Nelisiwe Shiluvana
Group Financial Director
Our 2024 financial year was difficult, as deteriorating economic conditions in South Africa and high food inflation weighed down consumer demand. While our Group responded well to contain certain of these impacts, we could not insulate our financial performance from the effects of weak economic growth, load shedding and high interest rates.
According to Statistics South Africa, the local economy grew by a marginal 0.1% in the fourth quarter (October to December 2023), bringing the annual growth rate for 2023 to 0.6%. The fourth quarter’s real gross domestic product (GDP) was R1 158 billion. This is above the pre-COVID-19 reading of R1 150 billion but still below the peak of R1 161 billion recorded in the third quarter of 2022. The biggest constraint on economic growth is load shedding with serious impacts on South Africa’s corporate sectors growth and profitability. The restaurant industry is highly exposed to load shedding which impacts on both revenue and profitability.
Given these conditions, we are pleased with the momentum in revenue growth. Due to our carefully managed cost base, our operating profit and margins have held up well. Our Leading Brands portfolio continues to perform strongly, with good performances from our Casual Dining Restaurant brands. The performance of our Signature Brands portfolio was below our expectations as it was impacted by the conversion of Fego Caffé restaurants to Leading Brands, load shedding and cost pressures. However, there are some areas of outperformance within that portfolio. Overall, our Brands performance was below our expectations as lower consumer spending dampened demand. This low performance at the front end flowed through to both our Manufacturing and Logistics results. Our Retail division continued to gain scale with a 35% growth in revenue. Our cash generated from operations grew by 13% while our cash realisation rate increased to 105%, supporting our cash conservation focus.
Financial performance snapshot
| * | Operating profit for 2023, excluding the Gourmet Burger Kitchen (GBK) dividend of R75 million was R786 million. |
This report should be read with the Summarised Consolidated Financial Statements and the AFS available online at: https://famousbrands.co.za/investor-centre/
Revenue
Despite a challenging operating environment, the Group continues to demonstrate positive momentum in revenue growth. Revenue grew by 8% to R8.0 billion (2023: R7.4 billion). This revenue can be attributed to solid sales throughout our restaurant network and inflationary increases.
Revenue from franchise fees increased 7% to R1.2 billion (2023: R1.1 billion) as the consumer was more resilient than anticipated despite lower disposable income. However, load shedding hampered performance, resulting in lost revenue.
| * | Manufacturing revenue after intercompany eliminations. |
Read more about the performance of our four divisions in our operational review.
Operating profit
The Group’s operating profit declined by 6% to R812 million (2023: R861 million). The 2024 operating profit is lower compared to 2023, predominantly due to the liquidation dividend of R75 million received in August 2022 from Gourmet Burger Kitchen. This boosted the operating profits and margins for 2023. When the impact of this dividend is adjusted, operating profit improved by 3.3% compared to prior year.
Our operating profit was negatively impacted by severe load shedding, the financial relief offered to franchise partners, increased employee costs, increased insurance costs, elevated fuel costs, generator maintenance and high food inflation across several categories in Manufacturing. Some of which were absorbed to offer competitive pricing to franchise partners. Being a commodity-dependent economy, widely traded and an emerging-market proxy, the Rand is vulnerable to shifts in global sentiment. The weak performance of the Rand impacted our imported goods and contributed to food inflation.
In 2024, we spent R25 million on diesel for non-fleet usage across our four South African divisions (2023: R14.8 million). Diesel prices remain stubbornly high, driven by the weaker Rand and international price increases. Pleasingly, our fleet diesel costs are down 2% due to efficient route planning.
The 2023/2024 insurance renewal cycle was completed in April 2023 and was the toughest in our history. The Group’s property damages and business interruption (PDBI) premium escalated at over 464% to R22 million (2023: R3.9 million).
The Group’s insurance risk has increased because food facilities are classified as high risk during a riot or social unrest resulting from the unlikely event of total grid failure. In addition, insurers have a low appetite for cold storage facilities and require property owners to implement extensive fire risk engineering management. Part of our response to a hardening insurance market, we set up an insurance cell captive to reduce our insurance costs.
operating profit margins
Despite the inflationary conditions, the Group’s margins held up well. The Group’s overall operating profit margin declined to 10.1% (2023: 11.6% and 10.6% when the Gourmet Burger Kitchen liquidation dividend is removed).
