The suboptimal integration of new Supply Chain projects into JSE-listed Famous Brands has eaten into the company’s pleasing top line turnover growth, which, therefore, failed to translate into corresponding growth in operating profit for the the six months ending August 31.

In addition, the business undertook a range of ambitious projects to integrate new high-volume low-margin business into its Manufacturing and Logistics operations, which proved more onerous than anticipated. 

Group revenue grew to R1.998-billion, up by 27% on the R1.572-billion reported for the 2014 corresponding period, while operating profit increased 14% to R347-million compared with the prior period’s R303-million. 

The operating margin declined to 17.4% on 2014’s 19.3%.

Famous Brands group CE Kevin Hedderwick said on Thursday that further costs were incurred owing to the final phase of the Group’s Fit-4-Purpose initiative, a programme aimed at bringing the business closer to its customers (franchisees) and consumers. 

“This investment has now been concluded and the resulting structure will play a significant role in building capacity and capability for the group’s ongoing growth.”

Besides internal challenges, the company also battled economic conditions and constrained consumer spend in most of its trading markets to report a strong increase in revenue for the period under review.

Famous Brands reported improved cash generated by operations before changes in working capital of R385-million, a 21% increase on the R318-million in the corresponding period.  Working capital increases were R108-million, resulting in a net cash flow from operating activities of R149-million on 2014’s R162-million.

Basic earnings per share (EPS) increased by 14% to 242c, while headline earnings per share (HEPS) rose 14% to 241c.  Diluted EPS improved 13% to 240c, while diluted HEPS grew by 14% to 240c.
 
Net cash outflow from investing activities of R117-million, compared with R60-million during the six months to August 31, 2014, was incurred primarily on account of acquiring controlling stakes in Retail Group Botswana and Cater Chain Food Services.
 
No borrowings were raised during the period, with Famous Brands’ net borrowings of R45-million up on the 2014 period’s R25-million, representing a low net debt/equity of 3% on 2014’s 2%.
 
An interim gross dividend of 190c a share, an increase on the 155c in the 2014 period, had been declared, payable out of income.

SUPPLY CHAIN
Famous Brands’ integrated Supply Chain comprised its Logistics and Manufacturing businesses.  In the review period, consolidated revenue increased by 33% to R1.58-billion and, in line with this, operating profit rose 33% to R14-million. The operating margin was 9.1%, in line with the 2014 period.
 
The Logistics division reported revenue of R1.35-billion compared with R1.04-billion in the 2014 period, an increase of 29%, while operating profit rose 12% to R43-million.
 
Hedderwick explained that this disparity was largely owing to the initial set-up costs of commissioning Famous Brands’ new Crown Mines Distribution Centre, designed to take on Gauteng’s previously outsourced frozen and chilled product basket.

“The facility was commissioned in May and it is anticipated that costs will stabilise in this high-volume, low-margin business once the operation builds momentum.

“We are optimistic that as the Crown Mines Distribution Centre facility is bedded down,
opportunities exist to enhance efficiencies and extract economies of scale across Gauteng.  In this light, the Logistics division’s margins should normalise and improve,” affirmed Hedderwick.

The division’s operating margin declined to 3.2% on the 3.7% reported for the comparable period.
 
During the period, capital expenditure of R15-million was incurred on fleet expansion and facility upgrades.

The Manufacturing division recorded an increase in revenue of 42% to R848-million, including the first-time contribution of the high-volume Cater Chain meat manufacturing business acquired in April.  Operating profit improved 45% to R101-million, while the operating margin rose very slightly to 11.9% compared with the 2014 period’s 11.7%. 
 
“Margin growth was contained by the impact of the low-margin Cater Chain business and the delayed integration of the previously outsourced pork and halaal products business [owing] to unforeseen Competition Commission conditions,” advised Hedderwick, adding that the initial take-on of these products started on October 1, six months later than expected.
 
“Margins were also forfeited in the deliberate strategy to support franchisees’ price competitive offering to cost-conscious consumers,” he pointed out.
 
Capital expenditure of R20-million was incurred, primarily on expanding production capacity and capability at the Coega Cheese operation.

In the forthcoming period, Famous Brands highlighted that further capacity building projects would be implemented, including the integration of the balance of the group’s pork basket requirement into the Cater Chain business over the next two-and-a-half years, in line with Competition Commission conditions. Thirty per cent of the basket was integrated into Cater Chain from October 1.  “Once completed, this development is expected to transform the Cater Chain business,” Hedderwick pointed out.
 
Further, a cream cheese manufacturing facility within the Coega Cheese plant was commissioned in September and was expected to be at full production capacity by the end of October.  This advancement would provide an additional income stream to the business.

FRANCHISING
Famous Brand’s Franchise division delivered combined revenue of R321-million, up 7% from the 2014 period’s R299-million, while operating profit improved 4% to R181-million. 

System-wide sales across the total franchise network, covering South Africa, the rest of Africa, the UK and the Middle East, grew 10.3%, while like-on-like sales increased 4.9%.  Significantly, the group’s mainstream brands grew system-wide sales by an average 10% and like-on-like sales by 5.2%.  Famous Brands also noted satisfying performance by its emerging brands.

“These solid results are testament to the group’s deliberate strategy of building a portfolio of brands which appeal to consumers across a range of dining occasions and income groups,” Hedderwick commented.
 
As of August 31, Famous Brands had a global footprint of 2 565 restaurants, opening 75 restaurants across its brand portfolio during the period under review. A further 139 new restaurants were scheduled to open during the remainder of the current fiscal year.
   
The division’s performance was also expected to be enhanced by continued investment across the group’s existing brand portfolio aimed at driving same-store growth and the benefits accruing from the integration of the recently acquired franchise operation in Botswana.
 
“In addition, given the good results delivered by the group’s table service evening-dining restaurants and in line with management’s stated intent, further opportunities to expand in this market segment will be pursued,” Hedderwick said.

He emphasised that Famous Brands was satisfied that the range of interventions across the component parts of the business – Franchising, Logistics and Manufacturing – would enhance the group’s performance over the next six months.