Bid Corporation Limited (BID) Earnings Call Transcript & Summary

Okay. We're ready to start.

Yes. Thanks. Morning, Bernard.

Morning, David. Do you want to do the intro?

Yes. Good morning. Welcome to our first quarter capital market update. I'm not sure -- are we doing questions? Are they going to come through...

Yes. [Operator Instructions]

Okay. Thanks, Ash. I'll hand over to you, Bernard.

Okay. Thanks, David. Thanks, everybody. We're not going to make this too long and in-depth. We did release the trading update to the market not long ago, which I think is fairly self-explanatory and goes into a lot of detail. Since we last spoke at the end of August, quite a lot has changed. And I guess by the time we talk in February, quite a lot will change. So some jurisdictions have got better. Some jurisdictions have got worse. Some jurisdictions have got better than worse. Some jurisdictions have got worse than better. And I guess we just need to brace ourselves for this continual roller-coaster for the next while -- hopefully, it's only months, as this pandemic unfurls. We make no call whatsoever as to when it's going to end or when three might be a vaccine or what the conclusion to it will be. All we can talk about, once again, is what we see in our business. And once again, I can only talk with a huge amount of optimism as to the rebound in our business as soon as we see conditions improve -- and confidence. So during the first few months, certainly in July, we saw volumes rebound very, very quickly, particularly in the Northern Hemisphere, where Europe and the U.K. enjoyed a relatively COVID-free type of summer. And we were very, very buoyed by the quantum and the speed of the uptick that we saw in our volumes across almost every geography in Europe and the U.K. Obviously, other markets have different trajectories as to where they are in the pandemic. But from an overall point of view, we certainly are very, very confident about the future. I think we're far more comfortable about where our business is and where our industry is than maybe we were 3 months ago and certainly where we were 6 months ago, yes. There was a lot of talk about the whole hospitality industry, the eating out at home industry was going to be radically changed. It was going to be fundamentally different and that -- a lot of people were writing our industry off and our customer base off. And I think that's proven to be wrong. Of course, there are changes. Of course, we had to adapt. Our customers have had to adapt. Their customers have had to adapt. And that will be a continually evolving scenario. But what we certainly have seen is that the first opportunity available, once people have a little bit of confidence, once they feel safe that they're operating in a safe environment, they'd go out and enjoy some eating out or related activity that we're a direct beneficiary of. So we've certainly seen it in every single geography. I can't say there's one geography where we haven't seen that and we haven't seen a very positive trend. Now obviously, those geographies that go back into lockdown struggle very quickly. Very quickly, the tap is turned off and the pubs are emptied out and the restaurants are emptied out until the tap is turned on again. And it is almost that analogy. You see on TV the last night out. Before a curfew kicks in or a lockdown, the restaurants and the pubs are packed to the rafters. The first day after, they're packed to their capacity that they'll allow them to be if it's 20% or 50% or whatever it might be. So there's certainly no great resistance to the offering of what our -- of the industry that our customers are in. There are certain parts, certain segments of the industry that are absolutely decimated. The cruise ship industry is absolutely decimated. Volumes are 0. The airline industry is basically on its knees. Anything to do with an airport or the airline industry is really struggling. Workplace catering in large workplaces, in office blocks, in CBD top office blocks is absolutely devastated. Sporting events, to a large degree, are nonexistent with crowds. There are around the world that are starting to allow crowds back again and that's a positive sign, but generally, that's been decimated. But notwithstanding those areas that are operating at close to 0, we've seen a remarkable bounce back and an over-bounce back in the other segments of the market. What we've also really been surprised at is with borders closed and people discouraged from traveling or not being allowed to travel, they're spending their money domestically. And I don't know how this works, but in almost every single geography, that local geography has been a net beneficiary. I'm not sure I can explain it, but people aren't making these overseas trips. They're spending their money locally. We're absolutely seeing the benefit of that -- or have seen the benefit of that across many, many geographies. And the impact in our business is that we performed much, much stronger in the non-metropolitan, in the non-large city CBDs than in the large CBDs. And fortunately, we've got a very, very comprehensive footprint in every country we operate, where we aren't necessarily CBD-centric but we have a national presence. And that served us great because it -- I don't think that there's any single country we can look at where we can say there's been a huge amount of growth in the capital cities. They've done it more tough than the outlying areas, the tourist destinations, the resorts, the further-flung locations. And yes, that's -- I guess that balance in the market and that diversification has worked well for us. David will talk a little bit further at some stage about the financial -- our financial position, which is exceptionally strong. We've been highly cash-generative. Our working capital is in a fantastic position and not because our business is smaller than it was. Obviously, that's a factor. But we've absolutely seen our -- an improvement in our working capital management manifested in whatever metric you want to measure it in, but there's been a wonderful improvement in that. And that's also got something to do with the change in customer mix that as you move away from some of these customers who are operating at 0, generally, they are larger customers who generally are going to operate at the lower