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Edited Transcript of FBR.J earnings conference call or presentation 28-Oct-19 8:00am GMT

Half Year 2020 Famous Brands Ltd Earnings Call

Midrand Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Famous Brands Ltd earnings conference call or presentation Monday, October 28, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Darren Paul Hele

Famous Brands Limited - CEO & Executive Director

* Derrian Nadauld

Famous Brands Limited - Managing Executive of Franchising & Logistics

* Kelebogile Ntlha

Famous Brands Limited - Group Financial Director & Director

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Presentation

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Darren Paul Hele, Famous Brands Limited - CEO & Executive Director [1]

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Good morning. It's Darren Hele here, the CEO of Famous Brands, I'd like to welcome you to our interim results audiocast today. Thank you for taking the time to join us, particular thanks to valued shareholders who may be on the line. Very importantly, 2 interested shareholders who may be joining us for the first time, and a particularly warm welcome to the team at Famous Brands who are listening to the results that we're delivering today.

I'll be handling most of the proceedings today, together with Lebo, our Group Financial Director; and Derrian Nadauld, will be presenting some of the detail on GBK and will be talking a little bit about Derrian's transition as well as he's transitioning currently to the Chief Operating Officer for Leading brands, and I'll talk about that a little bit later.

So moving on, in terms of the plan for the day, if you look at the agenda that you have on the slide in front of you, if you're following through there, I'll be handling this for a few minutes and then handing over to Lebo, she'll handle Section #2; I'll come back for Section #3; Derrian will handle Section #4, and then I will handle 5 and 6; and then we will all handle questions together. We should be roughly around 50 minutes through to Section 6, and then a like 10 minutes for questions. Please, if I could ask that you submit questions online. We will be given those questions at the end. So please feel free to do that. There is ability to do that through the portal that you are listening and watching the slides on.

There are lots of supplementary slides, which will be in the supplementary information. So again, I think that continues on our journey of improved disclosures that we have been -- have embarked on, and I think we're making some good progress on that.

Again, I think, just to remind you that we obviously have to balance competitively sensitive information versus stakeholder interests. Again, I think we are doing a good job of that. What you will note, again, for some of the analysts is probably a little lack of information around delivery. We still think that, that's competitively sensitive in the current climate, but hopefully, still enable you enough access to, to information to be able to make good decisions.

In terms of the presentation, it will be uploaded directly after this audiocast to our website and then the webcast, which is the actual full version of this, will be a little bit later today on the website again. So full presentation at 11:00.

So in terms of moving straight into our performance review. I think it's important really just to put some balance, and you've got some blocks on the screen there around the last 6 months. And I think on the face of it, not an exciting 6 months at 0% revenue, but I'm confident that as we unpack that, you'll get to understand it. We have, in our view, had a very busy and productive 6 months, so quite confident that the flat revenue doesn't mean that the business is flat in any sense.

There's lots of noise around IFRS, and I'm sure Lebo will help you to try and unpack that a little bit later. So again, the marginal decline in operating profit, not pleasing to see, but there is a little bit of noise around IFRS in that. So focusing on the 8% is in line with the new accounting standards. And I think once you've understood that, you'll see that there's some key parts of the business that are performing and some others that we are struggling with.

Most pleasing for us is that we're on a journey to build a track dividend -- a track record around the dividend. So the ZAR 0.90 dividend is really an exciting part of these results for us. And I think, hoping that we are really back to building a track record as we had prior to 2016, and our cash generation really does allow us to balance most priorities, including dividend, which is a real plus from our side.

In terms of some group overview, I'd like to maybe just take a little bit of time just to unpack the key parts of the business very quickly, and we'll get into more detail on some of the aspects a little bit later. But in terms of the South African landscape, Leading brands has been a key focus to drive competitiveness in our business and really moving forward in terms of some of the things that we've had to do and Derrian taking on that responsibility from the 1st of September. There's been an ongoing focus on innovation and some calculated investment to position the brands better, particularly around technology, which has put some pressure on the margin, but bear in mind that typically, the second half margin is slightly better.

In terms of Signature brands, a lot of our strategic objectives have been met on that side. So we're feeling comfortable around what's had to happen, and the margin is heading in the right direction, probably a little slower than I'd hoped. But I think we're on track in terms of some of our objectives and really driving hard towards the 25%. So some work down there around the margin growth, expanded the footprint on the key brands and rationalizing underperforming assets where need be.

In terms of the supply chain, really been quite a challenging time, and we've had a disappointing performance in the supply chain, but I think it's a reflection of the inflation environment and that has certainly led to deterioration in our logistics margin, which on the face of it, is very disappointing. But I think once I have unpacked it for you a little bit later, there'll be some key insights there that we are still hitting in the right directions.

