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Bidvest optimistic after strong results

PHS acquisition represents ‘a sweet spot in hygiene services’ as entrenched Covid behaviour is likely to deliver profits well into the future: CEO Mpumi Madisa.

FIFI PETERS: In December 2019 Bidvest announced it was buying UK-based hygiene business PHS for £495 million – around R9.1 billion at the time. Today that business has boosted the company’s profits as hygiene is all that people can think about with the Covid-19 pandemic requiring us to wash our hands and stay sanitised.

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We talk about the company’s [annual] results with CEO Mpumi Madisa. Mpumi, thanks so much for your time. I wonder if you guys speak internally about how this acquisition came at the perfect time for the Bidvest Group. It was announced even before the pandemic brought the world to a standstill.

MPUMI MADISA: Hi Fifi, thank you so much for the opportunity. Sometimes you get it right. Sometimes you get the timing right and you get the asset right. I suppose that’s exactly what happened with us with PHS, and you’re absolutely correct. We made this decision to focus on growing our hygiene footprint globally before the pandemic happened, and clearly it was the right strategy. We’ve chosen a sweet spot in hygiene services, we’ve made the right acquisition in acquiring PHS, and now that we’ve got 12 months’ worth of trading that business has also exceeded expectations in terms of organic growth. So all in all a really, really good decision.

FIFI PETERS: In terms of the momentum to trading and the performance of PHS, what do you see that as, as the world now tries to ensure that all its citizens are vaccinated with speed?

MPUMI MADISA: That’s great. So PHS has benefitted quite significantly from services and product that they’ve supplied into vaccination sites, into testing stations and so on. Of course what we are seeing is that as the global vaccine programme is progressing the UK in particular has done exceptionally well in terms of rolling out their vaccination programme. We do expect some of those sites to reduce in number.

But what is also happening in terms of vaccines, I suppose, is that we’re preparing ourselves for a time where Covid is going to be like the flu vaccine.

We’ve already heard in the UK they’re going to be taking bi-annual shots of the vaccine. Some of those sites are going to remain, so we’ll still be able to get some of the benefits that we’re providing into those sites. Countries globally are also saying that we’ve still got to keep the Covid protocols of washing hands and sanitising going, so we’re very comfortable that PHS and our other hygiene businesses will be able to continue benefiting.

FIFI PETERS: I was at a petrol station yesterday and there was a man who walked in with his child; the first thing that his baby boy did was to reach out at one of the portals that had sanitisers. I realise now that this behaviour of wanting to constantly stay hyginated is something that’s going to stick with us. Therefore the question arises: what are the plans then for PHS?

MPUMI MADISA: PHS already, from a market-share perspective, is number one in the UK; they’ve got a 30% market share. We’ll still try and do some smaller bolt-on acquisitions for them, but clearly we couldn’t do a big acquisition in the UK.

Then outside of the UK, Fifi, we are going to be looking for other hygiene targets.

We have already started looking. In Europe, as an example, we’ve got a nice pipeline. Unfortunately, because of the travel restrictions, we haven’t been able to travel, and you don’t do an acquisition on Zoom, right? You have to go into the country, meet the management, walk the floors, do a proper due diligence. We’re hoping that towards the end of this calendar year we’ll be able to travel, and we certainly have more acquisitions in the hygiene space that we would like to conclude.

FIFI PETERS: How do you plan on paying for them? Mpumi, I think what did stand out in your results also was the sort of wiggle room that you have had in terms of your lenders and settling some debt that was due in September, but also getting access to further debt. So how are these acquisitions going to be paid for?

MPUMI MADISA: Our policy in terms of how we fund acquisitions is always through debt. We’re very comfortable that we’ve got sufficient headroom. Our net debt to Ebitda [earnings before interest, tax, depreciation and amortisation] at the moment is 1.8 times. We’ve got our own internal tolerance level, which is a two-and-a-half times, which is below the bank covenant. So we’re very comfortable that we’ve got sufficient headroom.

And then also, just more broadly from the gearing perspective, these businesses are highly cash-generative. Hygiene businesses convert more than 100% of trading profit into cash. You are also buying equity machines, if I could call them that. So we’re very comfortable that even from a leverage perspective we’ll stay within our tolerance levels.

FIFI PETERS: Talking about the other parts of the business, how has work-from-home affected demand for your professional services that you provide to companies with the rise in a whole lot of vacant offices over the period?

MPUMI MADISA: Occupancy levels are very low, particularly in South Africa. We are seeing occupancy levels of around 10 to 15%. So it is quite significant. But it’s not across all business. This is mainly kind of financial services. It’s your auditors, insurance companies and so on, so it’s not across the board. But we are seeing very low occupancy levels.

What we have been able to do, though, is to offset. Occupancy translates into lower contractual revenue, but we’ve been able to more than offset that decline with non-contractual work, whether it’s specialised Covid cleans, when someone has Covid-19 in the office and you have to vacate and decontaminate the office. We’re obviously selling more consumables. Net-net, people are washing their hands more, so we are providing more soap, we’re providing sanitisers, and so forth.

All of that kind of non-contractual work is more than offsetting the decline as a result of the kind of work-from-home practices.

FIFI PETERS: And then the other parts of the business – are you comfortable with the performance in, for instance, the freight and logistics division and even the branded products segment where you house Adcock?

MPUMI MADISA: Very comfortable. The freight division really performed very well. Most of our big businesses, the terminal operations, our bulk-liquid operations, bulk agric and bulk commodities have done exceptionally well. The pressure in the freight division has really been in two main businesses, Bidvest International Logistics and SACD [SA Container Depot], because there’s a significant decline in container volumes. Those are the only two businesses in the main that were negatively impacted, but the rest of that division is performing very well.

Branded products – also a very strong contribution from Adcock [Ingram]. Adcock’s trading profit contribution in that division is more than 50%, so it’s quite material. We are very comfortable with Adcock’s performance.

The balance of the division also did well to recover from FY ’20. It is greatly impacted by the kind of work-from-home scenario, because we do provide office furniture, stationery, office automation and such things. There we don’t have the non-contractual piece to offset, so we all feel that pressure, but generally we are still very comfortable with the performance.

Our automotive division also has performed very well. It implemented a strategy of doing good-margin business instead of chasing volume, and that cost base has been aligned well. So we also had a very, very strong performance from automotive.

FIFI PETERS: Lastly I want to talk to you about your board. I stand to be corrected, but I think that Bidvest’s board is the only one among the top 40 companies where females are in the majority, and where black people are also in the majority. Have you received any backlash from those who think that it’s not equally balanced?

MPUMI MADISA: No, we’ve received no backlash. In fact, we’ve been congratulated for the diversity. The reality is that we are a South African business and we all strive for the demographics of our organisation to represent the demographics of the country, and that’s what we’re working towards. So, yes, our board is 80% black, 70% female. And one level below that my exco team is 50% black and 42% female. We’re working towards making sure that at all levels this organisation represents the demographics of the country.

FIFI PETERS: Mpumi, I was quite impressed as a female when I saw the board composition, and also to hear that you’ve received praise for that. But thank you for your time. We will leave it there. That was Bidvest CEO, Mpumi Madisa.

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