Group Financial Director’s report

In 2023, the Group achieved its short-term objectives of sustaining our revenue recovery, further improving our positive cash generation from operations and managing our cost base.

The Group continued its post-pandemic financial recovery, evidenced by strong earnings, cash generation and a strong overall financial position. We experienced an immediate improvement in restaurant sales as all COVID-19 restrictions were removed in June 2022. This improvement in the front end of the business meant a strong revenue uptick for our Manufacturing and Logistics divisions.

As the year progressed, our recovery was weighed down by deteriorating local economic conditions, including weak growth and high inflation. An inflationary environment, driven by increased food and energy costs, meant South African consumers’ disposal income came under pressure. In September 2022, the incidence and frequency of load shedding intensified, which added to the woes of both consumers and businesses.

In December 2022, traditionally one of our best performing months, we experienced the worst load shedding ever for that specific month.

According to the South African Reserve Bank estimates, load shedding negatively impacted 2.1% of quarterly GDP in the third quarter of 2022. Combined with the impact of the breakdown in South Africa’s transport infrastructure, load shedding undermined the country’s ability to continue its recovery from the COVID-19 lockdowns. The devasting KwaZulu-Natal floods in April 2022 and the poor festive season due to beach closures in the same province, also negatively affected our financial performance.

While the global supply chain challenges experienced during the pandemic receded, the Russia/Ukraine war has resulted in new pressures, especially on the core products of vegetable oil, maize, wheat and hake. In addition, the conflict had knock-on impacts on agriculture with rising fuel and fertiliser costs. This, combined with load shedding, has meant all our suppliers have increased their costs. We bolstered our inventory holdings across several commodities to prevent a supply shortage and lock in better pricing.

We carefully considered our product price increases to our franchise partners while repricing our menus to protect our franchise partners’ profitability. In many cases, we absorbed some price increases in our Supply Chain to drive increased restaurant sales with competitive pricing. Wherever possible, we sought to claw back margin through operational efficiencies across our four divisions. We have successfully gained momentum through our Manufacturing and Logistics Way programmes.

In 2023, we successfully renegotiated our interest-bearing debt facilities to provide increased flexibility and improved profile and tenure. While reducing our debt remains a medium-term priority, the current economic conditions and requirement for additional working capital will slow this down.

Revenue

Revenue increased by 15% to R7.4 billion (2022: R6.5 billion). This improvement is attributable to improved trading conditions across most markets thanks to the lifting of all COVID-19 trading restrictions and improved trading conditions. Revenue was materially higher than pre-pandemic levels in 2020 at R6.5 billion.

Revenue from franchise fees increased 17% to R1.1 billion (2022: R918 million) as restaurant turnovers improved. Leading Brands contributed 95% or R1 billion (2022: R882 million), an improvement of 16% year on year. Thanks to the removal of COVID-19 restrictions, including seating and alcohol restrictions, Signature Brands’ revenue increased 35% to R49 million (2022: R36 million).

We operate 88 Company-owned restaurants, this includes 18 in South Africa, 5 in Kenya, 28 in Nigeria and 37 in Botswana. Company-owned restaurant revenue increased 26% to R564 million (2022: R447 million). Leading Brands contributed 73% or R412 million (2022: R338 million) of this revenue, an improvement of 22% year on year. Signature Brands’ revenue was R152 million (2022: R109 million).

Primarily due to closure of the Bakery in 2022, manufacturing revenue decreased 21% to R175 million (2022: R222 million). Logistics revenue rose 16% to R4.7 billion (2022: R4.1 billion).

The Retail division, which supplies South African supermarkets with branded licensed products, grew its sales due to increased consumer demand and an expanded retail footprint. Retail revenue increased 23% to R273 million (2022: R222 million).

Read more about the performance of our four divisions in our operational review.

Operating profit and margins

The Group’s operating profit improved by 37% to R861 million (2022: R630 million). This figure includes the Gourmet Burger Kitchen (GBK) liquidation dividend of R75 million (see Group transactions below). Our operating profit was affected by bouts of prolonged load shedding, fuel price increases and higher raw material costs in Manufacturing, some of which we absorbed.

In 2023, we spent R14.8 million on diesel for non-fleet usage across our supply chain and admin divisions in South Africa, an increase of 221% on the prior year. According to the South African Petrol Association, the wholesale diesel price increased by 56% from R13.52 per litre in March 2022 to R21.03 in February 2023.

The Group’s overall margin improved to 11.6% (2022: 9.7%), including the GBK liquidation dividend. With the exclusion of the GBK liquidation dividend, the Group’s overall margin was 10.6%. Our operating profit margins continue to lag pre-pandemic levels due to increased input costs and under-pressure consumers who cannot absorb large price increases. In SA, our margin improved to 12.5% (2022: 10.1%). The AME region’s margin decreased to 5.7% (2022: 9.9%) due to economic pressure. The UK’s margin declined further to (11.4%), attributed to continued poor macro economic conditions, including high inflation and interest rates, soaring energy costs and struggling consumers.

