CFO's report

Together with the 47.6% improvement in trading profit, which rose to R7.9 billion, an equally significant highlight has been the translation of this profit into very strong cash generation, which has been deployed to reduce debt and strengthen the balance sheet.

There has been a conscious focus on streamlining businesses, which has extended from actions taken in the previous year. This has resulted in improved efficiencies and a lower cost base. Similarly, the process of disposing of non-core assets that started after the unbundling of the foodservice businesses in 2016, is now largely complete and we are comfortable with our portfolio of defensive, cyclical and growth assets. The portfolio enables us to leverage our scale to innovate, enter new markets and achieve competitive advantage. The active management of the assets of the Group has been a standout feature over the last year.

Continued COVID-19 impact

It is important to contextualise this result with regard to the COVID-19 impact. Our direct COVID-19 costs, of R182.5 million, were significantly lower than last year’s R1.6 billion. The COVID‑19 trading impact however continues in certain sectors, specifically in travel, aviation and related businesses, which have all been appropriately resized to the significantly lower demand. Similarly, the extension of work from home and the delayed return to a normal learning cycle, has created pressure. Management has made significant progress in realigning all these businesses to ensure better profitability into the future.

The supply chain continues to be impacted by the pandemic, which is evident in some of the trading businesses as well as in container freight movements, where material delays when importing containerised goods are being experienced. Freight rates have increased significantly, and we are managing certain product and raw material shortages. Where possible, orders are being front-loaded and management is very cognisant of the risk of inventory brought in at (potentially) elevated prices. Stock availability has, however, been a key differentiator and significant contributor to the trading businesses results. Within the Automotive division, while vehicle model shortages depressed sales activity to some degree, management anticipated this and successfully concluding sales at an improved gross margin, rather than focus on volume.

Protecting the financial position

The carefully considered and managed measures taken last year to protect the Group’s financial position, continue to deliver benefit. The Group’s liquidity and solvency have improved with a significant reduction in debt and an improved maturity profile, while expense control and cash management have been exceptional.

Bidvest concluded four bolt-on acquisitions in the Services division, and more specifically within Noonan, which has meaningfully enhanced its scale in the United Kingdom and is now better placed to target larger facilities management contracts.

Bidvest disposed of its interest in the Mumbai International Airport and finalised the sale of Bidvest Car Rental, which was shown as a discontinued operation previously. BidAir Services and a number of smaller, non-core operations have also been exited.

From an audit perspective there were no material IFRS changes. We did, however, complete PHS’s Purchase Price Allocation (PPA), which gave rise to a reclassification between goodwill and intangible assets in the balance sheet in the prior year.

Excellent results delivered

Group revenue was up 15.4% to R88.3 billion, which was enhanced by PHS’ inclusion for the full year, compared to two months previously, as well as the recent Noonan acquisitions. From an organic perspective, there was good revenue growth of 6.6%. There has been steady revenue growth following last year’s COVID-19 restrictions and four divisions produced good revenue increases, with two divisions slightly down.

The gross margin improved to 30.8%, with margin growth in Freight, Commercial Products and Services, with Automotive doing well to maintain its margin in a declining market. The Financial Services margin was impacted by lower foreign exchange activity and interest rate cuts, while in Branded Products there was a decline in margin, mainly as a result of the higher cost of imported products and a changed sales mix.

As has become common for Bidvest, expenses were exceptionally well managed. On a gross basis, operating expenditure is up 6.6% and on a like-for-like basis costs were well contained, rising only 3.3%. We are benefiting from the extensive restructure programmes which were undertaken in the previous year, and the strong focus on cost containment is continuing unabated.

In terms of trading profit, there were excellent results from the Commercial Products division with a good underlying trading performance, improved factory recoveries and well managed costs. Services has also performed particularly well and there is now an equal contribution in trading profit between the South African and offshore businesses. The Automotive division’s improved margin, together with better efficiencies and cost management, resulted in an improved performance. The Freight division handled higher bulk exports, and the results from these more than offset the constrained import and export container volumes. The Branded Products division, including Adcock Ingram, produced a good result especially given the changed working environment. Financial Services produced a reasonable result in what is a difficult environment, considering there was no foreign exchange as international travel was restricted, interest rates reduced as a consequence of last year’s COVID-19 interest adjustments, and delayed decisions on new fleet orders.

Acquisition costs are down, with no major businesses acquired this year, compared to the significant PHS transaction last year. There was an increase in the amortisation of acquired customer contracts, which relates to the PHS PPA, as well as the Noonan acquisitions.