In terms of the Africa/Middle East business, we think we've got positive momentum. Our competitive posture in that landscape is improving. We've opened our first company store for Debonairs Pizza in Lagos, which is really designed around setting the standard. We have had some challenges in Zambia. The competitive landscape is quite intense. And we've had a few litigation issues around a single franchisee, which really is around the competitive space, but we think we're managing it well. And there's also some currency pressures, as you would see it across Africa, but particularly coming out of Zambia. Disappointingly, we've closed 9 Mr Bigg's in Nigeria, but again, that is still part of that fix-and-repair program that we embarked on quite some time ago and making good progress in terms of the standard of the restaurants.

In terms of Wimpy UK, I think it's best described as steady 80-year stable business. We opened 2 new stores and nothing significant to report there, very happy with the progress.

What's so comfortable around GBK, that I think that we are certainly through the worst of what we've been through. And I think the fact that there's very little to talk about at this particular presentation is really some sign that we are in a much calmer environment out of the turbulence as much as the U.K. has still got some challenges. I think just a reminder around some of the noise there is that although we've got positive like-for-like sales, we've revamped sites. There are 7 stores that closed in this period, which were actually part of the CVA process that Derrian will unpack a little bit later. So it's not -- it's the same 7 stores we spoke to you at year-end and just really overlapped over that end of February, beginning of March period. So other than that, there are no further closures during that as well as reporting and managing our ESG as is becoming a topic of discussion with lots of shareholders and other stakeholders.

So I'm going to sort of pause there and just hand over to Lebo to talk you through the financial information, which I think is very important and to do a little bit of a deeper dive into some of those numbers that I've just given you the headlines on.

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Kelebogile Ntlha, Famous Brands Limited - Group Financial Director & Director [2]

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Thanks, Darren. Good day, ladies and gentlemen. We'll unpack our first half financial results in the next 9 slides, starting with salient features. We'll start by reflecting overall on where we are now relative to where we were during the previous financial period. At top line level, low food inflation persisted into the current year's first half, which contributed to us closing the 6 months flat relative to last year. While the SA business delivered 1% revenue growth, this was reversed by the decrease in the U.K.'s revenue compared to last year. We will unpack this later when focusing on segmental performance. In order to aid the comparability of our results to the prior year, we have included IFRS 16 adjusted numbers on this slide as well as on the next slide.

Most of you will recall that last year's interim results were impacted by the ZAR 874 million impairment that we recognized in relation to our GBK investment. As a result, we posted a loss per share of ZAR 5.72 for last year's first half. In comparison, we are pleased to report a comparable earnings per share of ZAR 1.79 for this year's first half. At this point, you might be wondering whether or not this means impairments are behind us with regards to our GBK investment. The short answer is that while we are cautiously optimistic at this stage, we will have to chase for impairment at year-end again and in line with IFRS requirements.

On a comparable basis, operating profit is down 8%. Our cash generation remains strong despite the challenges we experienced in our supply chain business. Our cash realization rate for the past 6 months on a comparable basis is a pleasing 101%.

The increase in our gearing level to 165% reflects the impact of IFRS 16 on our balance sheet, with ZAR 1.2 billion lease liabilities added to our net debt position. On a comparable basis, our gearing would have shown an improvement to 93% at the end of the first half from 134% in last year's first half. We are comfortable that our net debt level at ZAR 1.5 billion is not far off from our medium-term target of between ZAR 1 billion and ZAR 1.5 billion, excluding lease liabilities. As highlighted by Darren earlier, the declaration of the interim dividend is pleasing. As indicated in the SENS announcement, we will continue to monitor the group's performance, the operating requirements of the business and acquisition opportunities to determine further dividend payment.

This slide provides an overview of the impact that IFRS 16 had on our half year result. On the income statement, at operating profit level, IFRS 16 adoption resulted in us showing ZAR 18 million more in operating profit than we would have under the old leases standard. The reason for this is that the depreciation charge under the new leases standard is typically lower than the rental charge under the old standard as the depreciation is based on IFRS 16 right-of-use assets that are capitalized at discounted rental payment. However, offsetting this is the implicit interest charge under the new leases standard resulting from the unwinding of the interest discount on the IFRS 16 lease liabilities.

It is important to highlight that of the ZAR 18 million impact, ZAR 16 million relates to GBK, which is predictable, given the company-owned store model. Accordingly, the SA business performance for the review period has not been materially impacted by IFRS 16. The impact on the cash flow is due to the disclosure requirements for the cash flow statement. In short, the ZAR 85 million improvement in the cash from operations is offset by the separately disclosed implied interest and rental portion of payments made to lessors. In summary, approximately 90% of the IFRS 16 impact on our group results relates to our GBK business.

Over the past 1.5 years, we have focused on ensuring that costs are reflected in the correct divisions, which have brought a fairer and more accurate assessment of our segmental performance. Accordingly, corporate costs reported in our segmental report exclude shared services, which are allocated to the respective divisions. As evident from our segmental results, the focus is currently still on income statement reporting for segmental reporting.

