Group Financial Director’s report
Strategy and scorecard
In my 2019 report I noted that the business had committed to focusing on the following key areas in the year ahead:
- prudent capital allocation;
- leveraging the investment made in our new ERP system to improve our reporting processes for enhanced data analysis; and
- embedding divisional balance sheet reporting for monitoring divisional return on invested capital.
This focus would be pursued within the context of two of our fundamental strategic imperatives, being to improve our financial performance and optimise capital management.
It is rewarding to report that important achievements were made in terms of each of the key areas. During the review period, management significantly re-orientated the business leadership to focus on working capital management and free cash flow generation. Good progress was made in entrenching effective capital allocation through balance sheet reporting and management at business unit level, with a better understanding of how to create value for stakeholders at every level of the business. There is now a clear focus on cost leadership and ROI. We have also strengthened the finance capability in the organisation.
Management’s objectives in terms of capital are to safeguard the Group’s ability to continue as a going concern, to provide sustainable returns for shareholders, benefits for our other stakeholders and to maintain an optimal structure to reduce the cost of capital.
Our intensified focus on balance sheet management has substantially improved working capital management and related KPIs, and led to the second successful refinancing of the Group’s debt structure on improved terms.
The Group’s results for the year ended 29 February 2020 were pleasing, taking into account the challenging economic environment. The SA business reported a strong performance in H1, which unfortunately was not sustained in H2 primarily due to further deterioration of macro-economic conditions. It is also pleasing to report that solid results were recorded by the AME region and GBK and Wimpy in the UK.
Revenue for the period rose by 1% to R7.8 billion (2019: R7.7 billion). This increase is attributable to organic growth in our SA and AME operations, with SA contributing 78% to total revenue (2019: 76%). Higher revenue from the SA business is underpinned by an increase of 9% in Brands’ revenue to R974 million (2019: R895 million), and a 1% increase in supply chain revenue to R4.5 billion (2019: R4.4 billion). These results are creditable in the context of extremely challenging trading conditions featuring weak consumer sentiment and spend and an aggressively competitive operating landscape. The Group’s improved performance is tribute to the popularity of our brands, the commitment of our franchise partners to lead in the categories we compete in and management’s steadfast campaign to continuously innovate the offering and improve efficiencies across the business.
Operating profit before non-operational items and operating profit margins
The Group’s 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%). Our SA business reported a decline in margin to 14.0% (2019: 15.1%), however, a substantially improved margin of 17.5% was recorded in the AME region, up from 7.9% in the prior year which reflected the remeasurement of put options entered into with the Group’s JV partners in relation to the acquisition of Retail Group Botswana, effective 1 August 2015.
In our UK business, the improvement in margin is attributable to the reduced operating loss in GBK compared to prior year. Our Wimpy UK business delivered another pleasing performance, evidenced by an increase of 31% in operating profit to R23 million (2019: R18 million).
The Group’s non-operational item of R53 million (2019: R917 million) comprises an impairment recognised in the GBK business (at store level) due to the impact of the CVA on property, plant and equipment.
Net finance costs
The Group’s net finance costs reduced to R219 million (2019: R228 million) mainly as a result of our lower gearing level and lower average finance costs secured on the refinanced debt structure.
Income from associates
The Group holds equity interests in the following companies: Sauce Advertising (37%), UAC Restaurants (Mr Bigg’s) in Nigeria (49%), By Word of Mouth (49.9%), FoodConnect (49%) and the tashas group (49%). The Group’s share of associates’ profit for the review period was R5 million (2019: R4 million).
The Group’s tax expense was R219 million (2019: R133 million), representing an effective tax rate of 33.9%, mainly as a result of the impairment recognised during the review period at GBK restaurant level and unutilised tax losses. In the corresponding reporting period, a negative effective tax rate of 45.4% applied, impacted by the impairments recognised in that period.
Profit attributable to non-controlling interests
Non-controlling interests refer to the strategic JV partnerships we hold with the founders of key businesses in our Signature brands portfolio and Manufacturing division. Profit attributable to non-controlling interests increased to R65 million (2019: R57 million), of which 86% (2019: 80%) is attributable to our manufacturing JV partners.
