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Summarised Results

FAMOUS BRANDS’ CORE BUSINESS DELIVERS STRONG RESULTS DESPITE UNDERPERFORMANCE OF GBK UK 
  • SA business performed well across the value chain: Brands, Logistics and Manufacturing
  • Positive local currency growth achieved in the AME region
  • Underperformance by Gourmet Burger Kitchen (GBK) business 
Johannesburg; Thursday, 24 May 2018:  Famous Brands is Africa’s largest branded food services franchisor.  The Group’s vertically integrated business model comprises a portfolio of 25 restaurant brands, represented by 2 853 restaurants across South Africa, the rest of Africa, the Middle East and the United Kingdom (UK).  The Brands division is underpinned by substantial Logistics and Manufacturing operations. OPERATING ENVIRONMENT Darren Hele, Famous Brands Chief Executive Officer, says, “Challenging trading conditions persisted in the year under review.  Common to all our markets, the industry featured a highly competitive landscape, limited discretionary spend and subdued consumer sentiment.  Consistent with this environment, consumers’ scrutiny of value intensified, resulting in aggressive pricing pressure among competitors and further margin squeeze.  In general, muted like-for-like sales growth was reported by the industry across our trading territories.”  GROUP PERFORMANCE:  After several consecutive years of intense acquisition activity, management’s deliberate strategic focus during the year was on entrenching sustainable organic growth through growing capability and capacity across core operations, namely the Brands, Logistics and Manufacturing operations. Hele comments, “We made good progress in tightening execution of our vision to be the leading innovative branded franchised and food services business in South Africa and selected international markets by 2020:  we successfully implemented opportunities to build scale across our Brands and Manufacturing divisions; leveraged synergies to contain costs across the operations; pursued constant innovation and improvement to deliver unique customer experiences; up-weighted our human resources capability and fortified the depth of leadership to achieve our growth ambitions.” South Africa:  “Despite the testing trading conditions, our South African operations performed well across the value chain,” notes Hele.  “The solid results delivered by our mainstream Leading brands portfolio underpinned a pleasing performance in our Logistics and Manufacturing businesses, which reported improved efficiencies and strong volume growth respectively.”  United Kingdom:  Hele says, “The UK food services sector continued to face difficulties, with businesses subjected to notably higher property rates and increased labour and food costs.  Despite this, Wimpy reported satisfactory results.  While the GBK operation made some progress in adapting to the challenges experienced in that economy and industry, and notwithstanding operational improvements reported in the period, impairments recognised in GBK considerably reduced the carrying value of the business.”  RESULTS:  Revenue for the period increased by 23% to R7.0 billion (2017:  R5.7 billion), while operating profit before non-operational items declined by 5% to R890 million (2017:  R938 million). The Group’s consolidated results for the year are weaker than the prior comparable period, negatively affected by: an impairment of intangible assets at Group level of R304 million; an impairment of property, plant and equipment of GBP4.2 million (R69 million) at GBK; and a provision for property related expenses of GBP2.0 million (R33 million) at GBK. Basic earnings per share decreased 95% to 22 cents (2017:  414 cents per share), while basic headline earnings per share declined 8% to 393 cents per share (2017:  428 cents per share). Cash generated from operations before working capital changes increased to R1.14 billion (2017:  R932 million).  Cash and cash equivalents totalled R717 million (2017:  R405 million). The net debt/equity ratio was 126% (2017:  165%).  Return on equity declined to 25% (2017:  28%).  Net asset value per share rose 10% to 1 632 cents (2017: 1 487 cents per share).  In light of the Group’s higher gearing and following a capital structure review to ensure appropriate levels of debt and prudent capital allocation practices, the Board has resolved that no dividend will be declared for the review period.   OPERATIONAL REVIEWS  BRANDS:  This portfolio is strategically positioned to appeal to a wide range of consumers across the income and demographic spectrum and across meal preferences and value propositions. The division reported revenue of R851 million (2017:  R781 million), an improvement of 9%.  Operating profit increased 1% to R431 million (2017:  R427 million). System-wide sales (which include new restaurants) rose 8.1% (2017:  11.5%). Hele comments, “Disappointingly, the weak economic environment in all our trading markets dictated against a robust expansion programme.  We opened a nett of 182 restaurants during the period (2017:  192) and revamped 248 sites (2017:  231).”  Leading (mainstream) brands portfolio:  Hele notes, “Solid results were delivered by our Leading brands portfolio (Steers, Debonairs Pizza, Wimpy, Mugg & Bean, Fishaways, Milky Lane, Fego Caffé and Wakaberry).  During the period, intense focus was directed at upscaling our delivery offering both through in-house capability and third-party delivery service providers, and all of our brands enjoyed notably improved levels of participation.  Significant resources were also committed to enhancing our capability in the digital and social media sphere, with the investment recording good returns.” Signature (niche) brands portfolio:  “Our Signature brands portfolio underperformed our expectations.  We continued to repair and rationalise certain of the brands and exited others that despite remedial efforts, offer no potential for growth under our stewardship (Giramundo, The Bread Basket, Juicy Lucy, Brewers Guild and McGinty’s),” Hele says.   