Good morning, everybody. Thank you for those of you who've come in person today. It's always nice to see real people. This is not an AI, I hope. Also welcome to those joining us online to our half year results. Seems somewhat passé to be presenting these results in a very volatile environment. For those of you who stare at screens all day, a special thank you for coming. We've got a pretty traditional format. I'll take you through some of the key features. Justin will take you through the group financial results. I'll cover through divisional performance. Got some of my colleagues here as well, who can answer any of the difficult questions. We'll talk about prospects, but we'll ask you what the oil price will be before we do that and then we'll take some questions.
I think the environment, as you all know, I guess if you look at other people's results, it's a tough consumer environment for those of us who sell to South African consumers. Top line growth, fairly challenging across the portfolio. Nonetheless, I guess, at least decent volume growth in some of our key categories. Good to see some of our innovation working and hopefully at the year-end, we'll share some of that in goodie bags for those of you who come. Nice to see the Spitz business have a decent December, a very critical driver for their financial performance annually and it was good to see growth in footwear volumes. We'll cover off that in detail. Gross margins, absolutely fundamental to how we manage, you know, our portfolio.
Well protected in a very complex environment with lots of volatility, that was something that we were pleased with. I&J's profits performed. Fishing catch rates improving off a very low base. Pretty sporadic though, not as strong a recovery as we would have hoped for. Of course, another particularly tough period for the abalone business with obviously some accounting fair value adjustments significantly undermining at least the reported profitability, if not the cash flow. We are benefiting from a pretty severe restructuring initiative in the prior year, about ZAR 40 million came through obviously in this period. Group operating profit up just under 12%. Headline earnings pretty much in the same area.
Very strong cash generation, cash conversion, which I guess is very much a strong feature of this particular set of businesses and strong return on capital employed being sustained. That's also pleasing. Dividend pretty much in line with HEPS. That's the operating profit history. You know, I guess the COVID bump took a bit of momentum out of, I guess the history, but still solid recovery and sustained growth and profitability across many of the underlying categories in each of the business units. Of course, as I've said, decent return on capital employed and strong cash conversion, I guess all illustrated in the chart. Dividend, obviously pretty much in line with earnings and, you know, obviously for those of you who will start crying out for a special dividend, you'll have to be a little more patient.
Nonetheless, hopefully with strong cash flow generation, Sansas being able to, you know, succeed at acquiring something or doing something else, I guess the performance, historic and future, looks pretty good. I won't say much more. I have kind of covered that. Let me give you to Justin to talk about the detail.
Thank you, Simon. I think overall a sound performance, as Simon has already alluded to, with sustained profit growth. I think if you have a look at our earning comparison against the first semester of our 2023 financial year, we've achieved a 12.5% compound annual growth post that COVID period. A pleasing operating profit achievement in that regard. Revenue grew 4.9% underpinned primarily by selling price increases, but also aggregated growth in volumes across the portfolio. Gross profit grew ahead of our revenue with the gross profit margin improving from 42.9% to 43.5% over the semester. This was well supported by an improvement in I&J's earnings, albeit off a lower base. A sustained achievement across the rest of the business with margins largely protected. Selling and administrative expenses ended largely in line with last year.
We have continued to focus quite heavily on cost management. Benefits coming through in that number with regards to the restructuring initiatives that we implemented. Some savings in our distribution as a result of lower fuel prices and partly offset by some higher volumes. Also some savings coming through in the retail part of our business as a result of the closure of Green Cross stores. Operating profit grew 11.6% to just under ZAR 2.2 billion and the operating profit margin also improving from 23.2% to 24.7% over the semester. Net finance costs slightly lower, largely a function of the lower average interest rates that we've seen coming through in the semester. This was partly offset by higher average borrowing levels. You'll recall that in October 2024, we did pay a special dividend.
