Chief financial officer's report
Bidcorp delivered very pleasing results for the year ended June 30 2017. On a constant currency basis, excellent growth of 19,1% in HEPS was achieved, truly reflective of the strong performance of the businesses. Overall, Bidcorp expects another positive year.
Overview
Businesses in all geographies, with the exception of Aktaes Turkey and Logistics UK, performed well and achieved pleasing growth, ahead of last year and largely in line with management's expectations. Bidcorp's high standard of performance in home markets is not clearly evident when reported in rand terms as our reporting currency is schizophrenic at times. The rand appreciated considerably against three of our principal trading currencies; sterling, euros and Australian dollars.
This should not detract attention from the marketplace gains achieved in numerous Bidcorp jurisdictions. To give context to operational and currency effects, it should be noted that during the year the rand appreciated by nearly 20% against the British pound yet our UK-based foodservice teams (excluding the Logistics' business) still achieved home currency trading profit growth of nearly 18%.
The only significant disappointment related to poor performance at our Logistics UK business following previously reported management irregularities. Significant effort and cost were expended in dealing with these matters, which remain the subject of ongoing legal processes. In terms of dealing with the performance issues, remedial action is under way. However, this remains a non-core activity and management is committed to finding a viable solution for the business, hopefully at minimal cost as the business is downscaled over the medium term.
Rand reporting
Bidcorp is listed on the JSE in Johannesburg and has its corporate office nearby. We have reported in rand since our listing, and did so for many years prior to that in our 'previous life' as a key component of South Africa's Bidvest group.
We are well aware that nearly 90% of Bidcorp profit comes from our international businesses and it is well known that we measure and manage our operational teams in their home currencies. However, at this juncture, no one currency dominates in terms of contribution and therefore we see no reason to change our reporting currency just yet.
In South Africa, our shares are viewed as a rand hedge and receive significant support on that basis. Internationally, we are seen as a geographically diverse business with a growing presence in emerging markets of interest.
Bidcorp investors are well aware of currency-market see-saw effects and live with them. We are content to do so as well. If there is a material change in this situation, we will review our position, but that time has not yet come.
Since our listing in May 2016, our shares have enjoyed solid support across the investment community (local and international) and are currently held 55% by the international investment community.
Financial performance
Bidcorp has, in addition to its actual audited results, provided shareholders with pro forma financial information in relation to the comparative year-end due to the unbundling from The Bidvest Group Limited in May 2016, to enable a full appreciation of the true performance of the group. The following comment is based on the comparison to that pro forma information.
Bidcorp delivered very pleasing results for the year ended June 30 2017, though the true performance in home currencies was negatively impacted by rand strength across all major currencies. Headline earnings per share (HEPS) increased by 9,4% to 1 181,0 cents per share (PF2016: 1 080,0 cents) with basic earnings per share (EPS) increasing by 16,7% to 1 207,1 cents per share (PF2016: 1 034,0 cents).
On a constant currency basis, excellent growth of 19,1% in HEPS was achieved, truly reflective of the strong performance of the businesses.
Net revenue of R130,9 billion (PF2016: R140,5 billion) declined by 6,8%, in part due to currency impacts and the deliberate and planned exit of some low-margin contracts in various geographies, which still reflect in the comparative base.
These low-margin contracts are regarded as non-strategic and detract from our positioning as a provider of added-value foodservice solutions in the independent or free trade sector of our industry. The strategic thinking behind the deliberate exit of these high-volume contracts and the consequent rebalancing of customer portfolios has been well communicated to the investment community. In our core foodservice sector, solid revenue growth was achieved in local currency terms at most operations.
The strategic shift to the free trade sector helped us better manage our margins in highly competitive markets. Gross profit percentage increased to 21,7% (PF2016: 20,8%), reflecting the benefit of trading with the correct mix of business.
Operating expenses remained well controlled, decreasing 4,9% in absolute terms, despite wage pressure in a number of growing economies and higher sales and distribution costs as a result of higher activity levels.
