Famous Brands defies recessionary climate to deliver impressive results

Famous Brands defies recessionary climate

FAMOUS BRANDS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1969/004875/06)
Share code: FBR
ISIN code: ZAE000053328
(“Famous Brands”)
REVENUE
Up 12% to R908,3 million (2009: R811,4 million)
OPERATING PROFIT
Up 22% to R170,1 million (2009: R139,8 million)
HEADLINE EARNINGS PER SHARE
Up 24% to 115 cents (2009: 93 cents)
INTERIM DIVIDEND
Up 40% to 70 cents (2009: 50 cents)
CASH GENERATED BY OPERATIONS
Up 13% to R180,1 million (2009: 158,8 million)
NET BORROWINGS TO EQUITY
Improved to 16% (2009: 22%)

Notwithstanding continued recessionary trading conditions, Famous Brands (FBR), Africa’s leading Food Service franchisor succeeded in delivering a noteworthy performance for the six months ended 31 August 2010.Chief Executive Officer, Kevin Hedderwick, says, “Consumer spend remained constrained as the Group’s mainstream middle income target market continued to be affected by limited disposable income and tight lending criteria.” He adds, “The sector remained extremely competitive and this, together with the onerous trading environment, indicates that it is not unlikely that there will be further rationalisation of certain brands and individual operators lacking strong consumer equity over the next six to 12 months.” Hedderwick notes that the economic climate in the United Kingdom (UK) remained even more subdued than locally, featuring high levels of unemployment, negligible earnings growth and pessimistic consumer sentiment. “The performance delivered by Wimpy UK is a direct reflection of those conditions,” he says. Hedderwick comments, “Famous Brands enjoyed a surprisingly buoyant holiday trading period in March and April and benefited materially from strong trading during the FIFA World Cup. However, as anticipated, a marked decline in sales was experienced in the latter part of July and August following the conclusion of World Cup activities.” The Group’s footprint as at 31 August 2010 comprised 1 789 restaurants across South Africa, 16 other African countries and the UK.

FINANCIAL RESULTS

Group revenue increased 12% to R908,3 million (2009: R811,4 million), while operating profit grew 22% to R170,1 million (2009: R139,8 million). The operating profit margin improved to 18,7% from 17,2%, largely a reflection of the sustained improvement in the manufacturing margin which resulted from enhanced efficiencies in procurement and capacity utilisation, prudent cost control and reduced input costs. Headline earnings per share and basic earnings per share both rose 24% to 115 cents per share (2009: 93 cents).Cash generated from operations continued to grow strongly, improving 13% to R180,1 million (2009: R158,8 million). Increased capital expenditure of R23,6 million (2009: R11,5 million) was incurred on building Meat Processing and Bakery plants in the Western Cape, fleet expansion, and bolstering the Group’s Information Technology support service.An interim dividend of 70 cents (2009: 50 cents) was declared, an improvement of 40%.

OPERATIONAL REVIEWS – FRANCHISING DIVISION – LOCAL

Hedderwick notes, “The strong performance of the Group’s brands over the World Cup period and the inclusion of Mugg & Bean’s revenue for the six months contributed to improved system wide sales and operating profit.”Revenue from franchising grew 21% to R191,7 million (2009: R158,0 million). Operating profit rose 20% to R113,2 million (2009: R94,2 million), whilst the operating margin declined 0,6% on the prior comparative period, to 59,0%. System wide sales, which include new restaurant openings, increased 13,1%, and like-on-like sales improved 7,4%. The weighted menu price increase across the Group was 3,3%, illustrating real growth achieved by the division.New restaurant openings were sluggish as a result of the slow-down in new build activity over the World Cup period. A total of 42 restaurants were opened and 24 existing stores were revamped.

BRAND PERFORMANCE

Product innovation drove a 9% increase in customer count for the Steers brand, a reflection of the success of Steers’ new value burger range, GET REAL BURGERS, in attracting new users and the price conscious mass middle market. Wimpy continued to extend its penetration into emerging markets and attract new consumers. The brand’s solid performance was boosted by the tremendously successful marketing campaign conducted during World Cup 2010 which achieved cult status when its television advert became a viral marketing sensation on a number of social networking sites. Hedderwick says, “In a first-to-market coup, Debonairs Pizza launched mobile and online ordering via cellphone and the internet respectively, a development which has been extremely well received by consumers. Debonairs Pizza has developed an ‘Express’ trading format targeting emerging market areas. During the period the brand opened its milestone 300th restaurant, with 17 of those restaurants comprising the new Express format. Hedderwick adds that a record 40 new restaurants will be opened in the current financial year, driven largely by per capita consumption growth for pizza within the emerging market.During the reporting period Mugg & Bean launched its ‘Mini’ concept on Sandton Drive in Sandton, Gauteng, in partnership with Total Petroleum. The restaurant has traded extremely well since opening, and the Group has signed an exclusive agreement with Total to expand this concept further in the forecourt market. Mugg & Bean is also currently developing a ‘Metro’ trading format for rural areas. The smaller footprint will offer the same experience but require less investment. FishAways continues to establish growing awareness and gain support from consumers, illustrated by the brand’s top ten position in the Sunday Times’ Top Brands survey. Hedderwick comments, “In its maiden entry in the competition, FishAways achieved a remarkable 7th position.” tashas opened a new restaurant in Brooklyn, Pretoria, bringing to five the number of stores in the network. A further three restaurants will be opened in Johannesburg, Durban and Cape Town in the current fiscal year. Famous Brands holds a 51% controlling interest in tashas. The solid like-on-like growth trend delivered by Brazilian Café is encouraging and the network continues to expand, in partnership with Shell Petroleum. Management is encouraged that Brazilian Café is rapidly becoming a challenger in the forecourt convenience market.

