Chief executive's statement

In the past 18 months, we have added considerably to the scale of the Bidvest Group. It is now time to draw benefit from efficiencies of scale and deliver sustained service improvements to our customers. We can leverage scale to innovate, enter new markets and achieve competitive advantage.

Brian Joffe Group chief executive

Future

Bidvest is positive about the future. This is an exciting period for us. In recent years, we have achieved solid gains in generally difficult trading conditions. Today, we see evidence of recovery and growing confidence in many regions. Our businesses are extremely well positioned to benefit from any improvement in market conditions.

In the past 18 months, we have added considerably to the scale of the Bidvest Group. It is now time to draw benefit from efficiencies of scale and deliver sustained service improvements to our customers. We can leverage scale to innovate, enter new markets and achieve competitive advantage.

We are particularly positive about prospects in the UK and Europe. The British recovery appears to be firmly on track. Growth is by no means robust in Europe, but in many jurisdictions we see the first signs of revival. Our existing European operations will optimise these opportunities, while our new Italian, Spanish and UK distribution businesses will make a positive contribution.

Our Middle East and South American businesses are relatively small, but opportunities in their respective markets are sizeable. We look forward to sustained and substantial growth off this currently modest base.

Prospects in Asia Pacific remain positive. Our businesses in mainland China have established a solid base and further growth is projected. We are also excited about continued growth potential in the Australian and New Zealand markets. Our businesses in these countries are leaders and innovators. They are eager to enter new markets and deliver continued growth.

South Africa faces continued challenges, but continued resilience is also apparent. Consumers and business may remain under pressure, but we believe the economy will steadily revive over time, creating new opportunities. Our South African businesses are exceptionally well positioned to draw benefit.

Critical mass has been achieved in many operations. By the end of our 2014 year, the work of consolidation and integration after recent acquisitions was largely complete. This sets the scene for exciting innovation in many sectors. Bigger scale and stronger product and service offerings will enable our teams to seek further growth in the coming months. These opportunities will be vigorously pursued.

Bidvest remains a strongly capitalised and growth-minded business. We will continue to explore opportunities for acquisition in all markets.

Performance 2014

The Bidvest Group produced generally satisfactory results. Our trading profit rose by 16,6% to R8,9 billion (2013; R7,7 billion). Turnover at R183,6 billion (2013: R153,4 billion) was 19,7% higher.

Headline earnings per share rose by 11,1% to 1 733,9 cents. Distributions per share were up 15,8% at 834,1 cents. Net asset value per share increased by 18,5% to 9 965,0 cents.

Results were attributable to a mix of organic and acquisitive growth. It should also be acknowledged that as our Group derives about 40% of trading profit from outside South Africa, currency factors helped lift our rand reported performance.

There was considerable variance in the economic conditions within which our teams operated. Many international markets showed signs of improvement. We are not represented in the USA, but it was pleasing to see its recovery gaining traction as developments in the world’s largest national economy have knock-on effects in many markets. However, here in South Africa the economy showed little prospect of immediate revival and trading conditions remained difficult.

Performance also tended to be mixed. Our service and freight businesses in South Africa performed strongly. However, automotive retailing was under pressure, as was our fishing business in Namibia. The foodservice operations in Asia Pacific, the UK and Europe made impressive contributions.

Acquisition and integration

An 11th division was created at Bidvest South Africa following the acquisition – effective July 1 2013 – of Home of Living Brands Limited (HoLB). This is now positioned as Bidvest Consumer Products.

The acquisition of Mvelaserve Limited – effective November 1 2013 – enabled substantial growth within our Services division as many Mvelaserve businesses operated in the corporate outsourcing environment.

These acquisitions brought another 36 000 people into the Bidvest family, taking the total headcount from 106 000 to more than 143 000.

Integration of new staff members was rapidly achieved. This represents a substantial achievement by Bidvest managers and their teams. I am not exactly sure how they worked this miracle in a matter of months, but the Bidvest model and culture contributed to smooth consolidation.

