Darren Hele: Welcome on behalf of myself and Neli to our FY27 interim results presentation hosted from our Midrand offices. We value the interest that you've shown to register for this live audio webcast. Special welcome to the Famous Brands family from our various offices. We've all worked harder and smarter to produce these interim results in a very difficult trading environment. They are a solid set of results. Definitely not where we'd expect it to be on 28 February. Little doubt that fuel price and associated effects have constrained consumer spend and hampered our top-line performance expectations from day one of the reporting period. We still have a few specific operational drags on performance that are work in progress or actions that we are taking that have been closed out and are aligned to our strategic plans. No surprises there.
Darren Hele: Definitely less of a to-do list than this time last year, and no distraction creeping into the business. I always take the opportunity at this point to remind everybody about the driving force in our business, that nothing happens in our business unless a sale is made at a restaurant. The agenda will be very simple. Roughly 50 minutes of presentations with allocating 10 minutes to Q&A. The presentation, together with the supplementary slides, will hopefully assist you to answer some obvious questions about our business. The agenda will be split between Neli and I. I will start off, and then hand over to Neli, and then our colleague, Ntando Ndaba, who's our Group Risk Executive, will handle Q&A. For those of you who may not have used this before, please log your questions via the portal. It's on the top left of your screen.
Darren Hele: You can also make your screen a full screen. There's a button at the bottom right-hand side of your screen that you can use. Please feel free to put those questions in, and Ntando will put them through to us later. From a performance perspective, we're definitely a focused performance, and as a result of an increased cash flow, which has really been good. From our perspective, definitely a highlight for the year and very important as we head into H2. Really Leading Brands has led the performance, which underpins the resilient model of our Leading Brands. Supported by supply chain, which has been underpinned by a multi-year investment, and it's proven itself through these difficult times. We've invested through the difficult times, and it definitely bodes well for the future.
Darren Hele: We are, however, robustly addressing underperformance in some segments where we need to reduce cost distractions on the business. We have some good news that we have returned Retail to a profitable level. Retail was a distraction this time last year, if you may recall. We have made good progress to claw back to a solid margin despite the tough trading environment. Really of the last of our six highlights for the interims is that we remain a significant contributor to the South African economy and society as a proud B-BBEE level 1 contributor. This, as the saying goes, reflects our work both on and off the field. As you may have seen in the announcements already, we have some very, very strong numbers that we have put through. One would always like to be driving the arrows up on all six metrics.
Darren Hele: We are very proud of the three metrics that we focused on here, where we have generated strong free cash flow, strong revenue growth contextually given the environmental challenges particularly, and the pressure on the consumer. As our cash flow cycle has improved, post some of our investments, we have been able to focus on the dividend. Neli will obviously elaborate on some of these numbers a bit later. There has obviously been pressure on our headline earnings. As is obvious and some pressure on our operating margin. I think after her presentation, you will be able to get some absolute clarity on those areas of pressure that are related to the areas that we need to improve in the business. Again, as I said in the opening, are work in progress. There should be no surprises on some of these metrics.
Darren Hele: We would have loved a more conducive environment to be able to drive volume better, which would reflect through to the bottom line. We think given the circumstances, the driving the right metrics has worked and certainly the revenue growth has been very encouraging in tough times. Our franchise brand footprints remain relevant for new, and even more importantly, with our consumers. QSR is leading the way in terms of our business and further underpinning our relevance in consumers' lives and continuing to get closer to where the consumers live, work, and play, as can be seen on the chart in terms of our net restaurant growth and the size of the relevant networks in QSR. Our casual dining portfolio in Leading Brands has had a quieter time relative to their QSR colleagues, but Mugg & Bean and Milky Lane benefited from format-led growth.
Darren Hele: Wimpy remains a key part of our brand portfolio, giving consumers easy access to an affordable and pleasurable casual dining experience, and in some cases, may be their first casual dining experience. The story of Signature Brands is not as rosy as Leading Brands, and this remains work in progress in our business. Signature Brands have experienced some closures in the fine dining area and a deliberately slower period as we work on the model. Admittedly, slower pace than we had aimed for, but nothing we are concerned about, and we are marginally behind our targets for the period. We are very, very excited about H2 activity, and we forecast to open additional 80 stores in the second half, and the pipeline looking forward beyond H2 remains buoyant.
Darren Hele: With interested franchise partners and lots of pipeline opportunities, the property market. With 3,070 restaurants under our umbrella right now, we are very confident about our ability to open the restaurants in H2 and beyond. South Africa remains our home. It remains the driving force in our business, and the distinction in our business is important because Leading Brands is driving the growth in the SA context, and that is supported by supply chain, which is driving our operating profit. We continue to grow our SA footprint, and we continue to be a strong player in the SA market. We remain excited about SADC. However, it has come under significant pressure in the last six months, particularly Botswana, which has been challenging, and Neli will expand on some of that later.
Darren Hele: However, Southern African Development Community remains a key growth lever for us despite some of the challenges in these results.
