Notwithstanding subdued trading conditions, Famous Brands has delivered commendable results for the year ended 29 February 2012, achieved through “intensified focus and improvements in the front and back ends of the business,” says CEO, Kevin Hedderwick.
Hedderwick notes, “The period under review remained challenging for retailers. Pessimistic consumer sentiment prevailed in an environment featuring continued high levels of unemployment and indebtedness, limited real wage increases, and consumer spend pressured by rising power and fuel costs and widespread food inflation.”
He adds that the food services sector experienced a range of discernible new trends, most apparent of which was unprecedented fragmentation, reflected by aggressive price cutting and promotional activities; divergence by established brands from traditional core menu offerings; entry into unrelated categories; and portion size re-engineering. Additional pressure was exerted by traditional retailers attempting to gain market share from conventional convenience-centred food services operators.
“Significantly,” comments Hedderwick, “whilst the number of consumers increased across the food services category, the frequency of visits declined by 10% to their lowest level in twelve years, and in line with 2005.”
Hedderwick says, “Despite this unfavourable environment, I’m delighted to report on a performance that delivered against our stated strategies and continued to unlock value for the Group’s shareholders.”
FINANCIAL RESULTS: “Following a phase of intense acquisitive growth in the past two years, the Group undertook to focus on consolidating and integrating its new businesses, a programme which has been concluded and is reflected in the improvements in revenue and profitability of the Franchising and Supply Chain divisions,” Hedderwick explains.
Group revenue and operating profit grew by 15% to R2.16 billion (2011: R1.88 billion) and R413 million (2011: R358 million) respectively. The operating margin remained steady at the record level of 19.1% achieved in the prior comparative period. Headline earnings per share and earnings per share both increased by 15% to 278 cents per share.
Cash generated from operations before changes in working capital rose by 15% to R452 million (2011: R392 million). After changes in working capital, cash generated from operations amounted to a healthy R399 million (2011: R397 million). Capital expenditure of R88 million was incurred and comprised mainly R31 million for the acquisition of the Milky Lane and Juicy trademarks on 1 March 2011 as well as Supply Chain expansion activities. These included R18 million for the chicken fillet plant in the Manufacturing Division and R6 million for a new Logistics depot in Nelspruit which commenced deliveries in April 2012.
After payment of R159 million (2011: R128 million) in dividends, cash flows were sufficient to pay down net borrowings by R19 million (2011: R58 million). The low level of borrowings, net of cash and bank balances, of R82 million (2011: R101 million) represents a mere 10% of equity, (2011: 14%), affording ample scope to grow the business organically or by acquisition.
A final dividend of 120 cents (2011: 85 cents) per ordinary share, which recognises the new Dividends Tax, has been declared. This brings the total cash dividend to 200 cents per share for the 2012 financial year, (2011: 155 cents), an increase of 29%.
FRANCHISING DIVISION – LOCAL: The Local Franchising division, which comprises operations in South Africa and 15 African Countries, reported a satisfactory performance in an extremely competitive environment. In South Africa system-wide sales across the brand portfolio increased by 8%, while like-on-like sales grew 5%; the Group’s African market improved system-wide and like-on-like sales by 21% and 7% respectively. Combined revenue for the South African and African operations increased 14% to R440 million (2011: R386 million), whilst operating profit in this division rose 13% to R265 million (2011: 235 million). The operating profit margin was 60.2% compared with 60.9% in the prior year, slightly lower, effectively a function of investing in newly acquired and developing brands in advance of royalty collections.
Hedderwick says, “The Group surpassed its 2 000 restaurant milestone, opening a total of 146 new restaurants during the year (2011: 111), 113 of them in South Africa and the balance of 33 in Africa; the latter achievement is a reflection of Famous Brands’ success in gaining traction in the region. In addition, 99 restaurants were revamped (2011: 81), 92 of them in South Africa and the balance in Africa.”
He comments, “Once again the Group’s brands were acknowledged by loyal consumers via the annual consumer survey, Leisure Options, achieving a clean sweep of awards across all major categories in which our brands compete.”
FRANCHISING DIVISION – INTERNATIONAL: The results delivered by the International Franchise division, comprising Wimpy United Kingdom, are a reflection of the dire trading conditions experienced in that country. Revenue in Sterling declined 19%, and in Rand terms by 13% to R82 million (2011: R95 million). Operating profit decreased 30% to R8 million (2011: R11 million).
Hedderwick clarifies, “These results must be viewed in context. This division makes only a nominal contribution to Group revenue and operating profit, namely 3.8% and 1.8% respectively. The business is profitable and will rebound well when trading conditions improve in the UK’s currently stagnant economy.”
SUPPLY CHAIN: The Supply Chain division, comprising the Group’s Manufacturing and Logistics operations delivered another gratifying performance. Consolidated revenue grew by 17% whilst operating profit rose 21%. Increased volumes and tight management of costs ensured that the operating margin improved to 8.7% from 8.4%.
Hedderwick elaborates, “These results were achieved notwithstanding the Group’s deliberate strategy in the first half of the year to absorb margin pressure created by rampant beef price increases.”
- MANUFACTURING: This division increased revenue by 13% to R747 million (2011: R664 million). Operating profit rose 13% to R88 million (2011: R78 million), resulting in an unchanged margin of 11.7% (2011: 11.7%).
The following projects were concluded during the period and contributed to this business unit’s strong performance: full commissioning of a chicken fillet plant which commenced supplying product to the franchise network with effect from November 2011; and take-on of the soft serve component for Milky Lane.
- LOGISTICS: This division reported a 20% increase in revenue to R1.52 billion (2011: R1.26 billion). Operating profit rose 37% to R53 million (2011: R38 million), producing a record margin of 3.5% (2011: 3.1%).
“This stellar result was derived from attaining critical mass in line items handled, which increased by 43% during the period, and productivity improvements in the Owner Driver programme,” says Hedderwick.
PROSPECTS: Consumer disposable income will remain pressured by escalating electricity tariffs, fuel costs and general food inflation.
Hedderwick comments, “The bulk of consumers in payment arrears are middle-class earners, the traditional target market for food services operators. To entice them to resume previous levels of spending will demand intensified innovation, particularly should interest rates increase and economic uncertainty persist.”
“Despite the negative effect which these factors will have on the industry, the Group’s all-encompassing business model, exceptional personnel and best-in-class leisure brands position Famous Brands for continued growth,” he says.
Hedderwick concludes, “To achieve our audacious growth ambitions, the Group will undertake a range of initiatives in the period ahead aimed at unlocking further value for shareholders. This will include centralising our procurement function enabling Famous Brands to become an even lower cost producer; extending the Group’s presence in market segments where it currently has no representation, including identifying new joint venture partnerships; and continuing to explore opportunities to leverage the synergies afforded by Famous Brands’ supply chain.”