Bidcorp

Trading conditions across all the geographies in which the Group operates remained positive. Most businesses in the portfolio improved their performance in home currencies against a backdrop of low inflation and mediocre economic growth. However, in certain categories of products, particularly dairy, rampant price increases marginally impacted gross margins. Planned investments in new capacity, particularly in Australia, has created some short-term underperformance but strategic medium-term prospects remain exciting.

Our strategic focus of growing our independent customer base in our respective markets has driven organic growth and a few bolt-on acquisitions have been concluded in the period to broaden our product range and geographic extension.

As previously outlined, our low margin logistics activities globally have been identified as not fitting into Bidcorp’s strategic plan in the medium term and thus non-core. We have received a credible and realistic commercial offer for the UK Contract Distribution (CD) business which we are actively pursuing. In December 2017, Bidcorp took a decision to treat the CD segment of UK Logistics as a discontinued operation.

Bidcorp has declared an interim cash dividend of 280,0 cents per share, a 12,0% increase on the F2017 interim dividend.

The financial comment is based on the continuing operations of the Group.

Net revenue of R61,5 billion (H1F2017: R57,1 billion) grew by 7,7% (constant currency growth of 8,3%) reflecting our focus in the core foodservice markets in all geographies. Despite significant inflation in certain categories of products, largely dairy, overall food inflation across the basket remained relatively benign demonstrating real growth in market share across all operations. The exit of some low margin business in various geographies is still reflected in the comparative base.

Gross profit percentage was maintained at 23,6% (H1F2017: 23,8%). Certain businesses sacrificed margin to grow their free trade volumes and some inflation in the dairy category was absorbed. Operating expenses remained well controlled, increasing 3,6% like-for-like in absolute terms despite ongoing wage pressure in a number of economies. The overall cost of doing business declined to 18,7% (H1F2017: 18,9%) despite higher sales and distribution activity reflecting ongoing efficiency gains.

Group trading profit increased by 8,9% to R3,0 billion (H1F2017: R2,8 billion) and the trading margin was constant at 4,9%.

Share-based payment costs increased to R53,5 million (H1F2017: R45,0 million) reflecting the anticipated costs of long-term employee incentivisation across the Group. Acquisition costs of R14,6 million (H1F2017: R14,0 million) were incurred in bringing the various bolt-on acquisitions to fruition. The contribution of the various acquisitions in the period to the overall Group profitability has been minimal, however these businesses assist in building our scale.

Net finance charges are 16,6% higher at R136,5 million (H1F2017: R117,0 million). Cash generation from operations remains robust but has been impacted by greater utilisation of working capital typical of the first half of the financial year. Working capital has been generally well managed but reflects higher activity levels, structural investment and tighter supplier terms in Greater China, some strategic stocking, and impacts from recent acquisitions. Bidcorp remains well capitalised, with trading profit interest cover at 22,1 times (H1F2017: 23,8 times). We retain adequate headroom for further organic and acquisitive growth, however remain conscious of the need to balance debt capacity and shareholder returns.

The Group’s financial position remains strong, a positive attribute in volatile global markets. Total fixed assets have grown in home currencies reflecting both replacement and significant expansionary capital expenditure. Net debt is R3,4 billion which reflects the impacts of ongoing investment and acquisitions.

Cash generated by operations before working capital absorption was R3,5 billion and monthly average net working capital days increased to nine days (H1F2017: five days). Free cash flow (excluding dividends paid) was negative at R0,9 billion after investment activities absorbed R1,6 billion.

In July 2017, 70% of Pier 7 Foods, a small foodservice business based in Munich, Germany, was acquired incorporating five locations within Germany and one in Austria. In addition, a niche Portuguese horeca business was also acquired and integrated into Bidfood Iberia.

The Group also concluded smaller bolt-on acquisitions in Australia, Spain, New Zealand and Turkey. Total investment in acquisitions was R588,2 million, the benefits of which will be evident in the medium term as we extract synergies and efficiencies.

