Comment

REVIEW OF OPERATIONS

Bidcorp has delivered a resilient performance for the year which has been significantly impacted by the catastrophic economic and social consequences of the COVID-19 pandemic (COVID) which took hold across every operating geography from late January 2020 onwards. Our employees remained our top priority in terms of protecting their health, well-being and where possible, maintaining their incomes. Sadly, two employees succumbed to the virus in South Africa and a third passed away arising out of lockdown measures taken by the South African government. We extend our sincere condolences to their families and colleagues within the business. Our group's resilience is testament to our decentralised operating model, and we are grateful to all our staff for their valued and selfless contribution during these challenging times.

Headline earnings per share (HEPS) from continuing operations, post the introduction of IFRS 16 Leases, decreased by 48,6% to 741,3 cents per share (F2019: 1 443,6 cents), with basic earnings per share (EPS) from continuing operations decreasing by 68,1% to 463,5 cents per share (F2019: 1 451,0 cents). On a like-for-like basis excluding the impacts of IFRS 16, HEPS decreased by 50,0%. Currency volatility increased dramatically in the second half of the financial year and positively impacted the rand-translated results by 2,3%.

Performance across our business up until February remained pleasing and in line with expectations, however, with the onset of COVID in each operating geography, demand in the discretionary spend sectors, particularly across hotels, restaurants, pubs, leisure and travel-related segments initially plummeted as lockdowns and restrictions were implemented, but towards the beginning of June started improving from a very low base. A majority of customers have reopened and emerged from their "hibernation" at a pace quicker than we had anticipated, however, those businesses associated with "large crowds", such as entertainment, sporting clubs, contract catering and travel remain shuttered or severely curtailed in almost every country. Our businesses opportunistically pivoted into new channels, such as home delivery and supply to other retail related channels, however, the overall contribution of these initiatives was small and remains non-core and temporary. Non-discretionary demand from our institutional customers, including hospitals, aged-care, prisons, military and government departments initially declined but stabilised reasonably quickly.

Governmental support programmes in which we participated in several countries to provide food and care packages to the most vulnerable members of society via home delivery, have continued but are tapering off as restrictions ease.

The discontinued operations, Best Food Logistics and PCL distribution in the United Kingdom (UK), were successfully exited in March.

DISTRIBUTION

Bidcorp has not declared a final dividend, meaning the total dividend for the year of 330,0 cents per share represents a 48,4% decline against F2019, similar to the decline in HEPS for continuing operations in F2020 and in line with our overall distribution policy.

FINANCIAL OVERVIEW

Net revenue of R121,1 billion (F2019: R129,3 billion) fell by 6,3% (constant currency decline of 11,6%). Focus on volume growth in the independent sector has been offset by our multi-year journey to transition away from larger low-margin logistic type activities. The full impact of the COVID economic crisis became evident from late March onwards. Group sales for the last quarter of the financial year declined by 27,6% against the comparative quarter. In the week ended April 5 sales reached a low of 37% versus the corresponding week in F2019 but had recovered to 71% of the corresponding sales for the last week in June. This improving trend has continued to date and is currently at approximately 90%.

Gross profit percentage increased to 24,1% (F2019: 23,9%), which has enabled the group to trade through the higher cost base. For the last quarter of the financial year, the gross profit percentage was higher at 25,5% against the comparative quarter of 25,1% despite the additional COVID related inventory costs of R248,0 million.

The group's overall cost of doing business (operating costs excluding the IFRS 16 impact) increased to 20,9% (F2019: 18,7%), not a true representation of the cost saving efforts undertaken by the group's operations in the last quarter arising from the decline in sales. The group made EBITDAC (earnings before interest, tax, depreciation and amortisation and COVID related costs) equivalent to 5,7% of revenue. The additional COVID costs relating to abnormal receivables provisioning, inventory obsolescence and restructuring costs, which amounted to R1,5 billion for the year, was all incurred in the last quarter.