Darren Hele: We have actively and deliberately slowed down in the AME region while we have been refocusing. The loss-making has been clawed back in this period versus prior, and that recovery will definitely accelerate in H2. Signature Brands remains work in progress, and we have lots to do to claw back that to profitability. The UK market is challenging at present, with no imminent relief in sight in that particular market. As I said earlier, Leading Brands is a driving force of our business. It has maintained momentum and delivered growth despite the challenging market conditions. Distinction between casual dining restaurants and QSR restaurants remains important in the Leading Brands business. Neither is less important, but they are different in the consumer's life, which we respect, and we work towards servicing the needs of those consumers.
Darren Hele: The new store restaurants and revamped restaurants have shown strong growth in the marketplace, and our increasing competitive presence in the right places is important to us. That growth that we talk about and the ability to open net new restaurants is format-led, and that growth continues to create opportunities as we focus on drive-throughs, smaller restaurant formats that meet consumer needs and consumer demands. Consumers are not always just going out. From our perspective, pin drop delivery or home delivery, as some people call it, continues to be a channel where we work well in and not just leave to third-party aggregators to take product to the consumer. Our franchise partners remain committed to our business. They continue to show interest, and they like our business model, and they continue to underpin and invest in our brands.
Darren Hele: As the tech world expands, it is not just about selling hamburgers. Our investment in Munch and the rollout is simplifying our technology program and ultimately leading to an easier tech stack at store level for our franchise partners. Last year, this time, that number was sitting at 453. We have made good progress over the reporting period. Now getting down to the stuff that really matters, and that is growth. In terms of our Leading Brands portfolio, we have again distinguished there between casual dining in the purple and quick service restaurants in the yellow. We have provided the quarter-on-quarter performance given the nature of the trading environment that we are in.
Darren Hele: We don't report on quarters, but I think given the context of around Easter and of course, the fuel price that has been biting. With fuel prices only kicking in from April, there's been some serious pressure building on the consumer. Even then, I think the context of what we've done at system-wide level, which reflects the growth in the restaurants, is important, and that's really brought us through to a 2.7% average. Again, you can see some more pressure on casual dining than on QSR. The QSR team have delivered particularly well over this reporting period. The like-for-like picture is not as impressive for casual dining, and there's a strong performance that has remained in tough times for QSR. Casual dining has come under pressure, particularly under Q2, and that has put our like-for-like at a lower number of 0.8% for the reporting period.
Darren Hele: Again, given the context of the consumer, the pressures in Q2, we're very comfortable with this number at this point in time, and we believe there's obviously runway to recover and improve. So it reflects the environment, and it does reflect the nature of QSR versus CDR, and again, around the affordability gap particularly. Our supply chain business, as you saw in the earlier graph, which is a key driver of operational profit, is important. Owning our physical supply chain remains an integral part of our business model. It's really about the back end in service of the front-end franchisee and front-end retail. We've reinvested capital in our platform to modernize it during tough economic cycles and really started to see that benefit flowing through in these particular results.
Darren Hele: We've integrated more third-party products into our logistics platform, such as Coca-Cola, which services franchisees in the part, and in some cases we've added to our basket to service retailers better. Just to clarify, not the Coca-Cola basket for retailers. This is strategically important given the value of owning the supply chain in our particular business. We've been growing the basket or the manufacturing basket when appropriate, and the manufacturing team have been focused on where appropriate insourcing volumes that we can put through to our franchise partners at same or better quality, price, and service. We had faced challenges in the retail sector, as we'd reported. Sibs and the team have done a great job of clawing back some of the challenges that we've had. We've had significantly better economics in the retail mix and volume recovery is expected in H2.
Darren Hele: Most of the clawback had happened in Q2, so we think we'd certainly show some better recovery in H2 with volume growth. We continue to invest in manufacturing, which has been moderated with capital, and focused on value projects which actually create value within our business. The manufacturing team is very focused on how they deploy capital and working hard at moving the needle. Of course, the big shadow, I think, in the SA context and globally is the increase in fuel pricing. We are comfortable in that we have been able to partially recover some of that through agreement with our franchise partners on a special levy, which is quite unique to obviously our closed loop system. So we haven't necessarily taken the full hit of the pricing.
Darren Hele: We have quite a unique model and there was some margin recovery that we were able to do, not necessarily the full amount. The fuel price fluctuates dramatically from month to month. As reported previously, beef and coffee had been putting significant pressure on the business. It is good to report that these key commodities are showing less pressure on the business and have eased some of the pressure at the front end around menu pricing for us. There is still pressure on beef, but definitely not the levels that we spoke about when we last reported to you. I am going to take a little bit of time around this particular graph, but really what it does is explain the benign overall price mix effect that is supporting our focus on containing inflation through the supply chain.
Darren Hele: That is really what we are trying to do, is manage that inflation through to franchisees. We think we are doing a pretty good job of understanding it, given the dynamic basket. We are, however, suffering with some mix challenges, and that is a variety of factors that work through that. If you focus on the graph, you can see that volume was definitely led by the retail recovery and of course, growing the basket as I spoke about. Volumes definitely starting to pick up because of the different channels that we have. This indicates that the overall revenue per unit and mix is lower year-on-year and suggests that the supply chain is helping to moderate inflationary pressures across the basket.