FRANCHISING DIVISION – INTERNATIONAL

Depressed trading conditions in the UK, exacerbated by the effect of currency fluctuations and strengthening of the Rand, resulted in a 27% decline in revenue to R56,5 million (2009: R77,8 million), while operating profit decreased to R4,2 million from R7,1 million. Comparable like-on-like sales expressed in British Pounds were 8% lower. In England, the Group closed four company-owned restaurants and continued with the revamp and repair programme, albeit at a conservative pace given the current economic conditions. One new turnkey restaurant was opened in Basingstoke, in a prime shopping centre. This restaurant’s trading format, franchise partner and site will become the blueprint for further new restaurant openings. The restaurant is trading well and in line with management’s ambitions for the brand. Hedderwick notes, “The adverse economic climate has resulted in a decline in rental rates from previously punitive levels. This trend has encouraged the Group to explore opportunities to launch other brands into the market, including Debonairs Pizza and Steers.”

SUPPLY CHAIN
MANUFACTURING DIVISION:

This division delivered another strong performance, reporting a 10% increase in revenue to R330,1 million from R300,3 million and a 44% improvement in operating profit to R36,4 million from R25,2 million. The operating margin grew vigorously from 8,4% to 11,0% based on enhanced production efficiencies, prudent inventory management and better procurement practices. Significant progress has also been made in improving machine and operating efficiencies, a function of enhanced planned maintenance and reduced downtime. “Importantly, the Group has adequate capacity to take on additional business gained from recent acquisitions, without having to incur further investment,” Hedderwick explains.

LOGISTICS DIVISION:

This division performed well to deliver a 14% increase in revenue to R594,9 million from R524,1 million. Operating profit grew 23% to R16,3 million from R13,2 million. The operating margin improved to 2,7% from 2,5%. The business benefited from the take-on of previously outsourced bakery deliveries to Wimpy restaurants in Gauteng and the Mugg & Bean refrigerated business in KwaZulu Natal, the Eastern Cape, Western Cape and the Free State. During the reporting period the Group invested in its multi-temp fleet to accommodate the take-on of both these pieces of new business. The Group’s recently launched Black Economic Empowerment owner-driver programme delivered excellent results in productivity improvements. The programme will be extended to the Eastern and Western Cape during the current calendar year and to the Gauteng region early in 2011.

CORPORATE ACTIONS

Giramundo: The Group secured its entry into the mainstream chicken category with the acquisition of a 51% controlling stake in a peri-peri flame grilled chicken offering, Giramundo. Hedderwick says, “A complete overhaul of the look and feel of the brand has been concluded and the Group is on track to open its first two new restaurants in Kokstad and Nelspruit on 1 November 2010. The manufacturing and logistics components of the operation are in the process of being fully integrated into Famous Brands’ model.” He adds, “We are confident of Giramundo’s potential to become one of the Group’s mainstream brands. Early response to the brand from potential investors and landlords has exceeded expectations.” Keg and McGinty’s: On 1 September 2010, the Group acquired the franchise agreements, trademarks and intellectual property of the Keg and McGinty’s franchised pub and restaurant brands. The acquisition represents Famous Brands’ first foray into the pure leisure category. Hedderwick says, “The operations are currently being integrated into the Group’s business model, with the intention of taking on the logistics component by 1 November 2010. A complete new brand identity and positioning is being developed for both brands and will be launched in March 2011. The Group has ambitious expansion plans for this business and the category per se.” Vovo Telo: Famous Brands’ acquisition of a 51% controlling interest in Vovo Telo artisan bakery and café business fills another gap in Famous Brands’ franchise portfolio. The operations are currently being integrated into the Group’s business model. Hedderwick comments, “The Group is confident that the Vovo Telo brand has strong franchising potential and our belief is supported by the enthusiastic response from landlords seeking tenants offering a point of differentiation.” He adds, “We are in the process of establishing a Vovo Telo Baking Academy at Midrand, an important rationale for which is the potential to produce speciality bread and pastry products for Group brands such as Mugg & Bean and tashas, which business is currently outsourced to third-party contractors.”

PROSPECTS

Hedderwick says, “The Group’s traditionally strong December trading period should assist in boosting sales in the forthcoming six months, although the second half of the year is expected to be less robust than the first half, which enjoyed the exceptional benefit of World Cup trading.” He adds, “With only nominal menu price increases planned in the period ahead, tight cost control and innovative product development and marketing will be demanded.” He notes that Famous Brands’ immediate challenge will be to consolidate its recent acquisitions, including the aggressive launch of Giramundo and full integration of the Keg and Vovo Telo brands. “The Group’s healthy balance sheet and strong cash generating ability position it well for further improvements and acquisitions if suitable opportunities are presented. The excellent management team, growing portfolio of best in class brands and solid business model afford strong growth potential. Management’s priority will be to leverage those strategic advantages in the interests of all stakeholders,” concludes Hedderwick.

 

 

 

For further information:

Kevin Hedderwick
Chief Executive Officer
Famous Brands Ltd
Telephone: 011 651 5812
Del-Maree English
Investor Communications
Mobile: 083 395 8608