We have been paying down that debt since then, but over the semester did have higher average debt levels. Capital items, nothing of significance coming through in the semester. Last year, you'll recall that the ZAR 17.4 million includes a ZAR 12.6 million profit on the disposal of the squid fishing business that's conducted by I&J's joint venture. The effective tax rate largely in line, slightly higher than the South African corporate tax rate of 27%, but aligns with our historical performance. Headline earnings growing 12.3%, headline earnings per share by a slightly lower 11.7% as a result of the dilution of shares issued in respect of the group's various share incentive schemes. I think from an operating profit perspective, I think this table really demonstrates the growth that we've achieved across all parts of our business.
Obviously, most significant in I&J, with the improvement coming off a weak base, an improvement in our fishing profits, which was well supported by additional capacity as a result of the additional freezer vessel that we acquired in February of 2025. This was, as Simon has already mentioned, partly offset by a weaker performance in our abalone business, which continues to be pressurized by weak demand. Snackworks, pleasing performance, improvement in profits as well as an improvement in margins, well supported by innovation, top-line volume growth, as well as a favorable mix within our snacking business, which supported some of that margin improvement. Personal care, I think from a margin perspective, saw some improvement, was primarily a function of cost-saving initiatives across that part of our business.
Footwear and apparel recovered some of the margin loss that we saw last year, returning to levels achieved in H1 2024, as a result of improved demand through our peak season, as well as improved availability with a non-repeat of last year's supply chain issues, as well as a conscious decision taken by the business to bring in stock earlier to support that. This graph contextualizes the impact that price and volume have had on our top line. You'll see that price increases have been taken across most of our categories over the last 12 months. Important to note that we have been seeing some moderation in the extent to which we've needed to take price as a result of a softening of commodity prices over that period.
Volumes, we do cover some of the more the detail around the volume improvements or movements rather, in parts of in later in the presentation. That number primarily driven by improvements in creamer, biscuits, I&J hake sales, as well as improved footwear volumes in our Spitz business. We also saw good volume support, incremental improvements as a result of innovation launched in many parts of our business. Historically, we've always highlighted the importance of balancing price and volume. It's an important part of how we also manage our margins and protect the long-term profitability of our categories. I think in a challenging environment such as the one that we've been experiencing, we've had to carefully navigate this. In some categories, we've had to reduce selling prices in order to protect volumes and profitability in those categories.
From a gross margin perspective, I've obviously highlighted the improvement already, underpinned by I&J, but also the ongoing management of margins across our business and focus on cost control and efficiency in our production facilities. I think also, our disciplined hedging has continued to provide the much-needed certainty across our businesses in order to manage those margins. We have provided some information later on in the information section of this deck covering a comparison of our realized pricing against average market pricing over the semester as well as our current hedge positions. I think that's obviously quite important in the context of the uncertainty that we face. We are well hedged for the next semester.
From a restructuring perspective, you'll recall at year-end, we did highlight some of the restructuring initiatives that we'd undertaken in the second semester of last year. Simon's already spoken to and alluded to the ZAR 39.4 million saving that we've realized through the first semester. That's primarily a function of headcount savings. None of that number relates to the non-repeat of implementation costs that we incurred last year. The ZAR 42 million that we reported last year primarily related to the second semester, so that not yet benefiting our costs. Overall, I think the achievement in line with expectations with the annualized benefit of ZAR 76.1 million that we were expecting. I'm not going to go through the detail of each of these bullets. It will be covered later on in the presentation.
I think overall, the improved performance well supported by I&J Snackworks and then also Entyce and continued focus on cost control across the business. From a cash flow perspective, cash generated by operations improving 9.8%, slightly lower than our growth in operating profit. This is largely as a result of an increase in working capital investment through the semester. I think if you recall, last year, we did have a reduction in working capital. Working capital continues to be effectively managed, notwithstanding the increase in the working capital to revenue percentage to 25.3%. This increase was primarily a function of a decision to bring in inventory earlier, as I've already mentioned. This resulted in a lower level of trade payables at the end of December.
We also had a strong last two months of the semester from a sales perspective and that resulted in higher trade receivables. We've had no structural change in any credit terms or payment terms across any part of our business. If we adjust for the trade receivables impact, that would reduce the working capital to revenue percentage to 24.1%. An improvement on last year. Capital expenditure reduced off last year's ZAR 425 million base. Obviously, a non-repeat of the acquisition of the freezer vessel in I&J, which was a large contributor to the high base. We continue to invest in our facilities, particularly projects that underpin efficiencies, quality, as well as our innovation initiatives. For several years, we've also invested quite heavily in power and water infrastructure and backup capabilities across each of our sites.
