Chief financial officers report

David Cleasby
Chief financial officer
Our objective to generate above-average returns in each of our businesses, notwithstanding macro-considerations and short-term volatility in various markets, remains firmly intact.
We are in a favourable position, with sufficient headroom to be able to fund organic and acquisitive growth.
  • Operational
    and financial
  • Sterling job
    to manage costs in light
    of disruptions
  • HEPS
    rose 12,5%
    to 1 443,6 cents
  • Refinancing
    of Euro facility for 3 years
    and raising a further
    1 year GBP facility

  • Own brand Asiya, Bidfood Poland
    Own brand Asiya, Bidfood Poland.
  • Strong financial
    base to support real growth
    in home currencies
  • Final dividend of
    330,0 cents
    Total distribution
    to 640,0 cents

It is exceptionally pleasing to report on a year that has again delivered in terms of operational and financial performance.

It is commendable that Bidcorp's overall group revenue rose by 9,8% to R129,3 billion. Currency volatility positively impacted our (rand) translated results which was more profound in the second half of the financial year as the South African rand weakened against most currencies in the countries in which we operate. Constant currency revenue increased by 4,7% at R123,2 billion.

The group's trading profit rose 11,8% to R6,7 billion, and was 7,1% higher in constant currency.

Strategically, Bidcorp has been for some time pursuing higher margin business and exiting lower margin contracts. The success of this imperative is starting to deliver, contributing to gross margins increasing to 23,9% from 23,3%. The EBITDA trading margin improved slightly to 6,2%.

Even though the overall trading profit margin was fairly flat at 5,2%, it improved in most jurisdictions, but not Emerging Markets. The Australasia region delivered the highest segment margin at 6,9%, Europe showed an improvement to 4,3%, despite Iberia and Germany detracting, and the United Kingdom (UK) margin was higher at 5,2% with improvements in the Foodservice offering offset by a decline in Fresh. Emerging Markets at 4,9% was principally impacted by a large decline in Greater China.

As we have been highlighting, there has been ongoing wage and energy cost pressures, yet food inflation in our core foodservice markets remains low. We are naturally pleased with the 7% (constant currency) containment in operating expenses. Our management teams have done a sterling job to manage costs, considering a variety of social, political and economic disruptions we contend with as a global operator. The group's overall cost of doing business (operating costs) increased to 18,7%, from 18,3% last year, on higher sales and distribution activity, a greater focus on the better margin, freetrade customers, which results in a higher cost to serve this larger independent base.

Headline earnings rose 12,7% to R4,8 billion with constant currency earnings up 7,9% at R4,6 billion. Headline earnings per share (HEPS) rose 12,5% to 1 443, 6 cents, with constant current HEPS increasing 7,7%.

Balance sheet strength

Net debt was higher at R4,7 billion, from last year's R3,6 billion, and was largely as a result of higher working capital absorption and higher investing activities. As a percentage of EBITDA, net debt is up 10 basis points from 0,5 times to 0,6 times, but remains at a comfortable level.

We refinanced a significant portion of the Euro-denominated debt, at fixed rates. This provides us with more comfort during these volatile economic times as we manage our liquidity profile. Certain refinancings are due in the next six months which we will extend over an acceptable term.

The higher utilisation of working capital at R1,4 billion (F2018: R1,0 billion) is understandable, considering increased activity levels, tighter supplier terms and the particularly difficult timing of the period's year-end close, which occurred on a Sunday (June 30), in relation to debtors and creditors.

The working capital cycle is being monitored closely, specifically as importing activities are increasing across many areas of the group. It lengthens the supply chain but there is a positive impact on own brand and value-add product opportunities. As these activity levels increase, we remain focused on managing our working capital aggressively despite higher anticipated growth rates.

The monthly average net working capital days increased to 13 days (calculated on a 13-month rolling average basis) from 11 days last year.

Net interest paid was 25,5% higher at R285,9 million (F2018: R227,9 million). While asset management across the group is generally good, there are a few areas that need some attention. Additionally, there have been significant rate increases over the year particularly in the Asian geographies, which added to the higher interest charge.

Investment in fixed assets is currently high, but necessary to accommodate increased capacity as well as enhance and modernise our facilities for organic growth.

The overall tax rate (excluding associate income and capital items) is slightly lower at 23,3%. While UK tax rates are declining slightly, the group's overall mix is expected to be maintained at the tax rate guidance previously provided of between 24% and 25% for next year.

