Despite operating in an environment of muted economic growth, we entered this past financial year with strong momentum in our businesses and in the markets in which we operate. We traded well for nine months to March and were then impacted by COVID-19 and the stringent lock-down protocols. We responded quickly and decisively to the pandemic and realigned businesses accordingly, resulting in a strongly positioned balance sheet with an enhanced liquidity and cash flow profile.
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This year-end process has been particularly complex and demanding for several reasons. We consolidated two major subsidiaries, Adcock and PHS, for the first time and adopted IFRS 16. There was also the impact of COVID-19 on trading in the last quarter, with its resultant process restructure and impairments.
It has been an intricate set of circumstances to navigate, but I am comfortable that the results presented accurately reflect the performance of the Bidvest Group over the year.
Firstly, some highlights:
- Significantly, there was R9.2 billion generated in cash from operations, which is 38% more than last year.
- There was free cash flow of R3.7 billion, a R1.4 billion increase.
- Cash conversion of 135%.
- We have ensured good asset management during these challenging times and concluded the year with ROFE of 23%.
- There was a rapid response to enhance liquidity levels, manage costs and preserve cash, while dealing with the considerable demand changes, and simultaneously maintaining a robust balance sheet.
- Overall, like-for-like costs are down 6%, and the trading profit of R6.9 billion was 3% higher than last year, which is pre-COVID-19 expenses of R1.6 billion.
- We concluded the PHS acquisition, which is Bidvest's largest ever acquisition.
- Since mid-March 2020:
- We bolstered liquidity by securing an additional R4.5 billion in general banking facilities, which we have not needed to access as yet; and
- We have considerably enhanced our focus on costs and cash generation.
We traded well across the Group throughout the year and into the third quarter, despite the challenging economic conditions in South Africa. However, the severe impact of the COVID-19 related lockdown resulted in an almost complete cessation of trading in April.
In anticipation of the detrimental impact the pandemic would bring, we initiated steps to protect our financial position by raising an additional R4.5 billion in liquidity, we tightly controlled expenditure and capex, and we managed the cash position very well. The success of this is evidenced by our closing balance sheet and cash position, both of which we are very proud of - all the more so because during this period we also concluded the PHS acquisition for £495 million.
From a Group revenue perspective, which increased 0.6%, there was the benefit of consolidating Adcock for 11 months and PHS for two months of the year. This was, however, largely offset by the COVID-19 impact on our fourth quarter trading. From a post year-end perspective, we are encouraged that revenue is improving and most divisions are showing growth. Certain sectors, such as automotive, travel, tourism and hospitality remain under pressure, but generally our businesses have started performing and trading better, or in line with the markets they serve.
Gross margin is up to 30.6%, which is a 100-basis point improvement, and commendable in this economic environment. Pleasingly, most Group divisions improved margins, which has also been evident post year end.
Controlling the cost base
Another highlight over the past year was successfully controlling operating expenses. On a gross basis, expenses are 9.6% higher, which includes R1.2 billion of direct COVID-19-related operating costs. This comprises restructuring and retrenchment costs of approximately R400 million, another R400 million towards the Fund established to support employees, as well as additional provisions mainly on debtors Expected Credit Loss (ECL) provisions and inventory of R340 million. On a like-for-like basis, and stripping out the impact of these expenses, the acquisitions and IFRS 16, the Group's overall costs are down 6.3%. This is an exceptional result in this environment and the teams within the businesses must be commended for their good expense management.
There were pleasing trading performances in Services, Freight, Properties and Adcock, while Automotive, Financial Services, Branded Products and Commercial Products, were all down on lower demand and trade restrictions. Group trading profit was 19.9% lower, after the COVID-19 costs as well as an impairment on the Mumbai International Airport (MIAL) investment of R0.4 billion. Excluding the impact of COVID-19, the MIAL impairment, IFRS 16 and acquisitions, like-for-like trading was 3.4% higher, which is credible. We have maintained our normalised trading margins, which were slightly higher at 9.0% compared to 8.8% last year.
The Group management teams responded very quickly to the pandemic. Plans were put in place and implemented to protect our staff and businesses and, where necessary, appropriate restructure was done for anticipated future demand levels. Unfortunately, in certain sectors, particularly travel and aviation, the impact of the continued lockdown has been exceptionally severe, which led to the decision to divest from Bidvest Car Rental and Bidair Services. Bidvest Car Rental has been shown as a discontinued operation for the purpose of these results.