margin end of the spectrum and who generally are going to take a longer time to pay you. So I think just by default of us being focused on the correct type of customer, we've seen a change or shift, a very positive shift in our working capital structure, which will change over time as those types of customers gain traction again, and that will happen. But at the moment, to ride through this crisis, the shift has certainly helped us in terms of working capital movements, cash generation. Our CapEx program has been curtailed. We haven't stopped because we're very optimistic about the future. We just haven't taken any big decisions. And we're also harvesting some asset sales which aren't COVID-related and they're not knee-jerk reactions. They're absolutely long-term strategic decisions in terms of positioning our property portfolio and exiting those that are approaching end of life. And it's just part of our long-term asset management plan. If we just run through the geographies very, very quickly just to give you a bit of color as to where they are at the moment, I think what's happened in the first quarter is now absolutely irrelevant. All we can talk about is where they are now. And I suppose we do need to make reference to what we saw in the first quarter, but that's certainly no indication of what's going to happen going forward. If we start in -- let's start in Australasia. Between Australia and New Zealand, they're basically tracking at 100% of revenues now compared to last year. Victoria in Australia, which is the second largest province -- state, was in lockdown for 4 months, and that came back online about 3 weeks ago. They're still only operating at about 30%, 40%, 50% capacity. But notwithstanding that, we've seen both Australia and New Zealand operating at 100%. Sporting stadiums are starting to fill up again. Tomorrow night, there's a rugby league game where I think they're going to have a world record crowd in the COVID era, I think, at 52,000 people. So it does show you that life does carry on. People, yes, go back to their old habits and kind of sporting events, et cetera. So in the Australia, New Zealand business, we're running almost at 100%. Some weeks, it's at 100%. Some weeks, it's slightly below. But generally, we're tracking where we were a year ago. And things are looking relatively stable, relatively good. If we move on to emerging markets, that's obviously a combination of a lot of different countries with very different dynamics. If we start off in China, we've seen continual growth in China from about April onwards. They have had some scares when Beijing went into lockdown. Qingdao went into lockdown a few weeks ago, but they're relatively small, short, sharp and highly effective. And we've seen consumption really taking off in China, and our sales are strong. Through the rest of Asia, we're seeing a return back to normality and was probably running at between 80% and 90% through Hong Kong, Singapore, Malaysia, Vietnam. But they're all subject to rolling lockdowns and different changes. Just recently in Hong Kong, I think they limited the number of people at a table in a restaurant from 6 down to 4 just as a precaution, which obviously has an impact on demand. But people are learning to live with that. The one market that hasn't recovered is Macau, which is absolutely tourist-dependent and remains exceptionally depressed. So Asia seems to be well on the way. They seem to be coping with the second -- with their waves relatively okay. And so we're quite confident about the Asia component of the business. If we move to South America, very small in our portfolio, and they did it really, really tough for many, many months. Their lockdowns or their attempted lockdowns, the movement restrictions, the dining out restrictions went on for a very long time. But we're seeing a very, very strong resurgence in volumes through all 3 of the countries we operate in, in Brazil, Chile and Argentina. I think that they've had 6 months or more of it. I think their case numbers are relatively under control and aren't spiraling out of control, and they've learned to live with what they do. We've done a very good job, I believe, in South America of expanding our product categories that we're strong in and have used this as an opportunity to grow particularly in the protein category, meat, seafood, across Chile and Brazil. So we've seen sales numbers in those geographies greater than last year now not because of existing customers buying existing products but because of range diversification. So when the rest of the market comes back, I think we'll have a relatively good position. South Africa, we've seen a very good, steady improvement. Each week, we're seeing an improvement on sales numbers. Our Crown business continues to perform very well, but they've got a large exposure through the retail market with the products that they sell, and it's a very similar story with the Chipkins Bakery business. In the foodservice business, we are seeing consistent week-on-week gains as restrictions ease, as confidence returns. The majority of our customers are open again in some form, and we're not unhappy with the trend that we are seeing overall in the South African market. It's no pleasure cruise. It's not easy, but the teams are working very, very hard and are seeing that growth and certainly don't have a negative outlook as to where it's going. They're pretty buoyed by the fact that they are seeing this consistent improvement. If we move to Europe, we had a very good July, August. September wasn't bad either. I think they had a really good domestic summer, and they're probably paying the price for that now in terms of the lockdowns. The lockdowns came very quickly and very severely. And we've seen volumes that were in the weeks in July and August at 90% of previous year's levels back down to about 50% of previous year's levels. And quite honestly, I don't think that's going to change until spring. And hopefully, there's a vaccine or something else by that time. And yes, I just don't think it's going to improve. And we're adapting to that reality of it's going to be a long, dark, cold winter. We did indicate previously that we did see a risk with outdoor dining being the major driver of a lot of demand in the summer months and that when that disappeared, the demand