At Bidvest, we have never applied a uniform template to our business. No newcomer is required to unlearn what they know and start from a zero base. Bidvest provides new resources, wider infrastructure and access to a broader customer base. Newcomers are encouraged to make the most of these opportunities and seek out prospects for renewed growth, and the sooner the better.

I was thrilled to see that these opportunities were grasped in the integration process which has now moved to “fast forward”. I congratulate everyone and welcome all new staff members to team Bidvest.

Into Africa

In some instances, newly acquired Mvelaserve businesses have a footprint in Africa. Our consumer products business also has many African customers. This clearly gives added weight to our Africa growth strategy, but it would be premature to think Bidvest is now positioned for substantial and rapid African expansion.

Africa exercises growing attraction for a large number of international investors. Growth rates in some African jurisdictions are impressive in percentage terms, but a sense of proportion is important. Often, growth is big because the base is small.

Bidvest focuses on services, trading and distribution. Corporate and industrial services are a particular focus. As African demand for expertise in these areas grows, we will respond.

Increased sub-Saharan exposure gives us a front-row seat in the Africa space. We are well positioned to achieve incremental growth in sectors we know well. I am confident Bidvest teams will remain alert for all growth opportunities – inside sub-Saharan Africa and closer to home. As opportunities occur, our decentralised businesses will spot them.

Policy considerations

In African markets – or any jurisdiction for that matter – official policy is often a crucial issue when considering possible investment. Policy impacts can be considerable, especially when the investment is substantial and an extended time-frame is needed to secure an acceptable return.

Therefore, an investor needs certainty on the general direction of policy and how it will be implemented and interpreted.

Responsible business does not demand a free hand or try to run rough shod over national interests. Working in partnership with government is the best way forward. An investor with a long-term perspective is only too happy to strive for win-win scenarios that enable policymakers to build the nation while the investor builds a profit.

Historic opportunity

African policymakers stand before a historic opportunity. They are well aware investors are reviewing their options and reassessing Africa as an investment destination.

But it takes more than positive sentiment to swing the deal Africa’s way.

Jobs can be created, the tax-base extended and new industries established, but first the three Cs have to be in place … clarity, certainty and courage.

Profit motive

Clearly, policymakers have political and social agendas as well as a desire to attract investment. Investors accept that these agendas have to be accommodated in the overall business strategy. For their part, policymakers should make an effort to understand the motivation of the private sector. This requires no in-depth research. Private economic activity is driven by the profit motive. Even the most well-meaning, socially aware investor cannot ignore profit considerations.

This should not create philosophical difficulties for policymakers. Profit means sustainability. Investors expect to derive returns for decades. This is not proof of greed, it is proof new jobs will last.

Capital commitments without a return are called charity and after a while charity is apt to dry up. Africa does not want charity, it wants a chance. The best chance will come when policymakers and investors collaborate closely; for the sake of progress and profit. They are not mutually exclusive.

A lot hinges on successful implementation of clearly articulated policies.

When politicians and bureaucrats slip up, it is not only business people who lose faith. Ordinary people lose faith as well. Cynicism sets in and cynicism is probably the worst poison there is for young, hopeful Africans. We need their optimism and energy if we are to create and entrench prosperity.

Progress underway

I am no Afro-pessimist. I remain positive about Africa and my own country, South Africa.

Bad news obscures the good news, but progress is being made. I know because I am old enough to make meaningful comparisons.

Prior to democracy, South Africa confronted a shrinking economy, falling per capita income, double-digit inflation and a frightening fiscal deficit. Businesses did not invest in new infrastructure. They did not invest in R&D. Many did not invest at all.

That situation has been turned around and life has improved for millions of South Africans.

Since democracy, well over 5 million homes have been given access to electricity. Residential electrification rates are up from 30% to 85%. Water connections have also been made to millions of households. Sanitation has improved, so has access to decent housing.

I am rather suspicious of GDP growth rates as they give no inkling of where growth occurs and whether it is beneficial or not. GDP can give us a general yardstick and South Africa has not done too badly on a simple GDP measure.