Group trading profit declined by 37,6% to R4,2 billion (F2019: R6,7 billion). Excluding the impacts of IFRS 16, like-for-like trading profit margin was 3,2% (F2019: 5,2%).

Net finance charges excluding the impact of IFRS 16 implementation were 19,2% higher at R340,9 million (F2019: R285,9 million), driven up by rising Asian base rates, pockets of weaker asset management in the earlier part of the financial year and some acquisitive activity now fully in the base. Bidcorp remains well-capitalised and retains adequate headroom for further organic and acquisitive growth. Non-IFRS 16 trading profit interest cover is still at a healthy 11,3 times (F2019: 23,3 times) despite the impacts of the COVID crisis.

Not all of our businesses entered this crisis in as strong a market position as we would have liked and in order to ensure their long-term success, we have restructured Fresh in the United Kingdom, Guzman in Spain and Pier 7 in Germany, at considerable cost. This is to achieve simplification and refocus on core competencies and markets. Accordingly, we have impaired the goodwill associated with our Spanish operations by €45,9 million (R793,8 million).

Net investments in property, plant and equipment and intangible assets of R2,5 billion (F2019: R2,8 billion) remained elevated, but necessary for anticipated organic growth. Most of the capital expenditure was already committed before the onset of the COVID crisis and will reduce significantly in the next year. Non-IFRS 16 net debt at R5,6 billion (F2019: R4,7 billion) has increased, however, this is distorted as a result of the significant rand depreciation against most currencies by year end. In hard currencies, our net debt is slightly better than June 2019 at £261,5 million compared to £265,1 million last year. Free cash flow from continuing operations for the year was excellent at R3,0 billion (F2019: R1,2 billion) despite elevated investing activities.

Cash generated by operations before working capital absorption was R7,2 billion, pleasingly only a small decline of 10,6% over F2019. Significant focus on working capital, particularly from the onset of the COVID crisis, ensured strong cash generation of R1,2 billion, a large improvement on the R1,4 billion utilised in the comparative year. Receivables declined with the focus on collections, inventory levels were slightly higher, with payables declining as we worked with our suppliers during the COVID shutdown. Monthly average net working capital days increased slightly to 14 days (F2019: 13 days).

PROSPECTS

Bidcorp's strategy firmly remains on growth opportunities in the wholesaling of food and allied products to the eating-out-of-home market; organically through achieving the appropriate customer mix, by selling more products and gaining new customers; via in-territory bolt-on acquisitions to expand our geographic reach or to expand our product ranges; and via strategic acquisitions to enter new markets, as and when these arise.

Our current focus is to anticipate the likely "new normal" that will exist post the short-term effects of the COVID crisis and to scale our activities accordingly and responsibly. Overall activity levels have returned to 85% to 90% of pre-COVID levels with several businesses now achieving growth higher than the comparative period a year ago. There are, however, a few markets which are still lagging, those being the UK and some in emerging markets. Our businesses are preparing to ride out the next phase of the economic recovery mindful that activity levels will fluctuate as further waves of the COVID pandemic arise. We believe that there will not be any major long-term fundamental shift in consumer behaviour away from eating-out-of-home and early anecdotal evidence supports this. Small aspects of the business model are continually being modified, however, major structural changes are not required.

No significant acquisition opportunities in the foodservice space have yet become evident and we believe it is premature to be exploring these in the current environment. We are experiencing market share gains as competitors, without the financial strength of Bidcorp, struggle or exit the industry. We do expect in-country bolt-on opportunities to present themselves in the months ahead, and our local teams are all ready to pursue these as they arise.

We continue to scale back any discretionary spend in capex and other business expenses and are not committing to any large investments for future years until we have greater clarity on the growth outlook. We intend to conclude several end-of-useful-life property sales in the next six months.

