Introduction

Bidvest benefited from positive contributions from all international businesses, though the slowdown in the British economy had a marked effect on performance in our UK foodservice business in the last quarter of the financial year. Economic activity remained brisk in the Benelux countries, while the contribution from our Australasian and East Asian businesses was very pleasing. The first full-year contribution of the Angliss operations was significantly better than anticipated.

By year-end there were indications that the economic headwinds were becoming more severe in offshore markets, with the possible exception of East Asia.

In South Africa, our automotive retailing business was affected by high interest rates and the impact of the National Credit Act with the knock-on effect of reduced consumer spending, resulting in overstocked positions. Foodservice operations with direct exposure to the restaurant trade were also adversely affected by consumer belt-tightening, though other foodservice businesses benefited from the trend toward more in-home eating.

Cash flows remained strong, and revenue and trading profit growth were broadly in line with management expectations.

Diluted headline earnings were 1 051,0 cents per share growing 11,0%.

Translation of offshore earnings

The rand was largely stable, though the trend was softer. There was a gradual decline in the rand’s value versus sterling. Weakness was more apparent against the euro and a buoyant Australian dollar. This had a minimal impact on the Group’s earnings.

Bidvest continued to trade from a growth platform. Substantial investment has taken place to expand our infrastructure. Immediate returns on recent investments were not anticipated in 2008, but we expect incremental returns to accumulate.

Policy impacts

The major factor impacting the business was not so much the transition from buoyant trading conditions to a much more challenging trading environment, but the suddenness of the change.

The NCA was expected to put a brake on car sales at Bid Auto, but its implementation in June 2007 in the middle of a series of interest rate increases had a dramatic effect that extended to other parts of our business.

Locally and internationally, it has become difficult to predict the likely effects of changes in the interest rate climate. One indication of the increased level of difficulty was the rapid correction of growth rate forecasts by leading economists.

Bidvest has limited direct exposure to the consumer. However, the consumer accounts for an estimated 70% of the overall South African economy and therefore almost all business is affected.

Bid Auto has greatest exposure to the consumer economy and felt the full-year effect of the NCA credit squeeze and much firmer interest rates.

The NCA, in tandem with higher rates in a short space of time, raises the danger of overkill. However, government’s infrastructure spending will keep the economy ticking over.

Business risks

Business liquidations are almost certain to increase after years of tending lower. Bidvest operates in a largely business-to-business environment and is already addressing heightened credit risk.

Working capital management was identified as a critical issue early in the period and steps are being taken to improve internal controls and our return on funds employed.

We are also conscious of the mismatch between tighter credit and lengthening supply lead times as Bidvest becomes a more global company. Our businesses are importing more while looking for more extended credit terms, yet internationally we see less credit being extended. In response, all divisions are making a concerted effort to improve asset management and cash flows while turning over stock more quickly. At the same time, collection efficiency is being improved.

Skills

Skills shortages have become a growth constraint for all businesses in South Africa. Financial skills shortages are particularly acute. After several years of significantly higher training budgets, another challenge has become evident – retention of staff until a return is achieved on those who benefit from the developmental investment.

Imparting new knowledge is vital, but time on the job is indispensable. However, many individuals fail to appreciate the need for a practical grounding in a market where skills are at a premium and impatience has its short-term rewards. It remains to be seen whether lower growth and tighter economic conditions will influence an individual’s short-term outlook.

Inflation

Significantly higher inflation is an area of concern, but at Bidvest there is an approximate balance between positive and negative factors. Being predominantly a trading business, inflation creates an opportunity to protect margins if managed successfully. However, higher inflation brings higher costs, particularly energy and wages, both of which have a material impact in our business. Management needs to be innovative in maintaining their trading positions.

Historically, Bidvest grew into a major company in times of double-digit inflation. We believe the authorities will succeed in bringing inflation under control, but in the interim we have the reassurance that our divisional teams have proven ability to manage this particular challenge.

Balance sheet changes

The most material change in the balance sheet between 2007 and 2008 was the increase in net debt, which rose from R3,8 billion to R5,5 billion resulting in a net increase in finance charges from R566,2 million to R931,0 million.

Recourse to debt has grown in recent years, but Bidvest is today a much larger business following strategic growth into new areas of activity such as automotive retailing and new geographies (the Benelux countries and East Asia). A simple comparison of debt levels is misleading without considering the context of a hugely successful growth strategy.

Rating impact

Our ratings outlook was changed in April 2008 by the Fitch ratings agency from stable to negative. Fitch affirmed Bidvest’s national long-term rating of AA- and a short-term rating of F1. As justification, the agency quoted deteriorating leverage ratios following “aggressive investment”, an increase in net debt and shareholder-friendly policies, contrasting this situation with the net cash surpluses that were maintained until 2004.

Higher debt has been driven by capital expansion, the growth into new geographies and areas of business, and increased working capital demands arising from higher inflation and longer working capital cycles.

Our debt maturity profile prompted comment as short-term debt accounted for 66% of total debt by March 2008. Bidvest has traditionally funded in the short end of the debt market, but is cognisant of the need to maintain a more balanced liquidity profile.

The Fitch rating occurred in the immediate aftermath of major, high quality, acquisitions and at a time when strategic investments in infrastructure were peaking. It is a fact of business life that returns fall immediately after new investments.