Our growth rate averaged 3,16% from 1993 to 2014. We experienced positive growth in every quarter except two from 1994 till 2013. According to official statistics, 76 quarters of growth constitute the longest period of economic expansion since the Reserve Bank started to keep count.

Admittedly, many of our emerging market peers did much better over the same period. We have got some catching up to do and national planners have their eyes set on a target of 5,4% annual growth.

How do we do it?

Small steps, big gains

In the recent past, there has been a tendency to set big targets over extended time-frames. Politicians have voters to impress and big numbers tend to do it, but there is nothing wrong with stretch targets that focus the population on the big picture.

It makes more sense to break down the big targets into smaller, doable objectives for delivery over shorter periods.

You can not manage anything until you can measure it. Measurement has to be built into any delivery process and it has to be evident month by month, not once every few years. It is difficult to manage the delivery of 11 million jobs in 16 years, but reduce this to 5 000 jobs every quarter in specific sectors and the challenge starts to take shape.

We have become world leaders in strategy formulation. But we are way behind the curve when it comes to strategy implementation.

I applaud the architects of our latest strategy, The National Development Plan – Vision for 2030. They have developed an impressive blueprint. However, the planning commission admits the NDP “is neither perfect nor complete”. To make it work, we have to make it manageable, and that means setting short-term objectives, establishing a process to achieve them, measuring progress, applying learnings and making changes when we fail to achieve targets on time.

Education and jobs

Priorities also need to be set. This is relatively easy. In South Africa, they are education and business – creating jobs.

With education, we have made mistakes, but we do not start from a zero base. In recent years, the incidence of classrooms with more than 45 learners has fallen from 55% to 25% and we are close to achieving universal access to education. The quality of education can be much improved.

Our children deserve better schooling from qualified teachers who can help them realise their potential. Internationally, societies that prosper have one thing in common: a robust system of public education.

Better educated children have better employment prospects. Once they are in work they are better able to drive productivity gains and help their employers grow.

Growing businesses will help us achieve our national employment objectives. The lofty objective of 11 million new jobs by 2030 is laudable, but to get there we need a policy environment that clears the way for entrepreneurship. Government appears to be making a start down this road and has recently set up a Ministry of Small Business Development to encourage new business growth.

I confess I have some reservations about asking bureaucrats to go to bat for business. However, the initiative should be applauded as formal recognition that more needs to be done to foster small business growth and entrepreneurship.

Nation of entrepreneurs

The plan is to create a nation of job-generating entrepreneurs and a key mechanism is the reduction of regulatory constraints.

One interesting idea from the new minister is to introduce entrepreneurship education into primary schools and keep it on the syllabus right through until university. There are problems, of course. Where would you find the teachers?

One source of teaching recruits might be interns taking their articles in accountancy. Medical graduates are expected to perform community service. Perhaps some accountancy graduates could spend time teaching basic business skills in our schools. Older South Africans with a business background might also find this a useful way of contributing to the nation.

I see this as a voluntary system for those happy to share their knowledge. Reluctant conscripts are hardly likely to inspire entrepreneurial enthusiasm.

The good news is that South Africans – even those with an incomplete education – are eager to work for themselves, though most do it out of necessity.

Official statistics show that informal businesses contribute about 5% to national GDP while the informal sector employs about 1,5 million workers, a 10th of all people in employment. These entrepreneurs are not only traders, they also work in construction and manufacturing.

Cut the red tape

Government should look at ways of helping these entrepreneurs grow basic enterprises into formal businesses. An effective way forward is to cut red tape.

It is neither appropriate nor desirable to throw out all regulation, but it should certainly be possible to simplify some processes.

The initial focus area has to be on start-up businesses and informal operators looking to formalise their operations. But the principle holds good across all business regulation – the simpler the better.

Safeguards have to be in place – I am more convinced of this than ever – but layer upon layer of legislation creates confusion and delay. There has to be a better way.

If we are serious about creating a nation of entrepreneurs, we need to simplify the tax system, the workings of the corporate finance market, company registrations, company and competition law, reporting requirements imposed on SMEs and any other statutes that create complexity and hinder the building of a vibrant economy.

