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The Bidvest Group Limited
Annual report 2006
Financial highlights and results
The history of Bidvest
Our Group in brief
Consolidated segmental analysis
Performance at a glance
Geographical footprint
External appraisals
Chairman's statement
Chief executive's report
Financial director's report
Review of operations
Summarised sustainability report
Corporate governance
Financial statements
Management directory
Shareholders' diary
Chief executive’s report
Headline achievements
Deli XL flourishes as part of the Bidvest team
Dartline cross-Channel ferry service sold for substantial profit
Presence achieved in the United Arab Emirates and India
Organisational changes prove positive
Challenges of size, structure and succession addressed
New investments total R715,5 million in new or upgraded capacity
Brian Joffe
Chief executive
Results have exceeded our expectations, reflecting unstinting effort by a motivated and innovative team.

Life is about growth and for Bidvest’s entire life we have witnessed expansion and new development. Another year of growth in the life of Bidvest means another year of performance records. Revenue of R77,3 billion was achieved
(2005: R62,8 billion), operating profit rose to R3,7 billion (2005: R3,0 billion) and headline earnings reached R2,4 billion (2005: R2,0 billion).
Domestic macro factors
Within South Africa, these results were achieved in a largely favourable economic environment. Low inflation and a stable rand created deflationary pressures in some sectors while Bidvest customers in the manufacturing and exporting fields looked to us for pricing stability and smart solutions. Business confidence remained high, consumer spending continued unabated and GDP growth close to 5% was recorded for the first time in decades.

Bid Auto, Bidserv, Bidfreight and Bid Industrial and Commercial Products did much to maximise these trading opportunities. However, the performance of Bidfood was disappointing.
Offshore conditions
The mature market in the Netherlands and Belgium showed limited growth but our businesses flourished under new management. The United Kingdom economy held up well, despite fears that trading conditions might soon become more challenging. UK management were disappointed but not defeated by the loss of the Ministry of Defence contract and have taken vigorous action to secure replacement business.

In Australia, the foodservice market continues to enjoy a measure of growth. New Zealand ’s economy has slowed, though our business continues to expand its operational base.
Major South African investments
Bidvest invested a total of R715,5 million in new or upgraded capacity. In the environment of IT systems the software investment topped R86,9 million. The investment in our people’s development is also considerable with training spend now at R101,9 million.

In South Africa, our investments dovetail well with the policy initiatives of national planners. Much of the investment by Bidfreight will improve South Africa ’s ability to handle larger trade volumes through freight management efficiencies – a key strategic goal for South Africa.

Other major corporates have also engaged in significant capital expenditure programmes. The industrial and commercial landscape of our country is being expanded and modernised. More has to be done, but South Africans should draw comfort from the growth in the nation’s productive capacity. However, continued expansion of national infrastructure and on-time delivery of social improvements remain a challenge for South Africa. The mechanism of public-private partnership (PPP) can be leveraged to expedite delivery and should be utilised to a much greater extent. Planning the work is merely stage one; now we must work the plan.
Supportive environment
The ability to operate in a modern environment, with sophisticated financial systems and access to the latest technology continues to attract foreign entrants to the South African market.

Corruption and unethical business practices are a challenge in many countries. Whistle-blower legislation and the proliferation of “fraud lines” demonstrate that the problem is taken seriously in South Africa. Standards of governance at leading companies bear comparison with the best in the world.

Our regulatory environment is fair and transparent. Business people always seek lower tax structures, but our tax regime could hardly be called punitive. Policy initiatives such as black economic empowerment (BEE) may require explanation, but are generally understandable in the context of our unique past.
South Africa ’s crime scourge
The principal challenges for South Africa are job creation, crime and personal security. We urgently need to build capacity in our judicial system and improve the standard of policing and law enforcement.

Crime blights South Africa ’s prospects as a nation and as a destination for foreign direct investment. Our citizens not only meet the costs of crime through the trauma of a family loss or the hijacking of a loved one – they also pay as consumers.

