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CHAIRMAN AND CEO’S REVIEW |
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It was clear when
writing the 2007
annual report
that our business
environment was in
transition. |
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 However, few predicted the significance of
the changes to come and the impact they
would have on South African consumers.
The FNB/Bureau for Economic Research
Business Confidence Index shifted
dramatically in our financial year: this
index having hovered around 80 since
the first quarter of 2004 practically halved
in the space of six months to a recent
reading of 45. Consumer confidence
waned as sharply, with the same bureau’s
Consumer Confidence Index dropping
to negative numbers for the first time in
four years by the end of the first quarter
of 2008. South Africa’s changing fortunes were mirrored in many parts of the world
but were compounded domestically by
Eskom’s unanticipated supply crisis in
January, a spate of xenophobic violence
against immigrants, political uncertainty,
rising interest rates and a weakening
currency. Positively, South Africa was
not materially affected by the USA’s
“sub-prime” crisis and enjoyed the
benefits of historically high prices for the
nation’s basket of commodity exports.
It was unsurprising, if not entirely foreseen,
that consumers’ willingness and/or ability
to spend declined in the second half of our financial year. In addition, the weaker
currency coupled to the continuing and
unprecedented rise (until more recently) of
international soft commodity and energy
prices substantially impacted on the
domestic cost of many of AVI’s key raw
materials. We were fortunate in the year
to have hedged against this rise in costs
in many of our key raw materials which
ameliorated the size of price increases for
our key brands and preserved substantially
our gross margins.
Material to our reporting of these results
was the Board’s decision to dispose of Alpesca, I&J’s Argentinean hake trawling
and processing subsidiary. Alpesca was
acquired in 2001, largely on the promise
of its access to a sizeable and sustainable
hake resource which, if successfully
coupled to I&J’s ability to add value,
would enhance access to European retail
markets. Whilst this objective has been
substantially achieved and the operation
is efficient, Argentina’s mercurial fiscal,
currency and labour environments have
continued to undermine profitability and
returns. The disposal of Alpesca, once
complete, will allow the I&J team more
time to focus on opportunities in South
Africa and Australia. |
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 In spite of the deterioration in the trading
environment, demand for the Company’s
brands was pleasing, with robust growth
in the first half supported by satisfactory
demand over the remainder of the
year. Overall financial performance
from continuing operations (excluding
Alpesca) was good with revenue and
operating profit up 13,8% and 13,7%
respectively. Our improved performance
was spread across the business, with
good volume growth evident in many of
our key brands. The performance of the
tea, biscuit, and personal care brands
was especially strong, with solid gains in their respective market shares. A
detailed review of each business unit’s
performance is set out later in this report.
Headline earnings per share from
continuing operations rose by 14,9% to
159,0 cents. A final dividend of 47 cents per
share has been declared (2007: 43 cents
per share) bringing the total dividend
for the year to 80 cents per share (2007:
73 cents per share). A total of R549,7 million was returned to shareholders through a
payment out of share premium of 75 cents
per share and through buying back shares
in the open market.
Brands remain at the heart of our
business. This year we made good
progress in strengthening our ability to
sustain and enhance their value. Our
commitment to an optimal balance
between short-term profitability and the investment to support the long-term
value of our brands remains a central
philosophy. In the year, over R500 million
was committed to the marketing and
trade support of our brands and in
addition, more than R270 million was
invested in fixed capital that supports their
ongoing production. A number of material
capital projects were concluded in the
year, notably investments in new capacity
and technology to support our biscuit
and coffee brands. In the last financial
year, biscuit production capacity fell short
of unexpectedly high demand and our
service levels, to retail and wholesale
partners, fell below our target levels. The
successful commissioning in February
of the new Isando biscuit line has seen
service levels recover and provides
additional capacity for the years ahead.
We remain committed to product
innovation and appreciate that doing
this well and consistently requires
talented people, appropriate investment
and a keen feel for changing consumer
needs. Success here is substantially
important to our medium-term growth
prospects and the progress in the year
was pleasing. The Indigo team continues
to demonstrate their ability to enhance
and add value to deodorant body sprays and ended the financial year as clear
market leaders, substantially enhancing
current and future profit. At Snackworx, a
new marketing team reviewed the entire
biscuit and snacking brand portfolio;
packaging has been upgraded and a
number of exciting innovations make
their debut in the coming financial year.
The financial performance of our
footwear and apparel brand portfolio
within Spitz, despite remaining credible
was below our expectations for the year.
Trading was materially tougher in the
second semester which coupled to our
planned investment in new stores, people
and systems eroded operating margins.
We are confident that our accelerated
investment phase, notwithstanding the
reduction in margins during this year, will
be rewarded in future years. We were
delighted to see both the Lacoste and
Carvella brands listed in the top twenty
of the IPOS/Markinor 2008 survey of
South Africa’s “coolest” brands. Better
still is Carvella’s top 10 position amongst
brands rated “cool” by 16 to 19 year olds,
highlighting material promise for the
future of Spitz.
Efficient distribution is essential to our
business as it dictates where consumers find our brands and also has growing
significance with respect to our margins.