In terms of other costs, these are predominantly acquisition costs of R178 million, which relate to our PHS acquisition, and R70 million is due to the increased amortisation of acquired customer contracts, which are mainly offshore. The R2.0 billion in net capital items are significant and more than half are directly COVID-19 related. In terms of the overall mix of the impairments, there is R1.1 billion in impairments to goodwill, intangibles and PPE, R500 million on the fair value of associates, namely Comair and Adcock, and a further R247 million on the disposal and closure costs of various businesses.
Finance charges are up significantly, largely due to IFRS 16. Excluding the impact of IFRS 16, finance costs are up 7.4%, largely reflecting the additional funding for acquisitions, mostly PHS. We benefit from lower funding costs offshore, resulting in the average borrowing cost reducing by 100-basis points to 5.7%. We are comfortable with our interest cover, which is conservative at 8.4x EBITDA and has declined marginally from last year's 8.8x but remains well in excess of our covenant of 3.5x.
Associate income is down significantly and is related to the consolidation of Adcock, which was treated as an associate last year. There is also the impact from our investment in Comair, which is currently in a business rescue process. There were significant trading losses at Comair, which were incorporated until February 2020 when Bidvest stopped accounting for this investment as an associate. We have taken these trading losses and the impairment of the SAA claim, approximately R201 million, and written this investment down to nil (2019: R241 million).
Taxation expenses declined 40%. The effective tax rate has, however, increased substantially to 66%, compared to 27% last year. This is because of the significant non-deductible expenses, impairments and losses relating to COVID-19, and we have not raised deferred tax on the closed operations. This is expected to normalise in this new financial year. The core effective tax rate for the Group remains the South African corporate rate at 28% and, as we continue to grow our businesses in the UK and Europe, this rate is expected to reduce over time.
The higher non-controlling interest is predominantly Adcock following its consolidation.
Normalised HEPS, which was down 22.9%, was significantly impacted by the lost trading from COVID-19, IFRS 16, as well as the MIAL and Comair impairments.
No final dividend declared, robust balance sheet maintained
Given the enhanced levels of economic and business uncertainty, the restructuring processes underway within the Group, and the PHS funding programme, no final dividend has been declared this year. The total dividend for the year is therefore 282 cents per share, which is 53.0% lower year-on-year.
The Group managed debt and funding requirements very well through this environment, despite net debt after cash and cash equivalents increasing to R19.2 billion, from R7.8 billion, which largely relates to the PHS acquisition. Net debt to EBITDA is 2.1x, which is within our covenant of 3.0x.
In terms of total debt, 77% is long term in nature. We raised an offshore bridge loan for the PHS transaction and we are taking proactive steps to take out this interim facility. We are completing a domestic debt programme and we have credit approval for more than R4.5 billion, which will be utilised as part of the take-out of the bridge loan. Additionally, there is R2.4 billion in offshore cash available. The proceeds from the MIAL transaction and free cash flow will also be applied.
With regard to the debt maturity profile, there are no payments due in FY2021, and the bridge loan is only due in FY2022. In FY2023, there is the Eurobond facility, which was taken to fund the acquisition of Noonan and other smaller acquisitions. This facility has two additional one-year extension periods available, which we will review closer to the time.
Cash generation, the year's highlight
The Group's cash management and resultant cash generation, through what has been an extreme cycle, has been excellent. Cash generated by operations, at R9.2 billion, compares favourably with the R6.6 billion last year and received a benefit from the implementation of IFRS 16 of about R1.5 billion. We are pleased with the cash flow performance, as well as cash conversion of 135%. Working capital reflects a release of R0.9 billion, which compares to an absorption in the prior year of R1.3 billion, largely due to a reduction in trade receivables, driven by COVID-19 and the overall reduced trading. Ultimately, however, Group management must be congratulated on their ability to ensure very good cash collections through this timeframe. The free cash flow was higher by R1.4 billion at R3.7 billion, which is equally pleasing.
Tough environment, but we are optimistic
We fully expect the challenging market environment to remain for some months to come, but we are very encouraged by how quickly the Group's various businesses have responded to the challenges and adapted to this situation. We therefore expect areas of continued growth and enhanced profitability over the next year.
The PHS acquisition is bedding down well and meeting expectations and we will benefit from a full year's contribution. The Group is also currently considering various bolt-on acquisitions, which will contribute positively in the year ahead.
Importantly, the restructuring, cost savings and efficiency drivers which have been implemented are expected to ensure another year of robust cash generation.