AVI: A profitable toast to pricey tea and biscuits
Consumer goods company maintains profit by jacking up prices to offset weak demand
Beverage, snack, personal care and clothing group AVI is a solid and well-run operation. The model is all about balancing selling price against volumes, reacting appropriately to the competition, and intelligently ensuring that market share remains respectable.
For interim results to December 2017, the group posted what 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 once again proved their 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.Summarising 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 obvious detractor in these 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 winter range, and to rectify this underperforming segment Spitz management will be overseeing key aspects of Green Cross.
Weak demand environment
The Entyce Beverages segment saw challenging volume demands in tea, coffee and creamers, with some aggressive competitor discounting, most obvious around the Black Friday event. Although the stronger rand benefited procurement, factory production costs had to be well controlled in the weak demand environment.
Snackworks saw substantial volume declines in certain lines, with some consumers downgrading their biscuit preferences. Again, as it is with most AVI segments, managing the price/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 makeup Indigo Brands segment, the local market was good. Upmarket shoe and clothing stores 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 impacted by volatile economies in the region, such is the nature of doing business in the rest of Africa, this time being Zimbabwe and Zambia.
Growth in middle-class consumers
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 euros than dollars. 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 and perfume/makeup operations. Crutchley emphasises that the AVI philosophy is to maintain new project investment expenditure through the cycle.
“This will increase capacity and efficiencies, which is a positive for cost control” says Klipin.
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 sees growth in middle class consumers, lower inflation, a stronger rand outlook and a decline in interest rates as all 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 year-end dividend,” he says.
Chris Gilmour is an investment analyst.