Our ecommerce platform remains a source of competitive advantage and we are further investing in our digital strategy and data analytics capabilities. This crisis has accelerated our customers appetite for digitalisation, and we have been able to scale-up and enhance our capabilities accordingly.

Bidcorp's resilient business model and its entrepreneurial teams have enabled us to navigate the current COVID crisis and will enable us to take advantage of any market opportunities, whether organic or acquisitive, as they arise, and we remain optimistic about our future prospects, and the return of our longer-term growth trajectory.

Group and divisional sales evolution: March – August (as a % of F2019)
Group sales (constant FX)
Australasia
United Kingdom
Europe
Emerging Markets
 
Commentary


Divisional review

AUSTRALASIA

Revenue was down 6,9%, to R29,0 billion (F2019: R31,1 billion), a good result on the back of a difficult first three quarters and a very tough last quarter. Trading profits reported were 10,4% lower at R1,9 billion (F2019: R2,1 billion). Australasia remains the largest profit contributor in the group.

The onset of the COVID pandemic was a game changer over the last quarter, with sales recording a low of 35% of its F2019 demand in the week of April 19, however, recovering to 89% of the F2019 level by year end.

Australia performed remarkably given the tough conditions, not only with the impact of the COVID pandemic, but also off the back of the prolonged drought and the national bush fire crisis. Focus throughout remained on motivating staff and keeping the management team positive throughout this tumultuous time of uncertainty.

Results were notably impacted by the overall slowdown in the foodservice market, and the inbound tourism market. Indications are the local tourism uptick is predicted to revitalise the foodservice industry.

A significant benefit in navigating the restricted movement during the peak of the pandemic has been the strategically placed multiple depot approach, ensuring we are able to source, service and distribute locally. Many mid-size branches, within easy reach of suppliers and customers, have been a distinct advantage over the single large distribution centre model.

This extraordinary period presented an opportunity to focus on cost control, engage employees and draw close to customers in managing our collections and supporting them through the reopening process once the relaxation of restrictions commenced. Volumes held up well notwithstanding the impact of the sale of the Fresh business in September 2019, the discontinuation of Logistic operations and the exit of a large national contract.

Strategic focus on the preferred customer categories in the past has delivered, as aged care, cafes, restaurants and pubs recovered quickly post-lockdown, where large scale catering for events and venues have not yet been able to reopen.

New Zealand pushed through the low point of the COVID pandemic, with monthly sales being down 69% on prior month in April, recovering in June to only being marginally down on the prior year. This is an excellent result considering the complete shutdown of the border to international visitors and demonstrates the resilience of our industry when people can once again move around freely.

Notwithstanding this improvement, the hospitality industry remains highly vulnerable with the absence of foreign tourists and the end of government financial support. New service options were introduced such as home delivery, and new relationships established with the Civil Defence department who has added Bidfood to the approved national contractors for food supply in times of crisis.

Management's adopted post-lockdown strategy of proactively helping customers manage their debt while at the same time aggressively pursuing sales, has paid dividends, with the business seeing a significant jump in new customers and market share.

Sales and profit were slightly ahead of expectation at H1, however, the COVID pandemic terminated all international tourism, a key category of customer. Some relief has been experienced in the surge of domestic tourism.

Infrastructure investment was put on hold for all projects that had not commenced by March, Auckland North and New Plymouth depots were completed, with Christchurch Foodservice nearing completion at year end.

Foodservice and Fresh maintained high service levels despite the challenges faced. Processing continued their development as an important operating division reporting a pleasing result.

UNITED KINGDOM

The UK remained in full lockdown for most of Q4 due to the COVID pandemic. This enforced a downturn in revenue of 5,6% to R31,5 billion (F2019: R33,3 billion). Trading profit was even harder hit with a decrease of 61,2%, to R666,8 million (F2019: R1,7 billion).

Bidfood UK achieved a low of 30% of its F2019 sales in the week of April 5 however sales recovered to 57% of the F2019 level by year end. Most of this activity has arisen away from our traditional markets.

