F19 H1 Interim Results

October 29th, 2018

FAMOUS BRANDS REPORTS SOLID LOCAL RESULTS MITIGATES GBK UK UNDERPERFORMANCE WITH RESTRUCTURE STRATEGY 

• Brands: strong organic growth by Leading brands in SA and AME; disappointing performance from GBK UK
• Logistics: Commenced ten-year capacity building programme
• Manufacturing: Launched plant-wide efficiencies programme
• Revenue up 5.4% to R3.58bn  Operating profit up 3.9% to R421.8m      HEPS up 10.6% to 188 cents        

Johannesburg; Monday, 29 October 2018:  Famous Brands is Africa’s largest branded food services franchisor.  The Group’s vertically integrated business model comprises a portfolio of 25 restaurant brands, represented by 2 874 restaurants across South Africa, the rest of Africa, the Middle East and the United Kingdom.  The Brands division is underpinned by substantial Logistics and Manufacturing operations. OPERATING ENVIRONMENT:  Across the Group’s trading markets, delivery and online ordering remained key drivers of growth in the industry.  Notably, Fast Casual and Quick Service offerings continued to outperform Casual Dining establishments, largely due to their perceived appeal as convenient and less expensive, in a constrained disposable income environment. GROUP PERFORMANCE:  Darren Hele, Famous Brands Chief Executive Officer, says, “Our SA and AME operations delivered good growth and a solid improvement in operating profit, however, the UK Gourmet Burger Kitchen (GBK) operation continued to underperform the Board’s and management’s expectations, recording a larger operating loss than the prior comparable period.” Hele notes, “Remedial measures have been implemented at GBK: in addition to our ongoing turnaround strategy, we have initiated a Company Voluntary Arrangement (CVA), aimed at improving the financial stability of the business and promoting its long-term sustainability.” “In the six months under review, our Group strategic focus was on the key pillars and core competencies of the business, being our Brands, Logistics and Manufacturing operations.  We made good progress against our priority initiatives, including promoting sustainable growth through increasing capability and capacity across the divisions; judicious capital allocation; and sweating our investments by ensuring the projects we expended the most resources on delivered a proportional return on investment,” comments Hele.  RESULTS:  Revenue for the period increased by 5.4% to R3.58 billion (2017:  R3.40 billion), while operating profit before non-operational items rose by 3.9% to R421.8 million (2017:  R406.1 million). The Group’s results have been negatively affected by an impairment of R873.9 million (pre-tax) at Group level, relating to GBK. The basic loss per share for the period was (572) cents (2017: profit of 171 cents per share), while basic headline earnings per share rose to 188 cents per share (2017:  170 cents per share). Cash generated from operations increased to R540.4 million (2017:  R463.0 million).  Cash and cash equivalents grew to R924.7 million (2017:  R477.8 million). The net debt/equity ratio was 133.9% (2017:  145.3%).  Net asset value per share declined to 1 375 cents per share (2017: 1 670 cents per share).  No dividend was declared for the period.  Following a capital structure review to ensure appropriate levels of debt and prudent capital allocation practices, future dividends will be triggered when the short- to medium-term gross debt:EBITDA ratio reaches two times – and subject to operational requirements and potential acquisitions.  The ratio as at 31 August 2018 was 2.49 times (2017:  2.66 times).  OPERATIONAL REVIEWS BRANDS: This portfolio is segmented into Leading (mainstream) brands and Signature (niche) brands, strategically positioned to appeal to a wide range of consumers across the income and demographic spectrum and across meal preferences and value propositions. The brand network consists of both franchised and company-owned restaurants. The division reported revenue of R432.2 million (2017: R415.0 million), an improvement of 4.1%, with Leading brands contributing R366.5 million, up 4.6%, and Signature brands’ R65.7 million, an increase of 1.6%.  Operating profit grew by 9.9% to R222.5 million (2017:  R202.5 million), of which Leading brands contributed R218.6 million and Signature brands’ the balance.  The division’s operating margin rose to 51.5% (2017:  48.8%). Across the Leading and Signature brands, system-wide sales (including all restaurants opened during the period) increased by 7.3% (2017:  7.1%), while like-for-like sales (excluding restaurants opened or closed in the period) grew by 3.4% (2017:  1.4%).   Independently, Leading brands’ system-wide sales rose 7.1%, with like-for-like sales 4.1% higher.  Signature brands’ system-wide sales increased 8.6%, while like-for-like sales declined by 2.3%. Leading brands portfolio:  Debonairs Pizza continued to gain share in existing and new markets, while Wimpy, Steers, Mugg & Bean and Fishaways, retained market share.  Solid system-wide and positive like-for-like growth was reported by all of these brands, albeit partly supported by below-inflation menu price increases.   Fego Caffé and Milky Lane both recorded like-for-like growth, although Fego’s system-wide turnover declined marginally due to the closure of five stores. Hele says, “Strong promotions focusing on our brands’ great value proposition and high-quality meals drove top-line growth across the portfolio.  Particularly pleasing results were achieved from our investment in upweighting our online, digital and social media capability, and expanding our delivery offering across our brands.” Signature brands portfolio:  Spend in the premium segment of the Casual Dining consumer market remained constrained, and in this weak demand environment, the portfolio’s growth was largely underpinned by new restaurant openings, with Salsa Mexican Grill, Lupa Osteria and Turn ’n Tender each opening three new restaurants.  