Business is increasingly the target of organised crime, which bleeds company profits and pushes up the investment in systems to protect both the employee and the businesses. While the criminals prosper, we as citizens face the consequences at the shop counter in the form of higher prices.

The challenge has been with us for so long, we are in danger of resigning ourselves to it. We cannot simply accept the situation and sign off the extra costs as part of the price of doing business in South Africa. Energetic steps to defeat the scourge of crime must be taken. The authorities have a duty to “walk the talk” and ensure measurable improvements are delivered.

In terms of both national renewal and business growth, there can be no sustainability without the resolution of our crime problems. It is the responsibility of government to ensure a safe environment for its citizens. It is not the duty or role of business to fight crime.
Business-friendly jurisdiction
In other respects, huge progress has been made in transforming South Africa into a business-friendly jurisdiction. Our democratic institutions are sturdy. Our judiciary is independent. Our press is free. Our Government’s management of the economy has contributed to one of the longest periods of sustained growth on record.
Organisational change
Bidvest is continually engaged in a process of change and new development. Several key organisational changes have been successfully implemented to meet the needs of an ever-changing business environment.

The businesses of Bid Office were reallocated between Bidserv, Bid Industrial and Commercial Products, and Bidpaper Plus.

Office Automation, the e-procurement platform, the Renfin travel, banking and foreign exchange businesses now form part of Bidserv. Bidserv operates in a business-to-business environment and the travel, banking and foreign exchange focus falls firmly on corporate business.

Stationery and Office Furniture now fall within an expanded structure at Bid Industrial and Commercial Products.

Bidpaper Plus has been created to house Bid Office’s former printing, label manufacture, paper conversion businesses.
Decentralisation works
The Bidvest model requires business unit autonomy and local level accountability. It is a testament to the strength of operational management that divisional realignments resulted in minimal or no disruption. The change in reporting lines entailed no culture-shift. All business units have continued to perform at high levels of efficiency.
We had hoped to refocus Lithotech France and stem persistent losses. This strategy did not prove to be a practical proposition within any realistic timeframe. Rather than face recurring loss, the decision was made to exit the business.

In the UK, the Dartline cross-Channel ferry service, was sold for £58,9 million. The realisation confirmed the value potential identified within the Dartline business when this company was acquired in 2002. Dartline owned the Thames Euro Port, a large property portfolio that underpinned our investment. The prospect is for cross-Channel operations to remain under pressure from cut-price operators and the decision was taken to accept an unsolicited offer. For reporting purposes, Ontime Automotive, which formed part of the Bidcorp business in the UK, now falls under Corporate Services.

Bidvest Network Solutions was sold to Business Connexion Group.
International growth
Bidvest purchased Deli XL from Koninklijke Ahold of the Netherlands. The € 140 million transaction became effective in September 2005. As anticipated, the transaction proved earnings-enhancing and significant synergies have opened up for Bidvest’s European foodservice businesses. Deli XL is the leading delivered foodservice wholesaler in the Netherlands and Belgium. The businesses have been split into two separate businesses in line with Bidvest’s decentralised model. Operations have been successfully integrated into Bidvest Europe and an exciting platform for growth into mainland Europe has been established.

Bidvest Europe has bought a controlling interest in Horeca Trade, a small Dubai foodservice company. A presence in the United Arab Emirates will enable Bidvest to monitor growth possibilities in the Gulf’s hospitality and leisure markets.

The Group is also in position to follow strategic developments in another fast-growing economy – India. Bidvest has an interest in the South African and Indian consortium that was awarded the 30-year contract from the Indian government to modernise, operate and manage Mumbai International Airport. Our partners are the Indian infrastructure group GVK and the Airports Company South Africa.

Opportunities for growth are also being explored in Africa.

Bidvest remains an acquisitive and opportunistic company. We will continue to explore transactions where we can add value and earn an acceptable return.
BEE progress
Bidvest’s “A” BEE rating was confirmed while further wide-ranging BEE improvements were noted by the empowerment auditors. The role of our empowerment partners in the Dinatla consortium in helping drive forward these processes is readily acknowledged. It will come as no surprise that Bidvest is eager to prolong and deepen this successful relationship.

