Comment

Review of operations

Bidcorp delivered a resilient performance for the half-year in volatile social, political and environmental circumstances in some operating geographies and despite underperformance in a number of operations.

Headline earnings per share (HEPS), post the introduction of IFRS 16 Leases, increased by 4,0% to 728,3 cents per share (H1F2019: 700,2 cents), with basic earnings per share (EPS) increasing by 3,8% to 725,4 cents per share (H1F2019: 698,7 cents). On a like-for-like basis, HEPS increased by 4,3%. Currency volatility had limited impact on rand-translated results for the half-year.

Operating conditions were challenging in a number of geographies. Social unrest in Hong Kong and Chile impacted out-of-home demand, the bush fires in Australia dampened consumer sentiment while the lead-up to the UK general election and Brexit-fatigue dampened British consumer spending. In addition, trading performance was impacted by management underperformance in Bidfresh UK, Spain and Germany.

Europe continued to perform well, particularly Netherlands, Czech and Slovakia, Italy and Poland. Australia's revenue growth remained subdued while the team continued to rationalise exposure to lower-margin customers. New Zealand achieved both top-line and margin growth, offsetting cost pressures. Bidfood in the United Kingdom continued its growth trajectory. However, this was somewhat negated by the poor performance of Bidfresh. In Emerging Markets, South Africa maintained some growth despite tough economic conditions. The Middle East performed well. Greater China's performance declined as the recovery in mainland China was insufficient to offset the impact of social unrest on our Hong Kong activities.

The two discontinued operations exits are near completion. UK Contract Distribution (CD) benefited from a major contract win in the previous year, however, poor consumer sentiment in the QSR market impacted volumes. CD has operated efficiently and effectively in this period. CD disposal remains on track for March 2020. All expected costs arising from the sale have been expensed. PCL distribution business (PCL) performed to expectation despite lower volumes, generating a small contribution. No further material costs are expected into H2F2020.

Distribution

Bidcorp has declared an interim cash dividend of 330,0 cents per share, a 6,5% increase on the F2019 interim dividend.

Financial overview

Net revenue of R68,2 billion (H1F2019: R66,1 billion) grew by 3,2% (constant currency growth of 3,1%). Good volume growth in the independent sector has been offset by our multi-year journey to transition away from larger low-margin logistic type activities. Gross profit percentage increased to 23,8% (H1F2019: 23,5%), which has enabled the group to trade through the higher cost base.

The group's overall cost of doing business (operating costs excluding the IFRS 16 impact) increased to 18,8% (H1F2019: 18,5%) partly due to our greater focus on freetrade customers. Our significant investments over the past few years into operational capacity have also contributed to overhead growth, the full efficiency benefits of which have yet to fully manifest themselves. Cost pressures continue to be experienced in wages, fuel and energy, though the rate of increase appears to be moderating.

Group trading profit rose 9,2% to R3,6 billion (H1F2019: R3,3 billion). Excluding the impacts of IFRS 16, like-for-like trading profit growth was 4,2%. The like-for-like trading margin increased to 5,0% (H1F2019: 4,9%).

Net finance charges were 129,8% higher at R329,2 million (H1F2019: R143,2 million), the largest impact due to the implementation of IFRS 16. Excluding IFRS 16, net finance charges were up 10,6% driven by rising Asian base rates, some acquisitive activity now in the base and pockets of weaker asset management. Bidcorp remains well-capitalised and retains adequate headroom for further organic and acquisitive growth. Non-IFRS 16 trading profit interest cover is at a healthy 21,6 times (H1F2019: 22,9 times).

Investments in property, plant and equipment remained elevated, but necessary for anticipated organic growth. Non-IFRS 16 net debt at R4,9 billion (H1F2019: R5,1 billion) has declined, reflecting excellent free cash flows in the period, despite high investing activities.

Cash generated by operations before working capital absorption was R4,3 billion, an increase of 8,4% over H1F2019. Significant focus on working capital limited absorption to R0,2 billion, a large improvement on the R1,5 billion utilised in the comparative period. Receivables grew in the face of higher activity levels. Inventory levels were slightly higher, with longer supply chains on imports and expanded organic capacity. Monthly average net working capital days increased to 14 days (H1F2019: 12 days). Non-IFRS 16 free cash flow (excluding dividends paid) was R1,1 billion better than H1F2019.

Prospects

Bidcorp remains focused 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 investments in Spain and Germany continue to underperform. However, significant focus and effort are being directed to improve the platforms from which we can realise the potential of each of these markets. Management changes within Bidfresh UK should see this business return to growth in the medium term. Our discontinued operations will be behind us into H2F2020, enabling the group to be fully focused on its core foodservice markets.