Darren Hele: Now, that does sound like a bit of a mouthful, but really what it is indicating in our business and the numbers that we look at is that we are starting to become more efficient in the supply chain as a result of the investment. The challenge is the mix, and we need to work through that. The higher inflation in the prior period has driven key commodity pressures, and those are now easing, as you can see in the inflation number that is there. That is obviously primarily a food inflation, but there is packaging in that too. Now let me just talk about the complexity of the mix, because that is the negative number. I think volume can easily be explained and inflation can easily be explained and there has been some good work there.
Darren Hele: The mix has not been favorable, and it continues to move around as the brand portfolio performance changes and menus evolve. As an example, at Orazio, 53% of line items were bought in versus 57% last year. So we bought in less line items. 41% on value versus 50% last year, which is really indicating that the manufacturing volumes now represent 47% of our volumes. The increased utilization of our manufacturing capability, together with the changing external purchase mix, is helping contain the overall price carried through the logistics basket and ultimately to the franchisees. Some of the challenge within this is the introduction of a strong beverages category into our logistics network. Beverages were the major volume driver, but their GP margin was lower, illustrating the mix margin challenge that I have spoken about.
Darren Hele: We ultimately believe that we are well-positioned to convert the volume growth into margin growth, that is the most important thing, particularly given the low retail sales this year. We can do that through better mix, better distribution economics, and tighter transport control. Moving to some of the more challenging parts of the business. I have spoken about Leading Brands and I have spoken about supply chain. The Southern African Development Community area, as I have spoken about, is a key part of our growth and an area that we are driving hard to perform in. It is a key part of the Leading Brands, and it is an exciting growth prospect for us, despite Botswana being a detractor at present. Unfortunately, the decline in like-for-like sales in Botswana has continued.
Darren Hele: Botswana is a key detractor of performance, given the number of company-owned operations, and we are seeing a decline in these like-for-like sales in that particular market. As an example, we saw a 13.5% decline in like-for-like sales in Pula terms in the market for the reporting period. The transaction counts in that market remain under pressure, with pricing and mix unable to compensate fully for the lower customer frequency. The cost base is being managed, reflected in lower operating expenses and store-level labor savings. The benefits are not yet sufficient to offset the impact of lower revenue productivity. We are absolutely confident that our partner and the team are digging deep, doing the right things to navigate these challenging times, amid an outlook that is more uncertain than any time in the 30 years that we have traded there.
Darren Hele: Neli will elaborate a bit more around some of the dynamics of the transaction that we have announced on this particular market. Be that as it may, this shouldn't detract from our optimism around the SADC market. The team have really focused their operational discipline and continued to improve operations in the region, focusing on the basics in business around product availability, service, cost management, and network optimization. We have really dug deep in this particular region and working harder and smarter. On the positive side, we have continued to grow our footprint with seven new restaurants opened. Those restaurants we are optimistic about, and they have opened across Zimbabwe, Zambia, Namibia, and Eswatini. Several markets, however, continue to experience growth. The number that is really reflecting there is the size of Botswana is pulling the market down.
Darren Hele: Those markets too suffering with fuel pricing and with some of the dynamics that we are seeing in the SA market, really giving us more encouragement about being optimistic about this market. The consumer in these markets is not fundamentally different to the SA consumer. They are the same, suffering the same economic conditions, and they feel the same, and we are leading with value in these markets as we are doing in the South African context to make sure that we are relevant to the consumer, even though the consumer may have different nuances to what we are accustomed to. Of course, there is going to be some challenges. More recently, the fuel situation in Malawi has put pressure, and that would put pressure in H2. It is a basket of countries, and you are going to have a basket of outcomes.
Darren Hele: We are, however, focused on where we're expanding, and we're very specific and deliberate about what we're doing and really focusing on the markets that demonstrate attractive growth potential. Targeted growth is happening in this particular region, and the team is very focused on that. The challenge in the AME context is very different, and we're probably not as bullish as I would be coming across around SADC. We've absolutely narrowed our focus down to a focus on Africa, and I'll talk about that, and really shaping the portfolio to create a platform for growth or a refocused platform of growth. We still believe that growth outside of South Africa and outside of SADC remains an opportunity which we are tackling cautiously. I need to just reiterate that. This does read as a litany of challenges.
Darren Hele: Some are past, some are present, some are tackled, and some are in process of being tackled. We have now permanently exited the UAE. Actually, subsequent to this and to preparing the documentation, we have made some progress on our legal case, and we've got a strong outcome there in our favor. That was really as a result of some challenges with a multi-restaurant franchise partner. However, the ultimate end is that we've exited the market in totality, and we have no imminent plan to return to that particular market. So the focus then would be remaining on Africa. The portfolio does remain subscale. We have limited activity in the period. We opened a single store in Lagos, but you are likely to see more activity in H2, particularly coming out of our Kenya market, where there's been quite a lot of activity.
Darren Hele: There are, however, several markets experiencing significant inflation and supply chain challenges, so it's not all easy. Thankfully, the markets we're in are typically easier to navigate and generally are English markets for us. We have one Francophone market. But generally, we are struggling with some challenges with supply chain, and the team are working hard around working through those and making good progress. The revenue decline, as Neli will talk about, is not necessarily a reflection of performance. We have had a significant change in the business model moving Kenya and Mauritius from company-owned to a franchise model. So you have the revenue that then disappears and converts to a royalty revenue. Mauritius only happened in Q1, so there are some drag on these results, as well as restructuring costs which have been now managed and is now being managed as part of SADC.
