Bid Corporation Limited (BID) Earnings Call Transcript & Summary

Good evening, Good morning, everybody. Welcome to the trading update for Bidcorp for the 4 months, the 5 months to the end of November, end of October, the first quarter to the end of September. We'll take our normal -- we'll go through this in the normal fashion. I'll talk a little bit, David will update some of the financial information and we'll have an opportunity for some Q&A. If you could submit your questions using the Q&A function on the webinar and then we'll be able to answer your questions from there at the end. I guess if we were giving this update a week ago, maybe our time would be a little bit different or maybe it wouldn't. Our performance over the last; I'm going to go 5 months to the end of November, I know we talk about to the end of October; has I think been excellent bearing in mind that certain parts of the world are at different stages of the pandemic and of restrictions. So I think what we're seeing here is the true benefit of a Bidcorp which offers geographic diversity where we are in 5 continents, in over 35 countries and they're all at different stages of economic advancement of growth, but also in the pandemic cycle. And I think that's reflected in the results. So in very, very broad terms. In the 5 months under review we've had the Northern hemisphere of the U.K. and Europe being generally out of COVID type of conditions and operating relatively freely. But regards the Australasian segment being Australia and New Zealand being significantly impacted by COVID restrictions. I mean about 60% of Australia was in lockdown -- quite a severe lockdown from the end of June till sometime in late October. And New Zealand in an even more severe lockdown from the middle of August and they're only starting to emerge out of that very, very, very slowly. And bearing in mind, last year the Australasian segment accounted for over 50% of our group profits. So notwithstanding the fact that the Australasian segment was a little bit sluggish in the period, our business performed at record levels and we saw volumes bounce back very, very quickly in those areas where restrictions eased and when movement came back. And I think from that we can take a lot of comfort. And I know that I'm going to get lots of questions on what do we think Omicron's going to mean and what's the implication. And I'll answer that question right now, we don't have the foggiest clue. It will be what it will be, but all we do know is we'll bounce back out of it just as quickly as we bounced out of this. So yes, there might be some more restrictions or there might not be, who knows? But fundamentally, we are absolutely convinced our business model is intact and we're well poised to take advantage of whatever the conditions are in the market. Last week for example our sales were at an all-time record high, give or take ZAR 10 million or ZAR 20 million in a week, which for us is a very small number. So notwithstanding the fact that things might be going on, last week we were doing record turnover levels and that's because once again in this diversified model, you've got Australasia coming out of some COVID restriction and getting back to normality, but some of Europe is unfortunately struggling with a few lockdown issues. So since we last spoke, which I think would have been at the end of September, not much has changed. The business is absolutely tracking in the right direction. All our business units are profitable. The problematic businesses are far less problematic than they used to be or are well on their way to recovery and are profitable. The issues that we identified are still the issues that are creating a challenge for our teams to deal with, but our teams are doing it very well. And those issues are inflation, which is both our food input inflation as well as cost inflation through the whole gambit of what we purchase; labor shortages, wage pressures; lack of availability of equipment of pallets, of inventory; supply chain disruptions and all those other wonderful things. And we can talk as long as you like about all the negatives, but it's irrelevant. They are what they are. Our teams did a fantastic job of working -- of playing cards with the hand that they've been dealt and that's reflected in our results when we talk about the business operating at an all-time high and exceeding the levels of profitability that weren't there in 2019, but were actually there in 2020, which was better than 2019. Unfortunately, 2020 fell in a heap in the February-March when COVID first started appearing. So our business really is performing we think relatively well. There's no doubt we're a beneficiary I would say of product inflation where for many, many years, we hadn't seen food inflation. We are seeing it now and we're in a fortunate position that demand is strong. So generally, we're able to pass that food inflation and the cost inflation on relatively seamlessly. Now that's not a one-for-one correlation. There is a time difference. Not every customer gets a price increase every single day. Some of it is contractual and it's every quarter, every 6 months, every year, et cetera. So you don't see the full impact of that straight away, but it's certainly part of the process of how we manage the business. So where we look at the moment? We are very, very comfortable with where our business is and notwithstanding the fact that there are some maybe not so pleasant outlooks in probably Europe. Our view is they'll pass. It might not be a great winter, but I'm sure it would be better than last year's winter and we're seeing that in places like Latvia. We're seeing it in Holland where they have reduced restrictions, but then clearly not as draconian as they were last year and they're not as impactful on the business. They absolutely do have an impact and they do take the gloss off and they might take a business from being very profitable to a breakeven-ish type of situation for a few months. But the one thing we did see is as soon as the restrictions are released and things get back to normal, it bounces back very, very, very strongly, which comes with design challenges. If we just for a few moments go through each geography, each pillar that we have. Start off with the emerging markets. To us, that was probably the most pleasing outcome in that we're seeing some of these new businesses, these startups, let's call it, that we ventured into a few years ago coming into their own. And these businesses are 3x, 4x, 5x, 6x larger than they were going into COVID and that's absolutely starting to shift the needle on the size of the emerging market segment. What were small businesses are now no longer all that small and are becoming meaningful and that's balanced of course with the larger emerging market businesses that are more mature. So what we're seeing in, for example, in Asia is the business is mature and we're getting mature growth out of that business. So we're not getting 4x, 5x growth out of that business, but we're absolutely getting 10%, 20% growth out of that business. It's a similar situation in South Africa where we are seeing the business is operating at the levels that it was at 2 years ago. The foodservice business is struggling a little bit more, but that's offset once again with the diversity of the manufacturing businesses that we have in Crown and Chipkin. So you got the more mature segments in the emerging markets, which are performing well and you've got the smaller new ventures, which are performing very, very well and will add significant value to the group in years to come. They will be very significant components of our business in the years ahead. Europe had an awesome summer. Volumes across the board came back very, very strongly. We had record performances in almost every single country. Things were going very, very well notwithstanding the challenges that they did have of labor and the very sharp nature of the bounce back. We are seeing that taper off now over the last few weeks and you can see that in the sales statistics that we've given you that do show that the edge has been taken off the European numbers. And then it's probably, like I say, are heading into a more difficult winter, but we're not getting too upset about it. This probably gives the businesses a bit of a pause to catch their breath and get ready for the spring and for the summer next year. The problem businesses in Europe are, like I say, they're not problematic anymore, Spain and Germany. Obviously, they're not performing anywhere close to where we want them to, but there's a big difference between making a small profit and making big losses. So we're very happy with where we are in the short term and the challenge for us now strategically is how we drive those businesses according to the agenda that we've set and we have no doubt that will happen in the medium term. In the U.K., it's an interesting scenario there because the cost inflation is probably the highest that we have in the group or the most difficult to contend within the group. And I think their labor shortages, their driver shortages are maybe more complicated and more exaggerated than anywhere else. So we are seeing quite a lot of cost pressure in the U.K. and as we've said before, we'd rather invest in service levels as opposed to short-term profitability. So there's no issue with our top line growth in the U.K. business. We are, however, offset a little bit by cost pressures, but we are seeing those moderate over the last month or so. So the heat is out of that rapid increase