Bidcorp’s performance overall was in line with management expectations, considering the differing economic realities of its developed and emerging market exposures. Headline earnings per share (HEPS) increased by 9,2% to 700,2 cents per share (H1F2018: 641,0 cents), with basic earnings per share (EPS) increasing by 8,2% to 698,7 cents per share (H1F2018: 645,5 cents). Currency volatility across major currencies positively impacted our rand-translated results for the period. On a constant currency basis, HEPS grew by 7,1%.
Trading across developed market geographies remained positive, despite cost pressures, persistent low food inflation and moderate economic growth. Good top-line growth combined with gross-margin gains alleviated cost inflation.
Europe again delivered a standout performance, particularly eastern Europe. UK Foodservice continued to perform very well and Bidfresh continued on its recovery trajectory. Australia benefited from its previous infrastructure investments while continuing to rationalise its exposure to lower-margin customers. New Zealand achieved both top-line and margin growth, offsetting cost pressures. South Africa performed admirably, despite tough economic conditions. Greater China struggled, hampered by the after-effects of the loss of a major dairy products agency and dairy market crisis, which constrained gross margins and added costs as rapid range diversification proceeded.
Consequent to our previously announced strategy of exiting the UK Contract Distribution activities, Bidcorp has classified all of its UK Logistics’ activities as discontinued, the details of which are reported below.
UK Contract Distribution (CD)
Performance significantly improved on the second half of F2018, though the business still recorded a small loss. Service levels have improved and customer pricing has been substantially increased to more fully reflect the risk and reward of these activities.
Bidcorp continues to run a broad sales process designed to achieve a controlled exit of this business.
PCL distribution business (PCL)
Trading in PCL (dairy distribution business for Arla) was poor and losses were incurred. Despite improved service levels, profitability was significantly impacted by low revenue increases, higher distribution costs and a dispute on transport rates. As noted previously, the business relationship with Arla has largely broken down and negotiations for the sale of the major portion of these activities is underway. Accordingly, the intangible associated with this contract has been fully impaired and further costs associated with the exit will be incurred in the second half particularly vehicle fleet disposal costs.
Bidcorp has declared an interim cash dividend of 310,0 cents per share, a 10,7% increase on the 2018 interim dividend.
Net revenue of R66,4 billion (H1F2018: R60,9 billion) grew by 9,1% (constant currency growth of 6,8%), reflecting real growth in activity levels in all geographies. Despite significant cost pressures in fuel, wages and energy, food inflation in our core foodservice markets remains low.
Gross profit percentage increased to 23,4% (H1F2018: 22,9%), reflecting further freetrade growth in the mix as well as trading through the higher cost base.
Operating expenses increased due to ongoing wage pressure in many economies and higher fuel and energy costs. The Group’s overall cost of doing business increased to 18,4% (H1F2018: 17,9%) on higher sales and distribution activity and the cost of invested operational capacity.
Group trading profit rose 8,3% to R3,3 billion (H1F2018: R3,0 billion). Trading margin was maintained at 4,9%.
Share-based payment costs increased to R58,3 million (H1F2018: R53,5 million) on the back of further long-term incentivisation of staff across the Group. Lower acquisition costs reflect slightly lower acquisitive activity as management bedded down acquisitions made in previous periods.
Net finance charges were 5,8% higher at R143,2 million (H1F2018: R135,4 million), in line with overall trading profit growth. Bidcorp remains well capitalised, with trading profit interest cover at 22,9 times (H1F2018: 22,3 times). We retain adequate headroom for further organic and acquisitive growth; however, we remain conscious of the need to balance gearing and shareholder returns.
The Group’s financial position remains strong, a positive attribute in volatile global markets. Investments in fixed assets reflect both replacement and expansionary capital expenditure to accommodate increased capacity and facility modernisation. Net debt is R5,1 billion (H1F2018: R3,2 billion), impacted by normal first-half working capital absorption and ongoing investment.
Cash generated by operations before working capital absorption was R3,9 billion, an increase of 14,8% over H1F2018. Lower utilisation of working capital of R1,5 billion (H1F2018: R1,8 billion) is pleasing in the face of higher activity levels, tighter supplier terms and impacts from recent acquisitions not fully in the base. Monthly average net working capital days remained consistent at 11 days (H1F2018: 10 days). Free cash flow (excluding dividends paid) was better than H1F2018 by R0,9 billion, largely due to higher cash flow from operations and lower working capital absorption.
Several small bolt-on acquisitions were made, the most significant of which entailed the acquisition of the remaining minority of the D&D bolt-on acquisition in Italy and 100% of Igartza in Spain. Investments totalled R337,5 million. Focus remains on bolstering systems and infrastructure while extracting synergies and efficiencies from recent acquisitions in Germany and Iberia.
