Famous Brands reports strong financial results and cash generation

  • Revenue up to R7.8bn (2019: R7.7bn)
  • Headline earnings per share up to 417 cents (2019: 316 cents)*
  • Cash generated from operations (adjusted for IFRS 16 impact) up to R1.1bn (2019: R1.0bn)
  • Operating profit up to R912m (2019: R847m)*
* Includes impact of adoption of IFRS 16 Famous Brands is Africa’s leading food services franchisor. The Group’s vertically integrated business model comprises a portfolio of 24 restaurant brands, represented by 2 898 restaurants across South Africa (“SA”), the rest of Africa and the Middle East (“AME”), and the United Kingdom (“UK”). The Brands division is underpinned by substantial Logistics and Manufacturing operations. Darren Hele, Chief Executive Officer, says, “The Group’s resilient performance is creditable in the context of extremely challenging trading conditions featuring weak consumer sentiment and spend and an aggressively competitive operating landscape.” He adds, “Cash generation remained a core strength, with the business recording an 11% increase in cash from operations (adjusted for IFRS 16) to R1.1 billion (2019: R1.0 billion). This resulted in a cash realisation rate of 107% (2019: 97%), which represents pleasing earnings’ quality.”

Group performance

Hele comments, “Positioning our brands to remain innovative and relevant to customers has always been a key driver for the business. We continued to commit resources to ensuring our offering has a strong value for money component; investing in our technological capability in the digital and social media arenas; continuing to upweight our delivery offering; and ensuring our menus display greater awareness of evolving health and wellbeing trends.” He adds, “We also continued to focus on sustainable value creation for shareholders, underpinned by intensified management of the balance sheet, working capital and reward-linked performance.”

Group financial results

The results for the reporting period include the impact of the IFRS 16 standard which was adopted during the year under review. Revenue for the period rose by 1% to R7.8 billion (2019: R7.7 billion), attributable to organic growth in the SA and AME operations and an improved performance in the UK businesses. Operating profit before non-operational items grew to R912 million (2019: R847 million), positively impacted by improved results from GBK, and the disposal of Coega Concentrate tomato paste plant which reported an operating loss of R22 million in the prior comparable period. The Group’s operating profit margin improved to 11.7% (2019: 11.0%). Headline earnings per share rose 32% to 417 cents (2019: 316 cents), while earnings per share increased by 175% to 362 cents (2019: loss of -484 cents), as a result of the non-recurrence of costs and impairments recognised in the prior comparable period. The Group’s balance sheet remains healthy, with net assets of R1.8 billion (2019: R1.5 billion), representing a net asset value per share of 1 797 cents (2019: 1 527 cents). The Group’s free cash flow, after debt service requirements, improved to R246 million from a negative R217 million in the comparative period. While a dividend of 90 cents was declared for the first six months of the review period, in light of the COVID-19 global pandemic, the Board deemed it prudent to preserve cash to facilitate balance sheet flexibility, and hence no dividend was declared for the second six months.

Operational review – Brands

The Group’s portfolio of 24 restaurant brands is well positioned to appeal to a wide range of consumers across the income and demographic spectrum and across meal preferences and value propositions. The network comprises 2 791 franchised and 107 Company-owned restaurants (a total of 2 898 restaurants).

South Africa

Hele notes, “Our SA Brands’ division reported a 9% increase in revenue to R974 million. Operating profit reduced by 1% to R472 million, while the operating profit margin decreased to 48.5% from 53.2%. The margin decline reflects significant investment in technology enablers in the Leading brands portfolio, sub-inflationary menu price increases, higher operating costs due to tighter allocation of costs to our Leading brands and office relocation costs.” The Leading (mainstream) and Signature (niche) brands’ combined system-wide sales* improved 6.4% and like-for-like sales** increased by 2.9%. Independently, Leading brands’# system-wide sales grew 5.7%, while like-for-like sales rose by 3.5%. Signature brands’^ system-wide sales improved 10.6%, while like-for-like sales declined by 0.8%. * System-wide sales refer to sales reported by all restaurants across the network, including new restaurants opened during the period. ** Like-for-like sales refer to sales reported by all restaurants across the network, excluding restaurants opened or closed during the period. # Leading brands’ sales refer to sales of the Leading brands trading in SA. ^ Signature brands’ sales refer to franchise and Company-owned store sales in SA as well as sales cross border only where the brand is a joint venture partnership and the brand is not managed by the AME management team.

Leading brands

Hele comments, “Our Leading brands delivered solid results, reflecting their market leadership of the categories they trade in. Consistent with recent years and in line with general market trends, our quick service (QS) brands, Steers, Debonairs Pizza, Fishaways and Milky Lane outperformed the casual dining (CD) brands, namely Wimpy, Fego Caffé and Mugg & Bean. All four of the QS brands grew system-wide and like-for-like sales, and Steers, Debonairs Pizza and Fishaways continued to gain market share, while Milky Lane retained its competitive posture. Our CD brands all retained market share, with a particularly pleasing performance by Wimpy, after several years of decline.”

Signature brands

Hele remarks, “Our Signature brands operate in the over-traded, highly competitive CD market segment and their performance for the period reflects the difficulties faced. Like-for-like sales were flat, while system-wide sales growth was constrained by the closure of 17 restaurants. In light of the subdued economy, the roll out of new restaurants was necessarily conservative.” Lupa Osteria delivered the portfolio’s strongest like-for-like performance, largely attributable to a menu and pricing review, followed by PAUL, which is well positioned to appeal to the niche premium-end market segment, and the coffee brands, which benefit from strong strategic alliances with hospital partners, Netcare and Mediclinic.

