Chairman's and CEO's report
Review of results
The board of directors reports on the results for the 18 months ended 30 June 2007. Operating profit (excluding the pension fund surplus) grew by 5% for the twelve months to June 2007 (“2006/7”) compared to the twelve months to June 2006 (“2005/6”), despite significantly lower margins in Bull Brand Foods caused by adverse market conditions. Headline earnings per share decreased from 49,1 cents to 35,5 cents due also to 11,8 cents relating to the once-off pension fund surplus accounted for in 2005/6.
Revenue for 2006/7 increased by 17% from R3,1 billion to R3,7 billion due to double-digit growth in all operations and the inclusion of R121 million of revenue from Brenner Mills. The improved performance of the leather operations and solid results of the other divisions compensated for the lower Bull Brand results. Details of the performance of the operations are provided in the operations’ reports.
Balance sheet and cash flow
An increased interest-bearing debt-to-equity ratio of 43% reflects the incremental debt assumed on the acquisition of Brenner Mills as well as additional investments in working capital to finance increased activity levels.
In addition to fixed assets and working capital acquired in Brenner, capital expenditure of R147,2 million was incurred during 2006/7, the bulk of which was in the automotive division for the rollout of the new Toyota Corolla, Toyota Hilux and the Mercedes Benz C Class. Capital expenditure of R201,2 million (including R144,8 million of expansionary capex, R97,7 million of which relates to the Hosaf expansion) has been approved, which will be funded out of operating cash flows and borrowings.
Industrial segment
FELTEX AUTOMOTIVE
Continued growth in sales was driven by increased market share, the improved performance of Feltex Autoleathers and the inclusion of Caravelle Carpets in the results for the first time. Although vehicle build did not grow significantly over the period due to two model change-overs, long-term growth prospects remain intact.
INDUSTRIAL FOOTWEAR
The strategic decision to import footwear has proven to be a success, and further increases in revenue and operating margins have resulted. Demand for gumboots remain strong, driven by increased volumes in mining, security and construction and the strength of the brands.
HOSAF FIBRES
Profitability has continued to improve due to the increased capacity of the continuous polymerisation plant. The announced doubling of Hosaf's PET capacity in 2008/9 will ensure that Hosaf becomes a major player in the South African market.
Consumer segment
JORDAN & CO
Own manufacturing volumes were static for the period and margin pressure by the retail chains continues, but import volumes have increased significantly, particularly in the main brands of Bronx, Asics and Olympic.
BULL BRAND FOODS
The high cost of weaners and high maize prices have resulted in greater margin pressure being experienced in the fresh meat division. The cannery performed well during the period, driven by strong consumer demand for convenience products. Decisive management action has been taken to address the cost challenges.
BRENNER MILLS
Margins have increased in the 2006/7 financial year as a result of a strong marketing drive, a brand awareness campaign and synergies resulting from integration into the KAP group.
GLODINA
Margins were maintained despite pressure from retailers, and Glodina has invested further in capital expenditure to maintain its competitive edge. The potential from the hospitality sector remains largely untapped, and consumer demand remains strong.
Corporate activity
Effective 1 May 2007, the group acquired 60% of the issued share capital of Brenner Mills (Pty) Ltd, which holds significant synergistic potential with Bull Brand Foods in terms of marketing, distribution and animal feed. The group holds a call option over the remaining 40%, details of which are provided in the notes to the annual financial statements.
Effective 1 July 2006, the group acquired 100% of the issued share capital of Caravelle Automotive Holdings (Pty) Ltd, which manufactures loose-laid carpets for the South African automotive market. Synergies with Feltex Automotive Trim are substantial.
A 50/50 joint venture was formed with the Australian Futuris Automotive Group. Futuris Feltex (Pty) Ltd will produce tufted carpeting and supply Feltex Automotive Trim for the Mercedes Benz C Class and the export market.
Corporate governance
The directors subscribe to the principles incorporated in the Code of Corporate Practices and Conduct as set out in the King II Report on Corporate Governance (King Report) and comply therewith.
Sustainability
The group recognises the impact of its operations on society and the environment, and is constantly striving to improve the well-being of all stakeholders in this regard.
Directors and officers
There were no changes to the directors and officers during the period.
Capital distribution
The board has declared a final distribution of 3 cents per share, bringing the total distribution for the 18-month period to 17 cents (2005: 12 cents). The distribution cover is approximately 3 times (2005: 3,8 times). The policy of the group is to declare distributions annually after the year-end results have been finalised.
Outlook
The expansion of the Hosaf plant is expected to generate long-term returns for shareholders, and growth in volumes and parts penetration at Feltex Automotive is expected to continue on the basis of industry forecasts.
The consumer divisions remain well placed to maintain or improve operating margins into the future, driven by the strength of our brands and an improved performance from Bull Brand Foods. Brenner is expected to perform well and to add considerably to the operating profit of the consumer division.
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| C E Daun Chairman |
P C T Schouten Chief executive officer |
| 7 September 2007 |
