Credit rating

In December, Fitch Ratings downgraded the Group’s national scale rand currency long-term rating from AA- to A+ while the short-term rating was retained at F1. Commentators noted at the time that notwithstanding the downgrade, these ratings signify Bidvest's high credit quality and the strong protection to investors in its ability to meets its obligations.

In our view, the downgrade is more of a reflection of concern around the international economic crisis than a judgement on Bidvest itself. The overall business environment has deteriorated markedly and no company is immune to new realities; especially a company dedicated to sustained value creation.

Our recourse to debt has ticked higher in recent years, but so have the returns from major acquisitions. In 2009, the Deli XL businesses in the Netherlands and Belgium and Bid Auto’s fleet management business (formerly Viamax) were among the significant contributors to the Bidvest bottom line.

The downgrade is a reminder of heightened risk and changing business conditions. It has been noted. Our strategic intention is to work our way back to a higher rating without sacrificing opportunities along the way.

Foreign earnings

The rand weakened for most of the first half, but subsequently became one of the best performing emerging market currencies. The net effect was slightly negative on the translation of Bidvest’s offshore earnings.

Group policy is to take forward cover on the goods we import. At times of rand depreciation this is beneficial. When the unit strengthens there are negative effects. The purchase of cover may inhibit our ability to derive competitive advantage and can be a source of frustration within some divisions.

However, we are not in the business of currency speculation. We take a conservative stance and put faith in the trading ability of our managers. When our businesses place an order, they must be well positioned to sell those goods at an acceptable margin. Rand movements are a fact of life. We live with them and manage them.

We will maintain our general policy of taking forward cover; though we may in future give our businesses a degree of flexibility through innovation when it comes to the hedging of currency risk.

Optimum performance

We cannot control the rand. Also beyond our control is the translation effect on the earnings of each international business into rands. The focus of Bidvest has always been the optimisation of the issues we can control.

The challenge is to obtain a proper return in all the home currencies in which we work while achieving optimum management of all assets under our control. Do that successfully, and we can leave currency factors to balance out in the long term.

Balance sheet changes

There is one significant change to the balance sheet. It relates to the translation of offshore asset values at the time of their consolidation on the balance sheet at year-end. As a result, the foreign currency translation reserve declined by R1,3 billion.

The issue is technical and is a function of the strength of the year-end average rand exchange rates at the balance sheet date and does not reflect a deterioration of underlying asset values in home currency terms.

Our balance sheet overall reflects the corrective actions taken with respect to lower capital expenditure, more effective working capital management and lower levels of debt. The overall asset-base declined from R41,9 billion to R36,5 billion, reflecting in the main the rapid appreciation of the rand up to and including June 30 2009. Net working capital days declined to eight days from nine days in the comparative year, reflecting tighter management.

Incentives

As previously announced, an innovative, revised executive incentive plan was presented to our annual general meeting. The plan was accepted.

The scheme departs from the previous model as it entails continual reassessment of performance for the purposes of share awards. These incentives only vest when scheme participants are shown to add value on an ongoing basis. Scheme design follows international best practice and aligns performance criteria with the interests of all stakeholders.

Future

The after-effects of the stimulus packages around the world will affect tax regimes in all geographies. Governments can be expected to increase the tax burden of business and consumers alike in their efforts to balance budgets. Challenging conditions will persist for some time.

Bidvest businesses are in the main achieving improved returns on funds employed, expense management is bearing fruit and streamlined structures are in place. Cash generation remains a focus area. Renewed growth – both acquisitive and organic – is achievable despite tough trading conditions. This remains our objective.

Significant post-balance sheet event

On August 3 2009, five weeks after the Bidvest year-end, we announced a major expansion of our international foodservice interests.

For an enterprise value consideration of EUR250 million we have acquired Nowaco and Farutex, the leading foodservice players in the Czech Republic, Slovakia and Poland, from JPMorgan Partners and Bancroft Private Equity.

Nowaco has consistently shown itself to be highly profitable and is driven by a strong management team. Farutex offers exciting organic growth opportunities in Poland. Following integration into the Bidvest international foodservice division, Nowaco and Farutex are expected to contribute significantly to the Bidvest performance.

The transaction is expected to become effective in the third quarter of the 2009 calendar year. Bidvest has raised equity to fund approximately 50% of the enterprise value.

The acquisition is value-enhancing and contributes to Bidvest’s long-term vision of creating a truly international foodservice structure.

David Cleasby
Financial director