Good morning, everybody. So it's been, I don't know how many years since we did a physical presentation. So for those of you who still like to get out into the world, it's a warm welcome from AVI and my colleagues from the business units who are here, and Justin. And, sorry, we don't have any goodie bags, but, cost cutting, unfortunately, is the order of the day. So we have our normal presentation. I'll take you through some of the key features. Justin will do macro AVI consolidated financials, and I'll take you through some of the business units. There are a lot of common themes. This year, I'm gonna try and talk to macro, mostly. I know you guys can all read. I hate PowerPoint, because I don't want you to have to hear me say what's on the screen.
So if I breeze through things, it leaves a little more time for questions. And of course, welcome to everybody listening in on the podcast. So that's the agenda for the day. Let's go straight in. I don't think I have to tell you, for any of us who make things, it's been a very tough period to operate large manufacturing businesses. Load shedding's intensity has grown, disrupted our supply chains, cost us ZAR 58 million in direct costs, and it's easy to forget the impact on our suppliers and even our categories. We sell hot beverages, and if there's no power, people don't boil kettles to produce tea or coffee. So there's a very widely distributed set of indirect costs, which has affected also SA macro demand. I&J's also had a pretty tough year.
It's easy to forget how substantial the fuel increase has been, about ZAR 165 million year-on-year cost, which then was compounded by poor catch rates. One of the wettest and coldest winters that the Cape has had has continued to affect catch rates. And then load shedding, in particular, I&J has the double jeopardy. Not only does it process by cooking things, it then has to freeze them. And so you've got two large inductive loads, so the effect of load shedding is very substantial in I&J. And then, of course, the abalone sales mix in the first semester affected by the Chinese lockdown for COVID lifted some improvement, but it did affect the mix. Revenue up 7.8%.
I think for those of you who look at AVI, you will know that we had a very tough first semester from a volume point of view. We'll show you some detail later. The volumes improved materially in the second semester, and largely underpinned by us lifting selling prices for the full financial year. And we lifted selling prices in every single category, compounded by some very weak exchange rate. And then, of course, Ukraine affected soft commodity prices, particularly in the first semester. We did good hedging, and that will come up later in the presentation. The most important thing we try and do in AVI, in a very tough macro environment, is manage gross margins. The long-term value of this company is obviously its profitability, and that's all driven through gross margins, so pricing was important.
We did see a strong recovery in the second semester across the business, with operating profit improving by 14.5%, and that was underpinned by recovery and volumes. And that's not to say that volumes all went back into positive territory. They built momentum through the second semester, and the last quarter in particular was pleasing, which was encouraging. So operating profit up 7%. If we exclude the I&J business from the group's result, just under 13%, which was pleasing. And then, of course, there was a slightly lower tax rate, which you guys know about. Headline earnings diluted. Justin will come cover this in his section. Obviously, much higher interest rates and a little bit of dilution because of share schemes. The most important thing is cash flow remains strong in the business across all categories.
I think you will remember that because of COVID and because of the uncertainty around ports, we lifted working capital in order to ensure that we were able to sustain service levels in all our categories, which we have continued to believe is important in this uncertain environment. The dividend pretty much in line with the headline earnings increase. That chart just gives you the history. I think the important thing to note is the improvement of COVID. We are building momentum back from a very tough period, I guess, both globally and regionally. The I&J business, of course, the one that was the real laggard, and I've talked about that, we'll talk more later. Return on capital employed, pleasing to see that recover, despite the fact that we had higher working capital.
Of course, the performance of I&J would have put some of a dampener on that, but that's, I think, a pleasing trend. And again, very strong cash conversion in the business, which is also important, a very strong underpin to how we manage AVI's businesses. And then, of course, the dividend payout, pretty much, in line with the prior year, as a percentage of the share price, obviously, at the end of June. And that just gives you some of the history. We continue to pay out substantially the company's earnings. We've paid out, I think, 87%, over the last 15 years, which I think is a pretty interesting outcome, given that we've also invested significantly in the business over the same time period. And I'll give you to Justin now.
Thank you, Simon, and good afternoon, everybody. I think overall, a credible result in a challenging environment, supported by a strong second semester, as Simon highlighted. Revenue growth of 7.8%, entirely driven by price increases taken across all categories. Volume pressure obviously played its part in most of our categories, with a high level of inflation coming through and impacting consumers. Gross profit increased at slightly better than our revenue growth, at 9.1%, with gross profit margins improving from 38.6% to 39%. Our selling and administrative expenses increased ahead of inflation. This is largely a function of the recognition of the insurance proceeds last year, as a result of July's unrest.
We have provided some more detail around the comparability impact of that in the information slides at the end of the presentation. But excluding that impact, selling and admin costs would have gone up about 8.7%, driven primarily by higher fuel prices and the impact that that has had on our distribution costs, as well as some increased investment in marketing spend. Operating profit up 6.9%, with the operating profit margin well protected, at 18.2%. I will give a breakdown later on by business unit of that. Finance costs materially increasing for the semester, largely a function of, higher interest rates, as we are all aware of, but also some higher average borrowing levels.
We took a conscious decision early on in the year to increase our levels of inventory and protect service levels, given the supply chain environment that we were experiencing. We did see that come off a little bit in the second semester and year-end working capital levels are more in line with our expectation. Effective tax rate, as Simon has already alluded to, in line with a reduction in corporate rates from 27%. I think that you'll cast your mind back to last year, we did recognize the deferred tax assets and liabilities at 27%, so a portion of that benefit already recognized in the base, with ZAR 9.7 million benefit in the current year.