Bidcorp remains focused on growth opportunities in the wholesaling of food and allied products to the eat-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 mantra of “it’s all about the food, the service and the technology” articulates our aim of delivering customer satisfaction backed by high service levels, efficient infrastructure and fit-for-purpose cost-effective products.
Fresh produce, meat, value-add processing and supply chain procurement initiatives all remain areas of further potential across all businesses in the Group. Our bespoke global ecommerce and CRM platform continues to evolve and embrace our best worldwide intellectual property, all leveraged for the greater benefit of the Group. Our service capability continues to improve as we further invest in our decentralised infrastructure programme to fulfil the strategic objective of getting as close as possible to the customer base. Shared innovations across the Group greatly enhance our speed of business development.
We retain significant financial headroom to enable us to decisively capitalise on the right opportunities, either organic or acquisitive, while always remaining disciplined in our overriding approach.
Financially, the Group is strong and we expect cash generation to remain robust. Our objective is to generate above-average returns in each of our businesses in their home markets, notwithstanding macro-considerations and short-term volatility in various markets.
Bidcorp’s strength lies in the experience of its entrepreneurial management teams who thrive within our decentralised Group culture. Despite some short-term challenges in our emerging markets, the fundamental demographic and industry drivers of our global foodservice markets remain positive, positioning the Group to continue to deliver real earnings growth for the full year.
The region performed strongly. Revenue was up 1,2% to R16,0 billion (H1F2018: R15,9 billion). Trading profit rose 4,7% to R980,9 million (H1F2018: R937,1 million), demonstrating the benefit of the continuing strategic move away from the lower margin customer portfolio.
Australia had a reasonable first half, with sales slightly up on last year, a great result considering the exit of further low-margin business in the period.
Continuing focus was given to freetrade customer space, which now represents 77% of total sales, up from 73%. In terms of the metropolitan branch splits effected in F2018, all three regions are tracking well ahead of previous performance. Supply Solutions continues to perform well while developing further exclusive brand lines and other light manufacturing opportunities.
The key challenge is to drive continuing growth in a large, mature business – the strategic factor behind our move into liquor following the Festival acquisition. Initial Festival results were disappointing, but opportunities abound in the medium term, given improved operational performance.
New Zealand put in a credible first-half performance as consumers became increasingly cautious and many customers reported tough trading conditions. Sales showed pleasing growth, margins firmed and expenses were well controlled as branches focused on productivity improvements. Labour availability continues to be a challenge, as well as pressure on wage rates.
Construction started at three more sites to ensure we can maintain our growth trajectory. All the 2018 new builds are now delivering a positive return. Returns slipped slightly on the back of continued investment in property and related assets.
Notwithstanding uncertainty surrounding Brexit, revenue rose 10,0% to R17,2 billion (H1F2018: R15,6 billion) while trading profit increased by 17,9% to R856,7 million (H1F2018: R726,5 million). Foodservice continues to deliver excellent results, with Bidfresh refreshed and ready to deliver good growth.
Bidfood UK performed strongly, with sales and trading profit ahead of projections. Intense margin management delivered the anticipated gains, a pleasing performance in view of persistent cost pressures in wages, fuel and energy prices.
The independent and multiple freetrade categories showed continued growth, both in margins and volumes. National account volumes fell, but margins improved. The focus remains on exiting non-profitable business while improving margins across our existing customer base.
New brand Unity Wines strengthened its market position despite the brand transition undertaken. Own brand product growth was buoyant.
Bidfresh performance overall was flat. Seafood did well and margins improved. However, further losses were recorded at Meat. Steps are being taken to drive renewed Meat growth. The Produce business has been restructured following its new depot and geographical expansion. National accounts showed good growth. Independents face challenges in a slowing economy. Cost efficiency is key going forward.
Europe continues to be the stand-out performer in the Group, with most businesses delivering good sales growth and solid trading results. Eastern Europe jurisdictions continue to show record revenue growth, in spite of significant wage pressures throughout the region. Revenue rose 14,8% to R22,5 billion (H1F2018: R19,6 billion) while trading profit rose 19,9% to R979,9 million (H1F2018: R817,0 million).
Netherlands maintained strong momentum, supported by a solid second-quarter performance. Sales and trading profit exceeded expectation. Strong gains in the horeca channel more than offset a slowdown in other areas of the business, notably in the healthcare market. Freetrade growth was unabated and beat expectations. Margins were supported by import activities and some small price rises. Operational expenses rose. Labour availability remains a challenge.
Belgium performed strongly in both the horeca and institutional segments. Sales were above budget and margins well managed. All customer segments showed growth, except the Catering channel. Development of the ecommerce customer offering is ongoing.
Italy again performed strongly. Sales and trading profit growth was pleasing in view of the national economy slowdown. Cash generated by operations rose significantly. Sales to Bidcorp sister companies continued to grow. Continued success in the freetrade sector underscores recent gains. This will remain a point of focus in the second half, along with continued integration of the D&D acquisition.