Operational performance was buoyed by the shared-award of the delivery of the government care packs to vulnerable people identified to be shielded from the virus, and to a lesser extent from growing the new B2C markets.

The foodservice business utilised the government's job retention scheme to keep resource levels in line with the reduced volume and revenues. Trading profit was negatively impacted by once-off exceptional items brought about largely by the lockdown and reduced activity levels.

Active engagement with customers and suppliers early in the lockdown, such as agreeing to extended payment terms, matching activity levels and ensuring ongoing communication has delivered good results on collections and cash generation. Notwithstanding these proactive initiatives the increased risk of debtors defaulting is recognised and is an area of management attention.

The national accounts team are putting significant focus on winning new business from their targeted pipeline and have already secured a significant portion of their F2021 targeted new business.

Elite Frozen Foods, a small regional wholesaler was acquired at the onset of F2020.

Fresh UK had an exceptionally difficult year, aggravating an already troubled environment by the near-to-complete shutdown of the entire customer base. Summertime events in the UK are the lifeblood of the business and the cancellation of events such as Epsom, Ascot, Chelsea Flower Show, Wimbledon and the like, has proven to be significant.

After senior management changes, a new CEO from within the business took the reins in January and has capably guided the restructure efforts.

We removed as much cost as possible, as quickly as possible, which delivered some relief and the government job retention scheme allowed the furlough of staff. To ensure sustainability of the business, a significant restructure of most of the Fresh operations has commenced. We remain confident that a good business underlies these challenges. Once volumes resume and the changes are embedded, a return to acceptable profitability is anticipated.

The discontinued UK logistics' operations, Best Food Logistics and PCL, were successfully exited in March.

EUROPE

Considering the spread of countries and the varied levels of COVID-related impacts, Europe delivered solid results. Revenue was down 7,9% at R40,2 billion (F2019: R43,7 billion), with most businesses finding opportunities in the midst of the crisis to continue to operate. Trading profit was down 48,5% at R1,0 billion (F2019: R1,9 billion). Our eastern European businesses have shown great resilience, embracing the benefit of a retail customer base. Eastern Europe appears to be further along the economic recovery path than what we are experiencing in western Europe.

Sales reached a low of 27% of the F2019 activity levels in the week of April 19, however, has recovered to 70% of the F2019 level by the end of June. Activity levels in Italy, Spain and the Netherlands continue to recover, albeit somewhat more cautiously than our other European operations.

Netherlands was well-positioned for an excellent performance for F2020 prior to the impact of the COVID pandemic. Overall, sales volumes were down by 20%, but the cost base remained high as Dutch law prohibited any staff contraction through the pandemic. As the summer holiday period commenced, lockdown restrictions eased, and the recovery was palpable. National accounts, large caterers and institutional customers are still struggling, however, the freetrade hospitality sector is back to near pre-COVID levels.

Belgium was hard hit by COVID, and economic activity across the country fell 9%. Markets reopened in early June and the recovery was good, in spite of some cautiousness around second-wave infections. Focus remains on cash management and expense reduction until the market improves. Rollout of the new "myBidfood" ecommerce platform was completed, and fortuitously well-timed as the market embraces our online engagement.

Czech Republic and Slovakia capitalised on a resilient economy to weather the COVID pandemic very successfully. Recovery post-lockdown was very positive and the business was able to mobilise its resources to take advantage of this opportunity. Ongoing labour shortages persisted as cross border labour movement is restricted, accelerating the implementation of process automation where possible. Ice cream remains an important category, but strategic product diversification has brought better balance. Businesses were strongly cash generative.

Italy, the European epicentre of the COVID pandemic, experienced large-scale deterioration of economic activity and labour pressures. Economic recovery is anticipated to take more than two years, as the populace regains their confidence to return to normal. The business continues to drive its position as a strategic partner of independent, street-based operators.