would disappear. And I think it's a little bit more serious than that. But all our businesses, with the exception probably of Spain, are in reasonable shape. We'll write it out, no problem. We won't make a whole lot of money in Europe. But fortunately, the winter months aren't our dominant months in terms of financial performance. Europe is more of a seasonal business skewed towards the summery type of months. But Christmas is an important period, and we're not really sure that there will be a Christmas this year in terms of the impact on our business. The U.K. is a very similar story. The care pack business continued in July -- till the end of July. That was the home delivery for the vulnerable members of society. That government scheme ended at the end of July. August, we had the Eat Out to Help Out scheme -- government scheme, where they basically funded people's dining out experiences. I think it was on a Monday and Tuesday night to some degree, and that really had a very positive stimulus on sales. So August looked very good. September was okay until the resurgence in cases. And yes, we've seen a retreat. And once again, we think that, that will last until the spring. It would be nice if it doesn't, but it probably will. Now in all of these places that have gone into second wave or third wave or whatever it might be lockdowns, they aren't as severe as the first phase. In the U.K., education is still open. In most of the European countries, some form of education is still open. And it just isn't the same absolute hiding in the bomb shelter that they might have been in the first few months. And we're seeing that in our numbers. Although our sales are down, we aren't down anywhere as severely as we were in the first few weeks of April and probably moving into May. Where we sit at the moment across the group, almost all of our businesses, notwithstanding the fact of their very depressed volumes, are probably trading at an EBIT positive level and certainly at an EBITDA positive level. Probably the only exceptions to that might be Spain, Germany and the U.K. -- Fresh UK, which are fortunately smaller components, and we knew they were troubled businesses where we have taken remedial action. But fortunately -- unfortunately, the virus has hampered our ability to execute those and see them all through. But we have no doubt that what we've done has been correct, and we just need to be a little bit patient now and wait for volumes to return. So from an overall point of view, there's absolutely -- our teams are very motivated. Obviously, they're frustrated, particularly those in Europe and the U.K. who are going back into lockdown, and it's very difficult once you've tasted the sweet fruit out there to have it taken away from you. And they're all very passionate about what they do, and they are frustrated and angry and whatever else. But we're just trying our best to put that energy to the best use possible. And they are out there every day running their businesses, fighting, doing whatever can be done to minimize the disruption and, I guess most importantly, to maximize what the future looks like. We aren't making any short-term decisions. We're not cutting unnecessarily in a knee-jerk reaction. We understand that the next few months are going to be tough, but we also are very, very confident that following that, we're going to have some really good times. And if you cut too deeply now, you're going to have no capability to handle the upside when it comes to the other side. And we did see that in many geographies when we rolled out of the first wave that some of our competitors, big, small cut may be a little bit too deep and took a lot longer to get back up to speed than we did. And that's why we talk about the fact that we can locally think that we've gained market share. We've got no way of empirically proving that, but we do believe we've gained some market share. And that's because we were still exceptionally strong when things started turning and we could adapt very, very quickly and turn the taps back on and carry on trading at much higher levels. Now it's very difficult to go from 50% to 80% to 100% in a week, but that's what we've been called on to do in quite a few jurisdictions. That happens that quickly when it does open. What else do we want to talk about? I think it's very important just to understand we are managing this business for the long term. So it's not just about what we can cut in the short term. I want to emphasize that strongly. It's not about what CapEx we can cancel because we are going to need CapEx going forward. And obviously, we have curtailed it as much as possible. But let's be honest. We are still highly cash-generative at the moment. We're still profitable, and we need to maintain our market position and grow our market position in the markets that we operate. There are a lot of questions that we get continually asked about acquisitions. The assumption is made that well, times are tough and therefore, there must be a huge amount of acquisition opportunities. There isn't. That's a great theoretical position to take that there must be a whole lot of acquisition opportunity, but there really isn't because there's a lot of bank support out there, and there's a lot of people hanging on for dear life. There's government support. There's all types of schemes out there. So you don't really have this theoretical plethora of businesses that are in terrible economic condition who you can pick up for a song. It's just not the reality of what's happening out there in the market. We're very alert for opportunity. We continue to talk to lots of people in lots of different areas, particularly in market where we are. And we will do some acquisitions, but none of them are going to be for nothing. And at this point in time, it just isn't the amount of carnage out there that's being written about generally in the financial press. It might happen in months to come or years to come when the longer-term consequences of health, but certainly, at this point in time, there's certainly no huge list of businesses in desperate financial -- in a desperate financial situation. I think I'm going to hand over to David just to talk you through some of the financial numbers and then open it up to questions because that's probably the best way to handle this.