Darren Hele: The clawback in AME that I referred to in H2 is also as a result of some of that activity in H1. We've got a new operating structure which we've been working on, and that structure's been aligned to a licensed or franchise model and has been led and driven by the Leading Brands team out of South Africa. So we'll be fully out of our Dubai operations and where we were servicing some of the AME markets from. We've opened, in fact, this past weekend, our second Steers and second Debonairs in Malaysia. So our licensed partner there is focused on that second restaurant. Really a great kudos for us and the work that's been done by the team, again, in this reporting period. So very exciting for us and a nice growth story which we've spoken about before.
Darren Hele: The team will be watching that, and we hope to be opening further restaurants over the next couple of years. Again, some more challenges in the business and assure you that corrective actions are underway to restore portfolio profitability. We are definitely feeling a different trend to Leading Brands in this particular market. We are seeing a constrained consumer spend with feeling a bigger pinch on the consumer in luxury and fine dining versus what Leading Brands has particularly seen. I suppose that really does talk to ticket size and frequency versus the higher ticket size in the fine dining and luxury space. The core brand particularly, which sits as a unique model inside Signature Brands, which is our licensed company store arrangement, has continued to put pressure on the profitability with no improvement in losses versus prior years.
Darren Hele: That really is a challenge, and we are working hard on addressing that, and there has been lots of change and adjustment in that particular business model. The team continue to focus on the levers that they can pull. Probably not as simple as in Leading Brands, but focusing on value-led menu offerings, which again does reduce spend per head as much tactical and local marketing as possible and occasion-based promotions. Again, trying to focus on what the consumer needs, but it is a smaller and niche part of the business and does require a different mindset in certain parts. The captive market brands continue to perform well within that market. It is not a challenge in Signature Brands in its entirety. It is around some of the parts that make up the whole.
Darren Hele: We have commenced the revamp program in some parts of that business, so it is not all doom and gloom, and we have franchisees that are willing to reinvest in their businesses, and see value in that particular model. So comfortable again that you will start to see some clawback in H2. The Munch tech stack that I spoke about earlier, which I will not elaborate, also is getting a benefit in Signature Brands, and we are starting to see that rollout assisting franchisees in this space and helping them to better control their operations. The sales picture in Signature Brands is definitely not as rosy as Leading Brands. As you can see on the chart there, the burgundy being the like-for-like and the orange being the system-wide. We have had a very, very tough reporting period for H1 in this particular year. So work to do there.
Darren Hele: Some of that definitely driven by the company store model where we have seen the biggest drop-off in comes straight through onto this revenue line. So you will be seeing the numbers proportionately in the financials revenue and not franchise revenue. There are some closures, which is why you are seeing a growth in or a decline in the system-wide number. Hence the difference to like-for-like and system-wide, which really accounts for some of the closures, particularly in the fine dining portfolio. That is why you see that difference. So the like-for-like number not far off the casual dining portfolio with the mix, but definitely system-wide feeling some of those store closures. The UK restaurant sector is very interesting and is probably more of a challenge for us as a South African business. The cost pressures in the UK continue to erode sales performance.
Darren Hele: The consumer is very, very stretched and struggling in terms of how they prioritize their spending and their eating out. Eating out has become an expensive conversation. Those conversations are starting to be held at home or using online platforms a lot more. The consumer patterns have definitely changed, and the market is always highly competitive, and that part hasn't changed. We are seeing a definite drop-off in frequency in eating out as a broader market. We are a small player in the market, and those trends haven't been any different for us. The cost base in restaurants is a challenge. The fuel model works differently to SA, so those higher costs come through a lot quicker. They're not staged, they're not once a month. So you're feeling this constant climbing of prices.
Darren Hele: As they head to winter, the consumer's going to be feeling that a lot more. Labor is a significant cost, and that is a knock-on effect of a whole lot of things that have happened in prior years, but government continues to prioritize wages and particularly the new government. So running restaurants becomes particularly challenging with the cost on labor, and our franchisees are feeling that. That'll have a knock-on effect on to pricing, which is higher than what the consumer's willing to pay. We have worked hard at the reporting period to rationalize our own cost base, put in a new support structure. We have taken some of the support services and we've centralized them. We are doing some other activities around cost control.
Darren Hele: We still have a need to support the market, so we haven't been able to be overly radical in what we do. We need to continue to service our franchise network, but definitely have rationalized the cost base and working hard on that. As always, we have to put the consumer at the center of any market that we're in, and the team is very focused around value, convenience, and how they talk to the consumer, putting in promotions that are differentiated and experience-driven. So that work is continuing in the market and making sure we deliver on value. The convenience aspect is really driven by a high reliance on delivery aggregators. We don't have our own delivery platform there.