Headline earnings growing 4.4%, and headline earnings per share slightly lower at 4.3%, reflecting the dilutive impact of shares issued in terms of the group's share incentive schemes. As indicated, a strong second semester. I think this graph just breaks this down and shows where what the key drivers of that have been. Operating profit up 14.5% on last year through the second semester, underpinned primarily by our Snackworks and Personal Care businesses that benefited from higher selling prices, and as Simon has already mentioned, a slightly lower decline in volumes through the second half. I&J have had a difficult year.
Declines in both the first and second semesters, with higher fuel prices, poor catch rates, load shedding costs, and also the lockdown in China, which have negatively impacted our abalone sales mix in the first semester. I think also worth mentioning is we did have a fire at our value-added plant during the month of April that resulted in the closure of that facility for a month, and the loss of about ZAR 15.7 million worth of operating profit. We have not recognized the insurance income. We are insured for that event and are currently going through that process of recovering that. From a business unit perspective, growth across all parts of the business, with the exception of I&J.
Excluding I&J, operating profit up 12.7%, so I think a pleasing result in the rest of the business. Our food and beverage brands, operating profit margins reduced from 18.5% to 18%, primarily due to I&J. Some pressure in Entyce as a result of competitor activity, which required us to discount through the second semester in order to protect volumes. But overall, I think a pleasing result. Snackworks benefited from some of the operational leverage that we got from higher prices and factory efficiencies, and then lower reduction in volumes. Fashion brands, a nice improvement in our operating profit margins there.
I think, as expected, our Personal Care business delivered a strong improvement as a result of the acquisition of the Exclamation and Gravity trademarks from Coty at the end of last year. And our footwear and apparel business improved, despite the non-recurrence of some of the benefit that we got from the recognition of the insurance proceeds last year. This graph really contextualizes the impact that price and volume have had on our top line performance. You can see the significance of price. Price increases taken across all of our categories to ameliorate the impact of significant input cost pressures from both the weaker rand as well as higher commodity prices. I&J, obviously, the benefit also includes the impact of a weaker rand, but unfortunately, was offset by some lower fish sales volumes...
I think what has always been important to us and underpins our protection of margins and management of margins has been our management of price and volume. I think this has been a particularly challenging environment in which to manage this given the constrained consumer as well as the competitive landscape. I think whilst volumes are not unimportant, it is important to understand that our business is more susceptible to a loss of value than volume, and as a result we have managed our pricing in this context to protect the long-term profitability of our brands. As already alluded to, our gross profit margins have improved slightly on last year. Again, we have provided some further detail to the year-on-year drivers of the movements in the information slides at the back of the presentation.
I think worth mentioning is that I&J have detracted from the group outcome by about a percentage point, so that would have returned us more in line with historical levels had it not been for the I&J performance. The bullets in this slide really encapsulate the underlying performances of the business units. This is going to be dealt with in more detail later on in the presentation, so I won't go through this in much detail. I think what is worth mentioning, though, is, as always, our drive and focus on cost management and efficiency has remained, and has continued to will continue to underpin our performances in most parts of our business.
From a cash flow perspective, cash generated by operations increased 2.7%, this is slightly lower than the operating profit growth of 6.9% that we have recorded. Slightly higher non-cash add-backs were largely offset by some increases in our working capital position. Working capital was well managed. I think it ended in line with where we expected it to, with inventory levels increasing in line with the inflationary pressures that we are seeing, and some higher trade receivables as a result of a strong end to the year, with sales to be collected in the early part of FY 2024.
From a capital expenditure perspective, we increased our investment in our factories quite considerably from last year, an element of post-COVID catch-up in project activity, but we continue to carefully evaluate our spend in this area, particularly in the context of the constrained and difficult environment. Net debt increased to ZAR 1.75 billion. The increase on last year is entirely a function of the lease liabilities. We've had a number of renewal of operating leases in our businesses, and the lease accounting requires us to recognize it as a liability. Cash debt has remained in line with previous years, and our net debt to capital employed remains in our target range of 25%.
As mentioned and highlighted by Simon, our return on average capital employed has improved to 29.5%. I think this is largely underpinned by an improvement in our earnings. It's something that we will carefully consider and look at and obviously look to drive. From a dividend perspective, our final dividend of ZAR 3.10 has been approved, taking the full year ordinary dividend to ZAR 4.82, with the increase of 4.3% in line with our earnings growth. Our ordinary dividend cover ratio has been maintained at 1.15 times, and this represents 87% payout ratio of our current year earnings. Our dividend yield remains very attractive, at 7.1%, based on the closing share price at the end of June. I will hand you back to Simon, who will take you through the business unit performances. Thank you very much.
So Entyce Beverages , which is our tea, coffee, and creamer business, I mean, I think, you know, we don't break out, obviously, each, division, or each category for competitive reasons, but on balance, a strong performance, despite a lot of constraints from a consumer demand perspective and also from a cost pressure perspective. The factories all operated effectively, despite the load shedding environment. We had to take a lot of price here, and I'll show you those slides. I'm gonna go there, reasonably quickly, because I think that's where, when we look at volume and value, you'll get the most interest. Our value brands definitely benefited, in the environment where, clearly, people continued to be constrained, or parts of our customer base are very constrained, and we saw good growth.
