Financial director's review

David Cleasby | Group financial director

“Profits ensure sustainability and sustainability keeps employees in jobs.”

Highlights
	Turnover rises to R204,9 billion (2014: R183,6 billion)
	Gross profit percentage up to 20,8% (2014: 20,3%)
	Trading result rose 11,7% to R9,5 billion (2014: R8,5 billion)
	The increase in operating expenses on a like-for-like basis is well controlled
	Net debt dips to R7,8 billion
	Cash generated by operations up 9,1% to R11,7 billion (2014: R10,7 billion)
	Distribution per share rose 9,0% to 909,0 cents (2014: 834,1 cents)
	Italian and UK acquisitions quickly cash generative
	Working capital absorption down to R0,1 billion (2014: R0,5 billion), despite growth, increased costs of replacement inventories and acquisitions

Overview

The year was a tale of two shores, offshore and on. In general, performance by international operations was pleasing and positive. In South Africa, low growth, uncertain power supplies, waning business confidence and belt-tightening by hard-pressed consumers created headwinds. However, trading results at Bidvest South Africa held up reasonably well, especially in the first half. Business conditions worsened later in the year. The full-period inclusion of the 2013 Mvelaserve acquisition proved beneficial.

Despite macro challenges, several local operations achieved a measure of growth, though Consumer Products was impacted by low consumer spending while lower commodity volumes were clearly negative for Freight.

The value of geographic diversification was highlighted as results overall were very credible.

Results at the food businesses were underpinned by strong performances in Australia, New Zealand, the UK, Czech Republic and Poland while the Group newcomers in Italy and the UK made a pleasing contribution.

Windhoek-listed Bidvest Namibia was again under pressure and trading profit fell.

Investment income disappointed.

Acquisitions and disposals

Acquisition activity focused early in the year on the Italian and UK foodservice markets. Brescia-based Gruppo DAC S.p.A (DAC) and PCL 24/7 Limited bedded in well and were cash generative. Their results were in line with expectations.

Several small bolt-on transactions were concluded at business unit level.

Post-year-end, further strengthening of Bidvest’s South African interests occurred with the R446 million purchase of Plumblink, a specialist supplier of plumbing equipment and bathroom accessories. The business complements the industrial sector activities of Bidvest South Africa. The transaction has now been approved by the Competition Commission and became effective from July 1 2015.

Early in the second half, the Group sold the Protea Coin cash-in-transit, cash processing and Cameo devices businesses – previously part of the Mvelaserve acquisition – to Fidelity Services.

Océ, the digital printer supplier, has also been sold.

Adcock Ingram

Bidvest acquired an additional 8,4% of the equity of pharmaceutical firm Adcock Ingram for a further R737 million, taking its total stake to 43%. This was reduced to 37,7% post-year-end to accommodate new BEE structures. The new BEE arrangement requires existing shareholders – principally Bidvest and the Public Investment Corporation – to make available at least 15% of Adcock equity to new empowerment partners.

Settlement will be deferred for four years, during which period Adcock Ingram will pursue strategic growth while benefiting from improved B-BBEE credentials.

Investments

Bidvest took its interest in travel and tourism company Cullinan Holdings to 19,5% following the purchase of a further 9,9% stake from Imperial Holdings. Cullinan owns well-known travel brands such as Springbok Atlas, Thompsons and Hylton Ross.

The Group maintained its 25,8% shareholding in Comair Limited. The airline experienced tough trading conditions in its second half and earnings declined.

Investment income showed a substantial decline due to reduced fair value and mark-to-market gains on the investment portfolios, the impact of which equates to 3,4% of headline earnings per share (HEPS).

Net headline earnings adjustments in the year totalled R177,2 million, made up primarily of a R305,0 million fair value impairment of the investment in associates, offset by profit on the disposal of property, plant and equipment of R151,4 million.