Our operating profit margins remain under pressure as consumers cut back on discretionary spending and cannot absorb high menu price increases across all regions. In SA, our margin declined to 10.4% (2023: 12.5%) while SADC reported a margin of 13.4% (2023: 12.7%). The AME region’s margin improved to -26.0% (2023: -77.7%) due to economic challenges in several African markets. While operating conditions in the UK remains difficult, the UK’s margin improved to 11.4% (2023: -11.4%).
Leading Brands’ operating profit margin was 50.3% (2023: 51.0%), while Signature Brands’ declined to -1.9% (2023: 4.0%) due to impairments of R12.9 million. The Manufacturing and Logistics operating profit margins decreased to 9.0% (2023: 10.0%) and 1.9% (2023: 2.4%), respectively. The margins are under pressure due to higher overhead costs.
Retail operating profit margin improved to 1.7% (2023: 0.1%) with improved sales volumes lowering unit production costs and no material product write-offs. Retail remains competitive in a highly price-sensitive space.
Headline earnings per share and earnings per share
Headline earnings per share declined by 5% to 465 cents (2023: 488 cents), and basic earnings per share (BEPS) declined to 457 cents (2023: 523 cents). The earnings are lower compared to 2023, predominantly due to the Gourmet Burger Kitchen liquidation dividend of R75 million received in August 2022. Excluding the liquidation dividend, BEPS of 457 cents per share is 2% higher compared to the prior year.
Financial position
The Group’s balance sheet remains healthy, with net assets of R1 079 million (2023: R976 million) and net asset value increased 11% to 1 077 cents per share. The Group’s gearing was constant at 1.08 times. Its leverage marginally improved from 1.14 times to 1.13 times and is well within our primary lender’s covenants. Our return on capital employed was 31% (2023: 35%).
Gearing and debt structure
We are executing our programme to manage and reduce our debt in the medium term hence we prioritise free cash flows and disciplined fundamental principles of capital allocation. This includes adhering to stringent working capital measures, funding expansion mainly through internally generated cash flow and investing in lower‑risk core opportunities with a strong outlook for long-term returns.
While reducing our debt remains a priority, the current economic conditions and requirement for additional working capital and investment in our Midrand Campus impacted these objectives.
Our debt structure is in line with the Group’s current requirements and strategy. We comply with all our debt covenants and have access to adequate unutilised credit facilities.
Brands and trademarks
Our business model and continued sustainability depend on the health of our brand portfolio. Every year at annual and interim results, we review each brand’s value to ensure that our brands are reflected at the right value. We apply a robust valuation assessment with input from management and the Board. As at 29 February 2024, our brand portfolio carrying value is R351 million.
We reviewed the expected performance of the Signature Brands’ portfolio against the constrained environment coupled with the conversion of the Fego Caffés to Mugg & Bean restaurants and took the decision to further impair this portfolio by R13 million.
Cash flows
Our cash flow forecasts indicate that the Group’s overall liquidity is adequate to meet its working capital and capital investment requirements for the foreseeable future. Our liquidity headroom was R572 million at year-end, comprising R353 million in cash balances and R219 million in committed, undrawn facilities.
Cash flow movement in 2024
| * | Opening and closing balance excludes restricted cash. |
Capital expenditure
We continued to make strategic investments across our markets, with capital expenditure (excluding IFRS 16) of R184 million (2023: R162 million). This included investing in Leading Brands and in a flagship PAUL restaurant at the V&A Waterfront.
We invested in our Manufacturing and Logistics infrastructure, including new, more efficient generators and solar installations (in line with our sustainability investments), to increase our energy independence and alleviate the impact of load shedding. We benefited from the government’s tax incentive on the cost of renewable energy assets for businesses. This strengthened the investment case for renewable energy.
In Logistics, we rolled out the new warehouse management system across all distribution centres and began the first phases of the construction of our cold storage facility at the Midrand Campus.