These offerings are clearly differentiated, have strong consumer appeal and offer upside growth potential. tashas restaurants in the UAE continued to deliver robust results, and a further three new restaurants are scheduled to open in the balance of the financial year.   Rest of Africa and AME:  The Group is represented in 15 countries in this region. During the review period, the AME operations started to derive good returns from investments made over recent years. Revenue for the combined region increased by 9.9% to R135.2 million (2017:  R123.0 million).  Operating profit rose 27.2% to R24.3 million (2017:  R19.1 million), while the operating margin improved to 18.0% (2017:  15.5%). System-wide sales increased by 12.8% (2017: 1.0%).  The region contributed 10.8% (2017:  9.2%) to the Group’s total system-wide Brands’ division sales. Hele says, “Our ‘deep and narrow’ approach remains our core strategy in the region, with in-country resources having been increased in Zambia, Mauritius, Malawi and Kenya. Our continued focus during the review period was on growing the contribution of our four Leading brands in the region (Debonairs Pizza, Steers, Wimpy and Mugg & Bean), which accounted for 91% of revenue.” UK:  Macroeconomic trading conditions remained unchanged in the six months under review, featuring intense competition in a price sensitive environment and subdued consumer sentiment and spend. Wimpy UK:  The business reported a 13.6% increase in Sterling revenue for the review period, while revenue in Rand terms improved 18.2%.  Wimpy’s collaboration with GBK to leverage commodity purchase volumes continued to deliver lower prices for core products, enabling the business to contain price increases. GBK (UK and Ireland):  Hele remarks, “Good progress was achieved in terms of leveraging ongoing remedial measures in the operation.  Additional operational opportunities exist and are being explored, including launching a multi-vendor online delivery platform to increase the current offering from one to three vendors, which should enhance GBK’s competitiveness in an area in which it has lagged recently.” An operating loss of GBP2.6 million (2017:  GBP872 000) was reported for the six months, while the operating margin declined to (6.6%) from (2.1%) in the prior comparable period.  System-wide sales (Sterling) decreased by 6.8% (2017: increase of 11.1%), while like-for-like sales declined by 9.7% (2017: decrease of 3.2%). In light of the continued adverse trading conditions and sustained underperformance of GBK, an impairment of R873.9 million (pre-tax) has been recognised at Group level. The post-tax amount is R760.2 million. The Board is of the opinion that this impairment value is prudent in the current situation.      Furthermore, in the context of GBK’s deteriorating financial position, a CVA process has been initiated, following extensive investigation into the options available to improve GBK’S financial stability. Hele elaborates, “The CVA is designed to promote GBK’s long-term financial viability and sustainability. In this regard, the goal will be to reach binding agreements or compromise with GBK’s unsecured creditors, which could potentially enable GBK to exit underperforming sites and achieve rental reductions on others, thereby improving the health and profitability of the portfolio and general financial performance of the business.” Hele notes, “Seventy-five percent support is required from the unsecured creditors to proceed with the CVA.  We are hopeful that we will receive the required support and will apprise shareholders as the process evolves.” SUPPLY CHAIN: The Group’s integrated strategic Supply Chain division comprises its Logistics and Manufacturing operations, which are managed and measured independently. Stronger sales recorded by the Leading brands underpinned volume growth in the Supply Chain, while the sustained drive to improve efficiencies and control costs also continued to enhance performance across these businesses.  Combined revenue for the period increased by 7.3% to R2.25 billion (2017: R2.10 billion). Operating profit grew 15.8% to R256.0 million (2017:  R221.1 million) and the operating margin improved to 11.4% from 10.5% in the prior comparable period. LOOKING FORWARD:  Hele says, “Local and global trading conditions will remain challenging, however, we are satisfied that the Group’s growth agenda and strategies are clear, and will be achieved by focusing on the fundamentals of the business and prioritising allocation of capital and resources on key growth projects.  With opportunities to deliver against the growth agenda identified both internally and in the market, our outlook remains positive.” PROSPECTS: “Our SA operations are well positioned to capitalise on available discretionary spend in the Group’s traditional peak holiday period.  We are, however, of the opinion that trading will be relatively muted, adversely affected by a shorter year-end school holiday duration and sustained financial hardship experienced by consumers,” comments Hele. He adds, “We anticipate that growth over the forthcoming period will be driven by our Leading brands (specifically the Quick Service brands), which will benefit our Logistics and Manufacturing operations, and we will ensure that they continue to be optimally resourced to maintain their leadership position in the market.  Our key focus in the Signature portfolio will be on margin improvement.”   “The UK market will continue to be defined by uncertainty as the Brexit process unfolds, which will weigh on both sentiment and spend.  Our primary priority is to ensure GBK is optimally structured to manage ongoing trading challenges,” he notes. Hele concludes, “GBK remains the leader in the UK premium burger category in terms of consumer sentiment, and our focus on re-establishing the gold standard across the entire value chain and customer journey will leverage that position.   We are satisfied that the remedial measures currently underway, together with the inherent strength of the brand and positive impact of the CVA restructuring process, will enable GBK to make its rightful contribution to the Group in time.”