Associate earnings rose significantly following the full-year inclusion of Adcock, which became an associate in March 2014. Despite this full-year contribution, the impact of the Adcock acquisition has been a negative 2,7% on HEPS.

In 2015, total net investments in subsidiaries, businesses, associates and investments totalled R3,0 billion (2014: R5,3 billion).

Financial performance

Turnover reached R204,9 billion (2014: R183,6 billion) and the gross profit percentage rose to 20,8% (2014: 20,3%). Operating expenses remained well controlled, rising in rand on a like-for-like basis to 6,2%. This figure excludes the effects of foreign currency translation and the impact of the DAC and PCL acquisitions.

The average rand exchange rate weakened against the pound sterling, however, appreciated against the euro. The net result was a 0,8% improvement in trading profit.

Net finance charges were 6,8% higher at R1,1 billion (2014: R1,0 billion), principally a function of financing acquisitions that were not fully included or included at all in the prior year. The material new investments included Mvelaserve Limited (Mvelaserve) and Adcock Ingram for the full period, PCL and DAC.

Net finance costs were further impacted by utilisation of working capital through the year and South Africa’s rising interest rate environment.

Share-based payment costs rose to R228,6 million (2014: R187,1 million). This reflects the new allocation of long-term incentives to staff at a higher share price. Acquisition costs eased higher to R74,2 million (2014: R74,0 million).

The Group’s financial position remains robust. Growth in total assets reflects the effects of recent acquisitions on goodwill and intangibles, normal levels of capital expenditure on property, plant and equipment and trading activity in inventories and receivables.

Despite the outlay of funds for DAC, PCL and other acquisitions totalling R3,0 billion, net debt has declined to R7,8 billion against R7,9 billion at June 30 2014.

Trading profit interest cover (excluding the finance costs of the Adcock investment) is 11,3 times (2014: 9,4 times). This figure is comfortably above the Group’s self-imposed targets. Bidvest’s attitude to gearing remains prudent while adequate “headroom” has been retained to accommodate expansion opportunities.

Cash generated by operations before working capital changes increased by 9,2% to R11,7 billion (2014: R10,7 billion).

Working capital management improved despite our continuing growth, the impact of the rand’s devaluation on replacement inventories and acquisitions. Bidvest absorbed R0,1 billion of working capital in 2015 compared to R0,5 billion in 2014. This reflects the strong management focus on inventory levels, accounts receivable and payable and cash. Net working capital days decreased to 10,0 days (2014: 10,8 days).

Distribution

A distribution of 909,0 cents per share was made (2014: 834,1 cents). This is a rise of 9,0%.

Efficiency focus

Containment of the cost base remains a priority across the Group, driven by the need to remain competitive in highly volatile economic conditions. Several of our businesses engaged in restructuring and regrettably some jobs were lost in these exercises. Strong focus on savings is being maintained as cost pressures continue to grow.

In South Africa, inflation was driven higher by the rising cost of electricity and other administered costs while wage increases above prevailing inflation are consistently awarded.

Simultaneously, the business-to-business environment was characterised by intense resistance to price increases. This resulted in margin pressure across many industries and jurisdictions.

Increasingly, in all Bidvest geographies, ongoing focus to identify areas of potential saving results in innovative systems being deployed to drive efficiency gains. Learnings and ideas are shared across our businesses, notably in the e-commerce arena, helping us implement smart solutions faster and with minimal disruption.

Energy security

In South Africa, businesses face a further complication in the quest for cost efficiency as power supplies remain uncertain while the monopoly supplier continually increases tariffs. This is not the only form of cost pressure. Many of our South African businesses are forced to invest in standby generation capacity, sometimes at numerous sites. Capital expenditure therefore rises and the additional cost of diesel ensures that operational costs move higher every time the generators are switched on.

Cost drivers like this are difficult to contain, even though our teams constantly strive to cut power usage as part of their twin commitments to operational efficiency and good environmental practice.

Ultimately, the impact of this increased cost and the service inefficiencies arising from load-shedding are felt by our business customers who, in turn, pass the price increases on to consumers.

