Bid Corporation Limited (BID) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the Bidcorp conference call on the trading update that was released since last night. If we could just really set a few house rules. The purpose of the trading update is really to discuss the contents of what was released. So can we confine the subject to that, please? We are in a closed period, and we will remain so until we release our results. And the reason really, I guess, for today is to make sure that we can provide a good rationale and reasons for us having to delay our results and give you more color on the trading performance of the business. [Operator Instructions] So on that note, I'd like to hand over to Bernard. Bernard, over to you.

Thanks, David, and good morning, good afternoon, everybody. Apologies for the haircut, but I have been locked down in Sydney for the last 6 weeks and probably will be locked down for the next 6 weeks. So yes, I think we're not out of this COVID issue yet. But so be it, I think that's something we've got to get used to going forward. So I'd like to just talk about the trading statement and update that we gave to the market. I think there's some fantastic achievements in that, some amazing prospects and also 1 or 2 bits of bad news that we did feel the necessity to inform the market about, and we need to keep this all in perspective. So we've given you a guidance as to where we expect HEPS to come out for the year, which is above the prior year. And let's remember that the year-end of June '20 had 3.5 months of COVID impact in it, whereas this year has been a full 12-month COVID-impacted year. So I think for us to have an increase in profitability in a full COVID-impacted year is a credit to the amazing work that our teams around the world have put in. I don't want to spend too much time talking about the year that was because it's actually an impossibility. There were so many moving parts in every different geography of openings, of shutdowns, of good summers, of terrible winters, of reopenings or some geographies sailing through the year with very minimal impact. And all of that is what it is, and it all just results in the numbers at the end of the day. And the numbers are the numbers, which I think are a true testament to the fantastic work that has been put in by the teams. Because let's not make any mistake about it, our customers are amongst the hardest hit by this pandemic around the world. If you look at the hospitality industry, restaurants, hotels, travel, cruise ships, leisure, office catering, almost every single segment we're in has been impacted severely. And even by segments that weren't impacted -- that were apparently not impacted were impacted as well. Health care absolutely was impacted and continues to be, where you've got only COVID activities going on in many hospitals and none of the regular elective-type surgery and regular type of work. In aged care, of course, the business has continued, but as we said before, a lot of the discretion we spend in those segments has just gone. There weren't any Christmas parties. There weren't any Easter politics, whatever else it might be. So all of that has been scaled back significantly. So overall, we're absolutely impressed with the results that our teams around the world have put in. And all of them have a story, and all of them have a different story, and we look forward to go through that with you in detail in due course. I think the other absolutely amazing outcome of these results is our net debt. Our non-IFRS 16 debt, our true debt, has reduced from ZAR 5.6 billion at the end of June 2020 to ZAR 503 million at the end of June 2021. And to put that into perspective, our market cap is in somewhere at around ZAR 100 billion to ZAR 110 billion. So yes, to have net debt of almost nothing, I think, is a phenomenal achievement. And that's been driven by incredibly strong free cash flow generation and fantastic working capital management. In very difficult circumstances, our teams have done an awesome job of managing inventories and managing our debtors book that could have been very ugly, in fact, has been exceptionally well managed and looks very good. As we alluded to, and we've said previously, it was the -- been the intention of the Board to pay dividends when it's prudent and correct to do so. And I think it is fair to say that it's the intention of the Board to declare a dividend for the -- based on the full year's profits, in line with our previously declared cover of around about 2.5x. And obviously, with the low level of borrowings that we have, the almost insignificant amount of debt that we have on the balance sheet, obviously, that supports that. It's also fair to say, while we're just talking about cash, is we have continued to invest in CapEx during the