in costs that we could see in the U.K. When you look at the U.K. sales, we're tracking more or less 100% of where we were at the high-water mark of 2 years ago, which in reality with a bit of product price inflation is slightly behind in total volumes and that's purely attributable to the fresh business where we've taken a very deliberate and informed decision to scale back certain of the activities that we are undertaking in the fresh division and focus on profitability not necessarily top line and that's worked very, very well. So we do have a business that's outperforming where it was a few years ago. On a smaller scale, it's far more integrated within the Bidfood business offering seafood, meat, produce to Bidfood customers as well now and it's more focused on its core market and on core profitability. So that enables us to maximize the profitability out of the fresh business. And the food business, Bidfood U.K. is doing particularly well on the top line, some very good customer wins, some great customer retention and good growth generally in the market. And that's a market that opened up, I think it was in the middle of July Freedom Day it was, and we've seen the sales ramp up since then and that stayed relatively strong. The last segment is the Australasian segment. And like I say, 60% of Australia was in lockdown for 4 months. New Zealand has been in lockdown for probably 4 months as well. And bear in mind, those are very, very profitable, significant businesses in the group. They remained profitable throughout the period. They remained quite significantly profitable, but obviously not at the levels that we were 3 years ago. We are seeing that change relatively quickly. In Australia for example in November had a record month for November and volumes are very strong. They came back with a vengeance. New Zealand is a little bit slower than that. Auckland, where I think you got about 40% of the New Zealand population in the Auckland North Island part of that region, are only really coming out of a semi lockdown on Friday. So restaurants haven't been open and that will only open from Friday onwards under controlled circumstances. So I have no doubt that the New Zealand business will bounce back very, very strong once it does open up again. All the fundamentals in the business are tracking the right way. We're getting real customer growth, customer number growth, we're getting volume growth with existing customers, margins are holding up okay. We absolutely have cost pressure and I don't want to overemphasize it, but I don't want you to think it's not there either. There is some significant cost pressure and that might take a little bit of the shine off, but that's just the reality the world is facing. We're generating cash. Obviously we're putting a little bit back into working capital. As we grow and as the sales volumes come back, you obviously have to invest into that. And we are heading into the Christmas trading period, which does require an inventory buildup in order to get you through that, which is then followed by Chinese New Year at the end of January which causes further supply chain disruption. So we are investing in working capital for a very good reason. Our CapEx program is continuing. Primarily the money we spend on CapEx is spent on real estate, is spent on warehouses. And I think we've proven time and time again build it and they will come. Where we've put infrastructure in place; we've grown our market share, we've grown our presence, we've grown our profitability and it's proven to be a very, very worthwhile strategy for us. Our real estate investments are long-term investments, they're 20, 30, 40-year investments. So obviously your return on those isn't going to be as the same as the return on the businesses, but it's an integral part of running the business and it absolutely gives us a competitive advance. From a technology point of view, I want to just talk about that a little bit and it actually dovetails a little bit with ESG. Now when you look at our business, we've got -- very simplistically there are 3 components. We've got a warehouse full of inventory on one side and you've got a delivery to a customer on the other side. And those are very physical, real tangible activities that require warehousing, require hotlists, require people to move things or require robots to move things. But it's a very real activity. And then on the other side you've got the distribution to a customer whereby the product has to be on a truck, the truck actually has to drive on a road with a driver or driverless one day, actually has to go to the customer, the product actually has to be delivered to the customer. So you've got these 2 very physical activities joined in the middle and that middle part is where the technology comes into play and that's our linking to the customer and that's our secret ingredient as to where technology is adding a whole lot of value and where we are seeing a huge amount of benefit from what we're doing in the technology space with AI, with e-data, with our development of technology. And it's far more sophisticated than a customer being able to order electronically. That's very 2002, 2005 type of stuff. What we're doing now. Our understanding of customers, our ability to correct sell, to upsell, to fill the basket, to ensure repeat business, to track repeat business, to attract new business, to change the basket, to utilize the data that we have does give us a huge competitive advantage. We do it on a global basis, which I think gives us a unique selling proposition. We understand trends from multiple different markets and therefore can apply that. So that's the technology piece and I think that ties in with the ESG piece as well that we're very, very committed to reducing our carbon footprint, to reducing emissions. But the reality is we do operate warehouses, which have big freezers in them which utilize power. And of course we're building technologically advanced facilities that use less power, that have solar on the roof, a couple of them have wind turbines. We're doing all of that. We also have a huge fleet of thousands of trucks on the road and we're watching that space very closely for any type of technological breakthrough in terms of electric trucks, hydrogen power trucks, et cetera where we will be able to reduce our emissions. But we're absolutely committed to that and we're well on the path to that. Throughout our businesses, there are a lot of initiatives happening at the moment. There's a really positive outlook on where the business is going, on procurement, on value-add manufacture, on technology. And there's a general -- I guess there's general optimism that our people around the world have done a phenomenal job and continue to do a phenomenal job have seen the opportunity. And out of a crisis, there's always opportunity and somebody is going to do well out of a crisis and we're pretty determined that we want to be one of the beneficiaries and not be one of the complainers who talk about how tough it is out there. We absolutely do see the opportunity. We will be making investments. We will be taking a few -- we will be placing a few bets on some things going our way and I'm sure most of them will. So we are very optimistic. Like I say, I don't know what the impact of this Omicron will be more than any of you so let's not even talk about it because it will be whatever it will be and it will pass and the good times will come back again. Now all of what I've said about volumes being very strong are still in the context of many segments of our industry not being back to anywhere close to where they should be. So travel is nowhere close to where it should be. Anything related to travel and an airport is nowhere where it should be. Tourism, international leisure tourism is a fraction of what it was. The cruise ship industry is almost nonexistent. Sporting events are coming back, but it's quite patchy and it's jurisdictional. Concerts and festivals, et cetera are making a comeback, but certainly not at the same levels they were. This work from home phenomenon is absolutely having an impact on CBDs where you've got major employers in CBDs, and we're talking around the world, who are struggling to get their staff back full time. And that obviously has an impact on workplace catering, on CBD type of activity. So notwithstanding the fact that there are various segments that are operating way below normality, these have been offset by other segments that have performed phenomenally well. So once these other ones start kicking in, we remain very, very enthused about where the business is heading. From an acquisitions point of view, we have made a few small in-country acquisitions in Australia, New Zealand, South Africa, Brazil, I think Chile. There are a couple more that are at various stages of transacting, some which will happen and some which won't happen in many geographies. In terms of new geographies, we've said it before, there's nothing that's focally evident and available. We are looking at 1 or 2. I wouldn't like to put any type of probability on these things happening, but we remain very alert to any opportunity. And when you look at our balance sheet and the cash generation that we're seeing as well as our ability to borrow in the future. We've got the fire power to make acquisitions that are going to be the correct acquisitions. So we do remain very alert to that. I think what I'm going to do is hand over to David just to take you through some of the more financial aspects of the review and then we'll go to Q&A.