With the allocation of costs now embedded in our divisional reporting, we now are embarking on a journey of measuring ROCE at divisional level. Therefore, this marks an important starting point for us. We aim to provide you with disclosure of the divisional capital employed when we publish our year-end results. In the interim, we have provided some notes to aid the understanding of how we have calculated the ROCE. For capital employed, we have had to apply an allocation basis to determine the starting point for the capital employed base for the respective divisions as the balance sheet was previously not divisionalized in a manner that could provide a view of ROCE at divisional level.

Moving on to the results of the calculation, relative to our group's weighted average cost of capital of about 12% post tax, the group's ROCE is just under 18%. ROCE for the SA business is above 20%, mainly as a result of leading brands and manufacturing. We'll focus on the revenue and operating profit when focusing on the segmental performance in the next few slides.

Included in the net finance cost of ZAR 115 million is a net ZAR 34 million relating to interest on IFRS 16 leases. Excluding the impact of IFRS 16 interest, net finance cost have actually improved by ZAR 25 million, which is a result of the lower interest rates on the refinanced debt structure. The ZAR 99 million tax expense represents an effective tax rate of 34%, of which 4% mainly relates to unutilized tax losses and a further 2% split between foreign tax differentials and prior year tax adjustment.

As mentioned earlier, SA revenue is up 1%, mainly driven by the pleasing performance from our Leading brands portfolio. The significant increase in Signature brands revenue as a result of a combination of strong system-wide growth, particularly from company-owned stores, which generate higher revenue than royalty-only income from franchise stores and like-for-like growth. The impact of the loss of a key customer at our Lamberts Bay food manufacturing plant is reflected in the marginal decline in manufacturing's revenue. While logistics revenue increased by 3%, as we will see on the next slide, this did not drop to the bottom line due to pressures on margins.

The U.K.'s revenue contribution represents about 20% of the group's revenue. The reduction in the revenue reflects the U.K.'s current subdued economic environment, which is not helped by the protracted nature of discussions around Brexit. AME's revenue contribution, while under 5% of the group's revenue, continues to be a target area of growth for us, which we are excited about.

94% of the group's profits are derived from SA. Operating profit for the SA business decreased by 12%. Corporate costs are split up on Page 16 of our condensed consolidated interim results, which are uploaded on our website. Of the ZAR 18 million increase in corporate cost, ZAR 13 million relates to ForEx movement. As indicated earlier, GBK was the business unit most impacted by the adoption of IFRS 16. While the operating loss improved from ZAR 45 million last year to ZAR 11 million this year, ZAR 16 million of this improvement relates to that option of IFRS 16.

The group's margin of 11.3% would have been 10.8% on a comparable basis. There is a supplementary slide provided that shows comparable margins at divisional level. The reduction in SA's margins from 16% to 14% is largely a function of the following: margin pressures across our business units due to lower food inflation and increased operating costs; investment in technology capability for the Leading brands portfolio; a variety of costs related to our logistics business, which Darren will unpack later; and loss of a major client in our manufacturing business. For GBK, the comparable margin relative to the minus 1.7% is a minus 4.2%, which is still a pleasing improvement from last year's margin of minus 6.6%.

The key changes on our balance sheet compared to prior year are related to the adoption of IFRS 16, which we covered earlier. Our net debt position for the first half, excluding IFRS 16 liabilities, was ZAR 1.5 billion.

Pleasing highlights for us regarding the deployment of cash in the past 6 months are the payment of ZAR 100 million in dividends to our shareholders, which followed the resumption of the dividend at year-end as well as the continued deleveraging of the balance sheet with ZAR 180 million allocated towards the revolving credit facility. Included in the CapEx and other investing activities is CapEx of ZAR 84 million related to PPE additions, which was allocated as follows: 66% towards the SA business; 26% to the U.K.; and 8% to AME. The tax payment of ZAR 39 million is significantly lower than the prior year due to tax refunds received in the past 6 months.

Overall, we are very pleased with the strong cash generation and closing cash position for the review period.

With that, I will hand over to Darren.

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Darren Paul Hele, Famous Brands Limited - CEO & Executive Director [3]

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Thanks, Lebo. I'm just going to take some time now just to recap on some of the strategic imperatives and focus first on brands and really just take you through, particularly, with a focus on SA and AME business, which I think is important because we'll unpack GBK separately.

So in terms of the revenue line, most of this information has been put out in our sales announcement this morning. But from a group perspective, we are relatively comfortable with the system-wide restaurant sales in an SA context, and AME very comfortable. Again, I always caution around AME because you've got lots of exchange rate fluctuations in there. So from a brand capability perspective, the SA number, system-wide, 5.4% is great, but I think I'd like to just give you a little bit of insight on that because most pleasing for us is the performance around the Leading brands. So the Signature brand number there of 3.6% is slightly different to the definition you would have seen in our announcements because that is the pure SA number with the actual Signature brand definition does include some offshore activity because of the nature of some of the JV arrangements, which balances you back to your 5.4%. So real headline there is the Leading brands focus. And that Leading brands was underpinned with some really solid like-for-like performance in a very, very tough environment, at 4%. Again, in the current climate, if you'd ask this at the beginning of the 6 months, if we wanted, we'd have definitely take it.