Initially, the Dinatla deal attracted some criticism. Yet the structure has proved to be a robust and imaginative solution that has created enormous value for our BEE partners.

The refinancing of the Dinatla transaction within the originally envisaged timeframe has been announced. It is anticipated that Dinatla will continue to assist Bidvest as we strive for “AAA” empowerment credentials.
The wealth effect
Within South Africa, the issues of value creation, wealth distribution and the role of business are increasingly seen in the context of BEE policies. Reference is sometimes made to “trickle-down” effects, with the assumption that wealth comes to us all in the end.

In a well-run, expense-conscious business there is no such thing as “loose change” (you tighten it). Similarly, there is no such thing as a “trickle-down effect” when wealth is distributed between rich and poor. Wealth is not governed by the laws of gravity and the wealthy don’t let money slip through their fingers into someone else’s pocket. In short, wealth does not trickle. It is created by entrepreneurs who take calculated risks to achieve substantial returns and it is earned by hard-working employees who contribute their efforts and talents to a profitable enterprise.

The South African media have drawn attention to continuing wealth disparities. According to one report, half our black population still survives on R20 a day. Another says BEE transactions have led to the creation of 5 880 BEE millionaires.

Unsurprisingly, the contrast between continuing poverty and sudden wealth has raised questions about the efficacy of BEE as an engine of wealth distribution. The current policy may not be ideal, but BEE, or something close to it, is essential for South Africa ’s continuing stability, prosperity and progress.

The need to broaden the scope of empowerment initiatives is recognised by government. The emphasis increasingly falls on broad-based structures that channel benefits to black industry entrants, trainees, workers, managers and communities. BEE is a process. The concept is not immutable. It will evolve and change as new challenges arise.
BEE opportunity
The criticism of the commentators cannot be ignored, however. Some key BEE adjustments must certainly be considered. In particular the concept of “once empowered, always empowered” needs to be addressed. Once BEE shareholding structures unwind at the conclusion of a successful relationship, the points previously earned need to be retained. In my view, issues such as risk and the role of the entrepreneur should be examined closely as they apply in a BEE economy.

It is evident that thousands of black people within the top echelons of business have been substantially benefited by BEE transactions. The key issue surely is not that they now possess wealth, but what they do with it.

They are in a position to drive forward the next stage of empowerment by using their own money to buy into empowered enterprises and projects. By risking loss (the key criterion of entrepreneurship) they can demonstrate their faith in start-up black businesses or refocused companies that embrace broad-based empowerment.

The knowledge and insights they have gained by working in senior positions can be fully utilised as they help build the mega-corporations of the future. These BEE beneficiaries have the energy and ability to make a huge contribution to our economy.

BEE wealth might not “trickle down”, but it can be put to work to launch businesses, create jobs, put cash into pay packets and build a wider, deeper economic base. In this way, more of our people will enjoy the benefits of broader, more inclusive BEE.
Business risk
BEE is not a business risk though some temporary distortions may occur. Most business practice is self-correcting. Flawed practice creates losses. Loss leads to business casualties or motivates business improvements. Distortions will not last long. Sustainable BEE will occur hand-in-glove with service improvements. Businesses that embrace BEE and a quality ethic will prosper in the long term. They are not at risk.

The principal business risk at Bidvest relates to people and their skills. This issue is addressed by training investment and by building innovative, exciting businesses that energetic, imaginative people want to join.

Our companies are often industry leaders. Leadership entails a hidden risk – that of complacency. Bidvest guards against this risk through its decentralised, entrepreneurial business model. We may be a big business, but our culture insists that we behave like small operators with margins to mind, expenses to watch and returns to earn.

Some major groups think that a corporate bureaucracy is inevitable; part of the price you pay when you gain industry stature. We at Bidvest think we can do without “red tape” as we strive to be agile and nimble.
Size, structure and succession
Three other risks should be acknowledged: size, structure and succession.

