Famous Brands delivers searing performance in organic and acquisitive growth year

Searing performance in organic and acquisitive growth year

FAMOUS BRANDS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1969/004875/06)
Share code: FBR
ISIN code: ZAE000053328
(“Famous Brands”)
REVENUE HEADLINE EARNINGS PER SHARE
Up 17% to 242 cents
OPERATING MARGIN
Up to 19.1%
OPERATING PROFIT
Up 16% to R358 million
DIVIDENDS PER SHARE
Up 36% to 155 cents
NET BORROWINGS TO EQUITY
Improves to 14%

The year ended 28 February 2011 proved to be an exceptional one for Famous Brands, both in terms of organic and acquisitive growth.

CEO, Kevin Hedderwick says, “Notwithstanding the subdued economic climate, the Group has delivered another outstanding performance. We benefited from strong sales during the 2010 FIFA World Cup™, and despite fears to the contrary, our traditional peak trading period in December was also extremely robust.” He adds, “Our high profile brand portfolio continued to ensure that we remained top of mind amongst consumers seeking tried-and-tested quality offerings.”

FINANCIAL RESULTS: Group revenue increased by 11% to R1.9 billion from R1.7 billion. Operating profit improved 16% to R358 million (2010: R308 million), while the operating margin grew to 19.1% from 18.3% in the prior year. This robust margin improvement is based primarily on best operating practices achieved in the Manufacturing and Logistics divisions. Net interest paid declined 28% to R14.9 million (2010: R20.6 million) due to the sustained low interest rate environment and reduced net borrowings arising from strong cash flows.

After a slightly increased effective tax rate, headline earnings per share and earnings per share rose by 17% and 20% respectively to 242 cents per share.

Cash generated from operations increased by a robust 13% reflecting the Group’s sound cash generating nature and tight management of working capital. Despite sharply higher taxation and dividend payments, net cash retained for the year of R130 million (2010: R132 million) was in line with last year’s record level.

Total investing activities absorbed R87 million, comprising R44 million in acquisitions and a net R43 million on replacement and expansion capital expenditure. These outflows were accommodated from cash funds, leaving a healthy R43 million to pay down net debt.

Net borrowings as a percentage of equity improved to 14% (2010: 28%). Net interest paid was covered 24 times by operating profit, substantially ahead of last year’s already strong 15 times. The future capital expenditure programme of R75 million, including R31 million for the Milky Lane/ Juicy Lucy acquisition, planned for the year ahead will be settled from existing cash reserves and borrowing facilities.

A final dividend of 85 cents has been declared, which together with the interim dividend of 70 cents, brings the total dividend for the year to 155 cents, (2010: 114 cents), a 36% improvement.

OPERATIONAL REVIEW: FRANCHISING DIVISION – LOCAL: “This division delivered a pleasing performance and made an important contribution to the Group’s results,” says Hedderwick. Revenue increased 18% to R386 million (2010: R327 million) and operating profit improved 15% to R235 million (2010: R205 million). He notes, “The division’s operating profit margin was 60.9% compared with 62.5% in the prior year, primarily due to investment ahead of royalty collections from our recently acquired brands, notably an investment in personnel to ensure adequate capacity to continue to grow, and, or where necessary, repackage and reposition these brands.”

Hedderwick comments, “Our mainstream brands continued to build on well-established platforms, whilst our niche brands gained traction in their respective markets.”

A total of 111 (2010: 125) new restaurants were opened during the year bringing the network to a total of 1 861 restaurants. In addition 81 (2010: 72) existing restaurants were revamped.

“Once again we enjoyed heart-warming support from our customers reflected by the range of awards received this year, including for best burger, best chips, best pizza, best breakfast and best coffee,” Hedderwick says.

FRANCHISING DIVISION – INTERNATIONAL: “Trading conditions in the United Kingdom were amongst the most difficult experienced in the past decade,” notes Hedderwick. In this environment, revenue in Sterling declined 21%, and in Rand terms by 31% to R95 million (2010: R138 million). Operating profit fell 23% to R11 million (2010: R14 million). A further factor impacting these results was the termination of the Roadchef agreement which resulted in reduced turnover levels in the short term. The implementation of right-sizing measures ensured that the operating profit margin improved to record levels, from 10.1% to 11.3%.

A further six restaurants were revamped during the period and three new restaurants were opened.”Management is satisfied that the business is now well positioned to benefit from any improvement in the economy. Plans to open the first pilot Steers restaurant have been finalised and a suitable location is currently being sourced,” says Hedderwick.

LOGISTICS DIVISION: Revenue increased strongly to R702 million from R595 million, an improvement of 18%, while operating profit rose 31% to R21 million from R16 million, reflecting a significant expansion of the logistics basket, facilitated by enhancements in multi-temp fleet capability. The division’s operating margin increased to 3.0% from 2.7%. During the review period the dry basket business of Milky Lane, Juicy Lucy and the Pubs Division was successfully integrated into the supply chain. Hedderwick says, “The Group’s owner-driver pilot project in KwaZulu Natal has proved very successful in terms of productivity, customer service and empowerment. Currently 11 owner-drivers are in the programme and this number will reach 19 by the end of the financial year.”

