Solid AVI management proves its mettle in tough trading environment, results show
Beverage, snack, personal-care and clothing group AVI is solid and well run. Its model is all about balancing selling price against volumes, reacting appropriately to the competition and intelligently ensuring that market share remains respectable.
The group posted interim results to December 2017 that CEO Simon Crutchley describes as a decent set of numbers and reasonable performance, considering the challenging consumer environment.
Ron Klipin of Cratos Wealth says that although results appear to be relatively subdued the quality of management operating in an extremely challenging environment has once again proved its mettle.
Revenue was up only 2.3% as it was not easy to gain volume momentum and most growth came from price increases.
The gross profit margin, which is sensitive to the volatile exchange rate, recovered as cost inputs were helped by the strengthening rand.
In summarising the earnings, Klipin notes “there was tight control on expenses at only 2.1% up, resulting in operating profit up by 8.7%, with net financing costs down 10%, and headline earnings up 8.3%. This was a fine balance of value versus volume, which proved to be the right strategy, allowing gross profit margins to edge up, despite a lacklustre increase in volumes.”
The detractor in the results was Green Cross. Its summer offering was poor and had to be significantly reduced in price, with aggressive competitor discounting adding to its woes. Crutchley is hesitant on the H2 winter range. To rectify this underperforming segment, Spitz management will be overseeing key aspects of Green Cross.
The Entyce Beverages segment experienced challenging volume demands in tea, coffee and creamers, with some aggressive competitor discounting, most obvious around Black Friday. Although the stronger rand benefited procurement, factory production costs had to be well controlled in the weak demand environment.
Volumes declined substantially in certain Snackworks lines, with some consumers downgrading their biscuit preferences. Managing the priceand-volume matrix was key.
Klipin observes that in a highly competitive landscape, “AVI did not reduce selling prices, but in many instances, such as tea, coffee and biscuits, actually increased them, which proved to be a profitable exercise. Volume loss in this case was offset by higher prices, and due to the strength of their brands they could claw back the price of raw materials.”
In the perfume and make-up Indigo Brands segment, the local market was good. Upmarket shoe and clothing chain Spitz showed pleasing volume growth, and with most of its offerings being imported, selling prices were held stable due to the favourable exchange rate.
AVI International, which houses the offshore markets for Entyce, Snackworks and Indigo Brands, was affected by volatile economies in the region. Such is the nature of doing business in the rest of Africa, this time it being Zimbabwe and Zambia.
Fishing is always a tough game and I&J had problems accessing freezer lines, but benefited from decent price increases in hard currencies, being highly leveraged to exchange rates, with more bias to the euro than the dollar. The real drivers here are fish size mix and catch rates.
The group has invested in mitigating the risks associated with the Cape Town water shortage, which affects fishing as well as perfume and makeup operations. The AVI philosophy is to maintain new project investment expenditure through the cycle, Crutchley says. Klipin adds that this will “increase capacity and efficiencies, which is a positive for cost control”.
The CEO expects aggressive competitor discounting to continue into the second half.
“However, we will be playing the long game rather than chasing short-term volume gains and will continue to benefit from rand strength.”
Klipin says he sees growth in middle-class consumers, lower inflation, a stronger rand outlook and a decline in interest rates as being positive for AVI in 2018.
“With strong cash generation being a major feature of recent results, and debt falling below company guidelines, and in the absence of any new major investment opportunities, there could perhaps be a special yearend dividend,” he says.
THE ENTYCE BEVERAGES SEGMENT EXPERIENCED CHALLENGING VOLUME DEMANDS IN TEA, COFFEE AND CREAMERS THE GROUP HAS INVESTED IN MITIGATING THE RISKS ASSOCIATED WITH THE CAPE TOWN WATER SHORTAGE