Signature brands historically has been declining on like-for-like, and although it's really just creeping into a 1% positive there, I think the trend for us is important, and we take heart from it, and we are starting to see some changes, particularly at the top end of that particular market as well as some food inflation certainly starting to come through on that portfolio, but less so on the Leading brands.

So this is a new disclosure, and it's a first-time disclosure, really just to try and give you a sense of some of the dynamic in the SA environment, and we are seeing some quite unique differences in the business from a geographical perspective. So what you see on the slide there is the 9 official provinces of South Africa, and we are starting to see some changes. And you can see some compression in places like the Northwest as well as Limpopo, which are really unusual, particularly on a like-for-like basis. You wouldn't have had a line of sight of this previously, but from our perspective, Western Cape and Eastern Cape showing a slowdown versus where they have been, but there are some positives around the likes of Gauteng and KZN which have really bounced back. But I think it's important in terms of the SA narrative and starting to see some changes in some of those more outlying provinces where it's getting harder to trade and business is getting more difficult.

Another new disclosure, again, it's really just to try and give you some insight around inflation. There's always lots of questions around inflation from investors, but particularly, it's a lot easier when you get high inflation. And typically, as a rule of thumb, our food inflation numbers have been above core, and we are now experiencing some challenge around that. And we are simplistically not been able to recover any kind of significant menu increase in terms of overheads, and that's really put a lot of pressure on the supply chain business.

So what that graph is it's an internal graph, but really just looking at the portfolio as a whole, to try and give you a sense of what our index is in terms of price because obviously, you're covering multiple periods versus food inflation. And you can see on pretty much most of the metrics we are below food inflation. That's across the basket, but the basket behaves fairly similar. You have some differences between casual dining and quick service, but really just to give you an insight in terms of some of the challenges that we've been facing, and really hoping for some increase on the food inflation side without suppressing demand.

From a new store perspective, probably one of the slowest periods that I can certainly remember in our business and certainly in our time here. But again, some of that is deliberate, some of it is economic. We are definitely seeing a slowdown in terms of opportunities, particularly in new real estate. So most of the opportunities are existing real estate or existing opportunities that we are managing to convert.

In terms of AME, there is some activity there, but the slowdown is across the board, both Leading brands and Signature brands. For those of you who checked us, you'll know that this is a much lower number. We have decided to just split out the Frozen For You numbers out of there just because that business model is evolving, and I think it may create some confusion going forward. So while we did have it in initially, we have removed it and it will be removed from the base.

So I think from a store numbers perspective, we're very comfortable with the growth given the environment, but it definitely is a slowdown on where we're at. And we do think that there has probably been a slower first half than second half. So we're still looking to drive growth in the second half, but we'll probably be short of our projection that we put in at the beginning of the year. The market's certainly getting slower rather than warmer, and we'll have to drive through that process. But we're still comfortable that there are opportunities for our brands for growth and to really connect with the consumer in new spaces.

At year-end, we presented this slide in terms of what our focus and ambitions were going to be over this year. So really, what is -- you're seeing on the slide there is just a snapshot of how we're performing against that. So in terms of the objectives, most of them we have achieved. In other words, that we will certainly get there by year-end or we are there already. The orange items are just showing that we are underway, but we can't really say that we have completed them or that we have ended the road in terms of the objective, but some of them would need to complete year-end like like-for-like as an example. I think it's too early to say that you've met your like-for-like objective. In the SA context, you've got to get through the seasonal peak, which is critical in terms of our numbers.

Where we have not yet achieved and probably disappointed in ourselves in terms of some of the objectives is on the consumer-facing technology, and primarily there is that we have fallen behind versus our original launch date for Wimpy app. We are well on track in terms of that, but we had some, I suppose, tech setbacks, if you want to call it that. So by our own standards, we've disappointed ourselves, but we are on track for launching that pre-Christmas.

So I think just giving you a summary of where we are from a SA context. I'm going to hand over to Derrian to really just give you some insight on GBK as he has been doing over the last couple of reporting periods. So over to you, Derrian.

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Derrian Nadauld, Famous Brands Limited - Managing Executive of Franchising & Logistics [4]

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Thanks, Darren. So yes, really just 4 parts of the GBK business I'll be highlighting today. First is the CVA recap, I mean, how they played out at year-end, and we shared some of that really at the full year; how they've been translated from a sales growth perspective; how we've reset our base from a rent to turnover ratio; and then as we did at the full year was just to share with you what our 3-year outlook for the business is.

