JSE-listed consumer packaged goods group Libstar’s interim period – the six months ended June 30 – was largely characterised by rising input costs, which CEO Andries van Rensburg said led to a “relentless focus” on cost containment during the period.

South Africa’s food inflation averaged 6% during the period, up 1.8 percentage points from the 4.2% average increase in the first half of 2020.

In spite of this increase, Libstar’s food categories, which contribute 93% of group revenue, delivered a strong performance, and recorded 10.5% growth, with earnings before interest, taxes, depreciation and amortisation (Ebitda) rising by 10.1%.

These categories, Libstar said in its results announcement on September 8, benefitted from significantly improved food service channel demand and a resilient performance in the retail channel. Although the upper income consumer brackets where Libstar mainly operates were less affected than the middle- and lower-income consumers, the company noted that demand constraints became more evident at all levels.

In the household and personal care category, the demand for sanitiser and bleach products in the retail channel benefited significantly from stockpiling during the first half of last year.

Reduced demand off this high base, combined with significant cost-push inflation and service level disruptions brought about by the group’s facility consolidation project, resulted in the category reporting a 9.6% decline in revenue and a R15-million loss at the Ebitda level during this period.

Further, despite the application of Libstar’s foreign exchange (forex) hedging policies, lower average forex rates relative to the prior year resulted in the reduction of realised foreign currency translation gains of R20.1-million last year to a R3.2-million loss in the current period.

Other income and forex gains for the period, therefore, reduced by 84% from R80.9-million to R13-million, significantly impacting reported operating profit, earnings per share (EPS) and headline earnings per share (HEPS).

Libstar “continued to carefully navigate challenging market conditions”, Van Rensburg said, adding that consumer spending remains constrained, with both market and Libstar volumes trading lower, and pricing and mix changes largely driving growth.

“We were able to address the subdued market demand by continuing to launch new innovative products which cater to growing market trends. Our diverse product portfolio, comprising own-branded, dealer-own brand, private label and principal brands continued to assist us in responding to changing consumer behaviour,” he added.

The first half of the year also saw increasing industry input costs and selling price inflation, and in response, Libstar continued its focus on cost containment, with cost increases remaining at much lower levels than those of the comparative period.

Although the upper-income bracket of consumers has been impacted by the effects of Covid-19 and the weak economy, it has shown some resilience relative to other income brackets owing to better job security, accumulated savings and lower debt servicing costs.

“Our exposure to this customer base, therefore, offered some underpin to our results,” Van Rensburg commented.

Looking ahead, he said, Libstar is “well positioned to weather the current economic climate” as the group’s decentralised model and culture of entrepreneurship and innovation enabled it to respond with agility to changing consumer habits.

The ongoing focus on new product development to meet consumer lifestyle trends is evidenced in the 316 new and renovated products launched during the reporting period.

“Our focus on the relatively more resilient upper end of the market and limited exposure to volatile commodity products in our portfolio, as well as our world-class, low-cost manufacturing and portfolio optimisation, stand us in good stead.” 

FINANCIAL SUMMARY

For the six-month period, group revenue increased by 8.7%, while revenue growth from food categories was 10.5%.

Contributing 93% of group revenue, Libstar said the improvement was driven by increased sales within the group’s largest product categories – perishables and groceries.

Revenue within the household and personal care category, which contributes the remaining 7% of group revenue, decreased by 9.6%.

The gross profit margin declined from 23.4% to 22%.

Food category gross profit margins declined slightly from 23.8% to 23%, mainly owing to reduced export margins on herbs and spices following lower average forex rates relative to the prior period.

Household and personal care’s gross profit margins reduced substantially from 19.2% to 9.2%, mainly owing to the significant input cost inflation of raw material products such as steel, foam, polyvinylchloride and tallow.

Lower production volume throughputs, brought about by a decline in demand for bleach and sanitiser products relative to the prior period, also impacted on margins.

Group normalised Ebitda decreased by 0.2% at a margin of 8.9%, and normalised Ebitda from the group’s food categories (before allocation of central office costs) increased by 10.1%, supported by strong revenue growth, margin and cost control.

However, normalised Ebitda from the household and personal care category (before allocation of central office costs) reduced by 141.3% relative to the prior year, mainly owing to the significant reduction in demand and gross profit margin.

Fully diluted EPS and HEPS decreased by 24.2% and 27.8% respectively, mainly impacted by lower forex gains owing to unfavourable forex rate movements relative to the comparative period.

Normalised EPS, which the group believes is a more representative measure of operating performance, as it excludes unrealised foreign currency movements and other non-recurring, non-trading and non-cash items, increased by 2.5%.

Normalised HEPS, which also excludes these items, decreased by 0.8%.

Cash generated from operating activities increased by 47.6% from R225-million to R332-million. This was mainly owing to improved cash flow from operations, reduced net finance costs and a lower working capital investment compared to the prior reporting period.

Net working capital decreased from the 55 days during the comparative period and 54 days at year-end to 53 days at the end of June, to end at 14.5% of revenue, which is within the group’s targeted 13% to 15% range.