Famous Brands Delivers Robust Turnover Growth and Prepares to Capitalise on New Opportunities

Famous Brands Delivers Robust Growth and Prepares to Capitalise

 

REVENUE
up 27% to R1.998 billion
OPERATING PROFIT
up 14% to R347 million
DIVIDENDS PER SHARE
23% to 190 cents per share
HEADLINE EARNINGS PER SHARE
up 18% to 212 cents

Johannesburg; Thursday, 22 October 2015: The reporting period presented a number of challenges – both external and internal – for Famous Brands. Generally subdued economic conditions and constrained consumer spend were experienced in most of the Group’s trading markets. In addition the business undertook a range of ambitious projects to integrate new high-volume low-margin business into its Manufacturing and Logistics operations, which proved more onerous than anticipated.

Group Chief Executive, Kevin Hedderwick says, “Notwithstanding these challenges, the Group reported a strong increase in revenue. However, this pleasing top line turnover growth failed to translate into corresponding growth in operating profit, largely due to the sub-optimal integration of the new Supply Chain projects into the business. In addition, the final phase of the Group’s Fit-4-Purpose initiative, a programme aimed at bringing the business closer to its customers (franchisees) and consumers, incurred further costs. This investment has now been concluded and the resulting structure will play a significant role in building capacity and capability for the Group’s ongoing growth.”

FINANCIAL RESULTS
Group revenue grew by 27% to R1.998 billion (2014: R1.572 billion), while operating profit increased 14% to R347 million (2014: R303 million). The operating margin declined to 17.4% (2014: 19.3%) primarily as a function of margin erosion in the Logistics business.

Basic earnings per share (EPS) increased by 14% to 242 cents per share, while headline earnings per share (HEPS) rose 14% to 241 cents. Diluted EPS improved 13% to 240 cents per share, while diluted HEPS grew by 14% to 240 cents per share.

Cash generated by operations before changes in working capital improved by 21% to R385 million (2014: R318 million). Working capital increases totalled R108 million, resulting in a net cash flow from operating activities of R149 million (2014: R162 million).

Net cash outflow from investing activities of R117 million (2014: R60 million) was incurred primarily on acquiring controlling stakes in Retail Group (Pty) Ltd, Botswana, and Cater Chain Food Services (Cater Chain).

No borrowings were raised during the period. The Group’s net borrowings of R45 million (2014: R25 million) represent a low net debt/equity of 3% (2014: 2%).

An interim gross dividend of 190 cents (2014: 155 cents) per share has been declared, payable out of income.

OPERATIONAL REVIEWS

FRANCHISING: The Group’s Franchise division comprises three regions, namely: South Africa, Rest of Africa and International (United Kingdom and the Middle East). As at 31 August 2015 the Group’s global footprint comprised 2 565 restaurants.

Combined revenue recorded by this division increased 7% to R321 million (2014: R299 million), while operating profit improved 4% to R181 million. System-wide sales across the total franchise network grew 10.3%, while like-on-like sales increased 4.9%. Significantly, the Group’s mainstream brands grew system-wide sales by an average 10% and like-on-like sales by 5.2%. The Group’s emerging brands also delivered a satisfying performance.

Hedderwick comments, “These solid results are testament to the Group’s deliberate strategy of building a portfolio of brands which appeal to consumers across a wide range of dining occasions and income groups.”

The Group opened 75 restaurants across its brand portfolio during the period. A further 139 new restaurants are scheduled for opening during the remainder of the current fiscal year.

SOUTH AFRICA: “In the six months under review, good growth was reported across almost all of our brands. System-wide sales, including new restaurants, grew 9.1% and same store sales increased 5.2%,” says Hedderwick.

Sixty four (2014: 96) new restaurants were opened across the South African network during the period. The Group plans to open a further 116 restaurants in its home market in the forthcoming six months.

Hedderwick notes, “Mugg & Bean delivered a standout performance during the period, recording robust double digit growth. This brand continues to demonstrate extreme resilience as well as strong long-term growth potential, not only in South Africa but across the Rest of Africa as well. We are confident that Mugg & Bean, together with the Group’s other bouquet of niche coffee-related brands, will withstand competition from new global entrants.”

He adds, “Once again, Debonairs Pizza turned in a stellar performance, reporting both organic and numeric growth. As predicted by management, the much-publicised arrival of new participants in the pizza category has done nothing to slow down the performance of this brand, and in contrast, has served to grow the category, a development which Debonairs Pizza continues to benefit from.”

A range of revamps were undertaken across the Group’s brand portfolio, including significant work on the Steers brand’s creative platform, menu and promotional offering; in the period since this intervention was implemented, strong growth has been reported.

REST OF AFRICA: The Group trades in 16 countries in this region. System-wide sales reported by the division grew by 22.6% in line with management expectations. This territory now contributes 9.5% (2014: 8.6%) of total franchise system-wide sales. Eleven restaurants were opened during the period, and a further 21 are planned for the balance of the year.