Group trading profit increased by 6,9% to R5,5 billion (PF2016: R5,1 billion) and the trading margin improved to 4,2% (PF2016: 3,7%). Share-based payment costs increased to R97,6 million (PF2016: R64,0 million), the annual costs of long-term employee incentivisation across the group.
Acquisition costs of R46,1 million (PF2016: R8,9 million) were incurred in bringing various acquisitions to fruition. Although their contribution to overall group profitability has been limited to date, these businesses will assist in building our global presence going forward.
Net finance charges are 25,6% lower at R219,2 million (PF2016: R294,6 million) assisted by some deleveraging and lower interest rates. Cash generation has been solid, despite greater utilisation of working capital, impacted by higher activity levels, some strategic stocking, tighter supplier terms and impacts from a Logistics UK contract unwind.
Capital items mainly comprise net impairments in relation to goodwill for PCL 247 Limited, which was acquired in July 2014, closure of excess distribution capacity in UK Logistics as a first stage in the rightsizing of the business and the write-down of over-invested ERP software at Bidfood Netherlands. Net profit on the sale of businesses relates principally to the investment made by Puratos Group NV (Puratos) into the bakery business in South Africa and the IFRS fair value adjustment on the residual 50% investment.
Bidcorp remains well capitalised, with trading profit interest cover at 25,1 times (PF2016: 17,5 times). We remain conservative in our approach to gearing and retain adequate headroom for further organic and acquisitive growth.
The group's financial position remains strong. Total fixed assets have grown in home currencies, reflecting replacement and expansionary capital expenditure. Net debt is R1,7 billion, which is at the same level as June 30 2016 despite significant ongoing investment and acquisitions. Cash generated by operations before working capital absorption was robust at R6,2 billion, average net working capital days was seven days and investment activities consumed R2,2 billion. Free cash flow (excluding dividends paid) was positive at R1,7 billion.
Despite more than adequate 'headroom' for further growth, we remain judicious in our approach to finding the right opportunities.
Distribution
Bidcorp declared a final dividend of 250,0 cents per share in accordance with our dividend policy. Combined with the interim dividend of 250,0 cents per share, we have paid 500,0 cents per share for our first full year as a separate listed group.
Interest rates
A rising interest rate trend is apparent in many international markets. Specifically, rates ticked higher during the year in the UK and Eurozone, largely driven by rising inflation.
Despite the firmer rates, the funding we raised for acquisitions and refinancing was undertaken at rates competitive in the underlying markets.
We maintained our longstanding risk management practice of matching assets and liabilities in the home currencies of the relevant operations.
Inflation in the UK, Europe and South Africa included a measure of food inflation. As long as food inflation does not reach runaway levels, it is traditionally beneficial for a business such as ours and our local teams took advantage of the positive effect on trading margins.
Acquisitions and disposals
The acquisition of 90% of Guzmán Gastronomia and Cuttings (Guzmán), a leading national Spanish multi-temperature foodservice company, was completed with effect from April 2017 for an enterprise value of €75 million (R1,1 billion). Guzmán has national reach and supplies restaurants, hotels, industrial caterers and institutions. It has a strong presence in the independent market and generates attractive cash flows.
The group also concluded a number of smaller bolt-on acquisitions in Australia, Brazil, Belgium, Italy and the UK totalling R590,4 million.
Investment disposals totalled R670,4 million. Bidcorp concluded an agreement with Puratos, which enabled Puratos to acquire joint control of our South Africa-based Bakery Supplies business. The Puratos group is headquartered in Belgium and is the world's largest bakery ingredients business. This disposal does not represent a retreat from South Africa, but strategically will enable the business to develop new products using international innovation for the baking industry. The transaction was completed in April 2017 and is equity accounted in our results from that date.
Post year-end, the acquisition was completed of 70% of Pier 7 Foods, a small foodservice business based in Munich, Germany, incorporating five locations within Germany and one in Austria. An acquisition of a niche Portuguese horeca business was also completed.
Capital allocation, gearing and returns
Investment into capacity creation and innovation is a priority. Bidcorp has traditionally been well invested as this is a key ingredient of sustained organic growth. Furthermore, bolt-on acquisitions in existing markets enable geographic extension and product diversification, whichever is required. Management are encouraged to grow their distribution platforms via bolt-ons and these occur on a regular basis.