Headline earnings per share (HEPS) and Earnings per share (EPS)
HEPS increased by 32% to 417 cents (2019: 316 cents) and EPS improved by 175% to 362 cents (2019: negative 484 cents). EPS increased primarily due to the non-recurrence of costs and impairments recognised in the prior comparable period, being once-off costs of R17.2 million related to the CVA; an impairment of R873.9 million (pre-tax) relating to GBK, recognised at Group level, and an impairment of R25.5 million recognised in associate company, By Word of Mouth, in which the Group has a minority stake.
HEPS and EPS include the impact of IFRS 16 Lease liabilities which came into effect for the Group during the review period.
Cash flows and financial position
Cash flow movement during the review period
Net cash inflow from operating activities
The business generated robust cash from operations of R1.3 billion (2019: R1.0 billion), with a cash realisation rate of 107.9% (2019: 96.6%), representing pleasing earnings’ quality.
Working capital changes for the review period were R112 million compared to the negative R20 million reported in the previous corresponding period, which is testament to our increased focus on working capital management.
The Group’s net cash inflow from operating activities of R692 million (2019: R567 million) was positively impacted by reduced operating losses in GBK and an improvement in working capital.
Net cash outflow utilised in investing activities
Capex incurred on additions to property, plant and equipment and intangible assets rose to R173 million (2019: R137 million). This represents 68% invested in our SA business (2019: 67%), 20% in our UK business (2019: 29%) and 12% in our AME business (2019: 4%). No new businesses were acquired during the year under review.
The sale of the Group’s Coega Concentrate tomato paste business was concluded in October 2019, realising R31.7 million.
Total net cash outflow utilised in investing activities was R116 million (2019: R89 million).
Net cash outflow from financing activities (debt repayment)
Net cash outflow from financing activities was R554 million (2019: R760 million). The reduced outflow was primarily due to reduced borrowings repayments in the review period.
The Group’s closing net cash position as at 29 February 2020 was R486 million (2019: R455 million).
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 R17.97 (2019: R15.27). The increase in the net asset position is mainly attributable to the significantly lower impairment recognised during the period, being R53 million, compared to R899 million in the prior reporting period.
The reduction in total borrowings to R1.7 billion (2019: R2.1 billion) resulted in an improved gearing position of 66% (2019: 109%) excluding the impact of IFRS 16 lease liabilities. Including the impact of IFRS 16 the gearing ratio is 143%.
ROE increased from 20% to 25%, mainly as a result of GBK’s reduced operating loss of GBP-0.6 million (2019: GBP-4.6 million). ROCE was 20.0% (2019: -1.6%).
Gearing and debt structure
Subsequent to the review period, and as announced on SENS on 3 April 2020, we successfully concluded negotiations with the Group’s primary lender regarding a more appropriate debt finance structure. The debt covenants were concluded at the same level as the previous debt structure. Details of the new structure are outlined below.
We actively monitor the Group’s debt covenants on an ongoing basis. The debt covenants on the refinanced structure and other measures will be measured for reporting purposes at the end of August 2020, aligned with the Group’s half-year reporting period.
Impact of the COVID-19 global pandemic on the business
Going concern status
The Audit and Risk Committee (Committee) has considered the going concern assessment as prepared by management, including the Group’s outlook regarding trading conditions that will persist into the foreseeable future. This assessment is based on a range of varied scenarios (including assumptions regarding a worst-case scenario of a three-month total lockdown, the rate of return to normal trading, debt service and covenant requirements, working capital requirements and relief measures implemented by the respective governments in our various trading jurisdictions), and is satisfied that the Group is a going concern for the foreseeable future based on the information available at the time of approval of the AFS.
Post-balance sheet events relating to the Group’s investment in GBK and Group associates
In the SENS announcement published on 2 April 2020 and renewed on 20 May 2020, shareholders were advised that the Board had reviewed its investment in GBK following a deterioration in GBK’s store sales in the UK due to the COVID-19 global pandemic and the subsequent indefinite closure of all restaurants in the industry in the UK and Ireland until further notice. In this regard, the Board has resolved to not provide further financial assistance to the GBK business. Shareholders were further cautioned that this decision may result in an impairment of the full value of the Group’s investment in GBK. Deliberations in respect of this matter are still in progress. While not impacting on the Group’s ability to continue as a going concern into the foreseeable future, shareholders are advised that there is material uncertainty surrounding GBK’s ability to continue as a going concern into the foreseeable future.