year, and we will continue to do so. And we've always remained very confident and positive about our future prospects and about the recovery given when it was maybe a little bit out of step for other people. We were saying, we did think that there would be a strong recovery. And fortunately, we've been proven correct. So our CapEx doesn't just look 6 months in advance but looks 2, 3, 5 years down the track. So it's very important that we do carry on that investment trend, which we have done and will continue to do. I think more importantly than what happened in the year is what's happened most recently. And we've given you some sales data from March to month-to-date August as of last week. And you can see the strong progression in sales, and probably the more relevant yardstick to measure against is against 2019. These are in constant currency, these turnover percentages. And if you have a look at it at March, we ran at 72%, and we're currently running over 100% where we were in August 2019, which is totally non-COVID impacted. The 2020 numbers aren't overly meaningful because they were COVID impacted. But it is fair to say that July and August last year were our strongest months of the year in 2020 other than May and June in 2021. So we are comparing them against reasonably strong years in 2020, but you're comparing them against a very solid base in 2019. And so to track above where we were in 2019 in August of 2020, we think, is a fantastic achievement. And once again, that's a story of different parts. The Australia and New Zealand were the standout performance in 2020. And you can see that they've come off quite significantly in August, down to 95% of 2019. And that's basically because Australia -- half of Australia is in lockdown, has been since last June, various jurisdictions in and out. But basically, a big chunk of the country has been and will continue to be locked down for the next few months, which will obviously have an impact. And New Zealand is going to unfortunately add to that pain because New Zealand went into lockdown with what started as one case a few days ago, which has been extended, but it does seem to be unfortunately not looking all that great to my New Zealand colleagues around the line. I'm not hopeful that you all get out of your lockdown next Tuesday, but I sincerely hope that you could because the New Zealand business was tracking absolutely for [ a moment there]. We've got Europe tracking at 107% in 2019. That just talks for itself. In emerging markets at 105%, and that's notwithstanding the subdued performance out of South Africa, which we'll talk about in a while; and the U.K. running at 97%. And in the U.K., the reason that we are running a little bit behind 2019 is although it has opened, we are quite strong in some segments that just haven't recovered yet. And you're talking about conferences and travel-related issues, workplace, catering hasn't got back yet. So our core business is doing exceptionally well, but we're just not at 100% yet. And our guys there are very confident that by September, we'll absolutely be cycling above 100% where we were in 2019, which does play it very, very well. So where we sit at the moment is we've got the U.K. operating full steam ahead. Let's not worry about COVID. Europe is pretty much the same issue. Most restrictions are lifted. Obviously, there's still lots of travel restrictions and things are not that easy. But generally, it's back to where it was. And we're seeing absolute record weeks in many, many geographies. There's obviously a lot of pent-up demand. The emerging markets is always a mixed bag in that Asia, you've got some components that are in lockdown. So Singapore is gently emerging out of lockdown. Malaysia, [ Taipei ] in lockdown. Vietnam is in lockdown. China is in a state of, we believe, semi-lockdown, and that moves around a little bit. Hong Kong at the moment is relatively unrestricted. And in South America, there are restrictions, lots of -- parts of the economy aren't open, but notwithstanding that, we're seeing very, very solid growth. The Middle East is performing phenomenally well. And Turkey is performing phenomenally well. Unfortunately, the summer has been impacted by the fires. I think it's also fair to say that [indiscernible] hasn't been the best weather ever from a Northern Europe -- Northern Hemisphere point of view from Europe and U.K. So yes, the fact that we're getting the sales growth numbers are already phenomenal under all the circumstances. And then we can talk a little bit about what happened in South Africa in July. I know you guys are probably all perfectly aware of it. We had a major distribution center, it's probably our second or third largest distribution center in South Africa, looted on the day of the riots. The security footage of it was