We continue to see municipal infrastructure deterioration, that's become an important part of protecting our facilities. Net debt reduced from ZAR 2.55 billion to ZAR 2.1 billion over the semester. That number includes our lease liabilities. Excluding our lease liabilities, cash debt reduced from ZAR 2 billion to ZAR 1.6 billion, with our net debt to capital employed also improving to 27.8%, largely in line with our target gearing levels. From a return on capital employed, you've already would have seen this number, an improvement on last year, largely a result of the improved earnings. I think, in previous presentations, Simon has highlighted the fact that that is a number that is based off the book value of assets carried on our balance sheet and as a result is determined on a historical cost basis.
We do evaluate that number, based on replacement cost and it continues to be well above our weighted average cost of capital. Normal dividends. Dividend cover has been held in line with historical practices at interim, our normal dividend has increased in line with the growth in headline earnings to ZAR 2.45 per share. I'll hand you back to Simon, who's gonna take you through the individual performances. Thanks, Justin.
Not sure if that's time for tea. In Entyce Beverages, obviously our tea, coffee and creamer business. Strong performance from tea, which was pleasing. Nice to see some volume growth, you know, in our core brands. Obviously, price increases necessary to deal with input cost pressure. That slide will come up a bit later. You know, a decent performance from our most important two brands, Freshpak and Five Roses. A good product mix, which is also very important in this business. I'm not gonna go through every piece of detail. You know, this is something that you can digest, I guess, when you've got more time. Strong profit performance from the tea business, also an area that saw us, you know, manage costs effectively and benefited from some of the restructuring initiatives that we've talked about.
Coffee, a very complicated period with very strong increases in input costs. Trying to navigate, obviously, a very competitive environment. Obviously, we were reasonably well hedged going into this, but nonetheless, it has been a complicated environment, particularly with Arabica prices rising as quickly and aggressively as they have. Has abated more recently, but certainly not in this particular period. Some innovation underpinning the growth and performance in some of our value-added categories. Hug in a Mug. Mixed instant remains a tough category, with competition, still a material issue and affordability in that category obviously affecting demand. Margin improvement, though, again, as Justin said, largely from a favorable product mix. Creamer, we had an extremely strong prior year semester.
If you remember, obviously the change of ownership of Cremora, the brand that we compete with, from Nestlé to Lactalis, finding its way, I guess, into the semester. We needed to do some discounting here to protect our share of the category. We also benefited, obviously, in this category from the cost initiatives. This chart takes you through some of the volume and value. You can see, obviously, the impact on demand in the coffee category offset by materially higher selling prices. In creamer, obviously a discounting requirement to sustain our share of that category was necessary. Overall, as Justin said, in all of these categories, we do our very best to try and find the best balance between volume and value. Market shares. You know, I always warn you know, this is formal retail only.
It's very difficult to read, some of the informal channels, which are very significant, to our Entyce portfolio. That's, you know, the best read that we can get from the formal system. Nothing alarming here for us. Obviously, the Ellis Brown, decline in share in formal retail, a function of what I said about, you know, a slightly different competitive environment. Impact. As you can see, the robusta chicory blends are obviously the most affected in the period. This is net of hedging, okay? This would be that portion, you know, that we didn't manage to control the cost of. The Snackworks portfolio, as Justin said, a very pleasing performance, from biscuits underpinned by good innovation, something that we've been working hard on.
Certainly Bakers Choice Assorted in December, or the festive season in general, was pleasing to see, good growth innovation underpinning, you know, I guess 3.5% of the total volume, which we were pleased with. There's more of that to come. An area that was certainly benefited from some of the restructuring initiatives, obviously putting a significant amount of money relative to the prior year into marketing support and into innovation. Innovation, you know, comes at the expense of trial costs. It's not without some fixed costs. The snacks profit, we obviously here had a very competitive environment. This is an environment that has seen an enormous amount of bottom-end, competition intensity. It continues to grow unabated. Certainly in maize extrudates and potato chips, the most significant.