We are confident that our strategy of developing our capability to become an on-demand high service business focused on customer satisfaction continues to deliver strong growth. Our ability to handle the ‘last mile’ delivery over a complicated product range improves continually as we roll out our infrastructure programme. Our focus is ‘all about the food’ as we move towards achieving the correct customer mix. Our value-add proposition is driven by our people’s desire to deliver excellent customer service.

Fresh produce, meat, value-add processing and procurement initiatives remain areas of future potential, all of which will assist in growing the basket. The regular sharing of the best Bidcorp practices and innovations across the Group ensures that speed of business development is greatly enhanced, often avoiding costly mistakes.

Our investment in digital interaction with our customers is being leveraged off our ability to intelligently interpret our significant data sets. The development of BidOne, our bespoke global ecommerce and CRM platform, continues ensuring our best worldwide innovations are leveraged for the greater benefit of the Group.

Bidcorp strategically remains focused on growth opportunities; organically in our current markets through attaining the appropriate business and customer mix by selling more products and gaining new customers; via in-territory bolt-on acquisitions to expand our geographic reach and expanding our product ranges; and via strategic acquisitions to enter new markets. We remain disciplined in our approach to accessing the “right” opportunities, despite our appetite and capacity for acquisitions.

The timing of investments either into capacity creation or acquisition opportunities is often difficult to predict. However, we retain significant financial headroom and the ability to act quickly to accommodate any feasible possibilities, either organic or acquisitive.

Our financial position is strong and cash generation is expected to remain robust. Currency volatility in the global environment is a given, however, our objective remains to generate above average returns in each of our businesses in their home markets.

Bidcorp’s strength lies in the depth and experience of our management teams who thrive in an entrepreneurial and decentralised business model, a recipe we believe positions the Group well for continued growth in future.

In the short term, we believe the challenges of infrastructural investment in Australia and dairy pricing volatility particularly in Asia will favourably resolve themselves. In the medium term, the fundamental drivers of the global foodservice industry will remain positive in our markets. Bidcorp anticipates continued real growth in the period ahead.

The region continues to make a substantial contribution and remains the biggest profit generator. Revenue moved 3,6% higher to R15,9 billion (H1F2017: R15,3 billion). Trading profit rose marginally by 0,1% to R944,9 million (H1F2017: R943,6 million).

Australia’s first-half focus was on investing in the future and its strategy of creating more warehouses across smaller, manageable operations in its major metropolitan areas that provide exceptional service to foodservice customers. In AUD, revenue rose 4,6%. However, due to the expected lag between additional expenses and additional revenue, operating expenses went up 9,3%. Overall progress was highly satisfactory for a business that recently opened three additional metro sites in Sydney, Melbourne and Brisbane.

Foodservice division had been trading at peak, an effort that could only be sustained with renewed investment. Change implementation at scale without losing customers was testament to the strength of the business and the excellent work of all involved.

Supply Chain Solutions division continues to perform well and remains an important part of future growth plans. Fresh and Meat continue to make progress, albeit behind expectations.

New Zealand put in a strong second-quarter performance, offsetting a slow start to the half-year. Performance was driven by steady revenue growth, supplemented by ongoing focus on imports and margin management.

Trading conditions remained challenging in the core foodservice business. Revenue growth in NZD was pleasing at 7,9%, but price resistance kept margins in check. A tight labour market saw the cost of doing business rise slightly. However, a focus on supply chain efficiencies underpinned a solid trading result. Five new or upgraded distribution centres came on stream.

Fresh performance was impacted by an extremely wet winter followed by a summer drought, restricting opportunities to trade and manage margins. Processing put in a pleasing second-quarter performance, despite significant internal reorganisation to facilitate future growth requirements.

Revenue rose 5,3% to R16,2 billion (H1F2017: R15,4 billion) while trading profit increased by 3,4% to R723,9 million (H1F2017: R699,8 million).

Bidfood UK traded well thanks to continued focus on free trade growth, national margin enhancement and cost reductions. Trading profit exceeded expectation despite once-off costs and a bad debt write-off. Free trade volume growth of nearly 8% was achieved, accompanied by a little gross margin dilution. National accounts volumes were up 3% on ongoing tender wins and renewals. Overall costs were well managed and our business simplification programme gained traction.