Darren Hele: We are reliant on the delivery aggregators, as are most of the market players, and that is a particularly high growth area or remains a high growth area in that particular market. So really the cost pressures in the UK overall continue to put pressure on the sales performance overall. Before I hand over to Neli, I think really just to summarize is that we remain absolutely confident that we can remove the drag that Signature Brands is posing from a specific part of the business. UK is likely to be challenging in H2, and progress has already been made in AME, with notable change likely in H2. So I'm going to hand over to Neli, who give you a little bit more color on the numbers behind some of the statements. Thanks, Neli.
Neli Shiluvana: Thank you, Darren. Good morning, ladies and gentlemen. Our interim results reflect the resilience of our brand portfolio. We are very proud of the strong increase in our free cash flow, and you will see that there is also improved supply chain profitability. Revenue is under pressure. However, we maintained discipline in managing costs. Our operating cost increase was below inflation. During this interim reporting period, as Darren has also mentioned, the consumer disposable income was under immense pressure because of the rise in fuel cost as well as the interest rate increase. Beyond South Africa, the persistent high cost in the UK and the economic challenges in Botswana continue to weigh on performance. Although our group results are under pressure, they remain resilient, and we executed on our strategy.
Neli Shiluvana: Now, if we take a look at our income statement for the 6 months ended August 2026, revenue increased by 2.3% to ZAR 4.3 billion, and this was mainly supported by the supply chain growth of 5.5%. Our group operating profit nevertheless declined by 4.7% to ZAR 375 million, and operating profit margin declined to 8.6%. A significant moderation in our beef and coffee bean prices also provided some relief in terms of our cost of sales. Supply chain operating profit increased by 13.3% to ZAR 230 million. However, this improvement did not necessarily offset operating results from other areas which are underperforming. We maintained tight cost control where we held our combined administration, marketing, and operating expenses broadly flat at ZAR 1.4 billion. Operational efficiency initiatives across the business, lower depreciation, and lower employee costs supported this outcome.
Neli Shiluvana: However, we did experience some higher motor vehicle and fuel costs, which partially offset these savings. The expected credit loss charge increased by ZAR 3.3 million, mainly due to some of our export sales. We spoke to you about the new debt package, which we did in the prior financial year, and those gains have come through in terms of the capital repayments and the lower margins, which reduced our finance costs for our long-term borrowings. However, the lower finance income offset these gains. We recognized the ZAR 41 million goodwill impairment relating to the Retail Group in Botswana due to the imminent sale of our shareholding interest from 51% to 30%. The transaction remains subject to conditions precedent, including regulatory approvals. I will talk more about the details further on. The tax charge remained broadly stable at ZAR 96 million compared to the prior period.
Neli Shiluvana: However, because of the lower profit before tax, it meant our effective tax rate increased due to some loss-making entities in the group. Our total profit for the period declined by 23.4% to ZAR 200 million from ZAR 260 million, and headline earnings per share declined by 3.2% to 228 cents from 236 cents. If we look at our profit pools in terms of our segment revenue, our revenue increase of the 2.3% was mainly driven by South African revenue increasing by 4.5% to ZAR 4.1 billion, and this reinforces that this is the group's primary revenue contributor. From a franchising perspective, Leading Brands remained resilient, with revenue up 2.5% to ZAR 508 million. The turnover or the performance was driven by like-for-like and system-wide turnover. The brands are continuously rolling out new stores.
Neli Shiluvana: They are innovating on new menus, enhancing loyalty programs, all in response to our consumers' changing preferences.
Neli Shiluvana: For Signature Brands portfolio, they reported mixed results, and ultimately the performance does reflect as well as the reduction in the network. Supply chain was the main contributor, increasing 5.5% to ZAR 3.1 billion, which was an uplift of ZAR 165 million, mainly driven by the volume and pricing. This does include the in-sourcing of the Coca-Cola products as well as the frozen retail basket, which was not in our prior period volumes. For outside SA, the revenue does remain under pressure, where in SADC, revenue is 18% down to ZAR 183 million, and this was negatively affected by the continued decline in Botswana, which is weighing down the performance of this segment. Similarly, UK revenue declined by 19% to ZAR 53 million, mainly due to the subdued economy.
Neli Shiluvana: Lastly, in line with our capital light model outside South Africa, we have converted the Mauritius network from company-owned restaurants to a franchise model, and this is a continuation of what we did when we converted Kenya in the prior period. This was the main driver for the AME revenue declining from 78% to ZAR 7 million. In terms of our operating profit, the group operating profit declined by 4.7% to ZAR 375 million from ZAR 393 million, with the core South African business operations supporting the profitability of the group. Operating profit improvement was driven by the top-line operational efficiencies as well as cost management across the business. The Leading Brands remained resilient, slightly growing its operating profit by 1.2% to ZAR 241 million, driven by the revenue growth spoken to earlier.
Neli Shiluvana: In Signature Brands, the operating loss widened from ZAR 7 million to ZAR 9 million, driven by the performance in some of the brands, particularly the company-owned restaurants. The supply chain business operating profit increased by 13.3% to ZAR 230 million, which was an increase of ZAR 27 million, mainly due to the operational efficiencies from the investments that we have made at higher volumes and operating profit margin was improved also by the reduction in overheads, and also that our retail segment did reach break-even point. Global pricing for beef and coffee beans moderating improved the margins or the gross margins rather in manufacturing. The infrastructure and technology investments in supply chain contributed to the improved yields, the warehousing and distribution capability, and the logistics. In terms of our corporate segment, that comprises of intercompany transactions, which also includes leasing arrangements within the group.
