Chief executive's report
- Strong results mark Bidcorp debut as a JSE-listed company
- Global diversification supports pleasing overall performance
- Bidcorp investors welcome unbundling
- Pro forma headline earnings up by 32,5%
- Excitement across all teams as Bidcorp achieves independence
- Strategic rebalancing adds value and momentum
- South African commitment remains strong
- Base established for further growth, organic and acquisitive
Overview
Bidcorp marked its emergence as a separately listed company with a strong set of results and pleasing performance by teams in every geography. The confident start underlined our status as a respected global player in the foodservice industry and an exciting new contributor to the JSE’s Top 40 index.
Economic conditions varied enormously in every market in which we are represented. The only uniform factors were the hard work of our people and the ability of the Bidcorp business model to deliver solid gains irrespective of macro factors.
Bidcorp’s reach is substantial from day one as an independent company. We are represented in every continent except North America. Such wide-ranging geographic diversification spreads risk and reduces negative impacts.
The value of diversification was underlined in a year when Brexit shook confidence in the UK, political uncertainties mounted in Brazil and terror attacks rocked jurisdictions as far apart as Turkey and Belgium.
Every event was significant locally, but the overall impact on Bidcorp performance was relatively modest and our long-term growth trajectory remains on track.
Pro forma comparisons show Bidcorp revenue rose 21% year-on-year while trading profit topped 26%. Headline earnings were up by nearly a third at R3,6 billion.
Amicable separation
Unbundling from the Bidvest industrial services group created understandable excitement, both internally and externally.
The investment community – in South Africa and offshore – welcomed the launch of the foodservice operations as a distinct listed entity. Subsequent to our May 30 listing, Bidcorp shares were actively traded and unlocked significant shareholder value.
Share performance to date – ours and that of our old parent, Bidvest – indicates that one of the key objectives of the unbundling, this unlocking of shareholder value, was quickly realised.
Unbundling was expected to proceed without serious difficulties. In fact, the process proved to be even smoother than anticipated. This was primarily a function of the decentralised Bidvest model and longstanding operational autonomy. The process was also assisted by goodwill and good personal relationships. Leading figures on both sides have worked well together for many years. This helped to ensure an amicable separation.
Relationships remain positive and we wish our Bidvest colleagues every success in the years ahead.
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South African pride
A JSE listing was a logical step for us. We treasure our South African roots. This is where the Bidcorp story began, where the initial base was built and where our reputation for delivering shareholder value was first established.
It was not until 1995 that foodservice began the process of international expansion.
Today, 8% of revenue is attributable to our South African operations. This does not mean they are marginal or incidental. We are extremely proud of our South African businesses and continue to invest in their growth in 2016. We see opportunities for sustained expansion in South Africa and further afield in Africa, and that investment will be maintained.
Enduring values
Our status has changed. We are now a separate listed company, but we have made no effort to distance ourselves from our Bidvest heritage.
Our growth has always been driven by entrepreneurial managers in autonomous operations who take personal responsibility for identifying and pursuing growth. These operations and their leadership teams are deliberately lean. They avoid complexity and stay close to their people, customers and markets.
This business model was put in place when the first foodservice business was acquired in 1989. It is still relevant today. We see no reason to change it.
Local listing
It is perhaps understandable that some commentators have speculated about a future listing outside of South Africa. After all, most of our earnings are denominated in foreign currencies and our global reach is likely to increase in the years to come.
However, we see no benefit at this time of a move to any other financial centre. Bidcorp therefore has no current plans to list in London or on any other stock exchange, but we will continually reassess this position.
The best interests of our investors is always the key driver of corporate decision making at Bidcorp.
At some stage in the future, a major transformational transaction might induce senior management and the board to consider an alternative listing, if this were felt to be in the best interest of our shareholders.
This is a possibility at any global company with long-term growth ambitions.
No such trigger event is on the Bidcorp horizon and we are happy to call Johannesburg home.
Inner excitement
Our recent listing not only unlocked value, it triggered a wave of excitement across Bidcorp businesses.
Every business in every national market reacted with enthusiasm to these developments. Single-minded focus on foodservice enables every team to achieve objectives without distraction.
Pre-listing, senior management devoted a lot of time to communicating the vision and sketching out the Bidcorp future.