Czech Republic and Slovakia again recorded excellent first-half growth. Higher sales and better margins offset significant wage pressures due to labour shortages. Sales of our Nowaco products were pleasing, thanks in part to a highly effective TV campaign. Production numbers were positive overall. The Czech economy is slowing, but we are confident we can maintain momentum. Further depot openings are planned to ensure we can effectively service our increasing customer base.
Poland had an outstanding first half, once again registering record sales. The business drew strategic benefit from sustained investment in previous years. Growing sales to the independent street trade provided much of the impetus. Contract reviews in the national accounts segment assisted margin management. Smart Food, the subsidiary that serves Asian restaurants, is expanding its geographic reach. Our Food & Wine subsidiary continues to grow its wine sales and is expanding into spirits.
Iberia (Spain and Portugal) performance is below expectations. However, steady progress is being made internally on improving the business platforms and systems. The Barcelona region is still performing poorly, offset by good growth in Madrid and Lisbon. Focus remains on growing the independent customer-base. Restructuring of the legacy Food4 business impacted profitability. Frustock (Portugal) and newly acquired Igartza performed well.
Baltics achieved pleasing sales growth, driven by strong foodservice performance. Operations in both Latvia and Lithuania recorded a profit. Construction of the new depot in Kaunas is progressing well.
Germany continued to underperform. Horeca sales rose and national accounts ticked higher, though expenses remained too high. Additional management support has been deployed to assist our local operators. This remains a medium-term market opportunity for us. We need to structure the base before attempting expansion.
This segment continues to navigate the challenging economic and political headwinds in these developing jurisdictions. Even so, overall revenue was up 9,1% to R10,7 billion (H1F2018: R9,8 billion), with trading profit down 13,6% at R502,0 million (H1F2018: R581,3 million), largely due to the impact of the mainland China results.
Africa was impacted by a challenged performance at Crown Food Group (CFG) as recovery by the processed meats sector after last year’s listeriosis crisis proved slow. Bidfood and Chipkins Puratos (CP), our 50% equity-accounted JV, delivered excellent results, despite consumer pressure and cost rises well above food inflation. All businesses grew volumes in targeted channels, but margins are under pressure. Bidfood secured further street trade gains. National accounts declined slightly, but industrial catering sales rose. Sales through the MyBidfood ecommerce platform continue to expand. Our private and exclusive labels remain a differentiator in the market. At CFG, the Six Bar acquisition has been integrated into the business. CP grew across most channels, bolstered by good sales of own-manufactured products. Its state-of-the-art wet plant opens soon.
Greater China faced pressures as the economy slowed. Some sales gains were registered. Margins slipped and profit fell as expenses moved significantly higher as we expanded our product offering following the loss of our cornerstone dairy products agency. This loss was unpreventable, the principal (a large New Zealand dairy company) made the strategic decision to insource the selling function and outsource only the distribution component, which is not the type of activity we choose to be involved in. The Guangzhou and Shanghai operations were under particular pressure in adjusting to the loss of the dairy agency. Miumi, the Japanese food business, put in a strong showing. The second quarter ‘festival effect’ boosted Hong Kong and Macau.
Work continued on the further diversification of the product mix. Hong Kong and Macau plan to continue the introduction of new brands while stepping up investment in production centres. The hotel and restaurant channel and Chinese cuisine are focus areas for mainland operations. The business is now poised to resume its growth strategy, with the aim of repeating the performance levels seen in the previous 10 years.
Singapore achieved modest sales gains, but operating profit was slightly lower as a result of our Vietnam startup costs. The Vietnam JV became operational late in the period. Our Singapore business is now performing better after being transformed into a more traditional foodservice operation. Malaysia performed well, growing sales and margins.
Chile exceeded expectations. Volumes benefited from the October acquisition of Foodchoice. Organic growth remained the biggest driver, supported by contributions from the Viña del Mar branch. Sales from two more branches (Foodchoice Temuco and Antofagata) added to momentum.
Brazil achieved strong sales growth. Both the Irmãos Avelino and Mariusso components of the business reported solid gains as the foodservice sector benefited from a more positive consumer mood following national elections. Gains were underpinned by productivity improvements and the introduction of enhanced technology and reporting tools. We began the launch of own brand products in numerous categories, drawing on the experience of Group businesses around the world.
Middle East sales and profit exceeded expectations while margins improved. Operating expenditure was well managed. Dubai was under pressure. However, Abu Dhabi did well. Al Diyafa, the Saudi Arabian JV, recorded pleasing results, driven by new account gains and a better product sales mix.
Turkey recorded big sales gains. Trading profit lagged budget but was up on the comparative period. Izmir-based EFE put in an exceptional performance. Expenses were well controlled, but the weak Turkish lira drove some distribution costs higher.
Chief financial officer