Shareholders are also referred to the Audit and Risk Committee report for comprehensive detail on post-balance sheet events.
Our cash flow forecasts, which take into account the impact of COVID-19 global pandemic, are reviewed on a regular and ongoing basis. Our forecasts indicate that the Group’s overall liquidity remains sufficient and stable to meet our working capital and operational needs over the foreseeable future. The Board and management are committed to paying all suppliers and service providers in line with negotiated terms.
Ongoing general measures to optimise liquidity
Following a series of acquisitions in 2016, the Group has significant long-term structured debt on the balance sheet, however a robust programme is in place to:
- manage gearing levels through intensive working capital management;
- finance growth through internally generated cash flow; and
- focus capital investment on lower-risk core local opportunities with potential for long-term sustainable returns.
The Group has established a strong strategic partnership with its primary lender, which provides a stable funding platform and necessary liquidity for the business.
COVID-19 global pandemic-related measures to optimise liquidity
As discussed in the commentary on gearing, management has actively engaged with the primary lender subsequent to the year-end and negotiated a favourable debt structure which is more appropriate to the business and ensures our cost of funding remains competitive. We have also engaged the lender regarding additional short-term loan facilities, and a R300 million facility was granted in April 2020 in this regard.
In terms of preserving cash and protecting the business, we have implemented the following urgent measures:
- freeze on operational and capital expenditure and headcount;
- temporary royalty and marketing fund fee relief for franchisees for March and May 2020 (restaurants were not permitted to trade in April 2020 due to lockdown restrictions);
- negotiations with landlords;
- temporary hibernation of parts of the business not permitted to trade;
- reduced working hours, salary and Board fee sacrifices and limited retrenchments where alternatives were exhausted; and
- commenced plans to disinvest from non-core operations.
The lockdown measures implemented across the Group’s various trading jurisdictions have had an extremely severe financial impact on the business. As part of the Group’s broad response to maintaining its liquidity position through the crisis, the Board has taken the prudent and appropriate decision to suspend the dividend for the review period. The Board recognises the importance of the dividend to shareholders and will keep this position under review.
Change in auditors
As announced on SENS on 9 March 2020, the Committee, after following the process set out in paragraph 3.84(g)(iii) of the JSE Listings Requirements, recommended the appointment of KPMG to replace Deloitte as the Company’s external auditor, with Nick Southon as KPMG’s designated partner. The Board has accordingly appointed KPMG as external auditors in respect of the financial year ending 28 February 2021.
This appointment is effective from 24 July 2020, subject to the approval of the Company’s shareholders at the AGM on 24 July 2020.
I would like to extend my sincere gratitude to our audit partner from Deloitte, Shelly Nelson, for the professional, supportive service extended to the Group.
Aligned with our three-year strategic roadmap, and cognisant of the severe and ongoing impact of the COVID-19 global pandemic on our business, our primary activities in the year ahead will be centred on streamlining the business by prioritising core long-term operations, reducing costs and preserving cash.
Consistent with the business’s re-orientation centered on working capital management and free cash flow generation, we have committed to the following priorities:
- optimise cash flow management and capital allocation (including terminating further financial support to GBK);
- driving cost reduction initiatives; and
- continuing to align the supply chain and cost drivers to support our franchise partners and meet ROCE targets.
It is inevitable that the business will undergo transformation as we navigate the new and uncertain environment created by the COVID-19 global pandemic, but we are confident that the Group’s strong cash-generating ability and our low overhead structure position the business well for recovery.
I would like to extend my appreciation to my colleagues on the Finance team for their commitment and continued efforts to improve the division’s performance and its contribution to the business. My thanks also go to the Board and other Group Committees for their input and support during the year.
We value the relationships with our long-standing shareholders and our new investors who recognise the strong investment proposition our business affords. We will continue to strive to reward your support for our business.
Group Financial Director
29 June 2020