Libstar Results for the Six Months to 30 June 2023

Comprehensive strategic review concluded to significantly simplify the group and improve execution to accelerate profitable growth and stakeholder returns 

In tough market conditions, the group has concluded a comprehensive strategic review, which include:

• The simplification of the Group’s portfolio composition and operating model
• The growth of Libstar’s categories and channels
• The sustainability of Libstar’s operations and cash flow

During the period, market conditions remained challenging as persistent high levels of inflation, interest rate increases and load-shedding increasingly constrained consumer demand.

• Loadshedding diesel costs of R45 million (2022: R8 million) and R7.1 million in additional generating capacity investment.

In these conditions:

• Revenue grew 4.0
• Positive sales growth in the two largest categories, Perishables and Groceries
  Pricing and mix changes (contributing 11.0% to Group revenue) could only partly mitigate the impact of significant raw material, packaging material and production cost inflation (These inflationary pressures were exacerbated by lower volume production, resulting in weaker gross profit and operating margins).
• Volume sales declined by 7.0% due to weaker consumer and customer demand in the Group’s retail, export and industrial channels and the discontinuation of unprofitable lines in the HPC portfolio
• Decisive action resulted in Group operating expenses being contained to only a 1.4% increase from the comparative period, well below inflation

Commenting on the results, Libstar CEO Charl de Villiers said: 

“In these unprecedented market conditions, as committed, we conducted a comprehensive strategic review and have identified strategic priorities to accelerate profitable growth and stakeholder returns. This resulted in an in-depth review of our portfolio composition and operating model, as well as our category and channel participation. These initiatives will simplify operating complexity and improve our execution capabilities. 

“During the period, we prioritised actions to sustain our operations and cash flows amidst weakening consumer demand. This included cost management, investment in increased power generation capacity to ensure ongoing delivery of quality products, and the protection and growth of our own-branded and private label market shares. Our cash conversion ratio pleasingly improved following a substantial reduction in net working capital investment. We also reduced our capital expenditure following a period of significant investment.” 

Looking forward, De Villiers added: 

“We generate most of our profits and cash flows in the second half of the year. As we head into this period, we will intensify the simplification initiatives started in the first half, such as the discontinuation of unprofitable product lines. We will also start the implementation of our value-unlocking initiatives, including the increased use of shared services within our categories and developing our non-retail channels, in particular export, food service and wholesale channels. As we have done during the first half of the year, we will maintain increases in controllable manufacturing costs at below inflationary levels and continue to roll out improvement initiatives and further reduce net working capital and capital investment.” 

Strategic priorities

Based on the strategic review undertaken, the Board has identified the following strategic priorities:

1. Simplify the Group’s portfolio composition
   • Reduce exposure to underperforming business units, either through the formalisation of divestment mandates or consideration of other strategic alternatives, including the exit or closure of non-profitable product lines and divisions
   • Actively pursue functional and/or operational consolidation of appropriate product lines and divisions.
2. Simplify the Group’s operating model
   • Align the organisational design, accountability structures and reporting to a simplified, category-led and brand-driven approach which encompasses the Group’s own-branded and private label capabilities
   • Leverage shared business services where appropriate, such as sales and marketing consolidation and back-office consolidation
3. Grow the Group’s categories and channels
   • Accelerate the growth of retail channel offerings
   • Implement dedicated structures to develop export, food service and wholesale channels
4. Sustainability
   • Scope and implement these strategic initiatives in a responsible manner, ensuring the maintenance of:
   • Sustainable operations
   • Sustainable cash flows
   • Sustainable business practice

Financial Summary

Group revenue grew by 4.0%

• Selling price inflation and mix changes contributed 11.0% to sales growth 
• Sales volumes declined by 7.0% due to a decline in retail, industrial and export channels

Gross profit margin declined from 22.1% to 20.0%, but slightly improved on the H2 2022 margin of 19.5%.

