Bidcorp: a world class international foodservice presence.

Leadership review

Chief financial officer's report

With cash and cash equivalents of R6,0 billion on the balance sheet, the group remains well-resourced and strongly positioned.

In 2018, net revenue increased by 8,0% from R110,5 billion to R119,4 billion. The rate of growth in constant currency terms was 8,5%. Top-line gains reflect real growth in activity levels despite relatively benign food inflation in the core foodservice markets in which we operate.

Gross profit percentage was maintained at 24,0% despite increased penetration of the freetrade sector and the need, on occasion, to sacrifice margins for the sake of volume growth.

Operating expenses showed a like-for-like increase of 3,6%. Overall, this was a commendable achievement in the face of ongoing wage pressures and generally higher fuel bills. Quality support for independent foodservice customers also tends to increase cost pressures.

However, increased group collaboration has become a cost-saving tool as teams share best practice and learn from each other as they implement homegrown technology in the digital space.

The overall cost of doing business remained at 19,0%, a solid result in the context of higher sales, increased distribution activity and additional infrastructure investment.

Group trading profit increased by 8,7% from R5,5 billion to R6,0 billion and the trading margin was maintained at 5,0%.

Cash generated by operations before working capital absorption was R6,9 billion, an increase of 10,6%.

Though working capital management remained a focus area, we witnessed greater working capital utilisation. This was a function of higher activity levels, tighter supplier terms, some excess stocking (following the listeria crisis in South Africa) and the impact of recent acquisitions.

The rise in monthly average net working capital days was well controlled, up from 10 to 11 days.

Free cash flow (excluding dividend payments) was positive at R1,0 billion after investment activities absorbed R3,1 billion.

Debt and liquidity

There was no material year-on-year change to liquidity. Gross borrowings were R9,6 billion, with 64% of gross borrowings termed to beyond June 2019. The weighted average interest rate on foreign borrowings was 2,4%.

The net debt-to-equity ratio rose from 7,3% in 2017 to 13,5%. Net debt to EBITDA increased to 0,5x (2017: 0,3x), with trading profit interest cover at 25,8x (2017: 25,4x).

Net finance charges were 7,1% higher at R231,1 million (2017: R215,7 million).

An increase in net debt to R3,6 billion reflected ongoing investment and the impact of bolt-on acquisitions and the funding of the discontinued operation. Continued growth in total fixed assets was driven by replacement and expansionary capital expenditure.

Bidcorp remains well capitalised, with ample capacity to fund further organic and acquisitive growth. However, management is well aware of the necessity for balancing debt capacity with the need to ensure appropriate returns to our investors. This key consideration underpins a generally cautious approach to debt.

Incentivisation

Share-based payments increased to R99,2 million (2017: R94,1 million) as a result of further long-term incentivisation of staff across the group.

Incentivisation such as this plays a key role in our strategy of driving sustained growth across market cycles and generating above average returns in our businesses in their home markets. Highly motivated teams are measured on their returns on funds employed and in 2018 continued to achieve strategic goals in a highly competitive environment.

Investing in the future

Modernisation and investment in new infrastructure are ongoing. For example, our New Zealand business invested NZ$46,0 million in 2018 in five new distribution centres and an extension to an existing facility while the bill for modernisation in the UK jumped 45% in a single year to £33,0 million.

Ongoing investment in Bidcorp's proprietary ecommerce platform is another constant.

Despite substantial and continuing investment such as this, the group achieved a 34,6% return on funds employed.

Acquisitions

Acquisitive activity dipped in the review period and acquisition costs fell to R35,5 million from R46,1 million in 2017.

In all, we acquired 13 companies with combined annualised revenue of R4,6 billion. These bolt-on acquisitions were made in various jurisdictions, including Australia, Netherlands, Spain, New Zealand, Italy, Malaysia, South Africa, Greater China and Turkey. Total investments were R965,6 million.

