the foodservice industry, which was aided by international QSR brands increasing their respective store footprints. Whilst this contributed to Vector’s revenue increase, it was tempered by a six-week period of industrial action at the beginning of the year, which cost R20,2 million and resulted in a muted 3,5% EBITDA growth to R206,2 million.

Regrettably, one of Vector’s larger customers exited in the second half of the year, which removed volume from the distribution network. Whilst new business will effectively replace much of the lost revenue on an annualised basis, there was a current year impact due to added complexity with more products being managed and worked through the system.

Electricity supply constraints are a cause for concern. Whilst Vector is generally able to operate using backup power, the costs of doing so are significant. Certain of Vector’s customers are not equipped with generators and consequently cannot trade during power outages, which impacts Vector’s volumes. Fuel pricing remains uncertain as a result of both the exchange rate levels and the underlying oil commodity pricing. Vector has some ability to pass on fuel pricing fluctuations although it is, in many instances, affected in arrears.

Three key capital expansion initiatives are currently underway and are expected to be completed during the 2016 financial year. These include the new leased facility in Port Elizabeth (Coega) and the expansion of the Thekwini and Peninsula depots.

JOINT VENTURES

ZAM CHICK (“ZAM CHICK”)

RCL FOODS holds a 49,0% shareholding in Zam Chick in Zambia under joint management control with Zambeef Products PLC. Zam Chick exceeded expectations, with strong volume growth driven by consumer demand. We are striving to make chicken more affordable to people in Zambia, and to this end we were able to keep price increases below inflation. Equity accounted earnings increased a pleasing 41,1% versus the prior year despite the rand strengthening against the Zambian Kwacha by 6,0% during the year. Volume growth is expected to remain strong in 2016.

SENN FOODS LOGISTICS (“SENN FOODS”)

Senn Foods, a joint venture in Botswana which was entered into during the 2014 financial year, has delivered solid results with an after tax profit contribution of R7,6 million and is a good example of RCL FOODS’ approach to sound strategic partnerships in Africa. Senn Foods has a capable management team and has recently invested in a world-class infrastructure expansion to prepare for the planned growth over the coming years.

RCL FOODS also continues to forge strong portfolio relationships with its current customers to provide supply and logistics solutions in Africa. One of these is the strategic advantage that Vector brings in terms of the considerable synergies and benefits derived from an effective route-to-market.

ROYAL SWAZILAND SUGAR CORPORATION (“RSSC”)

TSB holds a 27,4% shareholding in RSSC which achieved an after tax profit of R84,2 million for the year, a decrease of 11,9% against the 2014 pro forma R95,6 million. Their results were negatively affected by the downward pressure on sugar prices in the EU.

HUDANI MANJI HOLDINGS LIMITED (“HMH”)

RCL FOODS signed an agreement to acquire 33,5% of HMH post the financial year-end. HMH is a poultry producer operating a feed mill, broiler farms and processing plant in Uganda. This is an exciting opportunity to enter the East African region with an established reputable partner, and the new venture will create one of the largest processors and marketers of chicken in both Uganda and East Africa.

TRANSFORMATION

RCL FOODS continues to make strides with the transformation process. Corporate social investment spend across the Group amounted to R18,0 million, up from R11,0 million last year. Our broad-based empowerment status remains a key strategic objective across all of our businesses. The Group attained Level 4 B-BBEE status, laying the foundation for further transformation gains.

INFORMATION TECHNOLOGY (IT)

During this reporting period, RCL FOODS has continued to optimise the Enterprise Resource Planning (“ERP”) systems within the Foodcorp, Rainbow, TSB and Vector businesses. Significant focus has been placed on leveraging the SAP system to successfully drive sourcing benefits. This initiative has now been extended to include Foodcorp and TSB information. Data analytics is a key enabler to unlock business value and insights which can differentiate the Group from its competitors. Added focus has also been placed on the optimisation of the outbound supply chain through the Vector SAP system solutions. A key project was the successful implementation of an integrated customer contact centre which has stepchanged the customer and sales teams’ service delivery.

An analysis of both the Foodcorp and TSB system landscapes has been conducted to leverage opportunities and synergies across the Group. We are confident that the IT strategy will unlock significant business benefits through a fully integrated ERP landscape built on the existing solid IT and business process foundations. The implementation of global best practice processes and shared services remains an important pillar of the strategy.

SUSTAINABILITY

The Group’s sustainable development framework is inextricably linked to the overall strategy of pursuing operational excellence and ensuring that our growth is undertaken with due regard to the sound principles of sustainable development. Whilst we are keenly focused on achieving our objective of securing the future, we simultaneously embrace the holistic concept of sustainable development within all activities.

In terms of embedding the culture of sustainable development throughout the Group, we are integrating our entire sustainable development framework into scenario planning, which will highlight any changes that may be needed to position the company appropriately. The merging of various businesses over recent years has triggered a requirement to refine the culture within the organisation, and provide us with the opportunity to embed sustainable development as a critical part of this culture shaping process, which is in an evolutionary phase within the Group.

The Risk Committee’s oversight of our sustainability initiatives provides the business with the ideal platform to identify both risks and opportunities on a continual basis. A copy of the sustainability report is available on the Group’s website www.rclfoods.com.

CONCLUSION

BUILDING FOR THE FUTURE

We are putting building blocks in place to support our ambition of doubling our business by 2020 whilst driving steady and sustainable improvement in operating margin. The primary drivers of this growth will be our energised leadership team, our clear strategy and a business culture that sees and does things differently. The fact that we are at a difficult stage of the economic cycle makes these aspects all the more essential to achieving our future aspirations.

In this context, it is pleasing to see that operational improvements and exciting growth possibilities have already become a norm within our business. For this I am grateful, and I express my appreciation to each and every person within the Group for their respective contributions.

M Dally
Chief Executive Officer