AVI upbeat on earnings in tough market

Branded consumer goods company AVI says it expects to continue growing earnings, although trading conditions in the second half of the year are likely to be more challenging.

CEO Simon Crutchley said the company would continue planning for the medium term and investing in projects, although it may slow down some expansion plans.

During the half year to December 31, revenue grew 10,1% to R3,6bn from R3,3bn as AVI benefited from higher biscuit, tea, cosmetic and footwear volumes. The company also enjoyed higher selling prices in its food and beverage units.

Operating profit improved 12,5% to R458,8m from R407,9m in spite of a “material decline in the operating results of I&J's Argentinian subsidiary, Alpesca”.

AVI said net profit improved 3% from R295,5m to R304,2m as tax and interest moved up while capital items came in lower than the previous period. Headline earnings per share rose by 11,1% to 92c from 82,8c.

AVI's share price fell 3% to R16,49 yesterday.

Weighing up the options

Alpesca was affected by poor catch rates, high wage inflation and lower shrimp prices. Crutchley said the company was weighing up its options and would either have to revamp the business model or evaluate its ownership in the division.

Warwick Lucas, an analyst with Imara SP Reid, said it was likely that AVI would either restructure or exit as trading conditions in Argentina were challenging and the company faced labour issues there.

The group spent R18,8m during the first half, mostly on replacement expenditure but also on its new biscuit line in Isando and new and refurbished stores for Spitz.

Further projects were expected to be approved in the second half of the financial year. However, the company expected rising input costs to continue to place pressure on margins. Crutchley said global inflation affecting many input ingredients would be countered through hedging and price increases where necessary.

Slowdown won't derail plans

In the previous six months, gross profit had declined slightly with gross margins down 0,4 of a percentage point.

Crutchley said a slowdown in consumer spending would not derail the company's growth plans. Also, the company's portfolio — which included brands such as Denny and Five Roses — was well known and defensible in a slower economic cycle.

Lucas said input costs were a concern, though, and likely to weigh on margins. While the company had forward cover in place, it was still exposed in some areas. “You can't forward-sell biscuits. It's not like there's a June contract on Strawberry Whirls.”

AVI which had a spread of divisions from food and beverages to clothing, was also keeping an eye out for acquisitions, Crutchley said.

AVI reminded shareholders of a continuing tax dispute, which may see the group liable for up to about R300m in additional taxes.

The matter was due to be heard in court but it was not expected to be resolved soon, the company said.

Source: Business Day

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