Thanks, Bernard. I think sales have been spoken about. They are set up pretty well in the document, so I won't cover those. The gross profit percentage is holding up well and is above both the comparative periods as we've set out. Our cost of doing business really which is our operating cost as a percentage of revenue is better than F '21, but a little bit above F '20, F '20 being a pre-COVID period. And if you look at it on a constant currency basis, we are seeing some operating leverage in terms of that costs haven't increased as much as revenue notwithstanding a lot of the cost pressures that Bernard has mentioned. Interest has come down versus comparative period on a constant currency basis as well as on a nominal basis in rand. So that's positive. Currency volatility is something that is going to be something that we are contending with in this period. At the moment in terms of HEPS, it's about 10% negative. But against the rand, which has weakened I guess in the last few weeks, that may pull that back a bit. But we reiterate, we do measure our businesses in home currencies and on a constant currency basis. So it's really only the reporting in rands that has an impact on. The working capital Bernard spoke about, we've seen some absorption. We think that we're back into the normal cycle where we absorb in the first half of the year and generate into the second half of the year. The working capital has gone out of it, but not out of culture with normality. I think one looks at it on a slightly different basis in terms of working capital as a percentage of annualized revenue. We think that the business requires somewhere between 4% and 5% of investment in working capital and we're tracking absolutely within those metrics at this particular point in time. Free cash flow is negative, but most of that -- more than that is really the working capital absorption. Liquidity, nothing really to add other than we absolutely have the firepower to deal with whatever opportunities we see in front of us and we will use that. We are trying to manage the costs of financing a bit better, but it is still a little bit difficult because countries do have some restrictions on moving cash around, particularly where those sort of job seeker or work protection schemes, employment protection schemes were employed in previous periods. So it's not as efficient as we would like, but it's getting better. We did raise EUR300 million RCF in September and so that's given us further firepower. No issue with debt governance, we are all early geared and so there's no issue there. I think the only thing really to add is maybe just a quick update on the Miumi fraud. We're very confident that it's been what we provided for the write-off in June has captured more the downside, but it is a process for us to go through the prosecution and setting up all the criminal prosecutions and civil actions. So that kind of thing is time consuming and it's going to take a bit of time to run. We're still confident that we will recover some of the losses that we incurred, but that will take a little bit of time. I think we have appointed a new CFO in Hong Kong for Angliss Greater China and he seems to be settling in well. So that's a positive. Other than that, Bernard, I don't really have anything else to add.