We did a lot of, I guess, useful innovation in flavor extensions across the portfolio. We saw benefits from that also. Again, our cost initiatives found their way into this part of the business and selling an admin costs in Snackworks well managed. You can see the volume growth in biscuits coming through, which was pleasing, underpinned obviously by some pricing necessary to deal with some of the cost increases. I guess in line with what I said about the snacking portfolio decline in volume and lifting of selling prices, again, underpinning I guess the overall performance. Market shares, same comment about formal retail playing our cha, a fair amount of contribution and growth, you know, from the wholesale channels important to us, in this portfolio as well.
Again, you can see the cost pressures that, you know, I guess continue to, you know, make pricing a very important part in value and volume management. Hedging obviously vital to manage, you know, the lumpiness of this. I&J, as Justin said, obviously an improved performance from the fishing business, coming through and underpinning obviously the very low prior year profit performance. This is well short of what this business needs to underpin, you know, its capital employed. So in as much as, you know, we are pleased with the improvement, we're still, you know, I guess at a profitability that makes it difficult to invest money into the category. Decent product mix, coming through. I guess if we go through to, you know, the abalone business, obviously a substantially challenged period.
Asian demand, competition in that market still constrains the performance of this business. Not a lot of change, structural change yet coming through in the oversupply, but I think in this current semester we'll see some of that. Nearly ZAR 38 million being expensed, obviously through the fair value adjustment of the biological asset. Well-managed site, no problems operationally. You can see the impact obviously on the operating profit in that waterfall chart, coming through with abalone obviously being the most material. You can see it really shows up obviously when you look at the ZAR 44 million, you know, that's brought down I&J's fishing performance, fairly substantially in this semester. Fishing performance, albeit a slow recovery in fishing performance, sporadic, you know, in the semester and of course catch loads taking longer to recover than we had hoped.
It's, it's helpful to have the extra freezer vessel in that its activity and contribution is asymmetrically more valuable. That did help. Domestic volume gains obviously in line with improved fishing performance and international 8.8% material improvement in volumes, overall and selling price increases obviously. We didn't have, I guess the weakest exchange rate experience, because of the rand strength net of hedging. Indigo remains a business dealing with I guess two things. One is the sustained pressure and competitiveness in the core deodorant body spray category. Lots of multinational competition, lots of discounting taking place, affecting demand in this weak discretionary income environment. We're working very hard to build a portfolio of lower priced products and we're seeing some of the benefit early on in this semester.
Hopefully the momentum will build, you know, through this calendar year and we're seeing good demand for this innovation activity. I mean, we did protect margins, admin costs and restructuring benefits have come through, overall we protected, you know, the operating margin 20.3% versus last year's 18.3%, which I think, you know, was credible under the circumstances. You can see the significance of the decline in the body spray business. You come through into market shares, though, not all even, mostly a function of female body sprays. Male body spray market share, at least in the formal channels, well protected. Certainly, you know, we see that as being sustainable, into the second semester. As Justin said and summarized, a pretty decent December overall, a better performance.
Nonetheless, a very challenging environment for clothing. Kurt Geiger, trades in a, in an environment characterized by significant and ongoing discounting through the semester, obviously carried through into, you know, this semester. A pleasing performance from the core Spitz business, as we've said, with decent volume growth. Very pleasing volume growth, for Spitz, for the core footwear business in the period. Obviously, some discounting necessary and that came through obviously in the average selling price. As I've said, obviously the decline in KG revenue in line with the comments that I've made about apparel generally in SA. AB International, you know, ongoing growth and performance, obviously, two challenging environments. Botswana in particular affected by the decline in the mining industry, a very material contributor to the economy in Botswana affecting demand.