In terms of capitalisation, Bidvest is significantly larger than it was at inception. In some cases, a single mid-size business unit within one of our divisions generates more cash than the whole of Bidvest 18 years ago.

We run major businesses in Europe, Australasia and Africa and have a presence in Asia. We also straddle different industries as our operations in distribution, trading and services are not confined to a single sector. At some stage, speculation is bound to surface about the wisdom of constant growth in so many regions and so many spheres.

This discussion goes back at least a decade. When conventional wisdom lauded “core competence” and “focus” we bucked the trend and kept faith with our diversified business model. In Bidvest “focus” is a management rather than an investment term. Experience has confirmed the continuing relevance of diversified businesses, particularly in emerging markets, but the debate about the strategy and the timing of any changes has never entirely subsided. The debate at board level is ongoing.

Some analysts may conclude there is a risk that the current diversified structure will at some point be unable to take the load and that a separation into geographic or industry-specific units will become necessary.

This discussion is sometimes put into the context of succession planning when the question is raised “Has Bidvest got the managerial strength and depth to support the structure and has provision been made for the replacement of the “Old Guard” that built the Group in the first place?”

Recent developments support the contention that the issues of size, structure and succession are well managed.
A new Bidvest generation
A new generation of Bidvest managers is emerging because our model encourages personal growth in the context of business growth.

Bidvest’s newly appointed divisional chief executives have more than demonstrated their ability to lead large, growth-minded enterprises at a time of change.

I have the greatest confidence in the ability of Bidvest business leaders to cope with change and growth. I have the same confidence in the ability of the versatile Bidvest business model to evolve and adapt, as it has under my leadership.

A key figure, financial director Peter Nyman, announced his intention to retire next year and a successor is already carrying out his duties.

Succession plans are in place at all levels within the Group to cover both long-term natural succession and short-term forced succession which may arise as a result of unexpected occurrences.
Interest by analysts in Bidvest strategies is understandable. This is a large business. It is expected to communicate clearly and set an example. Thankfully, Bidvest performs well under scrutiny   as highlighted in the external appraisals  .
Bidvest’s staff complement has grown to more than 93 000. They are a cohesive, creative and hard-working team. It is a privilege to lead them and I extend my heartfelt thanks for their contribution this past year.

The individual workload of our streamlined board of directors has grown significantly in recent months. I thank all directors for their input, wisdom and support. It is invigorating to work in such company.

My appreciation also goes to our shareholders, suppliers and customers. Your support is invaluable. Accept my assurance that Bidvest will constantly strive to meet or exceed your expectations.

The South African authorities have revealed that the nation’s current account deficit in the first quarter of 2006 was equivalent to 6,4% of GDP. Further deficits are expected and the rand has weakened against major currencies.

In these circumstances, it is understandable that the authorities take a cautious stance by adjusting interest rates. However, it is important not to over-react. Government’s growth strategy should not be radically altered. Infrastructure spending is an investment in South Africa ’s future. More homes, roads, power generation capacity, trains and public works mean more jobs. Employment creation remains a national priority.

The growth strategy is based on a sound, long-term vision. That vision deserves to succeed. Do not cut back too drastically. Give growth a chance. Growth creates growth.

Some consumers will have little option but to curtail at least some of their spending and some Bidvest business units may feel the effects. In the business-to-business environment, higher interest rates may affect cash flows. Insolvencies in South Africa have been at a 20-year low. The graph may tick a little higher in the coming year and the deflationary environment which has existed for some time in certain categories may soon come to an end.

Bidvest operations are well positioned for this challenging environment. Strategic investments have been maintained in capacity, systems and skills. Our business model is adaptable; so are our people. They have the ability to create solutions, protect margins and pursue further growth.

Bidvest has achieved a remarkable record for sustained growth over 18 years. Our intention is to keep up the momentum and seek continued growth in revenue, operating profit and headline earnings.
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