Our intention is to become one of the world’s foremost foodservice businesses. Increased scale may result, but bulk is not the primary objective. We plan to become leaders in terms of innovation, customer-friendly solutions and quality service delivery.
Strategic vision
The year not only witnessed our unbundling, it also proved to be a watershed year for the strategic rollout of our long-term vision.
Historically, foodservice businesses have complemented their services to hotels, restaurants, caterers and institutions with logistics. Logistics contracts are big on volumes, small on profits.
Real value in foodservice is found on the plate not on a warehouse loading bay.
Strategically, the choice is clear: do you move boxes on the back of a truck or do you add value on the back of smart foodservice solutions?
Some years ago, the decision was made to scale back low-margin, big-contract logistics operations and build momentum as a focused foodservice business that can protect margins through value-adding services.
The customers that benefit most from value add like this tend to be small to mid-size independents as we can assist them with their product and menu development while using technology and e-commerce platforms to deliver ordering efficiencies.
Our ability to extend the range into the fresh produce, meat, fish and speciality categories also bestows competitive advantage at attractive margins.
Core addressable market
This is our core addressable market and this is where we focused as never before in 2016.
The strategy entails some tough decisions around the exit of some large volume, slim-margin contracts. These decisions have to be taken if we are to achieve the correct balance. There may be some short-term pain. Sales volumes may stall, but the strategic benefits are sizeable.
Completion of this process is imminent at our Australian business. In the year under review its revenue fell while profit levels rose – solid indication that substantial benefits accrue when appropriate balance is achieved.
On a smaller, but perhaps more dramatic scale, we have carried out a similar rebalancing process in Singapore. This business – once a major trading operation – has been transformed. Foodservice is today the principal activity and profit levels are responding accordingly.
In Singapore, this change of strategy took a year longer than originally planned. Clearly, staff buy-in is essential, this required ongoing communication and encouragement. Old habits had to change and new ideas had to be embraced. Our people can now see the benefits and the Singapore transformation is substantially complete.
Other operations in other national markets have undertaken a similar journey. All report substantial progress. The strategy is bedding in well, providing a platform for future growth.
New horizons
Ever tighter focus on our core addressable market is expected to deliver organic growth at acceptable margins across Bidcorp. Smaller bolt-on acquisitions were completed in several markets in 2016. Incremental acquisitive growth on this pattern will continue.
No major acquisitions took place in 2016. However, we have explored several opportunities; some sizeable, some in new markets. We feel no compulsion to conclude new transactions. When the right deal at the right time presents itself, we will be happy to proceed.
We set no artificial boundaries when examining the potential for geographic expansion. We are not currently represented in the North American markets of Canada and the USA. This means the canvas is broad and opportunities are unrestricted, but, as always, we have to identify areas in which we can add value and contribute to the growth of the acquisition target.
Risk and return
Geographic diversification is one of the keys to effective risk management at Bidcorp.
However, there is always a danger that investment will be made into countries where mounting risks could destroy value and undermine the business case for continued involvement.
What is the Bidcorp attitude in situations like this?
We live in a fast-changing world where risk profiles do not remain static for long. Safe “bets” are few and far between. If you wait for absolute safety you fail to enter the game.
France and Belgium were terror-free a couple of years ago. Not any more. Recent events indicate the risk of bombings and violent attacks has risen substantially in both countries.
Bidcorp’s philosophy is simple… be aware of risks that might affect a country or region, but focus primarily on business considerations.
South America
Recent developments illustrate how this philosophy plays out in practice.
A few years ago we identified South America as an area of substantial long-term opportunity and took a stake in a Chilean foodservice business. Subsequently, we expanded into Brazil.
More recently, Brazil and South America generally have faced considerable challenges. Brazil has been in the grip of a political and economic crisis for more than a year. But we do not view these difficulties as justification for market exit.
Our Brazilian and Chilean businesses have demonstrated an admirable capacity to deal with national challenges and achieve profitable growth. We are happy to invest in teams with the resilience to grow at a time of market contraction. If further investment is necessary, we will be happy to make it.
Middle East
Different considerations apply in Lebanon, a market we recently exited.
The Middle East can be a highly volatile region and Lebanon’s near-neighbour Syria is in the grip of a long-running civil war with the potential to spill over into neighbouring states.
