{"id":4773,"date":"2024-06-13T16:00:32","date_gmt":"2024-06-13T14:00:32","guid":{"rendered":"https:\/\/famousbrands.co.za\/iar2024\/?page_id=4773"},"modified":"2024-06-20T16:13:47","modified_gmt":"2024-06-20T14:13:47","slug":"group-financial-directors-report","status":"publish","type":"page","link":"https:\/\/famousbrands.co.za\/iar2024\/leadership-reports\/group-financial-directors-report\/","title":{"rendered":"Group Financial Director\u2019s\u00a0report"},"content":{"rendered":"

Nelisiwe Shiluvana <\/h2>\n

Group Financial Director <\/p>\n

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. <\/p>\n

According to Statistics South Africa, the local economy grew by a marginal 0.1% in the fourth quarter (October to\u00a0December 2023), bringing the annual growth rate for 2023 to 0.6%. The fourth quarter\u2019s real gross domestic product (GDP) was R1 158 billion. This is above the pre-COVID-19 reading of R1\u00a0150\u00a0billion but still below the\u00a0peak of R1\u00a0161 billion recorded in the third quarter of\u00a02022. The biggest constraint on economic growth is\u00a0load shedding with serious impacts on South Africa\u2019s corporate sectors growth and profitability. The restaurant industry is highly exposed to load shedding which impacts on both revenue and profitability. <\/p>\n

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 Caff\u00e9 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. <\/p>\n

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Financial performance snapshot<\/h2>\n
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*<\/sup><\/td>\nOperating profit for 2023, excluding the Gourmet Burger Kitchen (GBK) dividend of R75 million was R786 million.<\/em><\/strong><\/td>\n<\/tr>\n<\/table>\n
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This report should be read with the Summarised Consolidated Financial Statements<\/a> and the AFS available online at: https:\/\/famousbrands.co.za\/investor-centre\/<\/a><\/p>\n<\/div>\n

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Revenue <\/h2>\n

Despite a challenging operating environment, the Group continues to demonstrate positive momentum in revenue growth. Revenue grew by 8%\u00a0to\u00a0R8.0 billion (2023: R7.4 billion). This revenue can be attributed to solid\u00a0sales\u00a0throughout our restaurant network and inflationary increases. <\/p>\n

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.\t<\/p>\n<\/p><\/div>\n

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*<\/sup><\/td>\nManufacturing revenue after intercompany eliminations.<\/td>\n<\/tr>\n<\/table>\n

Read more about the performance of our four divisions in our operational review<\/a>.<\/em><\/p>\n<\/p><\/div>\n<\/div>\n

Operating profit <\/h3>\n

The Group\u2019s operating profit declined by 6% to R812 million (2023: R861\u00a0million). The 2024 operating profit is lower compared to 2023, predominantly due to the liquidation dividend of R75 million received in\u00a0August 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. <\/p>\n

Our operating profit was negatively impacted by severe load shedding, the\u00a0financial 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. <\/p>\n

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. <\/p>\n

The 2023\/2024 insurance renewal cycle was completed in April 2023 and was the toughest in our history. The Group\u2019s property damages and business interruption (PDBI) premium escalated at over 464% to R22 million (2023: R3.9 million). <\/p>\n

The Group\u2019s 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.<\/p>\n

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operating profit margins<\/h3>\n

Despite the inflationary conditions, the Group\u2019s margins held up well. The Group\u2019s overall operating profit margin declined to 10.1% (2023: 11.6% and 10.6% when the Gourmet Burger Kitchen liquidation dividend is removed). <\/p>\n

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\u2019s 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\u2019s margin improved to 11.4% (2023: -11.4%).<\/p>\n

Leading Brands\u2019 operating profit margin was 50.3% (2023: 51.0%), while Signature Brands\u2019 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. <\/p>\n

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.<\/p>\n<\/p><\/div>\n

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Headline earnings per share and earnings per share <\/h2>\n

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.<\/p>\n

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Financial position <\/h2>\n

The Group\u2019s 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\u2019s 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\u2019s covenants. Our return on capital employed was 31% (2023:\u00a035%).<\/p>\n<\/p><\/div>\n

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Gearing and debt structure <\/h3>\n

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\u2011risk core opportunities with a strong outlook for\u00a0long-term returns. <\/p>\n

While reducing our debt remains a priority, the current economic conditions and requirement for additional working capital and investment in our Midrand Campus\u00a0impacted these objectives.<\/p>\n

Our debt structure is in line with the Group\u2019s current requirements and strategy. We comply with all our debt covenants and have\u00a0access to adequate unutilised credit facilities. <\/p>\n<\/p><\/div>\n

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Brands and trademarks<\/h3>\n

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\u2019s value to ensure that our brands are reflected at the right\u00a0value. We\u00a0apply a robust valuation assessment with input from management and the Board. As at 29 February 2024, our\u00a0brand portfolio carrying value is R351\u00a0million. <\/p>\n

We reviewed the expected performance of the Signature Brands\u2019 portfolio against the constrained environment coupled with the conversion of the Fego Caff\u00e9s to Mugg & Bean restaurants and took the decision to further impair this portfolio by R13 million. <\/p>\n<\/p><\/div>\n

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Cash flows <\/h2>\n

Our cash flow forecasts indicate that the Group\u2019s 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.<\/p>\n<\/div>\n

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Cash flow movement in 2024<\/h4>\n
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*<\/sup><\/td>\nOpening and closing balance excludes restricted cash.<\/td>\n<\/tr>\n<\/table>\n
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Capital expenditure <\/h2>\n

We continued to make strategic investments across our markets, with capital expenditure (excluding IFRS 16) of R184\u00a0million (2023: R162 million). This included investing in Leading Brands and in a flagship PAUL restaurant at\u00a0the V&A Waterfront. <\/p>\n

We invested in our Manufacturing and Logistics infrastructure, including new, more efficient generators and solar installations (in line with\u00a0our sustainability investments), to increase our energy independence and\u00a0alleviate the impact of load shedding. We benefited from the government\u2019s tax incentive on the cost of renewable energy assets for businesses. This strengthened the investment case for renewable energy. <\/p>\n

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.<\/p>\n

Our investments outside of South Africa were mainly in technology to drive convenience, own delivery and consumer experience. <\/p>\n

The Group\u2019s free cash flow was R674 million (2023: R864 million).<\/p>\n

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Capital management<\/h2>\n
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The Group generated R1.1 billion (2023: R1 billion) in cash generated from operations and this mainly funded the following:<\/p>\n