So firstly, our CVA recap. I mean you'll all recall, we put the business through this process towards the end of last year to restructure our property portfolio. That impacted 22 site closures. And as Darren mentioned earlier, 14 of those was, what we call, C sites. We took the decision really fairly swiftly after the CVA was approved to close those sites towards the end of last year. And then we subsequently had 8 B sites closing at the back end of February and the first week of March, which really is the closeout of that CVA process. And those 22 sites were written down to a value of ZAR 11.3 million, again, which we shared with you at previous results presentations.

We still have 3 C sites remaining, still trading at the moment, all 3 on the positive side are cash positive. But obviously, the nature of the C sites and their arrangements with landlords at those sites are kind of managed on a 3-month rolling period, and there's a potential chance that we may lose one of those sites. But again, without the landlord supports, they weren't going to be viable. So at this stage, 3 -- cash positive 3 sites. So the total write-down which we took at the end of F '19 was ZAR 13.4 million. So that's really just a recap of that CVA process and closeout.

How that translates from a sales perspective? Firstly, looking at system-wide sales, which includes the closures, over the first 6 months of this year, we were at negative 12.5%. A big part of that -- in fact, all of that is really around the store closures that we had in the base previous year. I mean I think really encouragingly for us, looking at the like-for-like sales, the existing sites that we're trading in the same period last year, we had positive 8.6%, which is substantially ahead of where the market has been tracking, and also nicely ahead of where our menu inflation for the first 6 months has been. So certainly in the core estate that we've got remaining, and post the restructure, we're seeing some really nice results coming through.

So just to illustrate the point, again, if we have a look at the store numbers that decreased, the site closures we had during the last year was really reflected 32% of our total footprint. And if we reflect that onto our turnover sells or our system-wide sales was down 12.5%. And again, I think the reason why we're showing it is to highlight the sites that we have closed, very specific, very deliberate in terms of the sites that weren't sustainable going into the future. So for us, any negative isn't growth, but certainly reflects that we've closed the right sites.

And then how that looks from a rent-to-turnover ratio, which I think is, again, just in terms of sustainability into the future is a key measure for us. Pre the CVA, we were sitting at 17.5% rent to turnover, which again, for those of you who understand our category is certainly not sustainable from a restaurant perspective. And pleasingly, post the CVA, our base now sits at 9.5% to turnover. So a much more sustainable position going forward.

And then as we shared with you at full year, really, what our 3-year outlook is our current year F '20, we're currently aiming or well on track to achieve our 3.1% EBITDA, which is again a significant improvement on the same period last year, and that translates to a negative 3% at PBIT level. And then the following 2 years, F '21, our forecast at this stage is at 4.4%, moving on to 5.5% in F '22, which will really bring us to that kind of golden market we're looking for is our PBIT breakeven.

So as I said, we -- lots has happened in the business and the restructuring now complete, like-for-like sales back well on track, the cost set has been rebased. And I think for us, we've got lots to look forward to in terms of stabilizing the business further into the future.

So with that, I'll hand over to Darren.

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Darren Paul Hele, Famous Brands Limited - CEO & Executive Director [5]

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Thanks, Derrian. I just wanted to recap. So as I said earlier in the presentation, Derrian has taken on a new role to head up our Leading brands in SA. So him and I are working closely together on that as we focus our business in terms of core. So Adolf Fourie has actually secured a work permit. In fact that actually came through last week and Adolf is an experienced executive in Famous Brands. So he actually steps into Derrian's role on the 1st of November, but will certainly be aided by Derrian in terms of a smooth handover in terms of working with the team as well as in the background with myself. So I think there's continuity from our side. We've certainly had the benefit of having Derrian navigate us through these tough times, and he is going to be taking on a new challenge here, which I'm most grateful for him doing.

So I'd like to just spend a little bit of time now unpacking the supply chain, having spent a little bit of time on talking about brands, which is the key part of our business. But I think it's important to understand what's going on in the supply chain side because typically, this business has always benefited from the front-end drive and also typically been supported by some decent inflation, and that has really been quite challenging. So to try give you some insight into some of these moving parts within the business.

So in terms of logistics, let's start there first in terms of focusing on the SA side as well as export. So in terms of the logistics capability has really been focused over this past 6 months, we've been quite busy, relocating our Free State facility, which was really way out of capacity. We've had a refocus on the business. We're splitting out the management from our franchising structures. So in terms of really focusing the Leading brand side of it and having put the logistics business back into the supply chain business. So as much as we consolidated it that way, internally, we'd actually run it slightly differently.

We concluded a 2-year wage agreement, which I don't need to say to you. For those who understand the SA environment, wage negotiation is always an important part of the business, and I think we've done well to get a solid 2-year agreement.

Although there has been a combination of factors in logistics, which I would say, is probably not an excuse, but create a perfect storm and have eroded margins. I think if everything's come together at once, it certainly happened over this past sort of 9 or 10 months, but really put some pressure on this past 6 months.