Expansion into new territories was driven by the acquisition of Pier 7 (a small foodservice business based in Germany and Austria) and Frustock (a niche horeca business based in Portugal, now integrated into Bidfood Iberia).

Acquisitions contributed R3,3 billion to group revenue (3,0%) and R22,5 million (0,4%) to trading profit. Clearly, there was no meaningful profit contribution in the immediate term. This was expected. Typically, with bolt-on acquisitions of this type, there is a short interlude while systems and infrastructure are bolstered. Synergies and efficiencies can then be sought, setting the scene for a material contribution across a broader operational base.

Dividend policy

At listing in 2016, Bidcorp committed in the medium term to 2,5 times headline earnings cover when determining dividend payments. The intention, all things being equal, over time is to reduce this cover, thereby improving returns for shareholders.

In 2018, the total distribution was 560,0 cents, representing dividend cover of 2,3x, a 12,0% increase over 2017.

It should be noted that since the demerger from Bidvest in May 2016, shareholder returns, excluding dividends, exceed 50%. What's more, since demerger, headline earnings per share are up 19% (or 28% in constant currency terms).

This track record, though admittedly brief, indicates that we are committed to delivering shareholder value in a consistent and responsible manner, while remaining true to our strategy of fostering sustained international growth.

Communication

A further priority is ongoing communication, not only to our investors but to all stakeholders, including our people, trade unions, communities, interest groups and the media.

Openness as an integral part of our culture helps to ensure no surprises, an important plus in today's dynamic business environment. Changes to key positions, at boardroom level and elsewhere, are communicated in timely fashion. Disappointments and worrying developments are also communicated in good time.

Over the last year, we were at pains to communicate the difficulties experienced at Contract Distribution (CD), our UK logistics business, and the decision at the end of the first half to treat the company as a discontinued operation, to be reported separately.

At CD we were confronted by a major contract loss, stubbornly high expenses, disappointing trading results and the need to right-size the business, reduce the vehicle fleet and close a major depot, with consequent redundancies.

By year-end, we were close to finalising our proposed exit from this non-core segment. Costs associated with this anticipated exit were substantially provided for and any further costs were unlikely to be significant.

Post the year-end, the prospective purchaser of our CD business notified Bidcorp that for its own internal reasons, it has decided not to proceed with the transaction. The CD business remains a non-core activity in respect of Bidcorp's global foodservice operations. Accordingly, Bidcorp is currently considering alternative proposals which were suspended due to the advanced sale process.

Business risk

Bidcorp is active in numerous jurisdictions and within a diverse range of communities. No matter where we operate, we are acutely aware of our environmental, social and governance (ESG) responsibilities.

In the corporate environment at large, the review period put a harsh spotlight on the governance aspect of the ESG framework.

It has become abundantly clear that without scrupulous regard for governance discipline, businesses run a heightened risk of financial loss, even corporate collapse, as poorly policed controls leave the door open to fraud and dubious accounting practices that may go undetected for years.

In recent months, members of the accounting profession, in South Africa and internationally, have been severely criticised by lawmakers, regulators and the media for their failure to spot warning signs, challenge suspicious accounts, expose conflicts of interest and hold senior executives to account.

Failure to apply professional scepticism in the face of glaring irregularities can result in spectacular losses in shareholder value, cost jobs and even lead to the collapse of an enterprise.

Alleged abuses in various cases include earnings manipulation, tax fraud, the creation of sophisticated mechanisms to hide losses and the extent of debt, non-disclosure of related party transactions and the out-and-out plundering of assets.

No organisation can be completely isolated from these risks. The challenge is how best to respond to them.

Lessons learned

In the reports of regulators who have investigated recent cases two key words appear repeatedly, 'scrutiny' and 'scepticism'. Scrutiny of all reports must be intense, and scepticism must be exercised whenever numbers appear suspicious or explanations seem vague or incomplete.

Bidcorp hires good people. Our people are honest and do a good job. But, in view of the recent spate of high-profile corporate failures, we have stepped up efforts to ensure accurate, transparent reporting at all levels. Numbers are not simply presented, they are interrogated.