The group is well-capitalised, enabling us to retain significant financial headroom to exploit the right opportunities, either organic or acquisitive. We remain conscious of the need to balance gearing and shareholder returns. However, our strong financial position is a positive attribute in today's volatile global markets.

Recent political and social upheaval in some markets combined with the unfolding coronavirus pandemic, is very likely to impact growth prospects into H2, the severity of which is impossible to predict. However, despite these short-term disruptions, the fundamental demographics and industry drivers of our global foodservice markets remain positive.

Bidcorp's resilient business model will enable it to take advantage of any market opportunities, whether organic or acquisitive, as they arise.

Divisional review

Australasia

Trading profit rose 6,6% to R1,0 billion (H1F2019: R980,9 million) on the back of revenue dip of 1,3% to R15,8 billion (H1F2019: R16,0 billion). Shifting away from lower-margin customers continues to deliver the benefits of management's implemented strategy.

Australia performed acceptably in tough conditions. Sales were flat as drought and the national bush fire crisis affected many regions. Profit moved higher as the strategic focus on independent business and growing the product range bedded down. Volumes were hit by the sale of the Fresh business and discontinuation of Logistic operations. Exit of a large national contract also affected sales as did lack of growth in meat and national accounts overall.

A key challenge has become the need to grow quality national contracts at acceptable margins.

Continued freetrade growth was registered. Foodservice opened in Bendigo in November. Supply Solutions (now Foodservice's largest supplier) again recorded pleasing growth. Liquor marketing receives growing focus. Expenses and payroll costs were well-managed.

New Zealand performed well. Sales picked up later than usual and heavy rain and flooding affected South Island tourism. Exit of a large catering contract in July reduced volumes while the opening of a second Auckland branch increased expenses. However, food inflation moved higher, sales rose and profit was slightly ahead of expectation. Infrastructure investment was maintained.

Foodservice was again the standout performer. The new Auckland North distribution centre opened a little later than planned. The existing South Auckland operation did well. New Plymouth moved to a new DC.

Fresh was assisted by a good Q2. Processing delivered another pleasing result.

United Kingdom

Revenue rose 3,4% to R17,8 billion (H1F2019: R17,2 billion) while trading profit increased by 6,1% to R909,4 million (H1F2019: R856,7 million).

Foodservice continues to deliver good results in spite of a weak economic environment.

Bidfood UK performance slowed after its strong start in the first quarter. Sales were flat, margins were effectively managed and trading profit was ahead of prior year. Gains were underpinned by a strong independent showing. We kept clear focus on our successful strategy: growing freetrade volumes, protecting national account margins, growing own-brands and exclusive offerings, driving ecommerce and delivering efficiencies.

In the past 18 months, the business has invested in new sites at Worthing, Penrith and Liverpool, creating platforms for growth in strategic areas. Technology investment continues along with the pursuit of operational efficiencies.

Manufacturing started the year well. Market penetration of our wine brand continues to improve. National accounts recorded several contract gains, the benefits of which will be evident in H2F2020.

Challenges will mount in the second half, but performance in the first six months positions us for another standout year.

Bidfresh UK had a disappointing first half. Revenue and profit were well below prior year. Seafood was again the main contributor, though sales slipped. Independents accounted for most sales.

Oliver Kay made significant losses. Recovery continues within Meat as the Henson's operation grew volumes and Campbell's (Scotland) achieved solid profit.

Post some senior management changes, a new CEO took the reins in January.

Europe

Europe continues to perform well, with most businesses delivering higher revenues and solid trading results. Revenue rose 4,1% to R23,0 billion (H1F2019: R22,1 billion) while trading profit rose 12,2% to R1,1 billion (H1F2019: R979,9 million). Our eastern European businesses have shown record revenue growth, but wage pressures were experienced throughout the region.

Netherlands did very well in a faltering economy. Sales were a little ahead of expectation and profit moved higher. Institutional segment achieved pleasing growth. Catering volumes fell, though national account turnover was up. Freetrade sales were well ahead of market growth. Reaction to our customer "Horeca Feest" event in Amsterdam was highly positive.

Belgium optimised opportunities flowing from a robust economy and growth in private consumption and purchasing power. Sales were up and margins protected thanks to vigorous action to curtail expenses. Profits ticked higher. Horeca, Institutional and Logistics exceeded expectations and prior year. Catering faced margin pressure but performed well. Rollout of the new 'myBidfood' ecommerce platform was completed.

Italy sales were in line with budget and trading profit moved higher. Foodservice continues to make a growing contribution and the business entrenched its position as a strategic partner of independent, street-based operators. Cash flows showed improvement.

Germany failed to meet sales expectations, though Munich and Stuttgart made up for national account volumes shed in line with the strategic independent focus. Hamburg and Southwest made losses and along with Vienna, faced sales challenges. New warehousing capacity in Munich came on stream late in the period, however, the transition costs were significant.