Of course Mozambique, with currency shortages making it difficult for our agents in Mozambique to, you know, make payments to us. Aside from that, you know, basically overall, as we show in this slide, strong profit growth, which is also very important. A very, very pleasing profit performance, notwithstanding some of the comments about the impact of Botswana and Mozambique. Talking about prospects, I don't know where to start. I guess so much will depend on, I guess, the impact of the current state of play. Fuel prices in particular for consumers in South Africa are significantly impactful if prices stay at these levels. A lot of people, you know, I think are on fairly thin ice as consumers in South Africa.
I think, notwithstanding, I guess that we're used to this, we're disciplined, it does make it very difficult to trade with any, I guess, fresh air in an environment where, you know, consumers are battling every month. It may put pressure on our margins depending on how we have to manage price and volume. We do have pretty good hedges, as Justin alluded to and you can see that at the back end of the presentation. There might still be some moderation, obviously net of the rand and we don't know what the trajectory of the rand will be, I guess, through the second semester. The second semester is pretty well protected. I guess it's the period, you know, that comes after that.
We're gonna have to manage volume and price, I guess, in a slightly different environment than we might have anticipated, I suspect, given, you know, the last two weeks and what it may mean to consumption and to obviously the fundamental cost of energy. We keep looking at our cost structure. We've got actually quite a lot going on. We're absolutely determined, you know, to build, you know, basically the most effective business model that we can. You know, we're becoming absolutely committed to the idea that each business model needs to support itself, where, you know, basically its efficiency and focus is very materially focused at the affordability levels that consumers can support.
We're taking a hard look at any costs that come from any of our central structures that we think might be inefficient and that work is very much underway. I guess, perhaps at the year-end, we'll have a little more to talk about. We're certainly working hard on innovation and that's not just innovation that supports obviously premium price points. It's to try and ensure that, you know, we can show up in affordable price forms. We've got lots of work. Not all of it, unfortunately, will come through in H2 that tries to bring some of our products, our premium products, to consumers in smaller pack formats, an initiative that's well underway across the business. In fact, in the first semester, did underpin some of the volume growth that we saw.
I&J as ever, unfortunately will materially be leveraged by the three big variables: catch rates, the exchange rate and fuel prices. Obviously, we're pretty well hedged for, you know, H2 and I&J's fuel. You know, there afterwards, obviously less certain given the current exchange rate and obviously the current spot prices of oil and material cost on cost in I&J, if fuel prices, you know, stay at these levels. Short-term catch rates, yeah, they're still lower than, you know, where they need to be. Obviously we're hoping, to see an improvement, you know, into the second semester on a more sustained basis back to historical levels. There is a TAC cut, obviously, in the calendar year. It's not gonna be material to the second semester.
Abalone, we're still dealing with, obviously sustained levels of lower demand, oversupply and pricing obviously at levels that aren't where they used to be historically. We've seen a little bit of a lift, in the last two months, which I guess is somewhat of a bellwether to hopefully an improved performance. Key thing here is to sit this out. There is, in SA at least, some restructuring taking place. We've had two farms, small farms close, which, you know, will hopefully, you know, I guess, limit some of the supply or the oversupply, I guess, in a lower demand environment. Footwear and apparel, this is a tough environment. You've all seen from, I guess, some of the results, not of our direct competitors, but I guess as a proxy for consumer spend.
You know, this is certainly a very intensely competitive space in SA. Lots of sales still going on post-Christmas. All of that, you know, I guess, puts pressure on the demand environment, notwithstanding that we're not direct competitors of many of these listed businesses. We won't have the repeat of the Green Cross closure costs, which will help. Again, in this business, we y ou know, looking at all of the metrics that help us drive efficiency and profitability notwithstanding, the demand environment. We're taking some of our brands online where appropriate, you know, because it is important to try and get to every consumer that we can. Takes time to build this capability. It's not overwhelmingly important to the way our consumers shop but nonetheless, it's something that we're doing.
From a CapEx point of view, you know, that's what we'll be spending money on in the second half. So just under ZAR 500 million is budgeted to be spent. There are a couple of other projects that are in the mix that we're looking at. They're not going to probably get done in this period, but we certainly continue to look at any project that allows us to get a return on capital if we can improve, you know, efficiencies in the process environment. As Justin said, we're having a torrid time, not so much with the failure of electricity, although that, you know, continues to be a sporadic issue, but it's the quality of power, you know, that is fed into the grid, you know, through local authorities.