• The H1 2023 margin reduction was mainly due to the under-recovery of overhead costs resulting from lower volume sales relative to H1 2022. Input cost inflation remained elevated throughout H1 2023 across all categories 
• Higher levels of load-shedding continued to have a significant impact on operational costs and the Group’s gross profit margin. Diesel costs to operate generators were R45 million compared to R8 million in H1 2022, and R31 million in H2 2022

Realised foreign currency translation losses increased to R13.5 million (2022: R2.7 million). Unrealised foreign currency translation losses increased to R13.0 million (2022: R12.5 million) 

Group normalised operating profit decreased by 26.6% at a margin of 4.5% (H1 2022: 6.3%)

• Impacted by the gross margin decline 

Group Normalised EBITDA* decreased by 18.3% at a margin of 7.0% (H1 2022: 9.0%) 

Fully diluted EPS decreased by 56.5% and fully diluted HEPS decreased by 57.3%

• Impacted by lower operating margins and higher interest rates relative to the prior period 

Normalised EPS*, which excludes unrealised foreign currency movements and other non-recurring, non-trading and non-cash items, decreased by 44.4% from 35.6 cps to 19.8 cps 

Normalised HEPS*, which also excludes these items, decreased by 44.9% from 35.6 cps to 19.6 cps 

Cash generated from operating activities increased by R129.0 million from R139.9 million to R268.9 million Mainly due to a reduction in net working capital of R202.8 million, which was offset by lower operating margins and higher interest rates relative to the prior period

*The Group uses revenue, Normalised EBITDA, Normalised earnings per share (EPS) and Normalised headline earnings per share (HEPS) from continuing operations, which exclude non-recurring, non-trading and non-cash items, as the key measures to indicate its true operating performance. 

Operational Overview

Perishables (50.6% of Group revenue and 38.6% of Group Normalised EBITDA before corporate costs). 

Revenue increased by 4.5% 7.8% was due to positive price/mix changes. 

• Volumes declined by 3.3%
  • Lower production volumes of fresh mushrooms from the loss of production at the Shongweni facility in H2 2022 due to a fire and load-shedding disruptions at the Deodar and Phesantekraal facilities in H1 2023

Gross profit margin decreased to 17.5% (H1 2022: 20.0%)

• Dairy margins were lower due to increased raw material costs, and under recovery of overheads, while the significant diesel cost to operate during load-shedding at Denny Mushroom (at facilities other than Shongweni), Lancewood and Finlar impacted margins

Normalised EBITDA decreased by 31.1% at a margin of 6.0% (H1 2022 margin: 9.1%)

Groceries (30.4% of Group revenue and 37.9% of Group Normalised EBITDA before corporate costs) 

Revenue increased by 4.7%

• Volume sales decreased by 9.5% and price/mix increased by 14.2%
  • Driven by lower demand for wet condiments in the industrial channel, which declined by 23.4% 

Gross profit margin declined to 23.1% (H1 2022: 25.1%) 

Normalised EBITDA decreased by 12.6% at a margin of 9.8% (H1 2022: 11.7%) 

Snacks & Confectionery (4.2% of Group revenue and 9.8% of Group Normalised EBITDA before corporate costs) 

Revenue declined by 12.7%

• Mainly due to the termination of the Pringles contract manufacturing arrangement for Kellogg’s from September 2022 
• Revenue increased by 1.8% on a like-for-like basis 
• Excluding the impact of the Pringles contract manufacturing, sales volumes declined by 20.7%.
  • This was mitigated by a 21.9% increase in price/mix from Ambassador Foods 
    

Gross profit margin decreased to 22.0% from 23.7%, excluding the impact of the exit of Pringles manufacturing in the prior period 

Normalised EBITDA decreased by 14.3%, at a lower margin of 18.1% (H1 2022: 18.4%) 

Baking & Baking Aids (8.5% of Group revenue and 9.1% of Group Normalised EBITDA before corporate costs) 

Revenue increased by 10.5%

• 12.4% positive movement in price/mix. 
• Volumes decreased by 1.9%, impacted by lower productions volumes as a result of load-shedding disruptions and the Amaro Foods factory shutdown for the commissioning of a new wrap line 

The gross profit margin increased to 26.3% (H1 2022: 25.2%)

• Strong performance in the retail and wholesale channel which increased revenue by 9.4% and contributed 85.6% of category sales 

Normalised EBITDA decreased by 0.8% at an EBITDA margin of 8.4% (H1 2022: 9.4%) 

Household & Personal Care (6.3% of Group revenue and 4.6% of Group Normalised EBITDA before corporate costs) 

This category, previously accounted for as Held for Sale, has been taken back into continuing operations to improve earnings whilst a buyer is sought. Group financial statements for the prior comparative period (the first half of 2022) have been represented to reflect this. 

Revenue increased by 2.5%

• Volumes declined by 10.2%, mainly a result of the discontinuation of unprofitable lines 

Gross profit margins improved from 13.4% to 16.2%, due to the discontinuation and the improved price/mix contribution of 12.7% 

Normalised EBITDA increased by 412.6% to R20.8 million at a margin of 5.7% (H1 2022: 1.1%)