Thanks, Bernard. I think you've highlighted a whole lot of the financial stuff already. I think the -- particularly the cash flow has been excellent in the quarter, I think bearing in mind the working capital was constricted as we went into June. So you're working off a June balance. But notwithstanding that, it's been very tightly managed in the quarter and has been a big driver of cash flow as we've gone forward, particularly when you compare it to what has happened normally in prior years. As I said, free cash flow inflow of about ZAR 1.2 billion. CapEx is in line with depreciation, as you mentioned. And we did have, I guess, the one-off benefit of the proceeds on the sale and leaseback transaction that we did. I think really just to -- we talked about the cash flow evolution as the group has gone into this crisis. And we've set it out. It's been very well managed. Our debt levels are -- fluctuate at the moment somewhere between GBP 175 million and GBP 185 million. That obviously changes on a day-to-day basis depending on the rand. But I think it's -- in context, it's GBP 200 million better than we were a year ago. So once again, just reiterating the cash flow generation and the strength of the balance sheet. Liquidity, we've got -- it hasn't really changed much in the last quarter from where we were at year-end, so still ample liquidity available to the group. And we don't see that as an issue going forward. Notwithstanding that, as Bernard said, the Northern Hemisphere is going into a much tougher period for the next few months. And really, just to finish off saying, debt covenants from our projections and where we are at the moment, there should be no issues from that perspective for the group. So I don't really want to reiterate. I think it's all set out on the announcement. So happy to take -- hand back to you or take questions, Bernard, as you said.