In our Brands division, our Leading Brands’ margin increased from 48.0% to 51.0% while Signature Brands’ margin improved to 4.0%, coming off a low base. The Manufacturing margin decreased slightly to 10.0% due to higher raw ingredients pricing and production challenges, including product write-offs and supply shortages. The margin for our Logistics division improved to 2.4% due to good volumes growth.

In our Retail division, which operates in a competitive and highly price-sensitive space, our margin was flat year-on-year. The margin was impacted by the product write-offs in the first half of the year.

Other income

Income from associates

Famous Brands holds equity shareholding in the following associates: Sauce Advertising (37%), UAC Restaurants in Nigeria (49%), FoodConnect (49%) and DHQ Interior Brand Architects (48.5%). Our profit from associates was R8.7 million (2022: R260 000).

Profit attributable to non-controlling interests

Non-controlling interests are interests the founders of key businesses hold in our Manufacturing division and Signature Brands portfolio. The share of profit for non-controlling interests decreased to R31 million (2022: R38 million).

Headline earnings per share and earnings per share

Headline earnings per share improved by 37% to 488 cents (2022: 356 cents), while basic earnings per share improved to 523 cents (2022: 317 cents).

Cash flows

Net cash inflow from operating activities

The Group remained highly cash-generative in 2023, with cash generated from operative activities of R961 million (2022: R871 million), and a cash realisation rate of 88% (2022: 102%). Net working capital increased by R145 million (2022: R10 million) due to increased input prices and higher inventory holdings to ensure stable supply and price certainty. This was necessary to manage several supply challenges related to global supply chain disruptions and load shedding. Strong working capital measures remain in place.

The Group’s cash flow forecasts show that its overall liquidity is adequate to meet its working capital investment requirements and operational needs for the foreseeable future.

Net cash outflow from investing activities

In 2022, we continued to re-invest in our business in line with our strategy. This included investing in Leading Brands, expanding our store base in Botswana and improving our Manufacturing and Logistics infrastructure. Major investments for 2023 relate to the relocation of our KwaZulu-Natal Distribution Centre and the purchase of our Midrand Campus for R181 million which we settled in cash. (see Group transactions below). In May 2023 we obtained a mortgage bond facility to the value of R300 million which will also be used to fund the development.

Where necessary, we invested in company stores, commercial and passenger vehicles, new generators and solar installations. Capital expenditure (capex) increased to R162 million (2022: R140 million).

Net cash outflow from financing activities

The net cash outflow from financing activities was R78 million (2022: R433 million).

Financial position

The Group’s balance sheet is sound, with net assets of R976 million (2022: R721 million). This represents a net asset value per share of R9.81 (2022: R7.19). The Group’s gearing was constant at 1.56 times. Its leverage improved by 0.18 from 1.32 times to 1.14 times. Our return on capital employed was 35% (2022: 29%).

Gearing and debt structure

In 2016, the Group made several acquisitions, resulting in considerable long-term structured debt on the balance sheet. We have a programme in place to manage and reduce this debt burden. This includes:

• Adhering to stringent working capital management measures.
• Funding growth through internally generated cash flow.
• Focusing on capital investment in lower-risk core local opportunities with a strong outlook for long-term returns.

At year-end, the Group’s total borrowings position was R1.1 billion (2022: R1.1 billion). In 2023, Famous Brands positioned itself to overcome the local and international supply challenges presented by the Russia/Ukraine war which has resulted in new supply chain pressures, especially on the core products. We bolstered our inventory holdings across several commodities to prevent a supply shortage and lock in better pricing. In addition, the acquisition of Steers Properties (Pty) Ltd and Halamandaris Props (Pty) Ltd for R181 million was settled with cash. Famous Brands renegotiated its borrowings with its primary lender to a more appropriate debt finance structure in line with our current requirements and strategy. This was successfully concluded in August 2022 and provides us with significantly more flexibility and an improved debt profile and tenure.

We comply with all our debt covenants and proactively monitor these continuously.

Impairments

The Famous Brands business model and continued success rely on our portfolio of strong brands, with a carrying value of R350 million as at 28 February 2023.

We once again reviewed our Wimpy UK operations in light of the difficult economic operating environment and impaired our goodwill in our investments in Venus Solutions Limited by R36 million due to the deterioration of the UK’s economic conditions and consumer demand.

We also impaired a brand in Signature Brands with R5.4 million due to the negative impact of the current operating environment and slower recovery after COVID-19.

In addition, we partly impaired our loan in our associate in Nigeria by R18 million due to a challenging economic environment.

Group transactions

Lexi’s Healthy Eatery

In April 2022, Famous Brands acquired a 51% shareholding of Lexi’s Healthy Eatery for R3.3 million. The acquisition pertains to the franchise and central kitchen operations of the business.

Gourmet Burger Kitchen

In May 2022, Famous Brands was notified that GBK’s liquidators would be paying an interim distribution to the creditors of GBK Restaurants Limited. The Group’s claim against GBK for dividend purposes was GBP55.2 million. In August 2022, Famous Brands received a liquidation dividend of R75 million.