actually spine-tingling. It was chilling to watch. It was awful just seeing hundreds of people climbing up racks 13 meters up in the air, looting the place, causing damage, causing massive destruction. And quite honestly, that was the darkest day I believe I've had at the group in 50 years because you just didn't know where this thing was going to go. Fortunately, it calmed down very quickly. Fortunately, our facility wasn't burned down despite the looters' best efforts to burn it down. They did try a few times unsuccessfully, fortunately. Our sprinkler system prepared to that. But they did manage to steal -- yes, our warehouse -- they did manage to cause a huge amount of damage to offices and furniture. They did manage to destroy a whole lot of vehicles. So it really wasn't a great situation. As you can see, our asset losses are about ZAR 73 million, which we believe are all covered by SASRIA insurance. Obviously, there's a lot of profits claim which sits outside of that. And time will tell how that goes. We don't believe that the July looting incident will have a significant impact on our financial performance in the current year. That's a very unfortunate event. But I suppose the heart-warming part of it is where our back-end business [indiscernible]. Our guys moved heaven and earth, and the community came out to help them move heaven and earth. And with a great effort of humanity, they managed to restock the place, to fix what was broken, to improvise with what couldn't be fixed and replaced. They managed to scratch around for some trucks around the place. And they got back up again within a week for Crown and Chipkins, and within 2 weeks, for the food business, which is the most hard hit. We never let any customers down. We switched our distribution to [indiscernible], Pietermaritzburg, Johannesburg, into the affected areas, and we certainly never let our customers down, and we added a lot of costs to our business. But it was always a case of let's get through this and let's get our customers through this. Trading is subdued for in KZN and generally in South Africa. Well, I guess as time goes on, it will become more just a factor of the economic situation as opposed to the direct impact of the civil unrest. If we can then move to this fraud, which really is the cause of us delaying the release of our accounts. Towards the end of June, we uncovered a fraud in the Miumi division of our Angliss Greater China business. Our Angliss Greater China business operates a multichannel silo approach to the market that you've got Angliss that deals in the broad range of product. And then we've got specialist businesses that operate in their own silos. We've got Gourmet Partner, PastryGlobal, et cetera, that all have a focus. Miumi was a business that specialized in the global procurement and sale into Hong Kong and China of Japanese-style product, of which some was from Japan, but a lot of it was Japanese-style product that's used in Japanese cuisine. And Miumi sold into the Hong Kong market and also into the China market. In Hong Kong, it primarily sold through the HoReCa type of business, which is hotels and restaurants, et cetera. And in China, they were selling through the whole set. So it was big transactions to a few customers. What we uncovered was very elaborate fraud, which was perpetrated by a 10% shareholder -- a former 10% shareholder, some employees in the business colluding in the Miumi business as well as some third-party -- external third-party service providers. I don't want to go into detail of it because this is obviously all subject to legal proceedings, criminal proceedings, investigations, et cetera. Needless to say, it's a large fraud, unfortunately. It's one of those that when it does happen, it's painful, trust me. It doesn't -- there's no excuses that we can make for it. That's something that possibly should have got picked up a year or 2 earlier. That's great in hindsight. We're all exceptionally brilliant in hindsight. But we did pick it up. We have terminated the employment of the people involved. We have done a very speedy exit out of that China wholesaling business where the fraud was carrying on. We've done a whole lot of containment work in the last 6 weeks. We've appointed Ernst & Young to do a full forensic investigation. And we believe there will be recoveries in the future. We just don't care of what those recoveries will be. But there is no doubt that certain of the colluding parties, the third-party providers, et cetera, will be making restitution and as well, we believe that it is subject to an insurance plan. But obviously, all of these factors take a long time. It's important to stress that it relates to the Miumi silo of the Angliss Greater China business. We have unfortunately some rogue operators acting in collusion in a very