Lots of raw material cost pressures in black tea, some in rooibos. I think the important thing, although the profitability of the tea business declined slightly, the gross profit margins, as Justin alluded to, very important to us, were very well protected and well sustained. And I've already touched on the fact that, you know, load shedding quite clearly shows up as a factor for consumers when they choose hot beverages. If we go to coffee, the pleasing thing is, well, we're all here and drinking coffee, I hope, before you started. The out-of-home business in Ciro continued to see improvements both in demand and in margin.
We did a lot of work on that business during COVID to rightsize its cost base, and we're seeing the benefit and the operating leverage of that and working hard to ensure that we sustain that leverage. I mean, there's no question here. Coffee prices rose very aggressively in the last, I guess, 15 months. They've ameliorated somewhat, but nonetheless, this put a lot of pressure on margins. We had to lift selling prices, and in some categories, that just simply affected the consumer's ability to digest those price increases. Mixed instant coffee environment, which has been tough for a number of years, we've touched on that before. We're getting some progress given the restructuring initiatives and cost management that's gone into that facility. And I talked quickly about Ciro. Let's go to creamer.
Here, we also had to lift selling prices substantially. You'll see that, when we come to the next slide. We did have, as we often do, some fairly aggressive competition. We have to see our way through that. Certainly, in the second half, we became a bit more combative, and I think we got some volumes back. But this was, particularly challenging to try and manage, I guess, both volume and value in an environment that was competitive, but with a very aggressive competitor at the same time. Again, we're seeing some impact on home baking. Creamer is used often in home baking, and with load shedding, we could see some trimming of demand as a consequence. So this slide, which I'm not gonna read, gives you, I guess, the volume, value, realities, for each of the tea categories.
What we've done here is give you a sense of what happened in the second semester, so you get some sense of the momentum build. And although the second semester didn't in tea go positive, you can see a substantial improvement, and in the last quarter, that improvement, in fact, was positive. So, you know, there is some positive momentum that we're seeing in that category. Similar for coffee, not quite as significant as tea in terms of the improvement, but I guess the most important thing is to reflect on the degree of selling prices that you're seeing that were necessary, just... Which I think people forget about, the cost pressures that everybody's been digesting in South Africa as a consequence of the exchange rate, soft commodity prices, and obviously, a materially weaker exchange rate. And the same is true for creamer.
Sorry, and you can see here the sorts of price increases, and again, the volume improvement, I guess, in the second semester, with our discounting and promotional activity playing a hand. Market shares, now this is becoming tricky because there's a big part of the market that's not as well read. We have a very good and strong business in the informal channels. This is obviously market shares for the formal channels only. But, you know, we are pleased with the market shares in general. You know, we are always willing to give up share if we think strategically that's the right thing to do in the short term. We run the business with very much a medium-term, long-term perspective around shares and brands, and I think overall, the performance, very credible.
Significant cost pressures right through the basket of key ingredients, as you can see, driven by both soft commodity pricing and exchange rate. Those are all the material drivers. Now, keep in mind that those are the costs net of hedging, and we run a very substantial and continuous hedging program of both physical and exchange rates, in order to try and manage our pricing and our margins. We turn to Snackworks, which is biscuits and snacks. I mean, this business had a very strong year, which was very pleasing, and the both, you know, coming through in the margin line, not as strong for the snacking part of the business, but for the biscuit business, a very strong performance once again, and you'll see that in the slide that deals with volume and value, the substantial price increases that were necessary.
The biscuit business, we had three price increases in the financial year to deal with, obviously, the sustained cost pressures. If you remember, the wheat price doubled with the Ukraine crisis. It's all lost because the wheat prices have come back, which I guess is a positive as we look forward into F24. We had very strong factory performance. We've been working extremely hard to continue to improve the efficiency and of all of our facilities, but certainly our Isando and Westmead biscuit factories coming through very strongly in the year. Snacks, a very tough period. We had lots of competition. We've had, you know, what you're seeing in South Africa often is regramming.
Our competitor has made packs smaller, and you go through a period where you're competing against different pack sizes, so your price points look difficult. This is a challenge that we continue to try and manage without obviously short-changing consumers. Very important to AVI that we build long-term relationship with consumers and give them, you know, the premium that they deserve with the product that they deserve. Lots of cost pressure because of distribution. Unfortunately, when you're moving small, light packets of potato crisps around, the distribution cost was substantially higher. But on balance, you know, I think a very strong performance from Snackworks with the EBIT margin just under 20%. This will break out for you the volume and value. As you can see, biscuits had a solid performance in a very difficult environment.
The volume declines were fairly small, but you can see the price increases that came through both in the first semester and obviously in the year, second semester as well. So price increases in March, September, and April in order to deal with those cost pressures. And snacks, obviously, you can see that for yourself. Again, substantial price increases of 16-odd% necessary, three price increases as well. Market shares are not a material change. Obviously, a slight loss of share in formal retail, but we anticipated that, knowing what we needed to do with pricing. We got very good demand of our affordable formats in the informal channels and the wholesale channel, which was very pleasing, and we think we did a pretty decent job under difficult circumstances of managing both, price and the volume in this portfolio.
You can see substantial raw material cost increase. I touched on flour, butter, every single one of our ingredients, and the one that doesn't show up here, of course, is energy cost and also the impact of running generators, but, you know, we dealt with that in aggregate. I&J, as Justin said, this business had a perfect storm or an imperfect storm, lots of challenges. The fuel cost, as I said, you know, and there's a slide that will show you that 160-odd million rand. You know, tough, tough fishing environment, lots of cost pressures. We needed to recover a lot of price-affected demand, both in SA and internationally. And, of course, the load shedding we discussed earlier in the introduction.