However, these geo-political considerations were not the primary reason for our Lebanese exit. We entered the market to explore long-term potential. We invested and sought to achieve growth. Initial losses were accepted as the price of entry, but it soon became clear that foodservice operations on the Bidcorp model had little chance of success in the near or mid term.
In any Bidcorp market, a significant portion of our revenue is derived from the hotel and restaurant trade. The taste for western-style menu items and the trend to out-of-home eating help to support healthy volumes. Those positives were absent in Lebanon and real-life experience indicated that giving a market lead meant accepting a recurring loss. So we closed down and moved on.
This does not mean we are sceptical about the chance of growth in the rest of the Middle East. Our businesses in the UAE and Saudi Arabia are profitable and show good growth. We are happy with our investment and look forward to continued expansion in these centres.
We must acknowledge that another neighbour of Syria – Turkey – faces a growing challenge.
Tourism’s vulnerability to terror attacks and political upheaval has been underlined by recent events. Despite these pressures, the general economy has demonstrated remarkable resilience. We therefore remain committed to our Turkish investment, but will closely review developments.
Brexit
The referendum on Britain’s exit from the European Union occurred late in our final quarter and had no impact on 2016 results. Market reaction and over-reaction were to be expected in the short term. Bidcorp’s attitude was simple: “Keep calm and carry on”.
We take a long-term view. Britain has a sizeable economy. Opportunities for growth remain significant. We are well placed to take advantage of them.
We did not delay investment decisions on the run-in to the British referendum on EU membership, nor did we institute an investment freeze following the vote to leave. We will continue our strategy of selective UK growth in support of our focused foodservice model.
Britain and Europe have mature economies and mature political leaders. We believe they will make responsible decisions and facilitate the UK’s orderly retreat from Europe without self-inflicted wounds.
Divisional overview
Australasia remains our biggest profit generator and the Australia business achieved pleasing earnings growth despite lower sales on the deliberate exit of several uneconomic contracts. Expenses moved higher, a function of the changing business mix. New Zealand continued its strong run and made further investment in sustained growth.
The United Kingdom foodservice business put in another pleasing performance, driven by continued growth of the foodservice and fresh produce businesses. Bolt-on acquisitions continued. The only significant disappointment related to the logistics business where management irregularities led to fraud investigations and impacted results.
European businesses put in a pleasing performance. The Belgian and Netherlands businesses showed improvement. Operations in the Czech Republic, Slovakia and Poland did well. A small loss was recorded in the Baltic Republics. We continued to grow our Italian interests and the Spanish business made progress while providing market intelligence on sectors with interesting potential.
Emerging Markets made a positive contribution and South African businesses built exciting momentum. Strong growth continued in Hong Kong and on the Chinese mainland. The Chinese economy may have slowed, but the growth of a middle class with a taste for western-style cuisine creates strong momentum for our businesses. Our South American operations showed continued growth and the core Middle East operations again put in a pleasing performance.
Appreciation
Our suppliers and customers took the transition to listed status in their stride. Relationships remained firmly in place, thanks to our decentralised business model and the growing sense of partnership with both suppliers and customers. We thank them all for their continuing support.
Without exception, the people of Bidcorp put in a sterling effort in a challenging year. Managers steer the business, people drive it. Our team got us off to a great start and I thank them all for their dedication and commitment.
In addition, I am deeply indebted to the directors of Bidcorp for their wisdom and guidance. Their strategic vision adds tremendous value to our business and I thank the entire board and our chairman and founder, Brian Joffe, for their support, wisdom and guidance.
Future perspectives
Challenges will continue in all Bidcorp geographies, but overall I believe there are more tailwinds than headwinds in the global foodservice industry. Bidcorp plans to make full use of them.
We see continued growth opportunities in every region – Australasia, the UK, Europe and Emerging Markets, including our home base here in South Africa.
The work of rebalancing the business will continue in every national market. Already, every operation draws considerable benefit from the clearer foodservice focus. Further benefits will be actively pursued. The work is very nearly done. In 2017, we intend to complete the job.
No major acquisitions took place in 2016, though several opportunities were explored. We remain an acquisitive business. If the right “fit” presents itself in 2017 we will pursue it, either to support operations in existing Bidcorp markets or as a means of gaining entry to new markets.
Our balance sheet is extremely strong. Our teams are well led, energetic and highly motivated. This gives us a firm foundation for continued growth in the year ahead, whether organic or acquisitive.
Bernard Berson
Chief executive officer