So from a performance perspective, I think it will help you to get some insight. You can see there relative to history now, and I mean, you -- for those of you who follow us are not used to these numbers being so low. So these centers of excellence are not quite aligned to the geographic provinces of SA, although -- so we have 6 centers of excellence servicing 9 provinces. So there is some overlap, but by and large, they are similar to the provincial slide I showed you earlier, but you can't make a direct correlation. So just be cautious. I think some of the disappointing issues there are really around, as I said earlier, the Western Cape and Eastern Cape. We've seen quite a significant slowdown there versus where we have been historically, and that's put some pressure on the business.

The Free State, also at a time where we moved the facility, a little challenging as well in terms of that sort of operation. I think the relocation may have put some pressure on sales, but it's not necessarily the reason for that decline. Probably most disappointing there has been our export business, although it's not a major driver. The volumes there are down, and that's really around some of the activity in Africa, but also as we get more competitive in Africa and localize the supply chain, it's going to have an impact on logistics because there's not as much of a requirement to export as there has been a list, we opened a new market, which may be very reliant on exports.

So this is a new disclosure, and again, I'm hoping it's a once-off disclosure, but may be required again at year-end, is really to just give you a sense of where the profit has eroded in logistics because I mean, it's -- there's quite a significant change from the first half of last year to the first half of this year and really to try and give you a sense of the nature of those items. And I mean, whilst we can't necessarily provide the full P&L, really to try and give you a sense that we are not necessarily in a deep hole there. There are some permanent factors that have been eroded out of the business, like allocating correct costs and also some margin sacrifices that are really permanent. In other words, that a margin on item has been cut, so unless food inflation comes through, you're not going to necessarily get growth, and you won't get growth back on the margin.

So there are also some temporary items in there, which may or may not work themselves over the next 6 months, but we are managing them well. And of course, if you're going to relocate the facility like the Free State, you're going to have some once-off expenses, and there are some other once-off expenses relating to some accounting treatments across the business. So I suppose this is not exact science because everyone will have their own interpretation of permanent/temporary once-off, but to try and give you a sense of where we're at through this business and why such a sudden curtailing in what has happened. Again, no excuses, but it feels like a perfect storm for us to be dealing with a whole lot of issues, including relocation of facilities, low-food inflation as well as some of our own internal allocation of costs to try and really understand how the business is performing.

I think clearly, though, it's a business that probably is not as profitable as potentially had been seen in the past. And some of that was really supported by the internal allocation of costs. What we are seeing though is the clear pressure on competitive margin. I mean the nature of the industry is such that everybody is fighting for volume right now, and of course, we do see some of that coming through in terms of some of the generic items that we may supply, and we've had to really focus hard on our pricing, and we believe we have done a good job of improving our competitive posture.

In terms of our strategic goals for the year, which we put forward to you, I mean, quite simplistically, they were around executing on Project Decade, which I'm comfortable that we have done. I think we've done a good job on the Free State or certainly not me, the team has done a great job on the Free State. And we have literally had to focus on Western Cape as well, which doesn't form part of this review period, but I'm comfortable to report was successfully relocated over the last 2 weeks. So that will be for reporting in the H2 results.

So Project Decade, for those of you who don't follow the business, there is some information in the supplementary slides to give you a sense of what it is in terms of our managed investment in the logistics business over a period of time.

All right. So I think I've given you some insight into logistics, probably not as effective as has been the manufacturing business. I think that the ability to manage inflation and the business model is a little bit easier. And again, the ability to find efficiencies has probably been a little bit easier in terms of where we're at, but also the team has put in a lot of effort and energy to do that, so starting to see the results.

So I'll talk you through some individual plant performance where necessary. I think both meat plants on the left of the screen there, are really feeling the effect of low inflation, particularly around beef. So the plants that are most affected by beef are those 2, and we are seeing some deflation on the beef side, and hence, having to pass-through price decreases or certainly did earlier in the year.

In terms of the Western Cape, which is the second the meat processing plant, we've actually closed that, and that closed at the end of July, going into August. So there's some table on sales there, which are reflected.

In terms of our bakery plant, we took a deliberate decision to also not supply KZN anymore because of some of the logistical challenges that we're experiencing on the M3, particularly some of the disruptions at Mooi River, and we've localized that supplier, I think, thankfully, we did because I think some of that situation is deteriorated at times and the nature of bakery is that you actually do not have any time to waste. So you're delivering a fresh product, you can't afford delays at -- for produce or whatever that might be.

So generally, I think, some decent performance coming through except at Lamberts Bay, which I think we've spoken about ad nauseam because that was actually reported on -- in year-end results because it affected H2 last year, and again, I suppose we'll talk about it at full year results. So I think really deeply covered. Obviously, not a situation where we'd like to be in, but I think we have found some silver lining on the cloud and managed to find a lot of efficiencies in that plant. And sometimes not having volume has actually proven to be of benefit to us, but at revenue line, obviously, quite a setback.