The fire, Justin touched on as well, which didn't help, obviously, the last quarter. That was load shedding related, unfortunately. Insofar as abalone is concerned, and we've got a slide that obviously breaks this out, I'll go there. Justin's touched on those points. I've touched on those points. Obviously, the biological asset fair value adjustment was a factor as well. And you can see, I guess, this is probably the best way of looking at I&J. We did a lot of pricing. We got some benefit from the exchange rate, and then we gave it up in fuel, in catch rates, and the load shedding impact, the VAP fire, and then the VAP abalone fair value adjustment. So, you know, it's a pretty clear and comprehensive perspective on I&J's performance.
You know, we're hoping to see a turnaround in some of those factors in F24. The profit history of I&J, I guess you can see the abalone performance in there because of the fair value adjustment and the impact of the sustained lockdown period in China, which we've talked about. Fishing performance, as you can see, this is one of the poorest fishing performances we've had for some time. Certainly, it's been a very tough season, lots of very bad weather, and we're hoping that in F24, we'll see some progress. We did get a TAC increase. Obviously, that only affects the second half because that's calendar year, you know, not financial year. You can see, obviously, the deleterious effect of both volume and selling price pressure in this business, which you can look at in more detail.
The Indigo Brands business, quite a lot of change in this business with us acquiring the Coty brands. It was a good performance. The purchase of the Coty brand certainly came through in the P&L, and that was pleasing. There's been quite a lot of work rationalizing this business, in the face of, obviously, that acquisition, and the margin expansion also driven by Exclamation and Gravity. We've been supporting this business out of COVID. If you remember, you know, people stopped using beauty and fragrance products and personal care products because they were at home, and we, you know, I guess, took the decision at the time not to overinvest in marketing.
That's coming back quite strongly, quite a lot of marketing investment that obviously would have affected the financial performance, but necessary and important for these brands, you know, into the future and into FY 2024. The Coty distributor agreement, we've been their partner for 19 years, having bought, obviously, their personal care brands. They focus on beauty and fragrance, and they've decided to do that themselves in South Africa now. The ZAR 50 million contribution is somewhat overstated in FY 2023 because we sold in to support the transition. And of course, you know, we will have to work hard in the new year to try and restructure this business to deal with that. We're very positive about what we can do. It's been a long relationship, a very productive relationship.
We've made money, but a lot of these relationships eventually mature as business partners make different decisions about their own strategies. The value and volume here, obviously, the volume here is impressive, but that's because of the acquisition. We've tried to give you some sense, obviously, of the impact of that. When we go through to market share, we've rebased that so that we're not cheating and giving you a market share that is flattered by history. That's actually the improvement we've already made with respect to the Coty brands we've acquired, where we've made some market share gains, which I think is pleasing despite the early nature of the acquisition. The Spitz portfolio, a pretty decent performance. We were pleased with this. Very tough environment. We've been working very hard post-COVID, which was tough on this business.
We've put a lot of effort, energy into product design and marketing, into extra inventory. We brought in inventory early. We found that in the prior year, the supply chain issues really affected our ability to have as strong a trading as we would have liked. You know, the comparatives are obviously slightly distorted by, you know, the July event in the prior financial year, but I think a strong performance from the portfolio. Strong need for pricing here, too, because everything we buy is imported, but I think we managed that reasonably effectively with currency hedges, I think, which is pleasing. That just gives you some sense.
We've kept the Green Cross number there, continue to make progress, albeit it's a smaller part of the business, but it was pleasing to see, notwithstanding that we have been through a period of right-sizing this business and margin improvement and operating profit improvement, which is all there for you to look at. And then volume and value, this is the one part of the business, where we actually got some volume gains, underpinned by a very strong December, which was pleasing, and of course, to some extent, the non-repeat of the July unrest. But in general, good volume, momentum, you know, through this financial year, and selling price increases lifted by 12%, obviously to ameliorate the decline in the exchange rate. Kurt Geiger, the clothing, still recovering.
We're working very hard to premiumize this business because there is so much competition in apparel in lower price points, and we think that strategy is beginning to pay off, which is encouraging. International, I mean, this is what we do, is we don't have any assets or we have distribution assets in markets. This is essentially using our South African manufacturing base and distribution, and we had a, I think, a good year, and we were pleased with that. There were some markets that were a bit tougher. We had the same need to lift selling prices in these markets because the cost pressures were systemic, and they as relevant to our margins in SA as they are in the markets that we sell into, and we were pleased with that performance of strong growth and operating profit.
That just breaks out what percentage, and you can see that, the percentage of operating profit now, 20.4%, up from 19.8% in F22, which was pleasing growth. So F24. Well, we all know that load shedding. I see we're back to stage 5 now that the BRICS conference is behind us, and we can now see reality again. Not easy for us. You, you need to understand that for those of us who make things, load shedding is way, way more disruptive, for lots of practical reasons. We're fully generator protected. It's expensive. We experience brown power, issues, which are also an issue for our sites. We've got lots of PLCs, and they're affected by this. I&J's value-added plant now is fully protected.
That was the one area where we were not fully protected for level six load shedding, but we are now, so that hopefully in F24 will help us. You can see that we made the fatal mistake of saying that, and, you know, quite clearly, who knows where we go in F24? We have to once you are hooked on diesel generators, because we can't reuse renewables, except for warehouses, you know, there's a big investment in infrastructure to support generating power with generators. And so that's a cost that, unfortunately, will show up in the P&L, if the level of load shedding is sustained. It's very important that we work with suppliers who also mitigate their load shedding risks because we need them to be able to support us.