This weekend, I think we had three major disruptions at three of our factories, you know, which take our processes down, require us to restart. We lose, you know, both manufacturing time and then there's a lot of waste as it comes as a consequence. It's a very frustrating thing. This is one of the hardest things to deal with. We can deal with it, but the economic cost of dealing with it is very significant. I guess the critical thing for our business is to continue adapting and changing. We know that the past, you know, is not the future. As I've said already, our alignment across the business of our business model continues unabated.
We're not afraid to disrupt ourselves, to try and work with our businesses, our colleagues to try and find smarter ways of doing the same thing to improve our margins, manage our costs, improve, you know, any aspect of our business. Equally focus, you know, on innovation that's both relevant and affordable, you know, for our consumers in this changing environment. We do take a long view, which means that sometimes, you know, we have to accept, I guess, the reality of the immediacy of both competition and cost. Justin mentioned that we are, you know, as ever, thoughtful about spending money without making a return. Something that I think we'll continue to focus on across the business. Again, you know, leveraging our domestic manufacturing ability.
We've got a couple of projects on the go at the moment, looking at international markets, for some of our product capability, which we think might turn out to be interesting. It's early days. As ever, we're thoughtful about how we spend money. If we have any surplus money, you know, we'll find an efficient way to get it back to our shareholder community. We are looking, as we always do, at acquisitions. Have to be high quality, very competitive world, very competitive environment in South Africa. You know, one day, hopefully, we will find something that we can make sense of. Thanks very much for coming and very happy to take any questions. Mr. Chauke, you don't ever disappoint. You're always the first.
Thank you. Shaun Chauke from JP Morgan. A couple of questions on my side, Simon. Maybe let's start with it. Please speak about the flexibility in the manufacturing cost base. What I'm trying to understand, is this mainly a function of labor, or is it due to the ability to switch lines for different products, therefore resulting in the ability to lower your fixed costs? If you could please provide more color. You know, how does this work in an environment where it works so well because the macro has been so constrained? In an environment where, let's say, the macro turns positive, you know, do you benefit more from a function of manufacturing versus underlying soft commodities versus what the volume uplift can give you? Thanks.
As always, a complicated question because every process of, you know, our business portfolio is different. You know, our thought process is simple. You know, we're trying to drive, you know, basically our process environments to operate with the highest level of flexibility at the lowest cost. You know, I guess we have to do that in the context of the current rate of demand. Which, you know, is the right thing to be doing. It doesn't eviscerate any of our ability to flex supply, you know, if we saw a sustained improvement. There would be, you know, even better leverage as a consequence because your cost base, you know, is largely fixed in your process environment net of, you know, your throughput costs, you know, which sit in your cost of goods sold.
You know, it's a complicated thing to answer and every process tea is different to creamer and creamer is different to snacks and snacks is different to biscuits. Even within a biscuit factory, you know, there are long-run lines and there are short-run lines. The whole philosophy, you know, is to minimize the cost of every bespoke activity, you know, whether it's at a product level or at a category level. You know, that's what we're focusing on. To ensure that we, you know, sustain and maintain our ability to respond to demand. We're not doing any of this that's essentially eviscerating our long-term ability to meet, you know, I guess, a higher rate of demand. I don't know if that helps.
Simon, the increase in premium products on smaller pack sizes, does that uplift in GP margin despite your increased cost on packaging and all that versus the benefits you get from capacity utilizations?
Yeah. We're very fussy about GP. If we're gonna do a small pack, you know, we're not doing that so that, you know, we only improve our rate of sale. It's important to do that and sustain your gross margin. It's a mixed bag and you know, some of it depends on the cost of capital required to achieve that outcome. In some cases we can pack small packs without new equipment. In other cases, you know, we might need a bit of new equipment. These things would all affect, you know, I guess your question. In general, you know, we're quite disciplined about ensuring that anything that we do, you know, gives us a return and therefore we're not doing this so that we can trade at a substantially different mix of gross margins.