I think -- let's take questions, and then we can wrap up after that. So Ashley, maybe you want to give us the questions that you do have.

So a question from Rowan Goeller and from [ Erina Schulemberg ] is around food inflation across the group and the different markets. That's the first part of the question. The second part, where does the group have greater operating leverage to volume or to price? And the third part, what innovative ways have you used to help your customers deal with the crisis?

Okay. So the first question is food inflation. Once again, we're across, I mentioned, in many geographies. And there's a slightly different answer to most of them, but the general theme is there is no food inflation. Obviously, some markets have a little bit. South Africa, I believe, it's running at about 5%, which is most probably in real terms nothing. Around the rest of the world, it's really trading at almost nothing. Don't ask me why. I can't explain it. I haven't been able to explain it for most probably the last 10 years. But no, we're not seeing any food inflation. And maybe that's because demand overall is lower in the foodservice market. Therefore, you've got more supply. Not necessarily everything can make its way into the retail market, and maybe that's kept, yes, prices relatively in check. We're not seeing deflation either. So we're seeing a great deal of stability generally across pricing. I did see somebody ask something at some point in time about supply chain difficulties and whether that was going to add to inflation. We actually don't know is the answer because there's a fair amount of dislocation and disruption in global shipping at the moment. And I'm sure you guys might have a better handle on it than me as to why that's happening. There's a great shortage of containers. There's a huge shortage of reefers, of refrigerated containers. They're in the wrong place. And it's all just a little bit outside that. The price of shipping a container around the world has gone up quite a bit. Fortunately, it's a small part of the price of the product where you're talking about food generally because 80% or -- I think it's about 80% of what we do. We source locally across the group. So the U.K. sources a big chunk of what they do very locally. Australia sources a big chunk of what it does out of Australia. So very few markets are totally import-dependent. You're talking about the likes of Hong Kong, Singapore, the Middle East maybe. But as for the rest of them, there's a high degree of self-sufficiency. But there is this issue of dislocation in global shipping. At market worse? I really don't know. So far, we've managed our way around it, as I'm sure most people have. But they're talking on a global basis. So there aren't going to be enough toys around the place -- in the right place for kids for Christmas presents. Now no, that doesn't impact us. But that just explains that there is a problem somewhere that containers aren't getting to where containers need to get to for whatever reason. The second question was operating leverage and whether it's cost or whether it's price. I don't really understand what the question means because obviously, they're both drivers and they both have an impact. Yes, it's pretty simple the way our metric works. You got sales. You've got a gross margin of about 23%, I think it is. You've got a cost of doing business of about 18% or 19%, and you've got an operating margin of about 5% out of that, give or take. And in your cost base, the largest cost is payroll, which accounts for about 65%. I think it is at the cost base. And that's not variable. Some of your payroll cost is variable. But some -- a fair chunk of your payroll cost isn't variable. And when you're selling 90%, you're going to send out one truck. You're not going to send out 90% of a truck. You just aren't going to fill it to its capacity. And you still got to employ the amount of warehouse people that you had before. They just maybe aren't going to be operating as efficiently as they have. So I think, as David talked about it, there's no linear -- it's not a linear trajectory between revenue and cost. And obviously, we have brought our cost back where we can. But there's just no ways you can cut your costs to counteract the shortfall in the revenue -- in the top line revenue. So I think we've done a relatively good job of maintaining margins. Our EBITDA margin for the quarter is only 0.5% -- I think it's 0.5% less year-on-year. But obviously, the quantum is less because your turnover is less. And I know we don't bank percentages, but it's still very pleasing to see that we could deliver a 5.7% EBITDA margin in a COVID world. The third question was a long time ago, and I have no clue what it was.

The innovative ways that we've used to help customers deal with the crisis.

Yes. Look, I think this innovation word is probably overused. There are a lot of words that are now overused, like pivoting and lockdown and a few others. Our business innovates the whole time. Our customers innovate the whole time. And we just have to be flexible enough and fluid enough to adapt to that. So at the end of the day, if we actually have to call a spade a spade and look at the countries that have come back 100%, there actually is no major change, the customers or the customers buying the products they bought before in the manner that they bought before, selling them to the same customers they sold before in the same manner they sold them before. And yes, they might have to swipe a QR code at the entrance to the restaurant. And yes, we might have to deliver the product and just infect it on the way. But fundamentally, not a whole lot has changed. So that's innovation. There's no great catch line we can give you that says we've got this innovation that's going to be a game changer. Innovation is a constant -- it's a constant evolution in what you do. And that's -- it's part of the DNA of what we do all the time. So we're constantly making these small changes and innovating around the edges to improve what we do. But can I tell you something that's absolutely revolutionary, it's going to blow your socks off and change your perception? Absolutely not. I think to us, the most comforting thing is that that's business as usual. As business comes back, it's business as usual, and I think that's the most positive message that we have to give. And that's the most positive experience we've seen, okay? Next?