Okay. Thanks, David. I've got a few questions, which I'll try my best to answer. I can't guarantee. What order patterns are seen from customers for December in Europe in countries where lockdown has started? Look, it's a November question. It's the last week. We don't really know what's happening this week just quite yet. There's certainly -- the hearsay is that nothing fundamentally has changed. Where we saw an issue in November was in a place like the Netherlands where volumes dropped by about 40% when restaurants firstly had to close by I think it was 8:00 p.m. and then they changed that back down to 5:00 p.m. and people just stopped going out. So we have seen those revenues go backward and we don't know what the impact is going to be going forward. And like I said, it will be what it will be. And yes, the restrictions aren't going to go on forever and when they come off, then the volumes will come back again. Do you see constant FX operating expense growth accelerating versus the 18.4% year-on-year you saw in the 4 month period? Probably not. Like I said, we are seeing some signs that the exuberance, the extremes of the pressure are definitely coming off a little bit. So we're hopeful that we can manage the cost pressure in line with the sales increases. So we're not overly concerned about it, but obviously it is an issue. I'm just looking for some more questions here. How much of your gross margin improvement is driven by mix to smaller strategic customers versus scale? Our gross margins are actually relatively consistent over the periods, over the 3 years that we're giving. But David, is that correct? I don't think there's been any movement at the gross margin level.