We're trying to get to consumers with a more affordable price point. And the fundamental philosophy is to make great products. You know, that's the real focus here. Just to make them more accessible.
Hi, Simon. Keith McLachlan, Element Investment Managers. Can we just chat through your hedge book? The slide in the information pack is wonderful, but it is a little vague because 75% of imports hedged. Which 75%? Obviously pertinent to the oil price spike and how long it lasts. First question is really some color on how much of your direct fuel costs and I&J is probably the weight of that, is hedged in that, in that hedge book. The second one, the second order of knock-ons is obviously into the agricultural commodities. How much of those are hedged as well? Just to get a sense on the kind of shape and mix of this hedge book.
I mean, all of our inputs, you know, basically that are fundamental to each of the categories are hedged. Our broad philosophy is to be around 50% hedged, that's so that we can manage, you know, our pricing in a known way. In general, our retail partners want 1 price increase a year. All of the things that, you know, we can hedge, which obviously, you know, are not, I guess, supplied through the gearbox of local supply. Flour for example, we would hedge because we procure it ourselves. Butter we would hedge because we procure it largely ourselves. Input costs like energy, unfortunately, are only hedged in I&J because we don't control the price of energy outside of I&J, but in I&J we, you know, obviously hedge it directly.
What you're seeing in the detail is in fact, you know, basically a pretty complete picture, notwithstanding that it's vague. It's not really vague because those are the things that we hedge and those are the substantial input costs that we need to hedge in order to support gross margins, as we've said. You can pick it up with Justin. You know, he's here, happy to take you through the detail.
Hi. Morning, Simon. It's Saad Chotia from Citi. Just a question on I see the volume uplift in certain, categories like Five Roses and coffees and a few other sort of lines. Are you seeing the consumers starting to trade up, yet or not really?
No, I don't think we're seeing, you know, I mean, any directional, you know, trading. You know, that, you know, I guess, you know, I could say with, you know, hand on heart.
Thank you. Just a second question. What is the lag time, if you can remind us from soft commodity spikes into your selling price inflation?
Well, hedged or unhedged?
Unhedged.
Yeah. It would be, you know, pretty immediate. I mean, you're buying in spot markets. If you unhedged, you know, you go to the market the next day. If you went to buy gas oil today, you're paying today's price. You know, most instances we're buying physicals. We do buy derivatives in some instances, obviously, you know, that's different. In general South Africa's an import priced parity economy. In packaging it takes, you know, a lot longer to flow through because that has to come all the way through the polymer complex and you don't know what your suppliers' hedging positions might or might not be. Packaging is the one that probably three-six months is probably hard rolls in general. The balance of them are spot market priced.
If, you know, they are procured in spot markets net of hedging. Yeah, it just does vary. Fundamentally, anything that we buy that's not hedged, you know, is at international prices because we import it and we ship it and then we bring it in.
Great. Thank you.
Questions in the room. Last chances. We'll go to the webcast now. We have a few questions there. The first one is from Talya Ginsberg from Umthombo Wealth, the question is c ould you elaborate on the importance of the non-formal retail sector to AVI?
I'll let Michael answer that. He's here. He's right next to you. Pass him the mic.
Can you hear me? Is this on?
I think take the other one, Mike.
This one?
Swap.
The informal sector is very important. Obviously, the level of importance varies across the different portfolios. It is important in personal care, in beverages, biscuits and snacking and becoming increasingly important. That having been said, the competitive intensity in that sector tends to be even greater than in formal retail. We see lots of new competitors entering in the entrepreneurial and family-owned space, appealing very much to the affordability, which has become the predominant purchase decision of many of our consumers. We do sell our premium brands in that sector but obviously, greater contribution coming from the sale of our value end of the spectrum.
You will ask the size. I mean, it depends. I mean, in some parts of Entyce in the portfolio, it's over 30%. You know, in other categories, obviously it's lower. You know, it's a very significant, you know, part of, you know, most of the categories that we trade in. It's a different channel. It's business is conducted in a different way. You know, as you've seen, if any of you read retail data, you know, it is a growing segment. It's very important that we show up there. As Mike says, of course, there are many prices, you know, in that system, many different product qualities and product saliencies.