Interest rates

The South African authorities are clearly becoming concerned about rising levels of inflation while keeping careful watch on the American Federal Reserve and any rise in US interest rates. The Fed held off the start of interest rate increases during the review period, but the expectation is that a rise is inevitable at some stage and that American rate “normalisation” will then continue, albeit at a slow pace in small, incremental steps.

Whenever they are implemented, higher US rates will almost certainly have significant knock-on effects on emerging markets, especially South Africa as our market is highly liquid and is often treated by global fund managers as a proxy for all emerging markets.

Our authorities signalled their sensitivity to these issues in July 2014 when local rates rose by 0,25%, presumably in anticipation of inflationary pressures to come while taking a defensive stance as a more jaundiced international view of emerging market risk was widely expected during the course of 2014 and 2015.

Similar considerations appeared to be in play in July 2015 when another 0,25% rate rise was announced by the South African Reserve Bank. This means South Africa has experienced three rate hikes in 18 months. The first – a rise of 50 basis points to 5,5% – occurred in January 2014.

The trend is clear. South Africa has entered a rising interest rate environment and the period of low interest rates is behind us.

Our capacity and desire to access capital markets remain, but timing is of the essence. Markets appear to have largely anticipated the trend to gradual rate increases, though intra-week volatility has been quite marked.

Rising rates clearly have an effect on borrowing costs at an acquisitive business like Bidvest. In practice, however, the net effect can be cushioned as rising rates may temper the selling price expectations of some vendors.

Three key issues dominate the South African interest rate debate: how long will rates continue to rise, how high are rates likely to go, and how severe are the emerging market effects likely to be once the Fed finally announces a rate rise?

Ratings

In South Africa, a further issue with wide ramifications for the cost of borrowing involves our sovereign credit rating. For the last year, South Africa’s sovereign rating has been one notch higher than so-called junk status.

In September 2015, Moody’s Investors Service, the international ratings agency, affirmed South Africa’s sovereign rating at Baa2, with a stable outlook in view of expectations that government would remain on the path of fiscal constraint in the current environment.

This was welcome news, though any deviation from fiscal discipline will clearly lead to renewed concern around our sovereign rating.

In November 2014, Moody’s affirmed Bidvest’s national long-term rating of A1.za with a stable outlook. Early in the second half, the Fitch ratings agency affirmed our Group’s national long-term rating at AA (zaf), again with a stable outlook.

The rand

Speculation about a Fed rate rise was negative for many emerging market currencies, including ours, and the rand again endured a period of sustained weakness. In the eight months to August 2015 the rand weakened nearly 10% against the dollar, partly on the back of an emerging market sell-off by international investors. Falling commodity prices added to the pressure as the rand – like the Australian dollar – is regarded as a commodity currency.

The average rand exchange rate weakened against sterling, but our currency fared somewhat better against the Australian unit and the euro. At times during the year, several currencies – including the euro – experienced considerable volatility.

Risks, reporting and engagement

The ailing rand remains a key risk as exchange rate weakness could fuel further inflation here in South Africa. Bidvest teams, however, have shown a remarkable ability to ride out the tough times and achieve growth.

It should be remembered that Bidvest’s decentralised business model is not dependent on one technology set, one currency’s performance, one policy environment, one jurisdiction or one industry.

At operational level our teams face a wide range of risks. These are addressed through robust risk identification and mitigation processes. Risk reporting takes place at Group, divisional and local level, business by business.

Clear, simple and straightforward reporting underpins all engagement with stakeholders. Simplicity and transparency are core Bidvest values.

Bidvest has developed its own set of integrated reporting tools that enable uniform and consistent measurement across a wide range of categories. Meaningful data is gathered at all organisational levels.

Measurement and engagement

Bidvest has always taken a holistic view. We believe there is no such thing as non-financial reporting. Every measurable factor has potential impact on performance. Environmental and social issues often highlight areas where efficiency can be improved and costs saved.