The associates and jointly controlled entities share of profit was slightly higher at R59,2 million. Minority interests of R33,2 million are relatively small but will remain a feature because of the Bidcorp model whereby owner-managers often retain a stake post acquisition.

There has been a small impairment of assets, some R40,7 million, which was offset by net profit on property sales of R65,4 million.

Discontinued operations include the UK Logistics businesses, CD and PCL. The CD sale process is ongoing, however, there has been an improved operational performance with most of the current customer base now at a sustainable revenue level. PCL, on the other hand, experienced significant trading losses (to April 2019), which led to an intangible asset impairment of R25,3 million. We disposed of the major distribution activities and the residual vehicle fleet, at significant cost.

Cash generation continues

One of the year's highlights was the significant 15,4% increase, to R8 billion, in cash generated by operations before working capital absorption and ongoing reinvestment capital expenditure. Pleasingly, all cash flows as a percentage of EBITDA and trading profits have been improved. Free cash flow (excluding dividends paid) was up 13,0% at R1,2 billion.

The cash conversion rate before working capital over trading profit was a significant 120%, which compares to 117% last year.

Liquidity management remains an important imperative. All our debt is, de facto, long-term as short-term debt currently amounts to R5,8 billion and available cash totals R5,7 billion.

Significant portion of our Euro funding has been refinanced and some 44% of gross borrowings now extend beyond June 2020. The weighted average interest rate on foreign borrowings is at 2,6% compared to 2,4% last year.

We are continually focused on the need to balance gearing and shareholder returns. Ultimately, the group's balance sheet strength, coupled with the reliability of our cash flows, provide us with the headroom to take advantage of growth opportunities. Our overall financial position is robust.

Growth remains key

The capital expenditures programme has continued with investing activities consuming R3,7 billion (F2018: R3,3 billion), primarily on maintenance and expansion capital, including the investment into key strategic properties. This compared to depreciation and amortisation of R1,3 billion. Continuing to invest in infrastructure is important to Bidcorp, and it was higher this year after making reasonably large infrastructure investments into Australasia, South Africa, and the UK. Our capital expenditure over revenue was approximately 2,3%, which compares to the average over the last few years of 2%, which is the more sustainable level.

Bolt-on acquisitions consumed R0,8 billion, none of which are a singularly material.

The strategy and intention of continuing our successful bolt-on acquisition programme remains an imperative. We are currently assessing a number of opportunities within the key regions in which we operate, but these will only be pursued when it is clear these are value adding and will achieve the group's targeted returns.

An important metric is our return on monthly average funds employed, which amounted to 32,6% (F2018: 36,3%), while the return on monthly average shareholder equity was 16,1% (F2018: 16,6%). titlehough these have declined over the year, the necessary investments made in the business will ensure we sustain our returns trajectory in the medium term.

Digital innovation

Good progress is being made on the BidOne ecommerce platform, and the CRM systems. BidOne already covers 25% of group revenues and is evolving and embracing fit-for-purpose intellectual property (IP), which is leveraged for the greater benefit of the group and remains an important competitive advantage. The new sales enabling CRM system (BidIQ) is in the user acceptance testing phase and will start implementation this year in New Zealand. Additionally, a new supplier order application is also in the testing stages.

Dividend intact

Our dividend policy of 2,5 times headline earnings cover remains intact, however, we have incrementally been lowering the cover. After declaring a final cash dividend of 330,0 cents per share, it resulted in a total dividend for the year of 640,0 cents per share, a 14,3% increase on last year's total dividend, equating to a 2,26 times cover.

The need to secure and sustain our licence to operate, and bring resonance to our customer value principle, has led to many other essential business requirements. These have included contributions by way of innovations, donations, workplace accord, training and development, enhancing supplier and other partnerships, as well as many other activities that define our purpose, and which have become equally important to Bidcorp.

Each stakeholder is essential to us and we are committed to continue delivering value to all groups of people that have an impact on our business. Shareholder returns by way of cash distribution and capital growth will, however, always remain a commanding beacon, and we will continue to manage the business in a way that enhances this objective. We see it as a measure of our success.

Driving performance

Share-based payment costs increased to R114,5 million (F2018: R99,2 million) on the back of further long-term incentivisation of staff across the group.