At a strategic level, three special meetings of the audit and risk committee were convened during the course of the year to consider the performance of our external audit firm.

Structural safeguards

At Bidcorp, we engage a unitary board structure rather than the typical European two-tier alternative. Our board comprises a majority of independent non-executive directors, all of whom have unfettered access to management and are able to attend any committee work of the board. Both the group and divisional audit and risk committees are chaired by an independent non-executive director who has unrestricted access to management and information. We feel this provides independent 'scrutiny' and 'scepticism' to the activities of the businesses and their management.

Our decentralised structure helps mitigate risk by geographical spread and economic diversification. Significant responsibility and accountability is devolved to local management teams. For instance, they may identify targets for acquisition, but any significant capital outlay is subject to stringent levels of authorisation. Senior executives and the acquisitions committee rigorously scrutinise the business case, valuations and deal structure. This separation of powers helps us respond quickly to local opportunities without losing control.

Reporting rigour

Decentralisation creates its own challenges, of course. One is the need to generate reliable and timely reports from all geographies. Substantial progress was made during the year in this area. However, the work is ongoing, and efforts will continue to ensure the efficiency and accuracy of local reports and their timely presentation.

Other warning signs showcased by recent governance failures in the wider corporate environment include headlong growth into disparate, unrelated sectors during an 'acquisitions spree' and a cavalier attitude to debt. Again, our conservative approach ensures we have some built-in protection.

We are 'all about the food'. We have specialist focus and take a disciplined approach to acquisitive growth. It has worked for us for years and we foresee no departure from acquisitions focus and philosophy.

Our conservative attitude to debt is well known. We may take on more debt, but we do so incrementally, making judicious use of the interest rate environment.

Our culture, our people and our ESG focus may not guarantee immunity from corporate wrong-doing, but they provide sturdy defences. These defences are regularly reviewed and stepped up as necessary.

External audit

In 2018, we continued to make use of the external auditing services of KPMG, one of the Big Four global audit firms. We are satisfied as to the conduct, quality and independence of KPMG in the audit of the 2018 annual financial statements.

Future

Bidcorp's second full year as a separately listed business provided ample confirmation that we are operating in the right space and have significant opportunities for growth. We therefore look forward to a year of continued expansion. However, within a portfolio of businesses operating across many geographies, we have a few short-term challenges which are being addressed. Specifically Greater China remains bedevilled by the effects of the dairy crisis and focus on diversification of the product base is underway. In PCL in the UK, discussions with the client around mutually beneficial reward for activity level needs resolving to enable the business to move forward.

Our debt-to-equity ratio is low at 13,5%, creating headroom to fund both organic and acquisitive growth.

Interest rates have already risen in the USA and are likely to rise in the coming year in Europe. We do not view this as a material constraint on our growth ambitions and, in line with standard practice at Bidcorp, we will take advantage of favourable rates as and when we can.

Traditionally, higher interest rates tend to lead to a softening of business valuations. So far, this has not been the case in the USA and vendors continue to put high price-tags on their businesses. We will closely monitor valuations in non-American markets should there be a shift in the interest rate climate. It remains Bidcorp policy to stay patient when considering acquisitions. We identify the right deal, buy in the right markets, at the right time… but only when the price is right.

No material acquisitions that meet our disciplined criteria have so far been identified, but, should opportunities occur, we will pursue them.

Rigorous management of working capital remains a priority and management teams will step up these efforts as we believe this is essential to our mission to deliver above average returns in every market in which we are represented.

In the year to come, we expect periods of currency volatility. The international environment can be quite uncertain and the trade war between the USA and others have had an unsettling effect. The rand has come under pressure, along with some other Emerging Market currencies.

Despite these challenges, management remains confident that forward momentum will be maintained. In 2019, Bidcorp is therefore budgeting for further real growth in earnings.

David Cleasby
Chief financial officer