sophisticated manner. This wasn't a simple hands and toe type of a project. It is a very sophisticated, elaborately planned scam that I guess as it got -- as it progressed over the years, then it's probably got a little bit cleverer and then more resourceful with how they hit us. And also, I make no -- I'm not trying to make excuses for it. We are just taking it on the chin, and we are doing a lot of soul-searching as to how such a thing could happen and where maybe some systems didn't work as well as they could and what needs to change going forward to ensure something of this magnitude doesn't happen again. Now I guess when you're running a global business, you're in 35 countries, you employ 26,000 people, the product that you're selling has a street value, we're selling chicken and prawns and pork and cheese and all of that, unfortunately, some people do get greedy. Unfortunately, there are dishonest people in our midst. And we just, unfortunately, have to be better at catching them. So we've taken the view of cleaning it up totally. We've taken the most conservative view. We've written off the inventory that we believe is impaired, which I think is in the region of HKD 102 million. And there's also some receivables that aren't going to be collectible, which we've impaired at HKD 253 million. The issue that there is fraud, this all goes back 6 years. And seeing that we only uncovered it 6 weeks ago, a whole lot of work is going into which year this relates to because it is a buildup over many years. And as you can imagine, dishonest people cover their tracks very well. So it's quite a complicated effort to backtrack and recreate what's happened over a 6-year period. But our best estimate is about HKD 60 million, ZAR 119 million relates to the current year. So our profits have taken a hit this year of ZAR 119 million. And about ZAR 95 million belongs to the 2020 year. So the profits in 2020 have potentially been overstated by the ZAR 95 million. Like I said, there's a heap of work that's going on. Ernst & Young are working furiously, interrogating computer records, recreating records. And obviously, we'll put this together as best we can to put it into the correct years. So there's a lot of work going on, and yes, I think it's fair to say that in everybody's best interest, our auditors, our own best interest, we thought let's give this a little bit of time just to make sure that we have put this into the correct pockets of previous years. We're pretty sure that that's the correct amount, but there still needs to be a little bit of work to make sure that it is. So that's the bad news. I think there's a whole lot more good news. We've got a fantastic business around the place. The actions of a few bad people shouldn't overshadow the fantastic performance of an amazing bunch of people who performed exceptionally well under very, very difficult circumstances. I mean for our business to -- and you can work it out from the numbers, hopefully, David won't shout at me, to generate an EBITDA margin over 5% in a COVID-impacted year is phenomenal. A lot of our global peers don't get those margins in their best years. They aspire to margins like that, and we achieved that in a COVID-impacted year. The future looks fantastic. We learned from our mistakes. Unfortunately, we make 1 or 2 along the way. And we've been as open and transparent as we can about the mistakes. But the business is in great shape. The balance sheet is in phenomenal shape, almost no debt. July trading was exceptionally positive with every single business turning a profit, including the 3 that were on the intensive care list, which are now in the -- I guess in general hospital wards, being Spain, Germany and the U.K. Fresh business, they absolutely are well on the path to recovery. So we see the future is very, very bright. We're very, very positive about the prospects of the business. Obviously, we're very upset about the negatives. We don't like to give bad news. But I think you guys have dealt with us for a long time. We're going to tell you the truth, we're going to tell you the way it is. [indiscernible] Unfortunately, there is a water [ tear gas ], so we've absolutely disclosed it. And we're moving on running the business positively, and we think we're in really good shape. So I think let me just see if David got anything he wants to add, and then I know Ashley's been sending a few questions, which I can -- while David is talking. I'll have a look.

Yes, Bernard, I really honestly don't have too much data. I think you've covered off all the aspects that we needed to talk about. I mean just to -- so at this point in time, the results will be released on the 29th of September. And yes, we'll notify you and the market, obviously, in terms of what goes around that a little closer to the time.