Our investments outside of South Africa were mainly in technology to drive convenience, own delivery and consumer experience.
The Group’s free cash flow was R674 million (2023: R864 million).
Capital management
The Group generated R1.1 billion (2023: R1 billion) in cash generated from operations and this mainly funded the following:
- Dividend payments of R410 million;
- Capital expenditure of R184 million;
- Debt repayments of R126 million; and
- Acquisition of a 45% shareholding interest in an associate, Munch Software (Pty) Ltd and a 51% majority shareholding interest in Famous Brands Restaurant Holdings Ltd in Mauritius.
The cash realisation rate, which is a measure of how EBITDA is converted into cash, was 105% (2023: 88%). The cash realisation rate improved mainly due to the improved collection rate in trade receivables and the positive impact of higher trade and other payables, which improved the cash inflow from operations.
Dividend
The Board declared a final dividend of 164 cents per share, bringing the total dividend for the year to 302 cents per share. This was guided by the principle of prudent capital management, the lower than expected performance in the second half, and the uncertainty in the interest rate outlook. Total dividend of R302 million was paid out of current year profits. In August 2023, the Board declared an interim dividend of 138 cents per share (2023: 130 cents).
Outlook and priorities
Our capital managements is based on a set of fundamental principles that guide our choices and enable effectives utilisation of capital. We will continue to apply prudent financial and investment decisions in our 2025 financial year which align with our strategic objectives. These include expanding our Leading Brands footprint in SA, SADC and selected AME markets leveraging various restaurant formats. Expansion outside of Sub-Saharan Africa will include a mix of franchising, master licence agreements and Company-owned restaurants. We will continue to invest in consumer-facing technology to maintain and improve our consumer experience.
Within our Supply Chain, the focus has been on optimising our Logistics footprint. This major project will conclude in 2025 with the redevelopment of our Midrand Campus and the relocation of our frozen foods storage facility from Crown Mines to Midrand. Our focus on investment in the Supply Chain will now shift to our Manufacturing operations, where we will address ageing infrastructure, equipment and technologies. This will be a staggered process. Our investment decisions continue to be influenced by the targets set in our ESG roadmap.
Liquidity remains a priority to boost free cash flow, thus we will continue to strengthen our working capital management practices. In the medium term, we seek to divest from non-core assets to simplify our business and reduce distraction. We seek optimal disposal and/or acquisition opportunities to unlock value for shareholders. As always, we will maintain a well-managed debt profile and seek to provide attractive returns to shareholders.
We are concerned about South Africa’s growth prospects, structural and policy issues and deteriorating infrastructure. These factors weigh down our revenue and operating profit and introduce additional pressures on our cash flow management and capex requirements. We are optimistic that growth will improve in 2025, provided the energy and water supply constraints are alleviated and steps are taken to resolve the crisis at our ports.
South Africa’s poor economic outlook for 2025 will put further pressure on consumers and the small business sector.
South Africa’s poor economic outlook for 2025 will put further pressure on consumers and the small business sector. In this environment, ensuring that our franchise partners continue to operate and remain profitable is our priority. In some cases, this means absorbing costs within the Supply Chain to offer our franchise partners competitive pricing.
Appreciation
In August 2023, I assumed the role of Group Financial Director at Famous Brands having served as Group Financial Director-designate since January 2023. I am grateful for the opportunity and trust that the Board has placed in me with this appointment. I am excited about the growth opportunities offered by this role as I build on the strong foundation from my predecessor, Deon Fredericks. The time I spent with him as mentor and leader in the organisation has truly given me a pathway to approach my new role with courage and confidence. I am grateful for the guidance and positive working relationship I enjoyed with Deon during my transition period. I appreciate the invaluable support and inclusiveness from Darren Hele, fellow Executive Committee members and Finance colleagues across the Group. I thank Chris Boulle, our outgoing Chairman of the Audit and Risk Committee, for the support and guidance and I look forward to working with our incoming Chairman, Busi Mathe. Lastly, I thank our Board members, shareholders, funders, and auditors for our constructive engagements.
Nelisiwe Shiluvana
Group Financial Director
21 June 2024