Czech Republic and Slovakia capitalised on a resilient economy to deliver solid profit growth. Further penetration of the restaurant channel continues. Freetrade growth was pleasing. Ice cream remains an important category, but strategic product diversification has brought better balance.

Production saw good revenue growth in Q2, despite intense competitive activity. Exports rose. Businesses were strongly cash generative and returns exceeded expectation. Preparations for the upgrade of the ERP system are well-advanced.

Poland produced pleasing results. Sales were up. The customer portfolio shows a 77% split in favour of independents versus national accounts. National account sales fell as expected following last year's decision to exit low-margin contracts. Farutex specialist subsidiaries continue to do well. Our ecommerce platform achieved 29% of total sales.

Baltics achieved revenue and profit growth on the back of a strong second quarter. Operations in both Lithuania and Latvia were ahead of expectations. Foodservice sales to independents and chains were up.

Iberia (Spain and Portugal) overall made a small loss. Frustock, the Portuguese business, did exceptionally well. The Guzmán business made operational progress with its transition from a local produce supplier to a national multicategory player but financially performed poorly. Igartza (a recently acquired multicategory business based in the north) made a positive contribution.

Emerging Markets

Emerging Markets continued to navigate challenging economic and political headwinds. Revenue was up 7,9% to R11,6 billion (H1F2019: R10,7 billion), with trading profit up 13,9% at R571,8 million (H1F2019: R502,0 million).

Bidcorp Food Africa (BFA) achieved commendable results in tough conditions. Sales eased higher without reaching budget. Trading profit was also up on prior year, but below target. Bidfood witnessed continued independent channel growth. National account business also grew. Industrial catering volumes dipped. 'myBidfood' ecommerce sales now account for 68% of net revenue. Most trading branches did well. Crown Food Group faced meat and poultry pressures, but made franchise and retail gains. Profitability improved significantly.

Manufacturing made good progress. Equity-accounted JV Chipkins Puratos had a difficult first-half, but is growing own-manufactured sales to independents. Good artisan volumes were registered. Bidfood Properties bought two new sites in Port Elizabeth and Pretoria while selling two Nelspruit sites.

Greater China delivered acceptable results in spite of the negative impact from social unrest in Hong Kong.

Hong Kong and Macau faced headwinds as protests impacted consumption and tourism. Out-of-home eating was hard hit and our sales dipped. Loss of a significant dairy brand contract created opportunities to introduce new dairy brands to the portfolio. Strong management action in response to the situation limited the decline in profitability.

Mainland China saw continued growth, ensuring an uptick in overall profit on prior year. Mainland businesses continue to widen the brand portfolio. Beijing, Shanghai and Guangzhou are selling more of the President, Boiron and Cacaobarry ranges. Penetration of the supermarket segment is pleasing. Meat sales are growing steadily. Strong focus remains on expense management, restaurant customers, chinese cuisine, own-brands and medium to high-end ranges like chilled and processed meats to enhance our foodservice offering.

Singapore and the Malaysia business continued revenue and profit gains, despite slowing economies. Singapore's largest sales division, Foodservice, beat expectations, fuelled by strong gains in dairy, veg/fruit and butchery. Margin management was assisted by the introduction of our house brand wagyu beef (Austige).

Brazil grew sales across the core Irmãos Avelino business and Mariusso but underperformed on expectations. Own-brand growth was pleasing. Avelino made a concerted effort to boost 'myBidfood' ecommerce sales in Q2. The ecommerce platform was extended to Mariusso in December. Sales operations were restructured early in the second half.

Chile experienced a dramatic fall in October and November volumes, the result of unrest and the resultant plundering of shops, supermarkets and malls. Even so, revenue exceeded target, but profit was below initial expectation. Calm returned in December, but renewed volatility may occur in the second half.

Argentina (the Blancaluna business in which Bidfood has a 38% stake) achieved good growth in line with expectations until political uncertainty in December impacted performance. Still, revenue and trading profit gains were secured.

Middle East was boosted by an exceptional Q2. Sales and profit exceeded expectation. Horeca UAE did well, despite margin pressure. Al Diyafa (Saudi Arabia) performed strongly. Horeca Oman face shipment delays but margins were well-managed. Bahrain faced trading challenges but recovered well. Bidfood Jordan reaped the rewards for constant portfolio development.

Turkey achieved strong sales gains, but a small loss was made. A new operation was launched in Antalya. Bidfood EFE continues to produce positive results.

Corporate

BidOne total electronic orders continue to rise along with order value. BidOne now handles 30% of total group sales, indicating promising momentum.

Bidfood Procurement Community (BPC) half-year growth was pleasing and an operating surplus was achieved. Work to improve supplier terms continues. Product category development is ongoing.

Directorate

Commentary

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 in the development phase 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