Neli Shiluvana: SADC operating profit decline of 77.8% is mainly due to the ZAR 11.6 million operating loss in Botswana, which if you compared the business last year, it reported a profit in the same reporting period. AME remained below break-even. However, there is rationalizing and cost management for this. The group operating profit margin declined by 70 basis points to 8.6% from 9.3% in the period. Leading Brands maintained an operating profit of 47.4%, although this was marginally below 48% in the prior period. Supply chain improved its margin from 6.8% to 7.33%. Our basic earnings per share declined by 23.4% to ZAR 1.81 from ZAR 2.36 per share, in this period. Between basic earnings and headline earnings, we adjusted mainly for the Retail Group impairment of ZAR 41 million, and post the adjustment, our headline earnings per share decline is 3.2% to ZAR 2.28 from ZAR 2.36 per share.
Neli Shiluvana: If we look at our free cash flow, I think for Famous Brands, just for a reminder, free cash flow for us is cash generated from operations less tax paid and net CapEx. The group presents a very strong cash generated, which underpins our disciplined capital allocation. The free cash flow more than doubled to ZAR 459 million from ZAR 221 million, which is a 108% improvement. This level demonstrates a significant improvement in our cash available for capital allocation, as well as our H2 working capital requirements. Our capital expenditure was reduced by 73% to ZAR 38 million from ZAR 140 million in August 2025. The group adopted a more selective investment approach, thus contributing to the improved levels in our free cash flow.
Neli Shiluvana: From a prior period, if we were to compare the results, our spend was higher, mainly due to the funds spent on the development of the Midrand cold storage facility. In this period, the investments remain focused for Leading Brands into consumer-facing technology as well as the network support and then supply chain into the infrastructure. Our investments are circumspect, and they are channeled towards achieving our strategy. The historical trends of our dividends, you would see that for interim dividends, we are increasing from 130 cents in 2022 to 162 cents per share in 2025, with an average payout of about 66%, and this was supported by the group's financial performance and strong free cash flow generation. For these interim results, we grew our dividend by 4.9% to 170 cents per share, with the total dividend growth of 6.9% over the last five years.
Neli Shiluvana: Our cash generated from operations, if we look at our cash flow, increased by 19.5% to ZAR 564 million, supporting capital investments, the debt repayments, as well as shareholder distributions. The networking capital movements that contributed to this increase include a ZAR 90 million reduction in levels of our inventory holding, which also includes the insourced products. Our trade payables reduced in line with the supply chain procurement activity. Lastly, our trade and other receivables increase was mainly driven by prepayments as well as other receivables. We then proceeded to pay interest on our debt facility as well as our tax to our revenue authorities. With the cash available, we allocated capital to investing ZAR 138 million to capital projects for routine maintenance enhancements as well as risk management, and we paid ZAR 90 million for mandatory debt repayments, including our right to use the assets in our operations.
Neli Shiluvana: We distributed ZAR 57 million to shareholders through our repurchase program, which was the first one that we have done as Famous Brands. Lastly, ZAR 262 million cash dividend was distributed to Famous Brands and non-controlling shareholders. After all cash movements, our closing cash balance is ZAR 351 million compared to an opening balance of ZAR 378 million. A part of the decline was partly attributed to the reclassification of Retail Group cash and cash equivalents to assets held for sale. In addition to our closing cash balance, we have access to ZAR 352 million in undrawn borrowing credit facilities, indicating that the business has sufficient liquidity and flexibility. The business has sufficient funding for investments. Darren also spoke earlier about the imminent transaction on Botswana. What we are doing here is in line with our capital light expansion, we are reducing our equity shareholding in that market.
Neli Shiluvana: Famous Brands will reduce its shareholding in Retail Group from 51% to 30%, and our partners in Botswana will then acquire the 21% shareholding interest. The group will retain economic participation in Botswana through a 30% shareholding interest, and we will continue to receive a master license fee under the existing arrangement. From an accounting perspective, Retail Group is classified as a disposal group held for sale. Thus, Famous Brands recognized the ZAR 41 million goodwill impairment during this period. Following the completion of the transaction, we will cease consolidation and then equity account for the retained interest as an associate. We expect the completion date to be 28 February 2027, and as any transaction, it is subject to conditions precedent, including regulatory approvals. In closing, the South African core business remains resilient, but the group is facing some pressure.
Neli Shiluvana: We are very proud of the strong cash generating position, which provides us with financial flexibility. The group is advancing its capital light strategy while retaining access to opportunities in different growth markets. Thank you, and I will hand that back to you, Darren.
Darren Hele: Great. Thank you, Neli. As we head into Q&A, I would like to just really recap around our business and really focus on our iconic brand portfolio, trusted and scalable business model. If you put that into context, that underpins why we say we have a brand portfolio that is trusted and a business model that is scalable. We opened 48 new restaurants in the reporting period. Our franchise partners invested in revamps of 67 of their businesses. We opened 4 new drive-throughs in the period. We operate 3,070 restaurants in 21 markets. Our brand portfolio, particularly in those markets outside of SA, is driven primarily by Debonairs Pizza, Steers, and supplemented by Mugg & Bean. So a very focused portfolio outside of South Africa. Our franchise partners are becoming multiple operators. The market has changed out there.