In terms of the plants that we don't own a 100% of, in other words, where we have joint venture partners in those businesses, I've separated those out to give you a sense of that performance. Again, the Turn 'n Tender Central Kitchen also retreating there based on red meat prices having come down. Bakery Company is a function really of menu changes. So there's been quite a lot of menu reengineering in our business, and they are a manufacturer of lots of different kinds of small items. And as we rationalize at the front end, they've felt the effects of it. Coffee Company is also as a result of deflation around coffee, and that's really put some pressure on that side.

TruBev, this wasn't a full reporting period, so it's not quite a like-for-like comparative. We only started that JV in around April last year. So there's not a full 6 months of trading in that comparative.

This is the first time you are seeing this slide, and this really talks around our retail sales. And by retail, what I mean is sales to supermarkets, as you would know, inside the likes of Spar, Pick n Pay, ShopRite and Independence. That business actually declined by 0.78%. So again, I think that reflects what's going on in the SA economy to some degree and in line with some of the reporting you're seeing from other retail-associated businesses. I think there's a reason why we've done that, and more importantly, we're going to be talking a lot more around retail going forward. We have taken a decision to in-source our distribution from the 1st of October. So previously, we were outsourced. So whilst we might have handled the key accounting and the manufacturing and some of the primary logistics very limited, we have now pulled that business in-house, and that is going to create some changes in our financial reporting.

So I'm not going to go into the exact details. I'm really trying to just give you a sense of the moving parts because we are even getting to grips with some of this. More difficult because it's going to be mid H2, so October, you already had 1 month, so your comparatives are going to be quite difficult. But there's going to be some quite big swings because the trading terms payable to the retailers, which as you know, can be quite significant, are going to move as an expense for manufacturing to the revenue line in logistics. So there's going to be quite an effect there. The margin's going to -- or most of the margin would transfer from manufacturing to logistics to cover the food trading term costs, which again will be quite notable.

So -- but simplistically, logistics ultimately receives distribution income previously paid to third parties. So that's the simple part, but getting there is not as easy as it actually sounds. So the net result of all of this is going to be an improvement in both logistics profit and expense-to-turnover ratio in manufacturing. That's, obviously, we've got to get it right first, but that's the theory. And I think the October integration so far has gone well and has met our expectations. And why I raise it? It’s not a small amount because at revenue line, it's around ZAR 170 million per annum, and we obviously hope to grow that. So you're going to see some shifts around the supply chain business to accommodate that.

The frozen product, we do supply some frozen product to retail, not to be confused with the Frozen For You business, please, is also not going to be in-sourced. That's not the full basket. Unfortunately, there is going to be roughly a ZAR 10 million hit in H2. And what that is really around is the destocking effect. So you've had a chain that has built up stock, and we are now having to pull that back, and there is the financial accounting effects on that. And we think through the new system, we're going to be a lot more efficient and be able to hold a lot less stock. There, obviously, will be different and more positive impacts on working capital, but from a P&L perspective, we're going to feel some pain with this transition, just really as a once-off, and I'll talk about that again at the year-end results.

So moving on, in terms of wrapping up manufacturing, again, I think that the team have done a fantastic job in terms of navigating some of the low food inflation environment, making sure so as we remain competitive. They had 3 key goals that we gave to you at year-end. All of those are well underway. I mean I don't think that we could claim that they are achieved yet because they are a journey, and the team assures me that they're going to be well on track for our year-end presentation to be presenting 3 greens here, but it's not an easy transition that they're trying to go through. So those 3 goals that they had there, there's lots of work underway, and we're very excited, and of course, it changes the nature of the way you manufacture as well. So really, hopefully, that will also bring a lot more efficiencies to the business. And we've certainly seen that over the past 6 months. If you actually strip out some of the bumps in the results like Lamberts Bay, the team has done a great job.

So I think that wraps up some of the sort of more operational stuff. I think -- I hope we've given you some insight into the activities. I think we've been very busy over the last 6 months, but being busy because busy is not always that productive in terms of the financial results. So I think you need to disconnect the 2, but we think that there's been some good progress on achieving our objectives.

So in terms of just wrapping up, now I'd like to really just give you some outlook for the second half in probably a few bullet points. And really, what we've said here is that we are well on track in terms of our plans, but there's some work to do in terms of our next 6 months. So in terms of the first focus area where we have done some keener focus with some investments. So we need to make sure that we are focused on that. We've opened our first company store in the second half for Debonairs Pizza. So that's going to -- although not reported on the first half, we've got work to do now in the second half, and the AME team are very focused on that.

We have to execute the take out of the retail business. I said to you it's going well in terms of the first sort of 20-odd days and the team have really coped but we're obviously heading into peak, and as much as we understand the business, we've still got things that we don't know, and we've got to learn. So there's quite a focus in terms of the second half of that.