Yes, it's not the same. The current is slightly higher, but it's a few basis points. It's not percentage points.

Yes. So I don't think our mix has changed all that much by the way because we had moved significantly into the sweet spot before and we've been talking about that for years and years and years. It's not like we suddenly had to pivot our business and change the profile totally. It looks like there are more acquisition opportunities than there have been for a while. Is that fair and what do you think is driving this? I think there are more acquisition opportunities and I think that's because the crisis is over and people have had a chance to catch their breath and determine if they do want to sell their business. Maybe before they did want to sell their business, but in the heart of a COVID pandemic wasn't necessarily the right time. So we are seeing more opportunities. More people are saying maybe it would be a good time to take some cash off the table. So yes, we are quietly optimistic that there are some more reasonable opportunities out there. In Europe, do you think the slowdown in revenue in November was driven by regional lockdowns or was it more a case of rising infections making people more hesitant to eat out? The only place we really saw a decrease of any significance was in the Netherlands. Germany, we've seen quite a large decrease as well, but it's a small base and it doesn't really shift the needle. And in the Baltics, we've seen a shift. But besides that, the rest of the European countries are tracking more or less where they were anyway. Also bear in mind, this is all seasonal anyway. So November is not a great month from a European point of view. You're heading into winter, it's a bit of a nothing month. December is more important, it's Christmas so the impact could be bigger on that. But I wouldn't read too much into the November number other than a couple of the countries that have gone into some type of a lockdown. Can you give a rough idea of the annualized sales of the businesses you've acquired in total so far? Wow, I don't think they would add up to ZAR 500 million in total in revenue, David. David can work that out quickly.