Midrand Campus

In February 2023, Famous Brands purchased the entire share capital and claims of Steers Properties (Pty) Ltd and Halamandaris Props (Pty) Ltd and paid R181 million to the sellers. Through this transaction, Famous Brands now owns the head office in Midrand.

The transaction was considered a small, related party transaction in terms of the JSE Listings Requirements, as the shareholders of the property sellers are Famous Brands shareholders. Steers Property (Pty) Ltd was partly owned by John Halamandres, a non-executive director of Famous Brands. Halamandaris Props (Pty) Ltd was owned by Panagiotis Halamandaris, Periklis Halamandaris and Theofanis Halamandaris, who are associates of Nicolaos Halamandaris, also a non-executive director of Famous Brands.

The transaction was subject to certain conditions, including approvals from relevant regulatory authorities, including the Competition Commission and the JSE.

Civil insurance claim

In 2022, the Group submitted a business interruption insurance claim for R17 million. This initial claim was rejected. In April 2022, Famous Brand submitted a revised claim for R14.4 million, which the insurer approved. The claim payout was received in May 2022.

Dividends

In August 2022, the Board declared an interim dividend of 130 cents per share (2022: 0 cents). The dividend was paid out of profits for a total amount of R130 million.

After considering the Group’s performance in 2023 and outlook for 2024, the Board declared a final dividend of 233 cents per share. This dividend is being paid out of profits for the year ended 28 February 2023, to the total amount of R233 million, bringing total dividends to 363 cents for the year.

A forward looking perspective

Famous Brands will continue to drive organic growth while optimising the business for efficiencies and cash savings. Our financial and investment decisions in 2024 will support our strategic objectives, which include growing our Leading Brands in South Africa and selected AME markets and enhancing our Manufacturing and Logistics capacity.

Our medium-term focus is on divesting from non-core assets, potentially reviewing our investments in Signature Brands. In our decision making, we also consider our debt profile and the need to provide attractive shareholder returns.

Famous Brands is known for our stable cash flows, largely due to our long-standing franchise partners. More than 66.3% of our franchise partners have been with the Group for over five years, and several franchise partners are steadily building up successful multi-franchise businesses across more than one brand. Optimising investment returns and ensuring profitability for our franchise partners is a priority.

We remain concerned about South Africa’s weak economic prospects for 2024, which will strain consumers and the small business sector. We will implement financial support relief for our franchise partners in South Africa (see the CEO’s letter).

We are confident that our diverse menu options, strong brands and resilient franchise partners will allow us to expand despite the economic headwinds.

Appreciation and welcome

I acknowledge the exceptional effort made by the Famous Brands’ team this year which was necessary due to the difficult operating environment caused by various factors that muted the business growth. The hard work and support of the Exco, finance colleagues, the various management Committees and the broader Famous Brands’ community made for a very successful year. I also wish to thank the Board and its Committees for their oversight role and for their guidance on the Group’s financial affairs. I appreciate our loyal shareholders’ ongoing trust that was placed in us and the valuable discussions with management. I thank our primary lenders for their commitment to building a strong and mutually beneficial relationship.

I served on the Board of Famous Brands since August 2018. In June 2021 the Board approached me to step in as Group Financial Director with effect from 1 August 2021, on a two-year contract. I considered it a privilege at the time when the Group was experiencing challenging times and to make a difference given my experience in the financial field.  In re-shaping the finance functions, I believe that I brought stability into, and was able to strengthen, the Group’s finance capabilities.

Each company has its unique culture and way of doing business and Famous Brands was no different. Although I was on the Board, this was a new challenge for me. I did not know what to expect or the challenges that I would face.

I found a warm and friendly environment that made me feel like I was part of a family from the first day. This is a good reflection on Famous Brands which originated in a family setting. The friendly, family-oriented environment, echoes through the offices and into the boardrooms and I was well received by Exco, by my new finance team and by the business in general.

In this environment, I was able to assimilate the business quickly and easily and it enabled me to introduce new and alternative accounting strategies, systems and processes. There were some challenges that we had to overcome, but that was par for the course and I was able to draw on my experience whenever these challenges arose.

I will miss being part of this family-oriented business. However the time has come for me to enjoy my retirement and spend more time with my family. It has been an amazing journey and I thank the Board for entrusting me with this role, and for giving me the opportunity to be part of this growing business. I wish you continued success and prosperity going forward.

I would like to welcome Nelisiwe Shiluvana, who will assume the role of Group Financial Director on 1 August 2023. She is a great asset to the team with her broad-based finance experience, starting with her reporting and operating functions in the telecoms industry to her consulting experience as a partner at EY. She has a depth of knowledge and experience in finance and will continue the journey of re-shaping the Group finance function so that it becomes more streamlined, focused and resilient. She has been a critical part of the team that has re-shaped finance, especially the reporting side, in the last 18 months.

I believe that Neli is an excellent choice and the right candidate to take over the reins from me. I wish Neli the very best with this new venture.

Deon Fredericks

Group Financial Director

21 June 2023