Okay. We have 2 questions from [ James Towman ]. The first is are any of the acquisition opportunity sizable? Or are they all small add-ons at this stage? And the second question was all the cash flow in the quarter from the sale and leaseback in working capital? Or was there some underlying cash flow?

Okay. I'll answer the first question. David can answer the second question. Not that I don't know the answer, but I'll let David answer it much more eloquently than I could. So the first question was on acquisitions. There's nothing that's large out there. And quite honestly, I don't think we'd consider anything too large at the moment. It's a very risky environment. You've got no idea how businesses have actually coped with COVID. Where we have looked at any acquisitions, there's so many adjustments that vendors are trying to put in of COVID in, COVID out, revenue would have been this, revenue should have been that, costs could have been this, government assistance was that. And in a small business -- a small acquisition, you can live with that. You can live with the risk. I think it's magnified a whole lot of times if it's a large acquisition. But notwithstanding that, no large acquisitions have come to the market and we aren't keeping anything large. David, do you want to talk about the cash flow?

I mean the assumption was a little bit in the quarter. So the rest of it really -- I guess you saw -- you can see the EBITDA margin. So we absolutely generated EBITDA cash flow from an operational perspective. So yes, the sale and leaseback did contribute, but the reality is what the operational cash flow offset a little bit of working capital absorption, which is much better than what we did in the comparative period and normal for this time of the year. So yes, some of it helped but it certainly wasn't all because of the sale.

Okay. We have 2 questions from Paul Steegers. Can you elaborate on provisions for bad debts? Do you see these rising materially during the second lockdown in Europe? And can you quantify these provisions? And the second part, can you highlight the nondiscretionary revenue percentage in your different regions?

The first question on the provisions is we've done nothing with provisioning in the first quarter. And we don't see a requirement that there will need to be an increase in provisioning. I'll say that now in November -- and obviously, we'll have to have a look in January, February as to see where Europe is, but we certainly aren't seeing any huge amount of stress in the customers' abilities generally to pay their bills. Now there's no doubt our bad debt experience is going to be higher than previous years and maybe -- I don't know. Maybe it will be double of what it was previous years. But if we put that in context, I think our historical bad debt write-off -- Charlie, correct me if I'm wrong, was less than 0.01% of revenue. So even if you double that, it's 0.02%. It's certainly not going to shift the needle by any huge amount if it's a one-off. So we don't see a requirement at this point in time to increase our provisioning. And at some point in time, obviously, we have to assess the provisioning that we have there, but we believe it's relatively comfortable and more than adequate. Second question was -- I can't remember my name most days. Sorry. Give me a clue.

Yes, nondiscretionary revenue percentage.

I wouldn't have a clue because I'm not sure what nondiscretionary means in reality. You'd put something like health care is nondiscretionary, but there's actually quite a large discretionary element to health care. So elective surgery, by and large, has been canceled. So in the Northern Hemisphere, you've got hospitals full of COVID patients now who might have different eating requirements, catering requirements. They might have closed down operating theaters. Wards are operating at different types of levels. So even in the health care sector, we've seen a decline in revenue during lockdowns. Certainly, in aged care and nursing homes, we've seen a decline in revenue. We've spoken about that before, where people are quarantined to their rooms. There aren't any functions. There's no family visiting. There's no family meals. There's no celebrations. There's none of that stuff. So even those nondiscretionary items have dropped. Education is the same. We'd put it in the nondiscretionary bucket, but it's moving around all over the place in different geographies. Schools are open. Schools are closed. Universities are open. Universities are back online. So I just don't know that I can -- I could give you a serious answer to that. We have no guaranteed revenue in our base. Some of it, I suppose, is just a little bit less volatile and has a much stronger resilience than other components of it.

Bernard, if I can just add on the provisioning. I mean we've continued through the quarter and beyond, obviously, to continue to provision as we normally do, so generally as a percentage of revenue which obviously we provision on a monthly basis going forward. So we haven't stopped provisioning for -- it's continued as normal as we normally do it.

Okay. A question from Vikhyat Sharma. How is customer mix looking? Does the skew to a national account impact the margin negatively? And from [ Taylor Ginsburg ], is South America material market for you? Could you see this market growing substantially?