I think this is one of the things that people forget about load shedding, is that there's an enormous, compounding, you know, I guess, consequence that finds its way into supply chains as a cost, and, with respect to disruption of packaging materials and the risks that come with facilities that are run with standby electricity. Another material risk for us is water. For those of you who live in Gauteng, which I presume you all do, you will know that, water shortages are a perennial problem. The infrastructure is underinvested in, and we know that we need a lot of water in some of our facilities, and this is not as simple as electricity, but we are working extremely hard to build the best and the most effective solution we can to protect our sites.
So we're well on our way to having extra capacity. The other risk we are looking at very carefully is the quality of municipal water that we get, where in some instances, when we test it, we know that the free chlorine, you know, is lower than it should be. So those are challenges for us. The most important thing we need to do is to accept that we're in a tough macro environment. Consumers are under pressure. Interest rate increases have affected disposable incomes. Inflation is permissive across people's cost bases. So, you know, clearly, you know, lifting selling prices is not something we choose to do. We try and be as tactical and as careful as we can. We're gonna continue to have to do that.
It's been encouraging to see some improvement in demand, particularly in the last couple of months, but we're not naive. We, we can't, at this point in time, say that, unless the economy, you know, does improve, that our ability to sustain volume growth will be easy. We are seeing some abating of soft commodity prices. Obviously, the rand's weakness, you know, thins that out to some extent. I think you can see substantially that we're well protected generally, with, except in a few circumstances.
If we look at the current spot price of commodities, in general, our hedges are pretty well positioned for the first semester and into the second semester of this financial year, which is obviously an important ingredient in ensuring we don't have to lift selling prices, and hopefully, in some instances, we can become a little bit more aggressive and hold on to our gross margins. The volatility of the rand, it's very easy to forget that South Africa is a rand import parity priced economy. Our cost pressures are always driven by the exchange rate in general. Some of them have leads and lags, so we're gonna have to, you know, manage that.
We have, as I've said, always in AVI, avoid speculating, but any hedging strategy is, in its own way, a speculation, but we do it to try and manage pricing and margins. I've touched on the fact that, you know, we don't have a real risk in H1. It does obviously bleed away into H2. We've got a lot of innovation. We're trying very hard to find intelligent ways of innovating, but at the same time, remaining affordable, recognizing that there are lots of constrained consumers. Of course, it's really important to us that we produce good quality products, things that support our brand, and that supports our ability, you know, to price and to leave a price when we need to in order to, to protect gross margins.
There's quite a lot of capital that, you know, will be spent, and some of it is, you know, COVID catch-up. Some of it gives us extra capacity and extra capabilities. We'll work hard to use those to try and drive operating profit growth. We still continue to see momentum in our export business, which is encouraging, and we're hoping for a good year in FY 2024. As always, you know, we work extremely hard, diligently across this business on cost savings, the organizational structure. It's harder and harder to do because we have a very, very lean organizational structure in AVI. I've touched on the Coty impact. We're quite encouraged by what we can do in Indigo, notwithstanding the loss of, you know, the last part of Coty's business with us.
I&J, well, so much will depend, you know, on the big levers in this business. Will catch rates improve? I guess so much depends on La Niña or El Niño. You know, the talk is that we're going into a drier cycle that might make catching a little easier. We have a new B-BBEE scheme. There will be some early first semester costs for that, and recognizing it's not cash, obviously, but it will affect the P&L. We're hoping w ell, we were hoping for the FRAP to be finalized on the last day of August. Jonty tells me we hopefully will get something in the next week or two, which we really, really need because we need to work on how we run this business with certainty. It's something that we really do need to see.
We're hoping that the abalone performance will improve now that the restrictions in China obviously have abated. Of course, the Chinese economy, as you guys know, isn't performing as well, and that certainly affects abalone because it is a luxury category. We're looking hard to optimize and diversify that risk. I think Jonty's off to Singapore next week to keep working on that. We are obviously hoping that the momentum we have in the Spitz portfolio will continue. Early part of this financial year is telling us that so far, so good. We keep working on developing our own brands and building momentum there. We are actually looking at a few new sites, which is encouraging, but we will be very disciplined about any expansion. We really expect capital return, which is a big driver in AVI. We won't expand just for the sake of it.
And we're focusing, as we do in all of the businesses, on costs. We try and run this business very leanly, but without compromising customer service. That's the CapEx. That's, obviously planned, so it's not insignificant. Those are the main projects. Some of those are carryover. The creamer capacity increase, that's fully automated, and that's certainly gonna help us manage some of the costs. We continue to look at the opportunity to automate, but we look for a very, very reliable payback. There's, quite a lot of money going into I&J, which is a bit challenging because we're anxious about the return on capital, and we need to see an improved performance to underpin those investments. I know that, all of you have a very challenging environment, too.
Picking equities in the SA macro environment is not an enviable responsibility, I'm sure. To some extent, we're all in this together. We've always tried to be direct and frank about the challenges of running our business. We continue to find clever, thoughtful, and innovative ways of simplifying the business model to deal with this challenging macro environment. We are, as I've said, committed to innovation, but we've got to make sure that they're scalable and that they're relevant to consumers and people can afford them. We work very hard on an ongoing basis on all of the, the real drivers of costs, which I'm not gonna list because, you know, they're there, and they're obvious.
