Capital market utilisation

Falling interest rates helped to bring down finance charges.

In South Africa, government benchmark rates fell below 8% and credit spreads narrowed. As short-term rates fell, the Group increased its exposure to local capital markets and leveraged our strong credit rating by using "commercial paper" to cover some short-term needs at attractive rates. Funding from capital markets totalled R3,1 billion at year-end.

With medium-term funding rates around 9%, the capital market is beginning to look like an attractive source of funding for investment purposes.

The view among many South African economists is that local short-term interest rates will remain flat for six months and perhaps even a year. In this environment we will continue to access capital markets in order to provide the Group with attractive, cost-effective funding while maintaining a prudent liquidity profile.

Debt

Bidvest's attitude to gearing remains appropriate in the current climate. Net debt was down, falling from R4,1 billion to R3,8 billion despite the additional debt assumed for the Nowaco group transaction.

To finance the Nowaco/Farutex transaction we issued shares, raising approximately R1 billion and then raised R1,7 billion in debt, principally from institutions in the Czech Republic. The Czech debt repayment is structured over five to six years at attractive rates. Use of these facilities provides a natural hedge against currency exposure on its asset base and ultimately the Group's balance sheet.

Ratings

Bidvest maintained its credit rating, verified by two independent rating agencies. We were rated by Fitch Ratings as A+ F1 while Moody's gave us a rating of A1.za/P1.za.

This rating band mirrors our profile of an acquisitive and opportunistic group at a time when markets and institutions are still risk averse.

We are conservative in the way we run our business. However, we do assume debt to fund investments. As a consequence, our debt may increase from time to time. Our investment behaviour has sometimes been anti-cyclical. This enables us to pursue significant opportunities and build long-term value for our shareholders.

Cost of restructure

Major once-off restructure and closure costs arose as restructuring was carried out at several businesses, notably at our UK businesses, Bidvest Automotive, Safcor Panalpina, part of Bidvest Freight and Bidvest Industrial and Commercial. Restructuring in the UK involved both 3663 First for Foodservice and Ontime Automotive.

The benefits of leaner structures and new management intervention are already evident. Further benefit is expected next year.

Risks

Credit risk sharpened, but early intervention and an aggressive approach resulted in an improved debtors position, indicating that the risk was well managed.

Currency risk is part and parcel of managing an international business. In respect of cross-currency purchasing, a prudent forward cover policy is one aspect of management; a long-term commitment is another. Rand strength may be negative at certain stages yet during another period rand weakness may have a net positive effect. Recent economic turmoil in Europe has demonstrated that forex policy is required in all jurisdictions, not only in South Africa. In terms of managing cross-currency movements, the Group ensures assets and liabilities are always matched in local currencies, thereby negating such exposure.

Our diversified model also balances risk. Consumers may not be rushing out to buy new cars, but the purchase of basic food items may continue as normal. Different levels of recovery in various countries also showed that macro-economic impacts can be balanced to some degree at a geographically diverse business like Bidvest.

Regulation

Bidvest has long been run in line with good sustainability practice and in accordance with the principles of triple bottom-line reporting. The business engages in stakeholder engagement and is open and frank in its communication.

The implementation of the revised King code involves no philosophical leap for us. We have long endorsed these principles as we embark on the journey of continued improvement in governance standards.

Recommendations as well as requirements are contained in the King III report. In many instances, we anticipated these changes as they track international developments that we are close to. Bidvest remains a pragmatic organisation and will ensure the principles embodied in King III will be practically applied within the context of the Group culture and structure.

Culture

From a financial perspective, Bidvest has a returns-based culture. This helps to explain our continued use of return of funds employed (ROFE) as a key means of benchmarking operational performance. Historically, Bidvest has achieved ROFE of between 40% and 50%. This year, many businesses exceeded that.

The yardstick is well understood across the Group and underpins our performancedriven philosophy. We aim to ensure that not only is the asset base sweated, but that capital reinvestment continues for the medium- and long-term development of the Group. We take a responsible stance on equipment replacement cycles.

The returns-based mindset contributes to the development of individuals, teams and businesses while adding value for stakeholders. This year's results confirm that focus like this helps to ensure acceptable performance levels even at businesses that face significant pressure in the face of difficult economic conditions.

ROFE remains an important tool. There are no plans to dispense with it but rather to reinvigorate its application by using long-term incentivisation to reinforce its value-add.

Targets

Market expectation (as gauged from sell-side analysts) was that our headline earnings per share would achieve growth in the low to mid-teens. HEPS grew by 15,1%.

Analysts were also keen to see how we would perform against our internal target of doubling the size of Bidvest in the five years to June 2010. The target was set when business conditions were broadly favourable and the overall consensus was that economies and businesses would continue to grow, perhaps with minor corrections along the way.

No one foresaw the financial crisis of 2008/09 and the depth of the recent global financial crisis. Despite setbacks last year, Bidvest has returned to the growth path.

We fell short of doubling HEPS, but are pleased to report the Group is over the high watermark of the 2008 financial year.

Future

The medium-term target for the Group is real organic growth in earnings across all our business.

We remain an acquisitive and opportunistic company. All avenues for growth will be pursued. Weak economic conditions in many markets create an environment in which business value can be extracted, both within South Africa and internationally.

Our liquidity profile is good. However, additional funding exposures to the capital markets will be explored in search of further cost efficiency and diversification.

We have sufficient debt- and equity-raising capacity across the Group to fund future organic and acquisitive growth. Financing of the Nowaco transaction confirmed our ability to raise capital at favourable rates from a variety of sources. This gives Bidvest leverage over other parties looking to acquire assets we may have targeted. When appropriate, we will make use of this financing advantage.

David Cleasby
Group financial director