The timing of material acquisitions is difficult to predict. However, we retain significant financial headroom and the ability to act quickly to accommodate expansion opportunities, both acquisitive and organic.
Our gearing is low in comparison to peers. However, our journey as a separately listed business is short. We see this as a competitive advantage in an environment where opportunities abound. We have committed to a 2,5 times headline earnings cover for dividends in the medium term. Depending on free cash-flow generation from year to year, this may well be reduced over time.
In the event the anticipated opportunities do not materialise as expected, management will look to enhance shareholder returns via higher dividend pay-outs or share buy-backs, whichever is most appropriate at the time.
Fundamental to Bidcorp is our ability to continue to generate above average returns in each of our businesses in their home markets. Returns on funds employed remains the key measure of performance across all businesses.
Ratings
Bidcorp has no international credit rating at present. Processes are currently under way that in due course will enable us to apply for a rating.
The April downgrading of South Africa's sovereign credit rating to sub-investment grade had no discernible effect on our business operations in South Africa. Similarly, the full-year effects of downgrades in the UK and Europe had little or no impact on the performance of Bidcorp businesses in the affected jurisdictions. Given the correct positioning of our foodservice operations in their respective markets, our strategic view is that macro-economic factors should not act as an impediment to local management's ability to outperform their local conditions.
Taxes
There is little doubt inter-government collaboration on equitable tax dispensations for multinational enterprises (MNEs) will continue and probably gather pace. The Organisation for Economic Cooperation and Development (OECD) has worked for several years on plans to address the issue of transfer pricing across international jurisdictions, aka BEPS (base erosion profit shifting).
Early in our 2018 financial year, the BEPS Framework published additional guidance for tax administrations and MNEs on the implementation of country-by-country (CbC) reporting.
However, Bidcorp is not an MNE in the true sense of the word as we operate a decentralised business model where every country and every business within that country is self-standing and self-sufficient in terms of management and autonomy. We ensure all our operations worldwide are aware of the latest CbC developments and updates while the group reporting systems and documentation are aligned with the latest CbC requirements. In addition, each financial team in each national jurisdiction works to ensure they comply with local taxation requirements.
We pay our taxes and respect the international BEPS and CbC processes.
Compliance and ESG
Taxation is not the only area in which rigorous compliance is necessary. Food and foodservice are heavily regulated industries. This is understandable as food safety and healthy eating are key issues for consumers and regulators.
We accept the need for strict adherence to the highest standards of food quality and integrity – along with the need to deal with environmental and social matters. Again, in line with our decentralised business model, these duties are undertaken by local teams. We operate in more than 30 countries. Different priorities apply in each region. For example, the black economic empowerment imperative is unique to South Africa. Local sourcing, food traceability and healthy eating, especially in schools, are major issues in Britain, Australasia and many European countries.
Managers on the ground are responsible for ensuring all national regulations are respected. In certain jurisdictions, they have an industry lead thanks to their familiarity with best international practice – a result of stepped-up information – and experience-sharing across Bidcorp businesses.
Group cooperation is growing, but central control is neither possible nor desirable due to geographic diversity, our decentralised business model and the lack of a single regulatory template. Accordingly, only material items that are common to all businesses are reported on through our ESG (environmental, social and governance) framework. Local teams are driven by sustainable business practices and have integrated these functions into their day-to-day workings. They continue to do an exemplary job.
The future
The group is well positioned for continued expansion in all geographies. Rising inflation is evident in many markets. This, combined with above average growth in the eating-out segment, indicates that prospects for our businesses remain positive. Cost pressures are evident, particularly in salaries and wages. However, the drive for efficiencies is built into the Bidcorp DNA and will continue.
Operationally, our people continue to demonstrate the potential for solid growth in largely fragmented markets. We therefore expect our businesses to achieve further organic growth and market-share gains.
In addition, we have ample resources to fund acquisitive growth in current markets and perhaps in new geographies in which we currently have no representation. Overall, Bidcorp expects another positive year.
David Cleasby
Chief financial officer
The annual executive strategy conference – Rome, September 2017