We have a unique brand portfolio. It's given us the ability to protect our gross margins. We spend a lot of time, care, and attention in ensuring that everything we produce is really high quality, is worth it, and that will continue, and we hope that that is giving us the ability to build some momentum against competitors. We're certainly not planning to change, you know, how we return capital to shareholders unless we can find something useful to purchase. We do look at expansion CapEx wherever it's appropriate, and we certainly continue to see opportunity regionally.
It's something that obviously is important, given the constraints domestically. And we have looked at quite a lot of opportunities, but so far, we've not found anything that we think is the quality that we need at the price, or, or even, in fact, the scale. So thank you very much for listening and for coming today. We appreciate that and your time, and very happy to take questions, either from the ether or from the floor. Surely it wasn't that boring that I put you all to sleep. Sorry, I can't really see anyone. You need a mic, I think.
Just a quick one on the potential ban on the Japanese seafood by the Chinese. I mean, is that just a product of a red herring, or is that something that could potentially meaningfully be positive to you guys?
We don't sell into China. I mean, certainly abalone, you know, we don't think would it affect it. It certainly sounds like the traditional Japanese-Chinese tit-for-tat, so. Anything else?
Yes.
Hi.
It's Byron from Investec.
Hi, Byron.
Hi. A couple of questions. The first one is on CapEx. You know, there was a bump up, but we can understand it's COVID, COVID catch-up. How do you think about it over the next couple of years, personally? And also, I know it's hard to break it down, but how much is actually maintenance versus growth at, you know, I&J and all that? It's hard to break it down, but just give us a sense.
Look, we take deploying capital very seriously at AVI, so, you know, we're capital allocators at the center. It's really important that, firstly, we sustain the efficiency of all of our productive assets, and where we can, at the same time, add either capacity and efficiency, you know, that gives us extra volume, we do do that. But you've got a big business. It is a big, complex business, lots of different manufacturing sites, different processes. So I'd say in the CapEx that you're seeing, most of it would be replacement, sustainable CapEx. But with each of them, and in some instances, there's the ability to extract extra value or lower costs. So it, at this point in time, is materially business as usual CapEx.
Will it hold at this sort of levels for a couple of years?
Well, it went down through COVID, and I think people thought that we'd given up, but, you know, we always flex CapEx against what we consider to be both the risk of the environment, the opportunity in the environment, and then, of course, our responsibility to sustain the current cash flows. So I would say that in my own mind, we spend a lot of time worrying about, you know, I guess, return.
We can flex it, and I'd say that probably at around ZAR 400 million. But keep in mind, a lot of what we spend money on is dollar-related, so you've got inflation in that number that is not to do with necessarily, I guess, us investing more, it's just the cost of CapEx having gone up. Yeah, I'd say it's probably between ZAR 400 million and ZAR 500 million, but it certainly can flex low as it did in the prior year.
Great. The second question is on. I think I'm getting nostalgic, you know, your investor proposition. I miss that line, which used to say, "Real earnings growth going forward.
Ah.
Well, let me finish. Right. So, you know, you've, you've had a lot of hits in the last five years. I mean, South Africa, the world, you know, COVID, load shedding, consumer, and so on, right? And you get to see under the hood of this business. Given where it is now and, you know, how you rightsize the business, at least for the next few years, is that , I'm not asking you to give a profit forecast.
I won't.
Yeah. So but
I'm in the JSE, after all.
Surely it's a better place to be now than it was in the past, where things might be slightly turning better and, you know, the prospects are a little bit better, as you said.
Look, this business is. You have to compare our capital return and our EBIT margins against many other businesses in SA. So we've worked extremely hard to preserve the original pedigree of this business so that we haven't compromised it in the pursuit of a top-line number. You simply can't prosper in South Africa if you don't deal with inflation. Inflation is something people, you know, we think about real money, and that's why we had a target of real earnings growth. The business's health is as good as it's ever been. If the macro environment improves, AVI has remarkable potential to deliver earnings growth because it's fit, it's got high capital returns, it's well capitalized, it's well managed. It's got, you know, obviously some categories that are more challenged.
But any business in South Africa that sells to consumers, who can decouple themselves from the reality of what consumers experience every day with job losses, inflationary pressure, load shedding, load shedding costs, you know, would be sitting here, and, you know, I guess it would be nice just to be optimistic. We don't run AVI like that. We've never dealt with investors like that. The business is in great shape. We need an improvement in the macro environment. I think we delivered, you know, in a semester, 12% operating profit growth. You know, that, I think, is reasonably impressive. But for the business to really accelerate, which it could do, we're going to need to see an improvement in SA's macro environment, and I think you guys all know that, too. I don't think I'm alone in saying that. We wish we could walk on water, but we can't.
Thanks for the presentation. Two quick questions, if I may. The first one is in the food manufacturing FMCG space, and I appreciate that you are disciplined in your acquisition strategy, but just generally as an industry, there have been very few acquisitions or transactions in that space. In an environment where top lines are struggling, you might have thought that firms might look to acquire to facilitate some growth. Any thoughts on why acquisitions have been at such low levels in that space? Is it a price inward focus? Just your thoughts on that.
Well, I can't speak for everybody else. You know, I can speak obviously for AVI and our philosophy. So we compete against multinationals, mostly. Everybody thinks we compete against the South African listed food sector. In general, we don't. You know, our competitors are all global FMCG businesses, and they have fabulous brands, you know, and, you know, we'd like to own those brands because that gives you the ability, you know, to manage your price and your volume, you know, in an environment like ours. So in our case, I mean, there are assets that one could look, you know, to acquiring, but the question then is, are you getting into categories where you can manage, you know, the selling price requirement in order to deal with the inflationary pressure?
