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Sugar and chicken hit RCL hard

The message is that those commodity products with no value-add are subject to market cycles – and dumping of cheap imports.

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.

Sugar glut

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

Source: RCL investor presentation

“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.

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Talking about sugar….the slump in this commodities price does not explain the collapse of the Tongaat Share price. In one year it has lost more than 80% of its value without real explanation. Perhaps Investec can shed some light on this? And perhaps the JSE would investigate this futher on behalf of minority sharehokders? Seems like some big sharehokders got out at over R110. Worth looking into if the JSE wants to retain credibility.

” feed, electricity and transport – continue to rise”: Who do we thank for this? Who keeps making our lives more costly?

The ANC has made the country ungovernable and poorer

Added to that cutting costs is more difficult due to labour laws. This is what happens in a socialistic ANC failed system.

Futher to my comments re Tongaat Huletts – all relavent information from their website cannot be downloaded and comes up as SORRY THAT PAGE CANT BE FOUND. Something is definitely up .

SA companies need to rethink their profit margins, which historically were always very high 30% plus & with markets opening up and SA consumers getting a better understanding of their options & rights alternative products will be purchased. Can’t wait for the same to happen in the motor industry.

Agree with your broad comment but not sure about motor industry. Margins are thin allready, reason for expensive vehicles are simple, it used to be called the Motor Industry Development Plan, some new name now but same thing in principle.

In the cost of SA sold vehicles a charge is build in to fund incentives given to OEM’s to assemble vehicles in SA. I have heard the anecdote that where it not for import duties ity would be cheaper to buy a SA assembled car in Aus and ship it back to SA thean to buy it here.

Also the reason why cars in Nam and Mozambique are much cheaper than in SA and why you see quite a few cars with non-SA plates in the border regions

Why wouldn’t we want to feed our population cheaply by allowing duty free imports of these “waste” drumsticks?

Protectionism might have a place, but it’s not in chicken.

Well the downside is that you lose employment. These imports are not done on a rational arms lenght basis – which is where tariffs actually do have a role to play.

It is not a question of our chicken producers being massively inefficient, chicken pricing in the states are done solely on breast meat, the rest of the chicken is a byproduct, anything that they get for it is extra.

To horribly mangle the old cliche: Teach a man to rear a chicken and feed him for ever, give the amn a chicken and feed him once…

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