Poland's very successful year to March was derailed by the COVID pandemic in the last quarter. Activity in the primary customer base, being hotels, tourism and conferences was significantly impacted post-March. Cost reduction has been key over the last quarter and some redundancies were unavoidable. Salary cuts and reduced hours were implemented to further decrease costs but protect job security. An optimistic recovery is underway. Some investment into vehicles was completed early in the year, but all other capex was postponed. The ecommerce platform processed nearly 30% of total sales.

Pier 7 Germany struggled, navigating both a difficult operational environment and a market plunged into recession due to the COVID pandemic. Significant restructuring was undertaken to simplify the operation and refocus our market. Management changes, although costly, were necessary and should be a turning point for this business. New warehousing capacity in Munich came on stream in the first half and the benefits of a simpler structure are already evident at year end.

Baltics reported much reduced revenues between March through May, but the recovery has been remarkable with year-end results outperforming the prior year. National account revenues have dropped but have been more than offset by the positive growth shown in the independent foodservice market and the retail sector. Local tourism is booming.

Iberia overall had a very difficult year. The COVID pandemic significantly impacted the population, aggravating an already problematic Guzman operational environment. After the year end, the management team has been replaced, triggering a significant overhaul of internal processes and controls to achieve simplification and focus on core competencies and markets. There is still some distance to cover on this journey, but the local team is motivated, and the market is recovering and remains an attractive foodservice opportunity. Igartza (a recently acquired multi-category business based in the north) pleasingly, was only slightly down on prior year results. Frustock, our Portuguese business, did well in light of the challenging last quarter.

EMERGING MARKETS

Emerging Markets, other than Angliss Greater China, continue to experience the onslaught of the COVID pandemic, with most territories still recording high daily infection rates. The challenging economic and political headwinds have not abated. Sales reached a low of 52% of the F2019 activity levels in the week of April 12, however, has recovered to 70% of the F2019 level by the end of June.

Revenue was down 3,1% to R20,5 billion (F2019: R21,1 billion), and trading profit down 34,3% to R0,7 billion (F2019: R1,0 billion).

Sales in mainland China have recovered and are now exceeding those of the comparative week in F2019. Activity levels in the other emerging market countries in which the group operates (South Africa, Brazil, Chile, Turkey and the Middle East) remain subdued as the path out of the COVID crisis still lags that of Australasia and Europe.

Bidcorp Food Africa (BFA) struggled through a difficult last quarter, navigating some of the most stringent COVID lockdown restrictions. Revenue and profits for the first eight months were pleasing but managing the crisis has been the focus for the last four months of the year.

Bidfood South Africa's business was severely disrupted by the lockdown restrictions, decimating the horeca and hospitality industry in South Africa. BFA found respite in busying the team with the more philanthropic type activities such as distribution of food care packages to impacted communities and mobilising home delivery services to support those in isolation. The competitive landscape is expected to undergo some change as the ravages of the lockdown go full-course, and we intend to capitalise where we can in market share growth.

Proactive engagement with customers, working alongside them to reopen and supporting them with payment plans, reopening training programmes and supply of the required personal protective equipment (PPE) to the horeca industry has grown goodwill. These initiatives will hopefully drive recovery in the short to medium-term.

Crown Food Group was able to fully operate over lockdown as people were forced to eat-at-home. The retail activity levels were impacted due to the restriction on deli's selling hot meals. The independent channel was also impacted as some butcheries were closed. The export operations struggled due to border closures. Ongoing competitor pressure in the meat and poultry sectors continue to challenge the team. Overall profitability showed solid growth for the year.

Equity-accounted JV Chipkins Puratos had a difficult first half of the year, navigating tough competition but growing own-manufactured products to the artisanal and industry segments and realising new opportunities with the global Puratos brands.

The properties entity will make further investments in Port Elizabeth, Pretoria, and there are plans to develop a new Johannesburg South multi-temp facility.

