Unrestricted dumping of sugar and chicken into the South African market has led to a slump in RCL Foods’ headline earnings for the six months to December. Headline earnings decreased by 26.3% to R475.1 million as a result of an oversupply of these commodities in the local market.
The challenges are not new. Two years ago RCL rightsized its chicken business, which saw it focusing on high value, high margin chicken products for the hotel and fast food industries, while its low margin, high volume individually quick frozen (IQF) business was scaled down from the production of 700 tons a day to between 80 and 100 tons a day.
“Foreign producers continue to sell cuts of brown meat that are unpopular in North America and Europe below cost in South Africa,” says Rob Field, chief financial officer of RCL Foods. The preference in North America and Europe is for chicken breasts and wings, and these can be sold there at a price high enough to cover the production cost of the entire chicken. Thus the brown meat – leg quarters of drumsticks and thighs – becomes offcuts which are classified as waste and then sold in any market that will take them for any price the exporters can get.
Pricing down, costs up
“While pricing is going backwards, our costs – feed, electricity and transport – continue to rise,” says Field.
In SA chicken imports are subject to a 37% duty and there is an application with the department of trade and industry to take this to 82%. “Even then I’m not certain it will be enough,” he says. “There is evidence to show that these exporters simply lower their prices until they achieve a sale. All we want is a level playing field. The lack of protection is forcing us to reconsider our investment in this industry.”
The sector is between a rock and a hard place says small caps analyst Anthony Clark. “On the one hand, it is being hit by rising input costs of feed that are forcing producers to raise prices. On the other, the avalanche of cheap imports is making it attractive for companies like Spur to look towards imports as a cost-saving measure.”
A decision on tariffs is due at the end of March, he says.
The sugar industry is similar. A lack of tariff protection saw import quantities rise from 50 000 tons in 2014 to more than 500 000 tons in 2017, which is equivalent to the production of three of South Africa’s 14 sugar mills.
“We have some tariff protection in place, but there is a glut of sugar on the world market and it is not enough to stem the tide,” says Field. “The irony is that the SA sugar industry has rebounded following the drought and is now forced to export sugar, in an environment of depressed prices.”
But the news out of RCL was not all bad. Revenue for the six months increased 3.5% to R13.3 billion driven largely by higher volumes in pet food as well as its Nola and Yum Yum grocery brands. While earnings before interest, taxes, depreciation, and amortisation (Ebitda) was down 9.9% to R1.08 billion, and headline earnings per share were down 26.4% to 54.8c, Ebitda excluding sugar was up 2.9%, driven by growth in groceries and margins.
Ebitda and growth per category cluster, as of December 2018
“We have done a good job with our brands like Nola and Yum Yum peanut butter, growing volumes and expanding margins. The pet food business is growing – pet food is a big category. People seem to feed their pets better than their children,” Field observes.
An upgrade to the pet food plant in 2017/18 has resulted in a step-change in quality, he says. RCL’s mid-tier brand, Canine Cuisine, has taken market share from Pedigree, once the undisputed market leader. And its high-end brands are now of a similar quality to imported brands like Hill’s and Eukanuba.
As with all consumer-facing companies, RCL does not expect an improvement in trading conditions until well after the election.
An interim dividend of 15c was declared.