Rest of Africa and AME:  “We pursued our deep and narrow strategy in this region, continuing to invest in and extend our presence in those markets with proven sustainable potential and exiting those which have consistently underperformed over a lengthy period,” notes Hele. Revenue grew 1% to R253 million (2017:  R249 million), while operating profit decreased by 10% to R45 million (2017:  R50 million).  System-wide sales grew by 10.0% (2017:  8.3%) and the region contributed 9.3% (2017:  9.3%) to the Group’s total system-wide Brands’ division sales.   Twenty one restaurants were opened and nine revamped during the period, substantially behind target and largely a function of the sluggish regional economy and limited access to capital and foreign exchange for prospective franchisees. The Group is represented in 15 countries in the region.  United Kingdom Wimpy UK:  Wimpy recorded an 8.6% increase in revenue Sterling despite closing a nett of three restaurants during the period.  One restaurant was opened, bringing the network to 78 restaurants.  GBK reported an operating loss before non-operational items of GBP3.6 million (2017:  operating profit of GBP2.1 million) for the period.  System-wide sales in the UK (excluding Ireland) were 4.9% higher, but after consistently outperforming the market since 2011, GBK’s like-for-like sales (Sterling) decreased by 6.8% compared to the previous year. During the year 10 restaurants were opened in the UK and two revamped in Ireland.  The total network comprises 106 restaurants. The prevailing adverse economic and socio-political environment in the UK is widely acknowledged, as is the downturn in the Fast Casual dining category. Hele comments, “We recognise that fundamental operational improvements need to be made to return the business to profitability.  Remedial measures implemented during the reporting period are expected to deliver improvements in the business, and with new management and intensified oversight in place we are satisfied that we can reverse recent declines over the medium term.”   SUPPLY CHAIN:  The Group’s integrated strategic Supply Chain division comprises its Logistics and Manufacturing operations. Revenue grew 9% to R4.3 billion (2017:  R4.0 billion), while operating profit increased 12% to R509 million (2017:  R455 million).  The operating profit margin improved to 11.8% (2017:  11.4%). LOOKING FORWARD:  “Our strategic intent is clearly defined”, says Hele, “to grow capability, capacity and scale across branded franchised, manufacturing and food services spaces.  To achieve this, we will apply an uncompromising filter to unclutter the business and advance targeted growth.”  BRANDS:  A further 211 new restaurants and 306 revamps are planned for the current financial year.  South Africa: “Growth will be driven by our Leading brands.  In line with our strategy to allocate investment in proportion to the anticipated return, we will commit further resources to entrenching our leadership position in the categories we trade in through supporting sustained ground-breaking campaigns, expanding our home delivery offering, and enhancing our digital and social media presence.  We will continue to monitor our site portfolio to ensure our footprint is optimally aligned with our market,” comments Hele. AME:  Hele notes, “Our focus will remain on growing the footprint and contribution of our four leading brands in the region (Debonairs Pizza, Steers, Wimpy and Mugg & Bean). Priority initiatives will include trialling a delivery capability, strengthening the marketing function and aligning social media platforms with our SA brands.  The Mr Bigg’s operation will remain the subject of ongoing rehabilitation.”  UK:  “We are optimistic that improvements will be derived from re-engaging with our customers and our staff, re-establishing GBK’s gold standard, and streamlining and investing in core operations,” says Hele, “In the year ahead our focus will be on those key initiatives which will ensure optimal allocation of our resources and deliver the best return on investment.” LOGISTICS AND MANUFACTURING:  “We have commenced developing and will implement a logistics upgrade programme to address short, medium and long-term logistics capacity needs, with immediate focus on the Western Cape and Free State.  We will also invest further in our meat, cheese and coffee plants, aimed at improving efficiencies and enhancing capacity. Following a successful pilot trial, we will be rolling out a standardised system and approach to managing all facilities, which will leverage additional efficiencies,” comments Hele. PROSPECTS:  Trading conditions are expected to remain challenging.  Intense competition will remain a key feature, while sustained demand from consumers for value will continue to squeeze margins. Hele observes, “A degree of optimism is evident in South Africa following recent leadership changes in government, the strengthening of the local currency, the decline in interest rates and stabilisation of our credit ratings status.  However, consumers’ discretionary spend will remain constrained with the recent VAT hike, and as low wage increases, personal indebtedness and high levels of unemployment persist.” He adds, “In the UK market, operational improvements introduced in the GBK business are expected to have a positive impact on performance, although we are mindful that the headwinds facing that economy and category specifically will remain challenging. We recognise that GBK’s contribution to profitability may take longer than initially anticipated, but we remain optimistic that our long-term investment strategy was sound and that the operation will add value to the Group in time.” Hele concludes, “We are resolute in our growth strategy to focus on our three key pillars namely, Brands, Logistics and Manufacturing.  Our resilient business model, high performance culture and steadfast focus on the fundamentals will continue to serve us well.”