Good laws are effective and simple.

Back to basics

One reason I am convinced of the benefits of simplicity and the merits of a back-to-basics approach is that I have had ample opportunity to observe the results within the Bidvest Group.

In many respects, keeping things simple keeps an organisation growing.

In the past year, we achieved sustained growth and consistent gains in market share. I see no reason why growth like this cannot be maintained.

Historically, Bidvest grew by delivering customer service improvements in fragmented industries. We never focused on pristine businesses where potential is largely realised. This in itself created scope for ongoing growth.

Over the years, our businesses have developed strong momentum, but nowhere do we dominate our chosen markets. We may lead in some sectors, but we lag in others.

When growth slows, our managers look for new opportunities in new markets or they innovate by redefining the sector and launching new initiatives. Of course, we sometimes facilitate entry into new markets through acquisition. That process picked up pace in 2014; not only at Bidvest South Africa, but across our international foodservice business.

Internationally, we entered the Brazilian market, widened our footprint in Chile and strengthened our operations in the UK. We also sought further growth in the Middle East and entered the Spanish market. At the beginning of the new period, we acquired a controlling interest in an Italian foodservice business.

Generally, these are highly fragmented markets. This creates potential for our businesses to achieve sustained growth on the established Bidvest pattern. What is more, many of the newly acquired businesses are quite small and have substantial potential for organic and acquisitive growth in the years to come.

Adcock Ingram

In January 2014, the Group acquired an additional 44,5 million shares in Adcock Ingram for R3,2 billion, bringing our total effective economic interest to approximately 30,0%. In recent weeks, the Competition Commission gave its approval for Bidvest to assume control of this pharmaceutical company.

Adcock Ingram creates a platform for long-term growth. For example, its over-the-counter portfolio could well become the core element in a significantly expanded product offering. Bidvest, with its background in distribution, trading and services, can add considerable value to the Board going forward.

It may take some time for this potential to be unlocked, however.

It should also be acknowledged that it is now clear we significantly overpaid for our stake in Adcock Ingram. At the time of our offer, we were firmly of the belief that we were paying a fair price. All information available to us in the public domain indicated our offer was reasonable. This proved not to be the case.

Our reliance on publicly available information is a mitigating factor. However, management must take responsibility for paying a price that, with the benefit of hindsight, was clearly excessive. As a result, we have written down our investment in Adcock Ingram to a level in line with a realistic market valuation. The write-down involves a sum of approximately R1 billion.

Succession

The Bidvest succession strategy remains firmly in place. Over the past year, I have devolved a growing number of responsibilities to Lindsay Ralphs, chief executive of Bidvest South Africa, and Bernard Berson, chief executive of Bidvest Foodservice – continuing a process that began two years ago.

Both executives, with support from their respective teams, have responded superbly well. They each run a substantial business. They have each added considerable value and secured sustained growth.

Bidvest is committed to ensuring the relevance of our business model and structure in a rapidly and ever-changing global environment.

Appreciation

say a sincere thank you to every team member in every Bidvest business. Financial figures never fully reflect the performance that goes in every day in challenging trading conditions. Achieving growth is difficult. Doing it year after year is truly remarkable. The dream of growth, no matter how tough the economic environment, continues. Hard-working people and dedicated managers make this happen, and I thank them for the effort and energy they put in day by day.

I am also indebted to the support of another exceptionally strong team – the Bidvest board of directors. Their unstinting efforts and strategic guidance are invaluable. I thank our chairman, Lorato Phalatse and our directors for their support in another challenging year.

When expressing appreciation, it is important not to forget two vital groups of people, our customers and our suppliers. Bidvest teams work as partners with both. To achieve growth and deliver a profit, we need to look at how we can do things better; to better serve our customers and to improve supply-side efficiencies. This requires good communication and close collaboration.

This past year, we again worked in tandem with suppliers and customers and made continued gains. I thank them for their support and commitment. They are part and parcel of the Bidvest dream. Without them we could not maintain our record for sustained growth.