Okay. I have a question here from an anonymous attendee. Congratulations on net working capital management. You spoke about debtors in stock, but what about credit terms? Have these been extended? If your revenue run rate continues at current rates, would you expect the business to start growing cash? And that's a very good question. We actually haven't stretched our creditors or extended our credit terms any different to what they were before. So that's pretty much the improvement in working capital has predominantly come out of tighter inventory and tighter receivable management. And we could take credit for a little bit and maybe we should. But what we found on the receivable side, in reality, is our customers actually wanted to pay their debt. They actually don't want to sit with big obligations over their heads because they don't know -- I guess they don't have the confidence to know when the next bump in the road is going to be, when the next lockdown is going to come. So they actually don't want to get too much in debt too much. So we've actually seen our debtors days shorten quite nicely. And on inventory, we've absolutely been able to streamline our ranges in the period. Customers become way more amenable to our suggestion as to what the range should be. Our house brand penetration has absolutely grown as a result of it, which is a long-term positive and changing the behavior in the market. Our revenue growth rate, we're at 100% from where we were in 2019, and we haven't absorbed a whole lot of cash. So I guess if our revenue growth by another 20%, 30%, 40%, we've got a few issues. And yes, we will absorb some cash. But I'm not sure we are going to see that quantum of growth in the market. I think it's going to be percentage points above where we are now. I think the one thing I didn't mention, I just reminded myself, is actually one of the biggest challenges we face going forward in many, many markets is labor shortages. We just can't get enough labor to get the work out the door. I mean, I say we can't. We struggle. And we're talking about drivers, warehouse guys, et cetera. It's very, very difficult. In the U.K., it's exceptionally difficult. And as a result of that, we absolutely are going to see cost inflation on our cost base. But fortunately, I think we'll be able to pass that on in the revenue base as well because we've also -- our customers are facing a very similar problem, that they've got the exact same staffing pressures and cost pressures. So there's definitely some cost inflation coming down the path. There's also product inflation coming down the path. Fortunately, on average, the basket is only showing a 2% or 3% inflation metric across most geographies. And hopefully, it can stay there because that's very manageable and probably a positive tailwind in our business. So that's important to note. It's also important to note that many of our customers are restrained and their capacities are restrained, not necessarily by COVID restrictions but by the availability of stock. A lot of hotels are only operating 50% capacity because they can't get people to clean the rooms and service the restaurants. Our dining establishments, our clubs, pubs, et cetera, aren't operating at full capacity because they can't get enough people to work in them. So yes, those are the challenges we face. That was a very long-winded answer. Let me see what else we got. Okay, I'll work through them one at a time. In what jurisdiction will the legal aid actually take place through the fraud? Hong Kong. Primarily, Hong Kong is a very small component to China, but the primary action is in Hong Kong. Re the fraud, please, could you explain exactly how the fraud was done? How are you certain that this is not an issue in other parts of your business? What controls do you plan to put in place on a group-wide basis? I can't tell you exactly how it was done because we are still working it through. And like I said, it was a very sophisticated case of creating customers purchasing inventory, maybe the inventory wasn't real, went through third-party warehouses and there were some [indiscernible] transactions. But I can't give you the full detail, and that will be released in due course. And obviously, that's all subject to full investigation. How are you certain that this is not an issue in other parts of the business? Look, I've got to answer that question as honestly as I can. And frauds do happen. I'd love to say that we're bulletproof to guarantee that there are no frauds in our business, that's just not the world we live. There are a lot of criminal-minded people out there. There are a lot of people with ill intent. We're facing cybersecurity challenges as is everybody at every point in time. I think the pandemic has accelerated the amount of evil and bad in the world. And how can we be sure that it doesn't exist in other parts of the business. We've got robust controls and overview mechanisms that did fail to a degree here. We should have fought this a little bit earlier. Obviously, we've beefed up our surveillance through the other businesses, our questioning, our interrogation, et cetera. It's one of those failures that the post mortem will be done in great, great detail and the learnings will absolutely be taken heed of. But I guess our greatest strength is that we do run a decentralized business. So when you do have a rogue element, that's confined to that one business. And there's absolutely nothing to suggest that was in anything other than that rogue business. So hopefully, that answers that as much as I can. Sorry, let