There was a significant reduction in capital items from the previous year, where we incurred R2.0 billion, largely related to the COVID-19 impact. This year’s relates to the disposal of certain businesses, specifically Ontime Automotive in the United Kingdom and BidAir Services. These costs were partially offset by insurance claim proceeds.

The overall finance charge is up 2.9% including IFRS 16, and borrowing costs, excluding IFRS 16, are 4.9% higher.

Dealing with debt

There was a higher average debt level over the year, because of the PHS bridge loan that was raised last year, and there was a lower average interest rate through the period. The average borrowing cost for the Group reduced markedly from 5.7% to 4.6%.

We maintained our normal, conservative approach to debt and funding. Net debt after cash and cash equivalents was lowered to R13.3 billion from R19.2 billion last year. We are comfortable with our debt funding ratios, with interest cover at 9.4x compared to last year’s 8.4x, and net debt to EBITDA at 1.8x, against 2.7x previously. The stability of our interest cover is pleasing and has been very consistent over the last two years.

A total of R4.9 billion in debt was repaid in the year. In terms of gross debt, 74.1% is long term, which we achieved through a debt restructuring exercise during the period. In July 2021, we raised a new offshore syndicated facility of £400 million comprising an RCF of £240 million and a term loan of £160 million. This will not only lower the overall cost of debt, but also extends the debt maturity profile and creates improved flexibility. The proceeds of this facility have been used to completely repay both the Euro term loan, and the balance of the PHS bridge.

In mid-September 2021, Bidvest successfully issued an inaugural $-denominated Reg S/144A senior unsecured five-year bond of US$800 million at a coupon of 3.625%. The notes, issued by The Bidvest Group (UK) plc, are guaranteed by Bidvest. This further diversified the Group’s funding providers and extended the debt maturity profile. Current funding facilities both locally and offshore are more than adequate to fund working capital requirements and support the Group’s strategic growth intentions internationally.

Associate income is down following Bidvest’s exit from Comair last year and the only remaining, material joint ventures are within Adcock Ingram.

Group taxation, excluding the impact of the Mumbai International Airport foreign exchange impairment, is broadly in line with the statutory rate in South Africa at an effective rate of 28% (FY2020: 30%). We expect this rate to reduce over time as the international operations become proportionately larger. New taxation rates are being proposed in South Africa for next year, and in the United Kingdom for 2023, and the possible impacts are being monitored closely.

The non-controlling interest or minorities is almost exclusively Adcock Ingram, where Bidvest has an effective shareholding of 57.9%.

HEPS was up 114.0% to 1,183 cents, which is an exceptional result. However, the more meaningful internal measure of performance, is normalised HEPS (where we strip-out acquisition costs, amortisation of customer contracts and COVID-19 expenses), which was 25.6% higher at 1,292 cents.

The Group has declared a final dividend of 310 cents, which was 6.9% higher than the 290 cents declared at the interim stage, resulting in a total dividend of 600 cents, which was a 112.8% increase year-on-year. We paid the dividend within our cover ratio of 2x to 2.5x normalised HEPS.

Free cash flow strong at R10.1 billion

Cash flow is, and will always remain, an important focus for Bidvest. We are exceptionally pleased with the cash conversion ratio of 144.5%, against the 137.8% last year. The cash generated by operations at R13.6 billion, compared to R9.2 billion, was enhanced by a working capital release of R2.4 billion, driven mainly by reduced inventories, which is partially a COVID-19 impact, as well as a result of supply chain constraints, and also increased accounts payable which is due to improved trading. Inventory levels are being monitored closely because of the exacerbated supply chain constraints in certain markets.

Our capital expenditure programme continues in South Africa. The main capital items are largely improvements to infrastructure in the Freight division.

There has been good working capital management across the divisions, and as the business cycles continue to normalise, we are expecting an absorption of working capital – which would be normal as business levels improve – in the first half of 2022.

Looking to the future

It’s very encouraging to see the improvement of COVID-19 vaccination statistics, especially in South Africa. This will stimulate an acceleration of economic recovery as the return-to-work and a reintroduction of international travel will be beneficial to profitability. Group businesses have been appropriately rightsized for current demand levels, and we expect upside as trading levels improve.

The Group’s financial position remains robust with good capacity for growth, and we are therefore actively engaged in seeking new acquisition opportunities.

The main levers for continued growth, including stronger markets, cost savings and efficiency improvements, as well as contributions from PHS and the Noonan acquisitions, all provide the comfort that profitability momentum will be maintained going forward.

Mark Steyn
Chief financial officer