And those kinds of assets, in our experience, both scaled and obviously with strong brands, you know, simply don't show up in the way we would like, you know, them to, to persuade us to participate. The balance of the market, you know, I can't speak for. Other people might have a different perspective, but as you say, there haven't been a lot of transactions. So I guess the other part of the system or other businesses, for their own reasons, look at it differently, or perhaps in the same way.
The multinationals, you're not finding any saying South Africa doesn't have a growth profile that suits them, and maybe it makes sense to withdraw, and there, there's opportunities in that space? Not really.
Well, if they did, we'd certainly show up as interested, for sure. But, you know, we can't. I mean, I can't speak for them. I don't know of any of them who've got to that place.
Another question, if I may. The category that surprises me is your biscuit volumes. Given the pricing, the premium nature of your products, your volumes held up a lot better than I might have expected. Just, I'm surprised there hasn't been more down trading and more volume erosion. Just some thoughts on that.
Well, we've got a lot of affordable price points. I mean, we trade with, you know, 100 SKUs, probably, and some of those SKUs, you know, like Topper, are very well priced. I mean, they're certainly not as well priced as some of the things you can buy, but, you know I won't give you my personal prejudice. Those aren't very nice. So I think we meet a market need at a price point. So we saw a lot of growth in Topper, where we provide consumers with what we think is a very affordable price point, but with a fantastic product. And that's, you know, I guess, where we saw real benefits. We had a fantastic choice season. Choice Assorted, traditionally, still a very important item, you know, across SA, you know, in season.
So we saw good volumes there, and we got some good volume growth. We certainly had, as you would have expected, in some of our higher price points, you know, obviously some volume pressures. But in general, you know, we got, you know, reasonable growth in some of those categories, which offset some of the higher price points. But, yeah, we do... People tend to think AVI is only premium, but like tea, we have Five Roses, which is still a Ceylon-based tea. You know, as good a tea as you can drink anywhere in the world, but we also sell Trinco, and that allows us to span price points in the system. We don't only sell at the top end.
Thanks, Simon. Appreciate it.
Morning, Simon. It's Cobus from All Weather Capital.
Yes, Cobus.
I just want to ask something about the Coty contract. So there's a y ou mentioned that there's going to be work, the potential working capital release, as well as they are obliged to buy some of the property, plant, and equipment in that. Did you have a rough estimate of what the cash flow impact of that is going to be?
No, I don't think, you know, we would like to say that. I think just at this stage, we'll report that later, if I may. Sorry, at the back.
Yeah. Thanks, Simon, for the presentation. I'm Andrew from Sanlam. Maybe if you could talk around your relationship with labor. I mean, as the business, manufacturing businesses get more optimized and more efficient, you know, obviously, you'd likely let people go. Also, you know, cost of living going up, wage settlements. I mean, yeah, maybe you could just give me your perspective on it.
Yeah. Our average wage settlement, you know, was very much in line with the target that, you know, we expected. Our relationships with unions are productive across the business. We didn't have any disputes in finalizing all of the bargaining arrangements, and we deal with quite a lot of different unions. So at this point in time, you know, that those relationships are sound. And our increases were, you know, around the 7% in general, so, you know, they were pretty sensible. I think the unions also understand that we're in a tough environment, so, you know, I think it was a pretty reasonable outcome.
Simon, we've got a few questions, or quite a few questions from the webcast. Lebogang from Citib ank has submitted several, so
I might not answer all of them.
Okay. Well, you prefer that I just read them out?
Yes, yes, yeah, just read one at a time.
Okay. Segment questions on Indigo Brands. How much sales will be lost from the Coty contract? How should we expect Indigo EBIT % margin to look post-removal of Coty brands?
It will look higher, as you've seen already. I'm not going to give a forecast on, you know, what the revenue will be, because it will also depend on the work that we've going to do with our own brands or the brands we've acquired. That would be, I think, a forward statement.
Thank you, Simon. On to Entyce. What will help drive operating margin expansion in Entyce? Better input pricing or operating costs?
More sales. You know, operating leverage, these are manufacturing businesses, so, you know, obviously, clearly, if we can get volume throughput, you know, we're going to get an expansion in margin within reason.
Thank you. On to I&J. Should we expect better I&J top line in FY 2024, an estimate, as hedging rolls off and abalone sales pick up? Are you expecting some margin expansion of improved cost structure and better management of load shedding in I&J?
I guess, you know, let's say that fishing improves, then the answer to those are yes. I think in general, certainly that's what Jonty's budgeted for. Justin, do you want to add anything? I mean, you need to speak on mic, so.
Thanks, Simon. I think it's as you said in the presentation, there's so many dependencies on the drivers of the business. If catch rates improve, we should get a very good top line growth, and if currency improves, similarly too. So we have got an increase in quota. If we can harness the benefit of that, we should get that anyway.
Okay.
Onto apparel. How should we think about the performance of apparel during FY 2024 estimated, and should sales track the second half 2023 performance?
I hope so.
Thank you. Further questions from Lebogang. Do you expect volume uplift in ZAR strengthens and inflation softens, or is the consumer still too weak to see volume uplift?
