Rooibos can be cultivated only in the Cederberg in the Western Cape and the drought has resulted in many plantations dying. Industry players estimate there is a supply shortage of between 25% and 30%, so producer prices have soared.
AVI CEO Simon Crutchley said there had been some volume pressure in the tea category as a whole. "The important thing is that our brands performed well. Overall demand has been resilient," said Crutchley.
"We are seeing a little bit of drifting by some consumers who are under pressure and some of them are buying down to Trinco from Five Roses so there's nothing obviously alarming, but I guess [it is] inevitable in this environment."
He said the outlook for input costs for the rest of the year was not promising. "Once the raw material costs start tracking backward, it will allow us to track down prices as well."
In the period under review, AVI reported a 7.6% rise in headline earnings per share to 302.9c. Revenue increased 11.6% to R7.13bn. Operating profit climbed 8.1% to R1.41bn and AVI declared an interim dividend of 162c, which was up 8% from the year-earlier period.
In the food and beverage unit, the operating profit margin fell to 18.2% from 18.8%. This unit houses Entyce Beverages, Snackworks, and I&J. Brands at Entyce include Five Roses, Trinco, Freshpak, Frisco, Koffiehuis, Ellis Brown and Douwe Egberts. Snackworks brands include Bakers, Willards, Provita and Baumann's.
In the fashion brands unit, Spitz's operating margin fell to 29.9% from 30.6%. Sales volumes declined 13.9%. Average selling prices increased 17.5%.
Electus Fund Managers equity analyst Damon Buss said AVI's results were in line with expectations. However, the performance of footwear maker and retailer Green Cross remained concerning. "Green Cross wholesale continues to underperform, despite the numerous efforts to turn this business around," said Buss.
In the period under review, the footwear retailer's operating profit margin fell to 9.6%, from 10.2%. Wholesale revenue declined 1.9%.
"Good volume growth in the groceries division shows the strength of the AVI brands, while the quality of the management is evident by the fact they restricted operating cost growth to 7.9%, which is an excellent result for a company that is so efficiently run and has minimal fat to cut," said Buss.
He said consumer sentiment and disposable income would remain challenges for AVI in the second half of its year, given the discretionary nature of the group's products. "However, the falling soft commodity prices and stronger rand should allow AVI to enter the 2018 financial year with significantly lower input cost inflation and hence they will be able to recoup the margin lost in the first half of 2017," said Buss.
Source: Business Day
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