Darren Hele: Our franchise partners are changing with that, and the majority of them now own more than one restaurant. That stat has evolved over time in line with market conditions. Our franchise partners are loyal and they stay with us and they invest with us. They often have other businesses, and we are very, very proud of the relationships that we have with them and the way they continue to see our business. They are an important part of our business. Nothing happens in our business unless a sale is made at a restaurant. That really puts them in that spot where they are very, very important to us. Our business is focused around franchising and our franchise partners. I am going to head into Q&A. Our colleague, Ntando Ndaba, is going to direct the questions at either Neli or I, and hopefully we will be able to answer them easily.
Darren Hele: Overlooking us there, sorry, is Victor, our franchise partner from the south coast of KZN. It is always good to be thinking about our franchise partners at this time.
Ntando Ndaba: Thanks, Darren and Neli. We do have a bit to go through, so I will just jump straight into it. We have a question from Mpon Goma from Prescient Securities. There is a lot of related questions just for interest, Darren and Neli. If you can provide some color as you expand, because you will be answering a lot of the questions. Neli, there is a bit of an interest on the corporate costs, which actually rose to ZAR 75 million from ZAR 47 million. Probably, if you can give us some color on how much of that is one-off, and how should we look at the corporate cost line in H2.
Neli Shiluvana: Thank you, Ntando. What we have got under corporate cost is, I would say is part of intercompany transactions that I have mentioned, which also includes some of our leasing arrangements. That is now coming through that we have finalized what the structure is because we had, as we mentioned, we built a cold storage facility for efficiency in terms of our operations, and that benefit is now going to start coming through. Then also there were some of the costs which related to our share-based payments, which we have now are also just working through all of that. Lastly, I think there was also a GBK number that was in there. That also just created a bit of a cushion in the prior reporting period.
Darren Hele: Maybe I can just add, that number that is in there is pretty much where the costs are.
Neli Shiluvana: Yeah.
Darren Hele: have been historically.
Darren Hele: It is kind of the number that we are working on, yeah.
Ntando Ndaba: Okay. Nellie, while you still have the mic, I will probably give you two more questions. One from Tshwalede Mohale, from Laurium Capital. CapEx outlook FY27, how is that looking?
Neli Shiluvana: Well, we still remain quite circumspect, Ntando Ndaba, in terms of our investments. The levels of which we would look at compared to prior period, we were mainly focusing on about 2% of revenue. We are trying to make sure that we stay within that range. When we spoke to the market at the end of H2 last year, we said we are looking at numbers of between ZAR 150 million and ZAR 180 million, and that is the range we still want to try and be able to work in for the H2 period. We are not anticipating being higher than ZAR 180 million.
Ntando Ndaba: Okay. Thanks for that. Another question from Anthony Clark, Small Talk Daily Research. With lower finance costs as debt is slowly reducing, improving your balance sheet, you did a ZAR 57 million share buyback in this period. With the share price under pressure, will you be accelerating on share buybacks?
Neli Shiluvana: Share buyback is one of our capital allocation levers, right? We will also look at the opportunities of what is making sense at that point from a business perspective. What is the highest and best use in terms of cash that is available is one of those levers that we would look to pull with the funds that we have access to.
Ntando Ndaba: Okay. Thanks for that. Let us go to Nick Wilson, News24. Darren, this one is for you. in May this year, Famous Brands indicated that it was going to aggressively expand on drive-throughs. In today's results, only four have been added. There are concerns. Can we expect Famous Brands to significantly ramp up drive-through rollouts? Is there anything that is holding you back, like retail space? If you can provide some color there.
Darren Hele: Yeah, I am not sure where those concerns would be coming from. I think we have been very open and honest from the beginning around certainly post-COVID, that we were lagging behind in the drive-through space. We put it out there. We identified that. I think the market shifted quite significantly post-COVID as well. So we know that we are underrepresented in the market, and we are working on closing that gap. The progress has to be slow and steady because the opportunities are important to be the right ones. You cannot just grab anything out there. I definitely do not agree with Nick that it is lack of retail space. In fact, the retail space market is very buoyant right now. There is a lot of developments. So it is really about choosing the right one, I suppose, because you can get it wrong.
Darren Hele: I am starting to feel that there is probably more opportunities in terms of real estate than actually there are going to be consumers at this point, but that is just on the view that we have currently. Choosing the right ones are important, and we would absolutely like to continue to accelerate that growth. That is not where we wanted to be yet. We are working hard at that. The number of four is not necessarily an exciting number for us, but we are really pointing out that it is in support of the strategy. You have a big network like Steers that already has presence, so you cannot necessarily just say, "Well, I am just going to open a drive-through." You have got to consider what else you have in the area. And of course, competitors may be in the area.
Darren Hele: Nick, probably the other way around is I would think, competitors may be feeling a little bit more uncomfortable with the fact that we are targeting these spaces. But what one would obviously want and prefer is that the market is growing faster and big enough to make space for more people rather than it creating competitive intensity. So yeah, we are excited about it, and I think we are the aggressor in the market, so to speak.