In PCL, service levels improved but further operating efficiencies are required.

Fresh trading profit declined by 5%, though Seafood made pleasing gains. Improved Seafood revenues were underpinned by tight cost control and rigorous margin management. Produce was impacted by duplicate handling and trunking costs, lower revenue and margins. The opening of the Birmingham depot will alleviate some inefficiencies caused by the rapid expansion of Oliver Kay. Meat division performed poorly, largely due to Hensons, which was impacted by staff losses ahead of the impending move to the new depot in Woolwich. The focus on independent growth continues throughout the division.

Most businesses performed strongly, particularly the eastern European jurisdictions which continued to report good growth. Revenue rose 20,0% to R19,6 million (H1F2017: R16,3 million) while trading profit rose 38,7% to R817,0 million (H1F2017: R589,0 million).

Netherlands put in a highly satisfactory trading performance. Sales volumes were ahead of expectation, driven by strong growth in the national accounts segment. Free trade horeca business showed good volume growth of 5%, despite strong competition. As expected, institutional and catering volumes were down, but ahead of budget. The healthcare category retained customers, but overall faces strong pressure. Promising growth was seen into the free trade hospitality channel. Further internal reorganisation occurred as we continue to simplify the business to improve profitability.

Belgium’s revenue growth continued to beat expectations and trading profit growth was pleasing. Expenses were in line with activity levels while gross margin held up well. The catering segment maintained volumes in the face of pressure, while the horeca and institutional channels exceeded budget. The ‘My BidOne’ ecommerce platform was successfully introduced.

Iberia (Guzman Spain and Portugal) delivered lower than expected trading profit – in part affected by Catalonia’s political uncertainty and consequent economic slowdown. Significant internal reorganisation, including IT upgrades, is under way to better align processes to the customer focus. Some small branches faced challenges. Gross margins improved and cost control was effective. Implementation of the Bidfood Iberia strategy continued. Recent bolt-on acquisitions (Frustock and Cárnicas Sáez) confirmed the potential for broader geographical growth. We remain enthusiastic about the Iberian market.

DAC Italy put in a pleasing performance, reflecting positive contributions from DAC and Quartiglia. Revenue and trading profit were ahead of the comparative period. Growth continued in the independent segment, in line with long-term strategy. Sales to other Bidcorp companies rose by 41%, spotlighting the appeal of the ‘Made-in-Italy’ product proposition. A further bolt-on opportunity was concluded early in January, adding to the geographical footprint across Italy.

Czech Republic and Slovakia put in an excellent first-half trading performance. Volumes exceeded budget across both the Czech and Slovakian operations, though rising personnel and production costs created challenges. The business optimised the trend to added-value products in the restaurant channel. Continued penetration of butcheries and baker’s shops was evident. Production volumes grew.

Poland performed strongly. Good volume growth was driven by continued penetration of the free trade channel. As a result, gross margin showed improvement. Cost controls were stepped up. Lublin branch moved to a new depot. The Gdańsk depot expansion programme is complete and expansion work at the Poznań site is nearing completion.

Baltics moved into profit, buoyed by revenue growth and reduced losses in Latvia and Estonia. Lithuanian operations performed strongly. A new, modern depot is under construction in Lithuania in order to alleviate capacity constraints.

Germany/Austria (Pier 7 Foods) performed reasonably in its first six months within the Bidcorp stable, and is profitable. This small acquisition is the first building block of a larger play in the German market, which is dominated by a few very large players, but also has a highly fragmented base of smaller to medium size foodservice wholesalers with a profile similar to ours.

These businesses felt the impact of the many varied economic and political challenges facing these developing regions. In April 2017, 50% of our Baking Supplies business was sold to Puratos NV, renamed Chipkins Puratos and equity accounted thereafter. Although revenue dropped 2,3% to R9,8 billion (H1F2017: R10,0 billion), with trading profit down 0,4% at R581,3 million (H1F2017: R583,8 million) on a like-for-like basis, revenue and trading profit were up 7,1% and 9,3% respectively.