SUPPLY CHAIN: This business unit comprises the Group’s Manufacturing and Logistics divisions. Combined revenue for the division increased to R1.4 billion (2010: R1.2 billion), an improvement of 15%. Operating profit increased 24% to R116 million (2010: R94 million) with the margin improving to 8.4% from 7.8% based on a range of productivity and efficiency initiatives.

MANUFACTURING DIVISION: The Manufacturing Division reported a 6% increase in revenue to R664 million (2010: R626 million). Operating profit rose 28% to R78 million (2010: R61 million), resulting in an improved margin of 11.7% (2010: 9.7%).

The slightly constrained revenue growth is primarily a reflection of the introduction of the Get Real Burger range by the Steers brand, which impacted on turnover in both the Group’s Meat Processing and Bakery Plants. The healthy improvement in gross profit margins is derived from lower input costs, sustained productivity improvements and further efficiency gains reported across all manufacturing plants.

During the period, a range of key projects were concluded including the expansion of the in-house manufactured basket of products. Capital expenditure of R10 million was invested in the review period in upgrading technology and equipment. A further R20 million has been budgeted for additional optimisation projects in the year ahead, including equipping the Meat Processing Plant with the capability to supply chicken fillets, thereby achieving another profitable backward integration opportunity.

LOGISTICS DIVISION: This division grew revenue by 14% to R1.3 billion (2010: R1.1 billion). Operating profit increased 16% to R38 million (2010: R33 million), producing an unchanged operating margin of 3.0%.

The goal to increase critical mass and enhance productivity continued in the year under review.

“A number of achievements can be noted,” illustrates Hedderwick. “Namely, the conversion of all distribution centres, excluding Midrand, to full multi-temperature capability; completion of the take-on of Mugg & Bean’s refrigerated basket in the Eastern Cape, Free State and KwaZulu Natal; completion of the take-on of Wimpy’s refrigerated basket in the Western Cape and Bloemfontein; phased introduction of the Group’s owner driver programme, and introduction of a five-day rolling week shift system at Midrand.”

Capital expenditure of R20 million was invested in a range of projects including a state-of-the-art frozen storage facility in the Western Cape and racking and handling equipment at a number of other logistics centres. A further R6 million has been budgeted for the year ahead primarily aimed at a multi-temperature vehicle fleet upgrade programme.

CORPORATE ACTIONS: Hedderwick comments, “The Group employed an aggressively acquisitive strategy in the review period facilitated by its strong cash reserves, depth of management, and opportunities afforded by the depressed market. Each of the acquired businesses will play a key role in rounding off our portfolio of best-in-class franchised leisure brands.” The trademarks and franchise agreements of the following businesses were acquired:

  • KEG and McGinty’s – effective 01 September 2010, for a purchase consideration of R27 million.
  • O’Hagan’s – effective 01 December 2010, for a purchase consideration of R13 million.

In addition, a controlling 51% stake was acquired in the following businesses:

  • Giramundo, a peri-peri flame-grilled chicken offering – effective 01 August 2010, for a purchase consideration of R1.2 million.
  • Vovo Telo artisan bakery and café – effective 01 October 2010, for a purchase consideration of R3.8 million.

After funding costs and taxation, the net contribution from these acquisitions during the reporting period was insignificant.

SUBSEQUENT EVENT: The trademarks and franchise agreements of Milky Lane and Juicy Lucy were acquired with effect from 01 March 2011. The acquisition of these iconic South African brands at a compelling price, together with the synergies afforded by their integration into the Group’s business model, make this transaction an exciting, low-risk one, which will deliver returns for shareholders from the outset. The purchase consideration was R31 million and no income was earned or recognised in this set of results.

PROSPECTS: Hedderwick cautions, “We expect trading conditions to remain difficult in the year ahead. Economic recovery will be muted and consumer spend will remain under pressure due to factors including electricity tariff hikes, increased fuel costs and the proposed toll road levies.Red meat prices have also risen steeply during the early part of the year, driving up food inflation.” He adds, “New store expansion will continue to be managed cautiously, with a planned roll-out of a further 176 stores across the Group’s network in the year ahead.” “Acquisitive growth was the overriding feature of 2011. In contrast, the 2012 fiscal year will be focused on consolidation. The immediate priorities are to ensure that all recent acquisitions are firmly bedded down and wherever possible integrated into the Group’s supply chain. We’ve got an extremely busy year ahead,” concludes Hedderwick.

 

 

Notes to editors:

The Group’s brand portfolio includes Steers (490], Wimpy including UK (616), Debonairs Pizza (279), FishAways (112), Mugg & Bean (109), tashas (7), House of Coffees (17), Brazilian/Brazilian Café (51), Blacksteer (6), Giramundo (4), KEG (26), McGinty’s (5), Vovo Telo (3) and O’Hagan’s (18). The Group also manufactures and supplies its franchisees and the retail trade with a wide range of meat, sauce, bakery, ice cream, fruit juice and mineral water products.

For further information:

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