The owner of Five Roses tea warns war will escalate costs
AVI expects margins to come under pressure after Russia’s invasion of Ukraine
AVI, which owns Five Roses tea and other household brands in SA, said on Monday that its margins are likely to come under pressure from rising raw material costs after Russia invaded Ukraine.
“Russia’s recent invasion of Ukraine has sharply increased the cost of fossil fuels and many soft commodities, some now trading at record levels,” the company said in a statement.
“If sustained, the cost pressures will accelerate and the balancing of margin and volume will become especially challenging in 2022.”
The price of Brent crude oil touched the $130 a barrel mark in early trade, the highest since 2008. The wheat price on the Chicago Board of Trade has skyrocketed 93% since the start of the invasion.
AVI said managing sales volumes in the next financial year will be challenging in the context of fluctuating consumer demand, aggressive competitor activity and the need to adjust selling prices to recover higher input costs.
Food producers can either absorb cost increases or pass them on to consumers, whose disposable income could be eroded by rising inflation.
AVI competes with Tiger Brands and a range of other food producers, which were dealing with higher prices for soft commodities before Russia invaded Ukraine.
AVI shares fell nearly 8%, the most since November, before pulling back to end 3.11% weaker at R65.40 on the JSE.
“The very cautious outlook, suggesting that there could be negative volume growth across the segments probably triggered a negative reaction from the market,” said Rella Suskin, head of research at Benguela Global Fund Managers. “The effect of the high Brent crude and soft commodities could reflect in the new financial year.”
The diversified nature of its portfolio — straddling largely food and footwear and apparel — came in handy for AVI in the six months to end-December.
The abalone operation within the I&J fishing business recovered from poor export demand and low selling prices, which were due to Covid-19 lockdown restrictions in key markets.
AVI increased selling prices in most of its product categories, which cushioned its margins against higher input costs. As a result, headline earnings per share rose 6.6% to R3.17 year on year and revenue rose 2.3% to R7.2bn.
Its food and beverage brands — which are made up of Entyce Beverages, Snackworks and I&J — grew operating profit by 5% to R1.15bn. Fashion brands, which consist of personal care and footwear and apparel, increased operating profit 14.4% to R364.5m.
The company declared an interim dividend of R1.70 a share, which is up 6.3% compared with the year-ago period.
Update: March 7 2022. The story has been updated with more information and the share price.