“Sustained growth of the pizza category in the Rest of Africa region and strong demand for Debonairs Pizza’s offering continues to drive expansion of this brand, which recorded double digit system-wide sales,” remarks Hedderwick.

He adds, “The Debonairs Pizza-Shoprite Master License arrangement in Angola has bedded down well and will gain traction in the second half of the year with the opening of a further five restaurants.”

Steers also reported a strong performance in the region, delivering a 20% increase in system-wide sales. New restaurants were opened in Zimbabwe, Malawi and Botswana.

INTERNATIONAL

UNITED KINGDOM (UK): The Group’s UK operation delivered satisfactory results. While revenue in Sterling declined, revenue in Rand terms remained in line with the prior comparative period at R53 million. Operating profit grew by 12% to R9.8 million (2014: R8.8 million) and the operating profit margin rose to 18.4% (2014: 16.4%).

Hedderwick states, “During the period the UK management team was restructured to position the business for future growth. Two new restaurants, one Wimpy and one Steers, will be opened in the balance of the current fiscal year.”

MIDDLE EAST: “Whilst this region offers good growth potential for the Group, political instability has frustrated interest from prospective franchisees,” explains Hedderwick. “In this context, Debonairs Pizza and Steers reported solid results, but will benefit from increasing their trading footprint in due course,” he says.

tashas’ Dubai restaurant delivered another strong performance, continuing to exceed management’s expectations.

SUPPLY CHAIN

Famous Brands’ integrated Supply Chain comprises its Logistics and Manufacturing businesses. In the review period consolidated revenue increased by 33% to R1.58 billion; in line with this, operating profit rose 33% to R144 million. The operating margin was 9.1% (2014: 9.1%).

LOGISTICS: This division reported revenue of R1.35 billion (2014: R1.04 billion), an increase of 29%, while operating profit rose 12% to R43 million.

“This disparity,” notes Hedderwick “is largely due to the initial set-up costs of commissioning the Group’s new Crown Mines Distribution Centre, designed to take on the Gauteng region’s previously outsourced frozen and chilled product basket. The facility was commissioned in May 2015, and it is anticipated that costs will stabilise in this high-volume low-margin business once the operation builds momentum.” The operating margin declined to 3.2% (2014: 3.7%).

During the period, capital expenditure of R15 million was incurred on fleet expansion and facility upgrades.

MANUFACTURING: This division recorded an increase in revenue of 42% to R848 million including the first-time contribution of the high-volume Cater Chain meat manufacturing business acquired in April 2015. Operating profit improved 45% to R101 million, while the operating margin rose very slightly to 11.9% (2014: 11.7%).

Hedderwick explains, “Margin growth was contained by the impact of the low-margin Cater Chain business and the delayed integration of the previously outsourced pork and Halaal products business due to unforeseen Competition Commission conditions. The initial take-on of these products finally commenced on 1 October 2015, six months later than anticipated.”

He adds, “Margins were also forfeited in the deliberate strategy to support franchisees’ price competitive offering to cost-conscious consumers.”

Capital expenditure of R20 million was incurred, primarily on expanding production capacity and capability at the Coega Cheese operation.

PROSPECTS: Hedderwick says, “We are resolute in our pursuit of growth strategies outlined at the start of the year, and despite the current challenges, remain focused on capitalising on the opportunities presented.”

These include:

Franchising: Performance will be enhanced with the opening of 139 additional restaurants in new markets across the Group’s network; continued investment across the Group’s existing brand portfolio aimed at driving same-store growth; and the benefits accruing from the integration of the recently acquired franchise operation in Botswana.

Hedderwick comments, “In addition, given the good results delivered by the Group’s table service evening-dining restaurants, and in line with management’s stated intent, further opportunities to expand in this market segment will be pursued.”

Logistics: “We are optimistic that as the Crown Mines Distribution Centre facility is bedded down, opportunities exist to enhance efficiencies and extract economies of scale across the Gauteng region. In this light, the Logistics division’s margins should normalise and improve,” affirms Hedderwick.

Manufacturing: In the forthcoming period a range of capacity building projects will be implemented, among them:

  • Thirty per cent of the Group’s pork basket requirement was integrated into the Cater Chain business from 1 October 2015. The balance of the basket will be phased-in over the next two and a half years, in line with Competition Commission conditions. Hedderwick notes, “Once completed, this development is expected to transform the Cater Chain business.”
  • A cream cheese manufacturing facility within the Coega Cheese plant was commissioned in September 2015 and is expected to be at full production capacity by the end of October 2015. This advancement will provide an additional income stream to the business.

Hedderwick concludes, “We are satisfied that this range of interventions across the component parts of the business, Franchising, Logistics and Manufacturing, will enhance the Group’s performance over the next six months.”

 

For further information:

Kevin Hedderwick
Group Chief Executive
Famous Brands Ltd
Telephone: 011 651 5812
Carol Dundas
Clear Distinction
Mobile: 083 447 6648