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Tech investments help lift Libstar’s profit

‘In tough times one needs to do things differently … and maintain moderate top-line growth,’ is the philosophy of CEO Robin Smith.

NOMPU SIZIBA: JSE-listed Libstar, which is behind the production of food brands like Lancewood and Goldcrest released their annual results today [March 18, 2020]. For the 12 months ended December 2019, the company reported group revenue up 2.4% at R9.9 billion. Their gross profit margins came in at 24% – that’s up 1.6 percentage points on the year prior. Normalised headline earnings per share from continuing operations came in at 84.7 cents, up 20.3% on the year before. Shareholders are set to get a final dividend of 25 cents/share.

To give us his insights into what’s been happening behind the numbers, I’m joined on the line by Robin Smith, the financial and commercial director at Libstar. Thanks very much, Robin, for joining us. Despite most CEOs describing this period as a tough one, your numbers show that at least you were able to keep your head above water. Your revenues were up, your profit was up. Just tell us the strategy that you employed to achieve this.

ROBIN SMITH: Thank you, Nompu. The strategy was really sticking to the three strategic thrusts that we’ve made very clear in previous reports.

The first one is to grow our own businesses through innovation and operational efficiency primarily, by understanding market insights and understanding category management, investing in technology, and so forth.

The second pillar is really to invest in our own capabilities and capacities; in other words, invest in our businesses. Examples of that were our par-bake frozen plant in our baking business, and expansion of our ready-meals production capacity, the automation of packaging of hard cheese, and such like. Those are all earnings-enhancing internal investment projects.

And then of course the third pillar, which hasn’t been as active in the last few years, has been the strategic bolt-on acquisitions for our existing businesses.

I think the growth in margins was very modest top-line growth. The growth in margins really came about primarily as a consequence of a better sales mix in our perishables category, and that is quite simply the sale of less bulk products, which comes at a lower margin, and more high-value products which come with a better margin.

So it’s an improvement in mix, as well as some price, but mainly improvement in mix.

NOMPU SIZIBA: In terms of the various brands that you produce, which ones proved more resilient, and what areas looked a little bit shaky – as you do say in your report that you had to reduce volumes on some of your brands?

ROBIN SMITH: Yes. Our Lancewood brand of dairy products continues to do well in the marketplace, and we do have some highly innovative products there that gained traction in the marketplace during the previous financial year. So the whole dairy category seems to be picking up quite nicely from a branded and private label and dealer-own brand perspective.

We saw some softening of demand for our outsourced manufacturing wet condiments for certain customers, but then again we saw an increase in private-label and dealer-owned brand wet condiments, which was kind of compensated largely for that. It’s not one size fits all.

And I think another reason for our resilience has been the fact that we do operate across a number of categories, across a number of channels. We’re not only in retail, we’re also in food service and the industrial markets, the markets with exports.

Then we mainly play in the upper end of the market, with dealer-own brand and private-label products. So it’s that mix and our ability to innovate within that mix that helps with resilience.

NOMPU SIZIBA: Yes. You manufacture many of the products locally, and you also import goods for labels that you represent here in South Africa. What did your cost picture look like in the year under review?

NOMPU SIZIBA: Well, the operating costs went up quite substantially – by over 12%, as you would have seen in the results. But if one starts unpacking that, our cost line increased by just a little over inflation, if you strip out the kind of comparative once-offs from comparing 2018 to 2019. So cost-containment remains a key focus area for us, and one obviously wants to drive top-line growth and maintain margins without your cost base running away.

But some of the cost base, like electricity costs and other utility costs, are pretty much beyond our control, but we do our best to mitigate those by becoming less dependent on, for example, the council water and investment in the electricity grid, and so forth. So those are all are ongoing initiatives.

NOMPU SIZIBA: Have you been making significant investments in perhaps producing alternative energy?

ROBIN SMITH: Indeed. I think just about all of our manufacturing facilities now have generating capacity, and that has come at some cost. We are also involved on a programme of installing solar panelling in in the factories – not to take over from the grid, but to lessen the degree to which we are reliant on the grid. And the same thing for water. Certainly in the Western Cape we’ve become far less dependent on municipal sources with several boreholes. And things like power-correction factors are in place to try and optimise our [resources].

NOMPU SIZIBA: You don’t deal face-to-face with the consumer, but more with the retailers. But, from the trends that you’ve observed around the offtake of your supplies to various retailers, what’s your reading of how the consumer is doing?

ROBIN SMITH: We must understand that the consumer remains under spending pressure, and I think will be that way for some time. So, I think the key is to offer the consumer alternatives, value for money alternatives, quality products and excitement, to continue exciting the shopper as opposed to just relying on your existing products and offerings to carry you through. In tough times one needs to do things differently, and I think if we can continue doing that we stand a chance of maintaining moderate top line growth, but at the same time trying to maintain margins and keep your cost base and under control.

NOMPU SIZIBA: Like you say, it’s a tough environment right now. So, are you eyeing any investments in the near future, or it’s just about maximising on the assets that you have already?

ROBIN SMITH: Well, I think the key to us is to maximise on the assets that we have, and invest in our businesses and continue doing what we do. However, in times like this, acquisition opportunities are often flushed out, and we’ll be alive to those; should they make sense from a base-line perspective, and should they enhance our capabilities and competencies, we will certainly taste those.

NOMPU SIZIBA: So with the Covid-19 situation causing total havoc in the short term now, it’s been great for the retail sector with panic buying. But in the medium term there are concerns of a further slowdown in economic growth. What’s your expectation around that, and how it will impact your business? And, of course, the one thing in your favour is that people will always need to eat. But these factors are real.

ROBIN SMITH: Correct. To prepare, it’s still too early for anybody to really fully understand the potential consequences on any business, and not only ours. And undoubtedly there’ll be risks. There will also be opportunities, especially in the short term. And all of our business units are closely monitoring the situation, and we’ll certainly take the appropriate actions to minimise things like stock-outs, and to uphold and optimise service levels to our customers.

We have long-established relationships with both our suppliers on the supply side, and the groups that we supply on the sell side, and looking closely with them to ensure proper planning at this time. But it’s very difficult to gauge the actual economic input of both risks and opportunities.

NOMPU SIZIBA: Understood. And lastly, the outlook for this year, 2020?

ROBIN SMITH: As I said before, moderate top-line growth. I don’t think we can expect massive growth in volumes, but the opportunity is for at least maintaining margins, as opposed to necessarily enhancing them, and cost containment, and just doing these more efficiently I think is the way South African businesses are going to have to go forward for some time to come.

NOMPU SIZIBA: Many thanks to Robin Smith.

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