Executives and management are available to stakeholders as required and make themselves available for face-to-face interviews, question-and-answer sessions and personal presentations.

In a digital world, a commitment to openness is a commitment to multiple formats. To support regular interaction we increasingly make use of new media, including blogs to share information with staff, video and teleconferencing, and social media.

Information flows are supply driven rather than demand driven. Stakeholders have never had to lobby Bidvest for more, better or timelier reporting. There is no need. We created the data streams and communication forums well ahead of time.

Compliance matters

Regulators and investors increasingly expect regular and transparent communication. We respond. Management gives increasing time and attention to reporting and compliance issues.

In recent years, financial markets and the corporate community have witnessed a succession of scandals and some lapses by regulators. Each abuse highlights another area of vulnerability. It is clear law-makers cannot legislate for every eventuality. Those with criminal intent will find ways to evade or bend the rules.

The best defence against wrong doing is the personal integrity of managers and staff who operate within a value system that stresses the need for honesty and transparency.

That value system is part and parcel of the Bidvest culture and its DNA.

We believe it is important that any further intervention by regulators take the form of principles that allow ongoing corporate self-regulation rather than another set of rules. Regulation that proves stifling will result in less, not more, communication.

Taxation

Bidvest is a multinational entity and each business is self-sufficient in each of its operating jurisdictions, in line with the Group’s decentralisation philosophy. Accordingly, very little intercompany business is conducted and we therefore have only a passing interest in the current global debate about transfer pricing and aggressive tax avoidance practices.

Many companies face growing pressure as consumers endure tough times and cut their spending. Simultaneously, countries and governments in the world have sizeable and often growing budget deficits. As a consequence, divergence seems inevitable between corporate tax payers producing lower profits and revenue departments looking to grow their tax intake to counter rising deficits, a path which will ultimately result in higher taxation of corporate citizens.

What is Bidvest’s attitude?

Bidvest seeks tax efficiency while maintaining generally cordial relationships with the tax authorities in all areas of operation. We owe it to our shareholders and employees to achieve efficiency like this. Profits ensure sustainability and sustainability keeps employees in jobs.

But we do not lie, we do not cheat and we do not use devious means to avoid paying our fair share of the tax bill. We pay it and we are proud of the tax contribution we make in every country in which we operate.

We take a long-term view of business. We plan to be around for decades.

To succeed year after year, you need healthy, well-educated employees who travel to work on a functioning transport system, live in sanitary conditions, in comfortable housing and have access to running water and reliable power supplies. For that to happen, government needs sufficient revenue to pay its way and Bidvest is proud of its contribution to this end.

The way forward

At Bidvest, our growth forecasts are rarely rooted on the assumption that macro-economic conditions will remain or become favourable. We are a sturdy international business that began life in an extremely challenging African trading environment. We know there are no free rides. You work your passage. This attitude has helped us achieve sustained growth since inception and is integral to our future focus as teams commit to the Group’s revised positioning – Proudly Tomorrow.

Uncertain trading conditions may persist for some time to come, especially in emerging markets. However, we are confident our teams have the resources, flexibility and entrepreneurial skill to achieve continued growth in the face of market uncertainties. We will therefore maintain the drive for real growth in every Bidvest region.

Management’s core focus remains the achievement of optimum returns in all our businesses.

Cash generation is strong and we retain the financial capacity to drive continued growth, both organic and acquisitive. Rising interest rates have not constrained our ability to borrow at relatively attractive rates. We have the resources to pursue continued strategic growth in several areas of opportunity, here in Africa and further afield.

In addition, recent acquisitions and investments provide a basis for continued gains in some exciting sectors.

Our teams will continue to seek operational efficiencies and synergies. Working capital management remains a priority. Efficient, highly motivated teams secured important gains in 2015, and are well positioned to secure more of the same going forward.

David Cleasby
Group financial director