Yeah, that is such a difficult thing to, to answer usefully. You know, I'd be glib and say, you know, I'd like that. I mean, clearly, if we can, you know, get into an environment where there is some improvement in the metrics for consumers' costs, you know, that certainly finds its way into consumption. That's the one thing we know about South Africa, is, is that people spend money. And so if there is obviously an improvement in wage settlements and employment in confidence, because confidence plays its hand, you know, we'll start seeing it, you know, in, in people's demand habits.
But, you know, I guess it's anyone's y ou know, anyone in the room, you know, might have a view. You know, I'm cautiously hopeful, based off, you know, I guess, some of the metrics we're seeing, and that's specifically for our categories. But yeah, it's still gonna be a tough environment until we see some of those metrics change, is my own view. I'm sure other people might have, you know, other views, but that's my view.
Thank you, Simon. Further questions: Can you provide some color on post-year end sales for the business, as well as color on trading on a segmental basis?
I'd say that post year end trading in general is, you know, reasonable. I can't, you know, be more specific than that. I'm not in a position to do that, but certainly we're seeing some positive momentum in many of our categories, which I think is encouraging, which I think I alluded to in the presentation.
Thank you, Simon. What sort of inflation are you seeing in the first half of 2024 so far?
Well, you know, which exchange rate are you gonna give me? Net of hedges, what we anticipate is what we're seeing. You know, clearly, you know, some things fundamentally have to change for the inflation rate to come back quickly. There's still quite a lot of embedded inflation in SA, which compounds its way through. And of course, you know, I hate to say it, you know, everybody, you know, tends to forget about load shedding. It's not a trivial problem.
It's a real big issue. It's a big cost driver. You see everybody reporting results. These are hundreds and hundreds of millions of ZAR worth of cost that are finding their way into the system. So, you know, I guess that will affect inflation substantially. And then, of course, the rand. I mean, the rand has moved, you know, in 8 weeks from 17.28 odd back to, you know, nearly 19. So that's also a big driver for anybody who's not hedged.
Thank you, Simon. The last question from Lebogang: Can you explain tactics by retailers? We see retailers discounting aggressively. How are you managing that? And are they asking for more volume discounts, et cetera, or has it been good for your brands?
No, I mean, our relationship with retailers and the retailers themselves are competing in a very competitive, tough market too. So, you know, like us, they use strategies. I mean, we, you know, play our role, and, you know, we support what we think makes sense to both of us. I mean, they're our partners. Yeah, it's like any set of circumstances where, you know, you've got competing constituencies all trying to, you know, create value. You're gonna have tension and... But, you know, in my experience, it's similar and it's sensible. But clearly, everybody's fighting for share.
Thank you, Simon. The next question from Taylor Ginsburg of Ntombo Wealth: Why were there lower catch rates for hake in I&J?
I'd say largely weather related.
Thank you. Then we have a couple of questions from Shaun Khan of Nedbank. First one, can you please speak about the launch of Tennis Rusks into your Snackworks performance? Was that substantial in reducing the volume decline?
It was important. Rusk is not the biggest category in biscuits, but we can tell you that Tennis Rusks is now South Africa's biggest single rusk. So that was pleasing, and that's obviously important, and it did contribute obviously to those volumes.
Thank you. Another question from Sean. On Creamer, with more CapEx coming online, are you seeing Nestlé regress from the SA market, given even unavailability of the 750 grams on Creamer, or are they generally having capacity constraints?
Look, we don't know, you know, inside their, you know, black box of, you know, their process environments. I mean, we, you know, compete, we meet our own orders, and, you know, we obviously compete. We've been gaining share recently. Now, that might be a function of manufacturing issues, or it might be a function of them, you know, holding price. We know that FMCG businesses globally... You know, goodness me, how long has it taken them to work out that actually you can put up selling prices? Isn't this a shock?
I mean, for a decade or even longer in Europe, they never put prices up. So, you know, I've always had quite strong opinions about, you know, what it means to operate in an inflationary environment like the, like ours, where in Europe, they haven't had much inflation. So yeah, my own view is that, you know, I think that if they are behaving differently, it's probably because they are more interested in probably making a little bit more money, we hope. But from a manufacturing point of view, I can't comment.
Thank you. The last question from Sean: With a strong performance from out-of-home coffee, is the mix still 15%-85% on sales? And what is the ideal sales mix target looking ahead, given normalization in trade and the challenge, and the challenge in retail sales?
If only business was like that, I could say, "Gaino, I want 85% and 15%." It's unfortunately not like that. We work hard to sell as much of everything that we can, and in the end, the ratio is the ratio. You know, we don't try and target the completely different categories, different consumption occasions, different consumers, different products. You know, it's just definitely not that simple. I wish it was, but it isn't.
Thank you. The next question from Siphelele Mdudu of Matrix Fund Managers. Tea volumes were positive in Q4 of FY 2023. How do you reconcile this to high load shedding?
Well, you, you remember that we went through a period, you know, where people obviously are completely exposed to load shedding, and then people start making a plan. You know, some people buy gas stoves, some people buy gas cookers. You know, some people make different plans eventually to deal with the experience that they have. So we think that, you know, some of that has flown through back into, you know, consumption, is my own take on this.
Thank you, Simon.
Tea is very important. You can't live without it. You all know that.
Then the last question from the webcast for now, from Mthusi Phiri of Benguela Global Fund Managers. In addition to CapEx spending, do you expect to increase the advertising spending in FY24?
Yes, definitely. Yeah, across all of our businesses.
Perhaps you can take some more
I think we're gonna call it there, unless there are any final pearls that anyone wants to try and ask. If not, thank you so much for coming. Appreciate your time, and take care.