Ntando Ndaba: Okay, thanks for that. Probably a bit on the international market. A question from Bekim Tetwa, Bateleur Capital. Given the portion of the Retail Group classified as held for sale and the exit of the UAE business and other restructuring initiatives in the period, can you please give us a sense of headline earnings on a continuing basis for this period? And probably just follow on to that is how should we look at the profitability of the UK business into the H2 and its future within the group?
Darren Hele: Give your answer the first one.
Neli Shiluvana: Okay. Botswana, we spoke to operating profit losses already of ZAR 11.5 million. That is sitting in our results. That we will likely going to continue to see some of that impact coming through until the closing date of the transaction. The UAE, the benefit of what we are seeing in the UAE is already sitting in. The exit in the UAE is already sitting in our operating profit results for H1, and we will continue to see that benefit also still coming through.
Neli Shiluvana: Lastly, in terms of the restructuring initiatives, which are still part of the A&E, wherever there is costs that the business can be able to extract, that is what we will continue to do in reshaping and opportunities where we have taken decisions around what we have done in Mauritius, where we are getting out of company-owned stores and rationalizing the business to keep it lean. That is how we would continuously look at those benefits to see them coming through as well in H2, without necessarily just giving a hard number of what will be headline earnings in terms of our H2 results.
Ntando Ndaba: Okay. Darren, do you want to take the UK business?
Darren Hele: Yeah, I mean, look, that is a good question. The UK is probably the market that is the most difficult in our world right now around our ability to flex there, the levers that you can pull. It is a smaller business, and the market is particularly challenging. So I am probably the most downbeat about that market versus anywhere else, and I think that is about being realistic. The team are working hard, so it is not an issue around the brand or the team at this point in time. The levers are quite difficult. So I am not suggesting that we are going to have a turnaround story here in H2. However, the context of it is we did have quite a dismal H2 last year there with some challenges and some credit challenges. So likely to be an improvement on H2 last year.
Darren Hele: But at best, I think we'd probably bring it back to break even. That's certainly not a forecast or guidance. Just to clarify that's what we'd be working hard to. I don't think you're going to get the kind of number that you had potentially 2 years ago, as an example.
Ntando Ndaba: Okay, thanks for that. Probably let's switch to margin pressures from Anthony Clark, Small Talk Daily Research. With accelerated living cost inflation ahead, I mean, rising interest rates, rising raw costs, and the cost surge in food ingredient inflation, what is the group doing with regards to passing on costs to try and maintain its margin?
Darren Hele: Yeah, that's a very broad question. We analyze every line, and we work with our franchise partners. As an example I raised around the levy, we try collaborative things. I mean, the good old-fashioned buying back that is normal in business. But one positive we have right now is that food inflation seems fairly benign. I'm not suggesting that's going to hold, but given the fuel price pressures, it's probably surprised us quite a lot. So essentially, keeping prices low to consumers is the focus. Keeping prices lower to franchisees keeps us in that kind of sweet spot of maybe 3% to 4% menu price increases at this point. But there's a range of things that we're doing in there, Anthony, around making sure that we're looking at menu innovation. The procurement teams are constantly working on how they can procure better. How can we deliver cheaper?
Darren Hele: All the usual levers that you'd be pulling in business are there. Again, but surprisingly, food inflation is not driving the pressure at this point in time compared to where we were, say, 2 years ago in this cycle where we were really passing on pricing to consumers just to keep head above water. But ultimately that's what you want to try and avoid, but you end up at a point where the consumer ends up having to pay more for a product because the product has come through the supply chain more expensive at the end of the day.
Ntando Ndaba: Yeah. Okay, thanks. I will squeeze in one more question, just to try and get a feel rather on H2. This is from Paul Ngoma. How have Leading Brands like-for-like and system-wide sales trended in the beginning of H2? I know it is like you only have September to talk about, but what is the feel?
Darren Hele: Well, September, on reflection, we would be happy with and probably better than expected. However, there is always a but in the business, is that school holidays did move compared to last year, a little bit more into September. So, September was encouraging and if you had given it to us at the beginning of the month, we would have taken it. October did then start well, and we are obviously in the thick of October right now, so that will be the true challenge. Did some of that school holiday activity build into September? I think that given the strong month-end focus right now, why I mention school holidays is that it is positive that there is still activity and consumer activity six months into what has happened around fuel pricing. So perhaps people are vacationing closer to home, maybe they are spending their money differently.
Darren Hele: It is probably too early to tell, but that was the encouraging part for us in September.
Ntando Ndaba: Okay, thanks, Dan and Neli. I think that is all the time we have for Q&A. I will hand back to you.
Darren Hele: Well, thank you. It is really great to have had this opportunity, and really just to say thank you to everybody who has participated to help us to get here. We will be closing out with that. So thank you to the finance team particularly, who have done a great job on the work, to our partners, Nedbank, the Standard Bank team, and particularly to the Exco team, the Famous Brands team, and the board for all of the support. To Yolandi, Celeste, Ems, thank you for all the work on the governance and getting us here. So thank you to everybody.