Greater China delivered acceptable results despite the negative impact from the COVID lockdown and ongoing social unrest in Hong Kong. Hong Kong and Macau faced headwinds as COVID lockdown, border restrictions and protests impacted consumption and tourism. Out-of-home eating was hard hit, with many customers having to downsize significantly or even close their doors.

Management have focused on the reduction of operational costs and tight management of working capital. The sale and leaseback of a Hong Kong property was concluded post-yearend and will be a strong contributor to positive cash flow in the year ahead.

Mainland China saw growth in the food and beverage sectors after the gradual release of city lockdowns across China. Businesses continue to widen their brand portfolio, in particular in the dairy brands. Penetration of the supermarket segment was well-timed as the sector benefitted from increased household consumption. Strong focus remains on restaurant customers, Chinese cuisine, own-brands and medium to high-end ranges like chilled and processed meats, to enhance our foodservice offering.

Singapore delivered a great result despite the country entering recession following the impacts of the COVID lockdown, restricting all tourism, conference and hotel occupancies. Government wage subsidies contributed to managing the cost base in addition to the general expense reductions. The foodservice division struggled as the market closed, but the consumer division showed positive growth as consumers prepared more food at home. Similar trends were noted in Malaysia and Vietnam, with quick recoveries experienced as the markets begin to reopen.

Brazil struggled under the lockdown, with sales dropping to below 50% of the prior year levels. Both the Irmãos Avelino and Mariusso operations implemented strict cost-cutting measures, including staff redundancies, but results were heavily impacted. Internal restructuring should deliver cost savings in the new year. "myBidfood" ecommerce platform was well used through lockdown, encouraging online sales and engagement with customers. Working-from-home continues to keep city centres quiet and the lunch-time clientele away.

Chile experienced a dramatic fall in sales volumes due to the knock-on effect of both the political unrest in H1 and the COVID lockdown in H2. Management have been keeping a close eye on managing the working capital, while at the same time pursuing other opportunities related to the foodservice market that are already showing promise. Relaxation of lockdown restrictions is anticipated in August, and hopefully the recovery is as quick as in many of our other geographies.

Argentina (in which Bidcorp has a 38% stake) was classified as an essential service and able to continue to operate through their lockdown, albeit at around 30% capacity. Government support through April helped ease the cost burden but losses were incurred. By year end, the business generated profits again and the team has a positive outlook.

Middle East, although boosted by an exceptional first half, felt the impact of the COVID pandemic as many of the large events planned for the year were cancelled. UAE suffered as demand for key products dropped off and inventory shelf-life was managed. Al Diyafa (Saudi Arabia) resumed activity once restrictions were eased as the QSR market was embraced. Introduction of their home delivery ecommerce platform provided a well-timed online engagement tool.

Turkey's foodservice operations struggled through the lockdown, however, their liquor distribution activities delivered good sales. The new operation in Antalya has been impacted by the late and partial opening of the resorts in this region. Bidfood EFE continues to establish itself and grow market share. A broad-based foodservice business was set up in Istanbul effective July 2020.

CORPORATE

BidOne, developers of the group's proprietary software including the ecommerce platform ("myBidfood"), saw continuing uptake of electronic orders, rising along with order value, and now handles in excess of 30% of total group sales, indicating promising momentum. Several businesses successfully repurposed their "myBidfood" platforms for B2C ordering during their height of the COVID pandemic.

Bidfood Procurement Community (BPC) continues to assist group procurement initiatives and to support the supply chain. Work to improve supplier terms and grow product categories continues.

DIRECTORATE

Mr DDB Band retired from the board at the 2019 AGM. The board expresses its sincere appreciation to Mr Band for his services as lead independent director, and the significant role Mr Band played through the development and establishment of the group.

The board welcomes Mrs T Abdool-Samad and Mr CJ Rosenberg, who were appointed as independent non-executive directors to the Bidcorp board in November 2019.

BL Berson

Chief executive

DE Cleasby

Chief financial officer

Commentary