Last year, we began an exercise to review
opportunities to reduce costs and look for
ways to widen distribution for our products.
We are delighted that this exercise, which
is not complete, saw us exceed our
savings target of R30 million in this year.
In addition our logistics team believe that
we have a very credible opportunity to
widen and improve our presence across
retail and wholesale channels. At present,
our sales and merchandising activities are
fragmented, with too many outsourced
partners and resultantly little to show for
the size of the Group. This is an exciting
opportunity which if effectively resolved
in the coming year promises wider
distribution, enhanced shelf presence and
reduced merchandising costs.
During the year we tackled three
under-performing areas of the business:
Alpesca, I&J’s joint venture with Simplot
in Australia and the ongoing losses in
the retail chilled juice business. Our
decision to divest from Alpesca has been
communicated, with progress on the
disposal expected in the remainder of
the calendar year. Simplot’s recovery was
pleasing, with improved manufacturing,
a strong recovery of market shares, and higher selling prices supported by
unusually high profits from sea-food
trading activity. Despite strong volume
growth following the successful re-launch
of our Real Juice brands, the ongoing
pressure of sustained raw material and
spiralling fuel costs resulted in a loss
similar to the prior year. We have resolved
to regionalise this category in the coming
year which will result in the juice brands
supporting a smaller but inherently
profitable activity.
In 2007 AVI celebrated its 63rd year
listed on the JSE, one of a handful of
companies with this track record. AVI has
a well established governance framework
that allows us to identify and actively
manage those issues that may materially
affect our long-term successful existence,
and also operate in a manner that
endeavours to meet the needs of present
shareholders without compromising the
needs of future generations. We manage
our sustainability responsibilities under
the following three broad categories: |
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Ethics: to be effective AVl must be
able to operate without censure or
compromise, and to do so its directors
and employees must act with honesty,
integrity and with the best interests of its stakeholders in mind. AVI has a
well developed framework, supported
by policies and practices that enforce
the highest ethical standards that are
rigorously applied by the directors and
the executive management. AVI has
a culture of ethical behaviour that is
integrated in the day-to-day activities
of each employee. During the year,
heightened focus was given to educating
employees on anti-competitive conduct. |
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Scarce Resources: in respect of
AVI’s commercial viability, its primary
exposure to scarce resources remains
that of the South African and Argentinean
hake fishing resources. In South
Africa, the catch limitations and other
control mechanisms imposed have
had a positive effect, resulting in an
improvement in the bio-mass of the
resource. This has not been the case in
Argentina where the resources seem
to be declining despite the controls
and limitations that exist. In addition
to managing the very specific risk
relating to its hake fishing resources,
AVI is committed to the application
of sustainable practices across its
operations; and |
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Transformation and Good Corporate
Citizenship – AVI recognises the social and economic imperative to be a
transformed company in the South African
context and to attract diversity in the
workplace. AVI also recognises the clear
commercial advantages to be, and to be
seen as, a good corporate citizen that is
desirable to work for and do business with.
Encouraging progress was made during
the year under review, and the Company’s
transformation remains a key focus area
for the Board. During the year the Group
received its first verified Broad-Based
Black Economic Empowerment (“BBBEE”)
rating in terms of the relevant codes
that had been gazetted during February
2007. The Group has achieved a rating of
40.13 (representing level 7 compliance)
which will allow our customers a BBBEE
procurement recognition level of 50%.
This however is not truly representative
of AVI’s transformation efforts as the AVI
Black Staff Empowerment Scheme is not
recognised as a share ownership scheme
in terms of the codes and therefore does
not give AVI the additional recognition
(represented by 7 points) we believe it
deserves. This scheme has placed 7,7% of
AVI’s issued ordinary shares in the hands
of a trust for the benefit of the Group’s
5 800 Black employees. |
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We are indebted to all our people, whose
diverse talents and hard-work have
contributed to this year’s performance. Our
success depends substantially on people
and here we are fortunate to have so many,
whose energy and passion for our brands
underwrites their market leading positions.
Talent at all levels of AVI remains a key
focus and the ongoing shortage of skills in
South Africa does remain a key challenge.
We were delighted to have enhanced
the Board’s diversity and skills with the
appointment of two new non-executive
directors in November and December
2007. Pinky Moholi and Adriaan Nühn
both add substantially to our Board’s
wealth of relevant experience and insight.
To all members of our Board, our thanks
for your support and contribution during
the year. |
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| Outlook |
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| AVI is fortunate to have a portfolio of
market-leading brands that have well
demonstrated defensive attributes over
many decades. Our brands provide
consumers enjoyment, quality and value
for money and are well positioned to
compete effectively for growth and
market share in the years ahead. Our
government’s ongoing investment in GDFI
remains substantial and there are indirect
benefits which will support a fair level of
consumer spending. This, coupled to our
people’s passion to enhance operational
efficiencies, to improve and innovate our
products underpins our confidence that
we can sustain and grow earnings over
the medium term. |
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Angus Band
Chairman |
Simon Crutchley
CEO |
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| 3 September 2008 |
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