We're not expecting trading conditions to improve. We're, obviously, hoping for a much better peak than last year because last year was really subdued. So we think that there's some favorable conditions around, certainly, the school holiday side of it, but we're not expecting things like Black Friday to help, and we're not expecting the economy to help. So there's going to be a challenging time. And we also feel that on the U.K. side that we've got some tough times ahead still, given the lack of clarity there.

We need to continue to pursue acquisition opportunities. So the fact that we haven't necessarily done anything, I'll remind you, it doesn't mean that we're not looking, and we continue to be very focused, particularly around the brands and any potential upstream manufacturing opportunities. So that's really where the focus lies. And I think it goes without saying that we want to continue to drive profitable, sustainable long-term growth. So we are not looking for short-term gains right now. Everything we're doing is focusing on the business model, and we're having to take some short-term pain at times, but we think that there's some benefit around keeping our eye on the prize in terms of long-term growth. We're a long-term player in this category.

The key, key focus is around Leading brands, and a key part of the business is to continue to deliver like-for-like growth ahead of food inflation, particularly when food inflation is as low as it is and not necessarily showing signs of any ramp and tick up at the moment.

In terms of the supply chain for Leading brands, again, making sure that the cost drivers remain competitive, and you've seen some of that conversation in the logistics and manufacturing results now. And really, as the market becomes competitive, our supply chain needs to react and has reacted. So the times are difficult out there, and it's -- there's no reason why it should be any better for our supply chain. The Leading brands team need to make sure across the board, not just from Famous Brands, but from all of our supply chain partners that we're getting a competitive deal.

So I can't see the pressure that we felt in logistics, not coming through in H2. I think there'll probably be some lesser pressures. But again, if food inflation is not moving, we're going to feel that pressure coming through. And of course, we also have Western Cape relocation in the H2 results. With the relocation, you don't know what you don't know.

And as Derrian said earlier, GBK just needs to keep its eye on focusing on the casual dining market and outperforming that. You can't do a lot more than what the market will allow you to do and making sure that you are winning against your competitors.

And we have to continue to rationalize underperforming assets. The business, we've got lots of moving parts. I think you've seen that over the last 6 months and probably the best part of 18 months. So we continue that journey, and we're not going to be stopping that.

So I think that just wraps up the outlook in terms of the next 6 months. And hopefully, we can deliver on that.

And then we'll move over to questions now.

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Questions and Answers

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Darren Paul Hele, Famous Brands Limited - CEO & Executive Director [1]

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So (inaudible) who is our group financial executive, has been analyzing the questions and he will read out those questions for us. Are there questions (inaudible)?

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Unidentified Company Representative, [2]

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We currently have like one question online from (inaudible). And the question goes as this, what are the long-term growth plans and strategy in the U.K.?

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Darren Paul Hele, Famous Brands Limited - CEO & Executive Director [3]

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Derrian and I will answer that. I mean I'll answer it. I think right now, we are focusing on what we have in terms of GBK, particularly. I mean Wimpy is a -- I suppose, an export from SA, and that will continue. But from GBK, right now, there's not a focus on opening new stores. There's a focus on managing what we have and really waiting for the market to turn. So I think we need to wait for the market to turn to probably answer that question properly because right now, we're focused on the operational side of the business and there's not a focus on driving growth of new stores in the business. And I think if you understand the business model, you'd understand that's probably the key driver in terms of what the long-term strategy would be is getting and reaching more consumers. So at this stage, we're very much focused on operational execution and keeping ahead of the market. I don't know if you want to add to that Derrian?

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Derrian Nadauld, Famous Brands Limited - Managing Executive of Franchising & Logistics [4]

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Yes. I think that's fair, Darren.

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Unidentified Company Representative, [5]

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We have no further questions at the moment. I think we'll just take 2 minutes to get any more questions from online.

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Darren Paul Hele, Famous Brands Limited - CEO & Executive Director [6]

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So I suppose we can take that as a compliment. So -- and I'm sure we'll have lots of questions from shareholders as we engage over the next couple of days and look forward to some of those engagements.

I think (inaudible) if nothing else has come through, I think we can probably close out then and move forward. Nothing else?

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Unidentified Company Representative, [7]

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Nothing else on the line. I think we can close off the session.

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Darren Paul Hele, Famous Brands Limited - CEO & Executive Director [8]

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Well, great. Well, thank you to everybody for attending today and for the interest in our business. We really do appreciate it. We look forward to engaging with you again in May when we deliver the full year results. And I think from our perspective, we are confident that our business model is robust, and we're doing the right things in a really tough environment. So we're just going to keep focused on that for the next 6 months and recap with you at the next engagement. But thanks once again, and thank you to all the FB team who've joined in. Hopefully, you've gained a bit more insight into our performance over the past 6 months. Much appreciated.