The changing dynamics of labour across the globe are clearly evident, and this drives the importance for the group to ensure the continued attraction, retention, and motivation of its existing entrepreneurial talent. Together with escalating employee costs throughout many jurisdictions, it has required a higher level of focus to ensure that we than continue to achieve our operational and strategic objectives. While costs management and efficiencies play an important role, suitable and relevant short and long-term incentives remain an important motivator of performance.

Reward systems within the group are varied and determined by the achievement of realistic profit and return targets together with an individual's personal contribution to the growth and development of the group. Going forward, we intend to further enhance the focus on the areas within the control of the individual.

We also seek to ensure that the long-term incentive structure is aligned to the overriding group objectives, and in this instance we seek closer alignment between shareholders and other stakeholders for a sustainable period.

Risk management measures

Bidcorp's debt is currency matched to the underlying assets, which provides a natural hedge across the group, and we continually ensure that we maintain that principle. It is critically important to us, considering the geographic spread of currency exposure risk we face.

Enabling an environment where the in-country management teams are focused on the day-to-day operations and not over burdened with governance is, in effect, the key role of the Bidcorp corporate office.

Additionally, the mix of fixed (long-term funding) and floating interest rates (short-term funding) is another area where we are focused on mitigating interest rate risk elements that may arise.

In terms of solvency, our debt-to-equity ratio is 16% from last year's 13%. Trading profit interest cover is at a comfortable 23,3 times (F2018: 26,2 times).

Accounting policy changes

The Bidcorp group financial statements are prepared in accordance with IFRS. Interpreting IFRS is complicated and is being made even more complex by the ongoing updates to various standards. Interpretations of IFRS between audit firms can also be divergent. I believe we need simplicity to return, to enable the key user of the annual financial statements, the shareholder, to be better positioned to fully understand a company's true financial performance.

Accounting policy changes for IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments have not had a material effect on the group's financial performance, balance sheet or cash flow statement.

Going into 2020 there is the new IFRS 16 Leasing Standard. The impact of the new IFRS 16 change effectively means, among other aspects, that we will be moving lease liabilities of about approximately R5,1 billion onto the balance sheet. The impact on earnings is estimated to be small, which should not affect next year's growth. Considering we own approximately 70% of our properties and 82% of our vehicles, there will be a positive impact, by moving the right-of-use asset onto the balance sheet, in that the comparative analysis between us and our peers will become easier.

External audit change

A significant event over the year, has been the change in external auditor to PricewaterhouseCoopers Inc. (PwC). This, in conjunction with the proactive monitoring review process performed by the JSE on Bidcorp's 2018 AFS in the year, resulted in a detailed examination of Bidcorp through new eyes. It is pleasing that the group has emerged from this with a "clean bill of health" and has given us great comfort that we are well structured in terms of our governance, processes and systems to ensure ongoing compliance, as well as effective financial accountability.

I wish to extend a warm Bidcorp welcome to the PwC team and pass on my thanks to everybody involved in ensuring this year's audit was successfully concluded. My sincere appreciation is directed toward KPMG Inc. for the significant input that it has delivered to our group over many years, specifically through the unbundling and becoming a separately listed company.

Accolades, appreciation, anticipation

A tremendous accolade for Bidcorp, was winning last year's investor communication award for the Industrial-Services sector at the 34th Annual South African Investment Analysts Society Awards. This is awarded to companies that have demonstrated effective investor communication across the various channels. The award is gratifying as we regard communication, in the few short years since listing, as an important component in building investor trust and an indication that we are delivering effective, transparent and relevant information to our shareholders.

I also wish to extend my appreciation to the finance teams across the globe, our audit and risk committee members and everyone else involved in ensuring the final approval of this year's financial statements. Considering the challenges of the new IFRS standards, ongoing regulatory and policy change, as well as the transition to a new audit firm, it has been an enormous task. The Bidcorp characteristic of accountability has been well demonstrated through this process.

The group's financial base is supportive of the Bidcorp business to deliver continued real growth in home currencies. Our objective to generate above-average returns in each of our businesses, notwithstanding macro-considerations and short-term volatility in various markets, remains firmly intact.

We are in a favourable position, with sufficient headroom to be able to fund organic and acquisitive growth. The strength of the group's financial position provides a cushion for the vagaries of markets and unanticipated events throughout the 35 different countries, which trade in 20 different currencies, in which we operate.

The fundamental demographics and industry drivers of our global foodservice markets remain positive, which is the key reason we anticipate real earnings growth for the 2020 financial year.

David Cleasby

Chief financial officer

Slough truck, Buckingham Palace, Bidfood UK.