me just -- I just want to make sure I don't leave any out here. With July and August revenues bouncing back nicely close to F '19 levels, can you give some guidance on what current year cost levels are relative to 2019? Yes, I think I sort of gave a roundabout answer to that. And the roundabout answer is our cost level is probably pretty similar to what they were in 2019, but there are some cost pressures coming through. But we also do have the benefit of the efficiencies that we gained through the pandemic. So we also did trim some of the fat out of the business. So we do have the benefit of that. But to a degree, that is offset by increased labor costs. We're also seeing in many geographies, increased energy costs and increased fuel costs. But the core -- our core belief at this stage is our cost of doing business is pretty similar to what it was in 2019, and our margins are pretty similar to what they were in 2019. And we fixed a few of the problem businesses, which obviously is some of the upside. Is the fraud write-off added back to the HEPS range? Could you please provide a little bit more color regarding the Australian revenue levels, 95%, looks very strong given that half of Australia is locked down. Can these levels continue? Let me answer the Australian question, and David can answer the HEPS question. Fortunately, in Australia -- and it's Australasian by the way, so those numbers are a combination of Australia and New Zealand, of which Australia accounts for about 66% and New Zealand 33%. And as at that point in time, New Zealand wasn't in lockdown. They only went into lockdown this week. So we will see the New Zealand numbers come down quite significantly for the next few weeks while they're in lockdown. Hopefully, [indiscernible]. From an Australian point of view, we've been absolutely amazed as to the stability that we've seen in our revenue levels. And I guess that talks once again to the fact that we are geographically diversified and many parts of the country aren't in lockdown. So we don't -- Queensland is not in lockdown, Northern Territory, WA, South Australia, Tasmania and some of Victoria. So that's absolutely giving us some benefit in that we're not seeing our whole business down. The Australian business is, at this point in time, still quite handsomely profitable, not at the same levels as when you're running it at 100% revenue. But we certainly haven't seen volumes for the [ cliff ] and panic settings. So I think the New Zealand impact will come now and will be a little bit severe, but hopefully, it's for a short period of time. But once again, and this is the optimism, when it does come back, it bounces back incredibly strong. We've seen that in every single geography. So you just have to buckle up and ride these profits. I'll let David talk about the, is the fraud write-off added back to the HEPS range.

Unfortunately not. So those contents have been taken directly on the nose through the P&L. And I mean, you'll be able to figure out, I guess, the impact on the HEPS in the current year. So we don't have the luxury of adjusting those quantums. If we're in the U.S., I guess we've shared something different, adjust it and readjust it. But it's taken basically on the nose.

Thanks, which I think answers another question, yes, which is a number of parts. So let me just read the question. Any update on the acquisition through the year from what you previously announced? Cash balance obviously provides many opportunities. Just to confirm that ZAR 119 million impact of fraud is in the HEPS guidance? Or is it treated as an exceptional? You mentioned Spain and Germany on the road to recovery, what's the current outlook for Fresh U.K. now the events market has reopened? So as David said, the ZAR 119 million after-tax is taken on the chin. So the HEPS number is reduced by that ZAR 119 million, just to cover off on that. The fresh U.K. business is looking fine. We're well on the road to recovery. It's profitable. We've streamlined it a whole lot. We've got a lot of synergy between it and the food business. They're working much closer together, and without taking away the individual customer facing that we're famous for and makes it a breakfast [ in set ]. We're confident on the Fresh U.K. business. We're confident on Spain, we're confident on Germany as we have been. On acquisitions, yes, we have made some acquisitions during the year. We've made small acquisitions in Brazil, Dubai, Italy, Germany, and a regional distributor in Australia, which only happened I think it was at the end of May, might have been June. So it had no impact whatsoever in a regional part of WA called [indiscernible], but they're all relatively small. There is a runway of acquisition opportunities that we are looking at, both bolt-on and new geography. But we're still living in difficult times. I can't get out of my house, mind out of the effort. And we've got a lot of those restrictions that we still have to get our way through. But I think we are in a great position. We've got a strong balance sheet and we remain exceptionally positive about prospects of all our businesses and what the future holds. Clarity, when you say 10% minority shareholders, so more than one shareholder that will make up 10%? No. Sorry, it's one shareholder who held the 10%, who was the General Manager of the business. So we bought this business in 2012, I think it was. And he retained a 10% stake in the business. And obviously, he is no longer a shareholder in that business. Here we go. I think [indiscernible] I think we've got them all actually.