Bidcorp Food Africa delivered revenue and trading profit growth in tough trading conditions. Focused expense management underpinned gains. Bidfood performed strongly, securing continued independent channel growth and revenue increases in excess of inflation. Growth of Bidfood's private and exclusive label range continues. To date, 58% of revenue is transacted via Bidfood's ecommerce platform. Crown Food Group built momentum on manufacturing performance improvements. Competition remains significant in very tough market conditions. The Griffiths Crown JV had a short-term impact on Crown Ingredient Solutions as QSR customers were transferred to the new unit. The new Chipkins Puratos JV made excellent progress. Puratos' knowledge and best practice are being implemented across the business. IT tools and collaborative systems continue to add value across the whole division.

Greater China grew overall revenue and trading profits, but was impacted by dairy market dislocation, pricing pressures, the effects of a strong euro and rising operating and logistics costs. The Hong Kong business was challenged by pricing pressures in the dairy category while poultry imports from Europe fell away due to avian flu. High warehousing costs negatively impacted profitability. Angliss Macau achieved pleasing growth in other categories, but failed to offset the decline in its dairy business. Operations in mainland China faced similar challenges as the previous undersupply of dairy products (and higher prices) was followed by oversupply. Reliance as a category on lower margin dairy is diminishing overall as the higher margin product range grows. Structural supply chain changes resulted in some working capital absorption.

Singapore grew revenues and trading profit moved slightly higher. Margin pressure was offset by good cost control. Foodservice, now the largest division in the refocused business, continues to grow in the restaurant, hotel, pub, club and café segments. Bidfood Malaysia made its first contribution following the acquisition of Aeroshield's Malaysia business.

Chile delivered good revenue growth despite recessionary conditions. Trading profits were flat due to the initial costs of the introduction of seafood categories, excess product storage and the opening of the new Viña del Mar branch. Stepped-up credit controls drove working capital improvements.

Brazil witnessed satisfactory revenue and trading profit growth as the economy showed tentative signs of recovery. Competition sharpened in the foodservice market. Unemployment remains high and some consumers are downtrading. Significant internal development of the business has been undertaken. Freezer construction began in the recently acquired Mariusso business to enable expansion of the range.

Middle East operations benefited from second-quarter revenue improvements, but the uptick could not offset an overall decline in trading profits to levels well below expectation. Geopolitical challenges contributed to a significant fall in UAE demand. Lower volumes necessitated changes to the brand basket. Saudi Arabia, less impacted by regional instability, showed good second-quarter growth as the economy diversifies away from oil revenues. Oman and Bahrain, both in early stages of development, made significant revenue gains.

Aktaes Turkey achieved pleasing revenue growth and the business moved back into profit. Margins were well managed, though distribution costs rose and the Turkish lire's depreciation affected imported product costs. Hotels still face low occupancy rates, but the horeca market remained resilient. Acquisition of the EFE business, a local horeca-focused business, delivered the expected gains.

Logistics UK

As previously outlined, low margin logistics business' globally have been identified as activities that fall outside Bidcorp's strategic plan in the medium term. We have received a credible and realistic offer for the UK Logistics' CD business, the consequence of which we are carefully evaluating in the best interests of all our stakeholders. In December 2017, Bidcorp took the decision to treat the CD business as a discontinued operation.

Performance, as anticipated, was disappointing at CD which recorded losses. The Shared-User unit experienced falling volumes on the loss of a significant account in May 2017. A further contract (KFC) representing 30% of the overall volume exited on February 14 2018. Operations will be significantly downscaled thereafter, the costs of which in relation to people, property and vehicles will be expensed in the second half of the financial year.

Mr Brian Joffe will retire from the Bidcorp chairmanship on March 31 2018, but remains on as a non-executive director. Mr Stephen Koseff, currently an independent non-executive director, has agreed to accept the board's invitation to assume the role of independent non-executive chairman, effective March 31 2018.

The board expresses its sincere appreciation to Mr Joffe for his services as chairman, particularly in leading the formation of Bidcorp, as well as its JSE listing on May 30 2016, which were critical development phases for the Group.

BL Berson

Chief executive

DE Cleasby

Chief financial officer