It's one of the challenges, you know, which is this arbitrage that, you know, exists in South Africa, which, you know, I don't think I'm the only person to talk about it. You know, we run our businesses, you know, with very, very strict, you know, I guess, quality and control and value systems. I guess the regulatory framework is something, you know, that we police ourselves on, are vital to support high quality product and our brands. That in this informal channel, as Mike says, you know, there are many different types of suppliers. Obviously, you know, there's a very different value system, I think, in some cases, you know, which makes, you know, the competition, you know, quite challenging sometimes.
The next question is from Siphelele Mdudu from Matrix Fund Managers. You've highlighted innovation quite a bit in these results. How are you thinking about innovation going forward particularly in a constrained consumer environment?
Well, innovation, you know, is a fancy word, you know, I guess, you know, that really says, you know, we're trying to solve consumer needs and be those needs, you know, shifting habits, expectations. Snacking has become a materially more fundamental way that people consume, which means that you need to have smaller formats. Some of our innovation is aimed at that. Some of our innovation is new and novel. Some of our innovation is the extension of what we already sell. Some of our innovation, you know, is underpinned by affordability and lower price points. You know, it's a complex, you know, basket of activities across the portfolio. We see it's absolutely essential for us to get better and better at this.
We're changing how we structure it, how we do it so that, you know, we can become quicker and quicker at getting to market. That's, you know, I guess what it means. That's why it gets the emphasis.
Next question from Chris Logan at Opportune. Well done on the results. It seems China has increased its abalone production. Where is AVI's abalone operations on the global abalone cost curve and how big a cost is Eskom electricity to your abalone operations?
Eskom electricity is a meaningful cost. We are looking at an alternative energy solution for the farm to try and ameliorate some of those costs. Those costs have risen pretty much about 25% to 30%, you know, of our fixed costs, I guess. Significant. Where we fit in, I couldn't tell you know, how we would ever read the Chinese because a lot of it's quite informal, quite small, not as institutional as ours. We know that in South Africa, we are the lowest cost producer. That's data that I think we've been able to glean over some time. How we compare against China, I guess we can't read.
Next question from Catherine Blersch at Granate Asset Management. Across a number of categories, you have been losing market share for a number of years. Are any of these categories becoming less attractive businesses? Are there any areas you would look to exit, or what can you do to retain or gain share?
Yeah. I mean, share is a very important long-term fundamental thing to be concerned with. It also, you know, can be, you know, I guess, you know, a guide that you know, might misread. You know, none of our categories fundamentally, aside from, you know, probably mixed instant coffee, you know and there that's complicated because there's 100% instant coffee in there, you know, which has become less profitable, over time. Parts of the snacking portfolio, because margins, you know, have been hollowed out. Remember, you know, I guess, you know, you want to contest in categories where you can continue investing capital and, you know, sometimes categories, you know, are over-invested in by a system and eventually the margins, you know, fall to levels that don't make sense.
We don't mind giving up share if it preserves the economic opportunity and we believe, you know, that we can still succeed with the share that is left over. The problem with share reads in South Africa, particularly the ones that we provide you with, is that they're not a complete read. We've actually gained share, quite significant share and volume, you know, in the informal space. Inasmuch as our shares on aggregate look like they're declining, they are declining in one system. Unfortunately, the retail system has its own embedded problem, where some retailers are significantly more successful at the moment than others and that has affected some of the shares that, you know, we show up in because, you know, we would be supplying some of those retailers whose share in the system has been declining.
It's a complicated question. We don't run the business with share as the only metric. I mean, we accept that it's important, you know, I guess to look at volume rather than share, in a system that has two tiers to it, like, you know, our retail system does.
Thank you. Murray Moore from Aylett & Co is asking why the discrepancy between I&J and SHG catch rates?
SHG. Sea Harvest. I'm not going to say. I do know why, but I won't say. I'd prefer not to say.
Those are all the questions on the webcast for right now.
Thank you very much. Thanks very much, everybody. I think there is some lunch, if I'm correct. Thanks for coming today. We really do appreciate those of you who still attend.