I don't particularly. But I can certainly try and get back to you, James.

When we say 1Q '22 saw record HEPS, is that after the impact of currency impacts and not in constant currency terms? As far as I'm aware, it's both. David?

Yes, that's right.

That's a record in both. And for us, obviously the constant currency is more important than the actual FX. Have you gained some sustainable efficiencies as a result of the pandemic and could we therefore expect a stronger margin outlook in a normalized trading environment whenever that happens? I think the honest answer to that is yes, we did pick up some sustainable efficiencies, which are offset by inflationary pressures now. So you're throwing whatever you can at the business to maintain service levels and customer satisfaction in a very difficult labor environment. So yes, there are efficiencies. There are absolutely no doubt, but they're offset by some cost increases and whether those cost increases will diminish over a period of time, I don't know. So I'm not sure that we are going to see a fundamental change that's going to see an upward movement in our operating margins by a significant demand. After seeing the Northern and Southern hemispheres equality last year, is it fair to say that Australia -- Australasia's recovery is likely to offset the possible impacts in U.K. and Europe especially with regards to profitability as Australasia is very high margin business? We hope so. We don't know what the impact on the Northern hemisphere is going to be. We just don't know what's going to happen. So certainly no panic at this point in time. It's no -- that's just not something we have any idea about. Other than like I say, this is the benefit of a Bidcorp where you've got this diversity of geographies. It would be fantastic if everyone was firing on all cylinders at all times. That doesn't really happen. We are very fortunate that the Australasian business is starting to fire up again when there are some clouds on the European side. But how the 2 correlate to each other, I'm not overly sure. I've got no more questions at this stage, I don't believe.

No, that's right, Bernard. Those are all the questions that we've received today.

Okay. So yes, I just want to cover off on the fact that we are being -- we're optimistic. We see a lot of upside in the business. Our teams have performed fantastically. Every business is profitable at this point in time, some of them significantly so. And we're continuing with what our strategy is and we continue to execute on that, whether it's driving technology further in the business, whether it's driving manufacturing and value-add further in the business. And the other thing that we are carrying on is our focus on ensuring we have the right mix of customers at all times and that's a constantly evolving issue. In Australia for example, we've declined to tender on our largest customer, which is a QSR customer, and we've declined to tender. The contract is up within the next year. And for us it makes a lot more sense to use that capacity that it frees up for the rest of the business, particularly where you've got constraints on labor and everything else at this point in time. It's a customer that accounts for about 6% of the Australian revenue and significantly less in terms of profitability. So this is an ongoing issue in the business. We're constantly assessing what's right for our business going forward. What does the customer -- what does the correct customer base need to be? How do we build the correct sustainable model going forward where sure you can take advantage of volume at certain times in the evolution, but in other times on the journey it doesn't make sense to have certain types of customers? And those are honest conversations we're having with customers and I think customers do appreciate the honesty and the transparency with how we handle that. But we're not afraid to have those conversations and I guess utilize our resources in the best manner possible. So where we sit at the moment? Hopefully this new variant doesn't create a significant amount of disruption, but who knows. We're well equipped to handle whatever gets thrown at us as best we can. And I have no doubt that our teams across the world, all 25,000 people, are doing whatever they can to make it happen, certainly have made it happen. And once again it's a privilege for me to talk on their behalf and how fantastically they have done in the tough times and when it got good again and maybe we'll enter into a few more tough months in some geographies. But our teams are certainly well equipped to handle it. And we look forward to updating you in February on the 6 months. And we are very positive about the outlook of the business and the building blocks are in place. The foundation is pretty strong. We've got some great initiatives happening and we remain very enthused and excited about the future. So thanks, everybody, for your attendance. Have a very safe festive season. Don't do anything too silly. But go to lots of restaurants, eat lots of food out, make sure you take lots of people with you and spend lots of money, please. And have a very safe festive season and we'll talk to you in the New Year. Thank you.