AME

The Group is represented by 322 restaurants in 16 countries in this region. Hele says, “In line with our deep and narrow strategy in the AME, we implemented a more direct approach to developing brands in existing markets and investing in Company-owned outlets in key nodes in East and West Africa. We continued to expand strategic alliance partnerships, trial new trading formats, strengthen marketing capability and leverage delivery offerings where appropriate. We also signed key Master License agreements in the UAE, Saudi Arabia and Oman.” Combined revenue reported for the region rose to R314 million in Rand terms (2019: R273 million). Operating profit increased to R55 million, up from the R22 million reported in the prior year which reflected the re-measurement of put options entered into with the Group’s JV partners, effective 1 August 2015. Accordingly, the operating profit margin was positively impacted, improving to 17.5% (2019: 7.9%). Like-for-like sales were solid, with 12 of the 16 trading markets recording positive growth. The region contributed 8.7% (2019: 10.2%) to the Group’s total system-wide Brands’ division sales. Five brands accounted for 93% (2019: 93%) of turnover across the region, namely, Debonairs Pizza, Steers, Mr Bigg’s, Wimpy and Mugg & Bean.

UK

Wimpy UK

“Following rationalisation of 12 under-performing stores in the prior year and an ongoing revamp programme, the portfolio is optimally structured to capitalise on growth opportunities in the constrained economic environment,” says Hele. “Expanding the delivery offering across the network continues to offer opportunity for growth,” he adds. The network comprises 67 restaurants (2019: 67). The business reported solid results in the year under review, boosted by an increased contribution from the delivery offering, a re-engineered menu and improved sales in revamped restaurants. Revenue in Rand terms increased to R122 million (2019: R113 million). Revenue in Sterling was 4% higher. Operating profit grew by 31% to R23 million (2019: R18 million), while the operating margin rose to 19.0% (2019: 15.7%).

GBK (UK and Ireland)

Remedial measures implemented to stabilise the business and return it to profitability gained momentum, however, year-on-year sales declined, aligned with the general trend across the industry. The strategy to leverage opportunities to expand the multi-party delivery platform progressed well, but although online delivery revenue grew, this solid performance was offset by weaker in-store sales in malls and on the high street. GBK UK reported an operating loss before non-operational items of GBP-0.6 million (2019: operating loss of GBP-4.6 million). The operating margin improved to -0.9% (2019: -5.7%). System-wide sales (Sterling) were GBP68.9 million (2019: GBP80.2 million) largely due to the closure of 24 stores as part of the Company Voluntary Arrangement process, eight of which were closed in the review period. GBK UK and Ireland’s combined like-for-like sales increased by 2.7% (2019: decrease of -4.2%). Hele says, “In line with our rigorous capital allocation programme, we have resolved to not provide further financial assistance to the GBK UK business, following the deterioration in GBK’s store sales in the UK after year-end due to the COVID-19 global pandemic, and the subsequent directive by the governments of the UK and Republic of Ireland to indefinitely close all restaurants in those countries.”

Supply chain

This division, which comprises the Group’s integrated Manufacturing and Logistics operations in SA, is in service to the front-end Brands division, and its primary function is to provide a competitive advantage to franchise partners through efficient and effective supply and margin support. Volumes across both operations declined due to lower demand levels in the Brands division. Combined revenue of R4.5 billion (2019: R4.4 billion) was reported, while operating profit reduced to R457 million (2019: R513 million). The operating profit margin declined to 10.2% (2019: 11.5%), primarily due to the tactic to contain price increases in the sustained low food inflation environment; downward adjustments to remain competitive in a market where margin was sacrificed to gain volume; and the ongoing programme to re-allocate corporate costs to the appropriate business units. Capital expenditure of R63 million (2019: R47 million) was incurred, primarily related to the commissioning of the two new distribution centres in the Western Cape and Free State.

Subsequent events

Hele comments, “Aligned with our three-year roadmap, and accelerated by the COVID-19 global pandemic, our focus over the past two months has been to right-size the business, reduce costs, and preserve cash to facilitate balance sheet flexibility.” He notes, “A range of measures were swiftly implemented across the business. These include a freeze on operational and capital expenditure; providing franchisees with temporary financial relief; strategic temporary hibernation of parts of the business not permitted to operate under lockdown restrictions; and a limited retrenchment programme where all other options have been exhausted. Following the easing of restrictions, operational focus has been on optimising the Group’s home delivery competence, where practicable and in line with regulations. The viability of the limited delivery-only model remains to be proved, but at this early stage is showing positive signs, given that this channel is the only access available to consumers.”

Looking forward

Hele states, “In this post COVID-19 era, the operating environment will continue to evolve and create challenges; accordingly, our business will be focused on adapting and transforming to overcome the challenges and optimise on the opportunities presented.”

Prospects

Hele says, “Parallel to the remedial and revival activities underway during lockdown restrictions, we will continue to roll out our three-year strategic roadmap. The three key areas of focus include an expansion programme (grow our Leading brands and retail business and build depth of the AME footprint); a consolidation programme (disinvest from non-core brands, manufacturing and logistics facilities, and intensify investment in high-return assets); and our programme to optimise capital management and allocation. Future focus will remain on generating free cash flow and reducing interest-bearing debt and non-essential capex. We will also continue to align the supply chain and cost drivers to afford our franchise partners a competitive advantage while maintaining return on capital targets.” “The Board and management are confident that we have a solid business model and the right specialist skills to lead our recovery. Our strategically structured diverse portfolio, agility and the ability to continuously innovate across brands and trading formats will be key to driving growth,” Hele concludes.