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Edited Transcript of D01.SI earnings conference call or presentation 5-Mar-20 10:59am GMT

Full Year 2019 Dairy Farm International Holdings Ltd Earnings Presentation

Quarry Bay Apr 2, 2020 (Thomson StreetEvents) — Edited Transcript of Dairy Farm International Holdings Ltd earnings conference call or presentation Thursday, March 5, 2020 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Clem Constantine

Dairy Farm International Holdings Limited – CFO and Director of Property & Store Development

* Ian James Winward McLeod

Dairy Farm International Holdings Limited – Group Chief Executive & Director

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Dairy Farm’s 2019 Year-end Results Briefing Conference Call. (Operator Instructions)

I would now like to hand the conference over to your host today, Mr. Ian McLeod, Group Chief Executive of Dairy Farm; and Mr. Clem Constantine, Chief Financial Officer of Dairy Farm.

Thank you. Please go ahead, Mr. McLeod.

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Ian James Winward McLeod, Dairy Farm International Holdings Limited – Group Chief Executive & Director [2]

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Okay. Thank you, and good afternoon. This is Ian, and welcome to the 2019 annual results for Dairy Farm. I’m sorry that we need to divert from our face-to-face presentation given the need for current health precautions. It does, however, indicate another example of what has been a challenging year for everyone as some of our own business is faring better than others in very unusual circumstances. It does, however, say something about our diversified portfolio of directly and indirectly managed businesses that, while not unaffected by the environment, we do feel we are better insulated against their washed effects.

I’d like to move to Slide 3, and these are the 4 points we wish to cover today: firstly, the 2019 highlights; secondly, the financial results: then a business performance overview; and then, finally, finish with an outlook for 2020. So let me start with the 2019 highlights on Slide 4. Total sales were up 26% against the prior year. We achieved sales growth from 4 out of 5 of our divisions. And we have benefited from an improving profit trend across all our grocery markets.

In addition to the initial delivery of our key improvement programs have also benefited profitability as has the overall business performance in Southeast Asia. We’re also pleased with the execution of our space optimization plan in the Southeast Asia food business. While we still have work to do, we have experienced a stronger Southeast Asia financial performance year-on-year as a result of our actions, emphasizing the benefit of standardization, synergy and scale across our business, wherever possible.

I’ll now hand over to Clem to talk you through our financial results in more detail.

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Clem Constantine, Dairy Farm International Holdings Limited – CFO and Director of Property & Store Development [3]

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Thank you, Ian. Let me take you through the results for the year-end December 2019. Now turning to Page 6, sales and underlying profit. Total sales, including associates and JVs, were $27.7 billion, up 26%, driven essentially by the inclusion of Robinsons for the first time for 11 months and 12 months of Yonghui last year 9 months. Subsidiary sales were $11.2 billion, down 5%. The key movements here were the divestment of the Rustan’s business to Robinsons and the ongoing execution of our store optimization plan in Southeast Asia.

Subsidiary underlying profit was $437 million, down 14% on the year, caused by 4 main factors: our continued investments in our business, particularly IKEA; the social unrest in Hong Kong; but offset by improved profit performance in Southeast Asia; and benefits from our cost improvement programs. Underlying profit attributable to shareholders was, therefore, $321 million, down 10% on the year, a creditable result given the impact on profit from the social unrest in Hong Kong.

Now turning to Slide 7, our sales. We have had strong sales growth in 4 out of 5 divisions. Overall food sales were at $7.4 billion, down 8% on last year, driven by our divestment of Rustan’s and our space optimization plan in Southeast Asia. Convenience sales were $2.2 billion, up 4% on last year, a strong performance from China and steady performances from both Hong Kong and Singapore.

Health and Beauty sales were $3.1 billion, up 1% on last year. This performance reflects the consolidation of the Rose Pharmacy business and a strong performance from our Guardian business in Southeast Asia, but impacted from the social unrest in Hong Kong. IKEA sales were $766 million, up 6%. We saw good performances in both Indonesia and Taiwan and strong e-commerce growth. In Indonesia, we added 1 store at Sentul in Jakarta in November 2019 and 1 store in Taipei in May 2019. Both stores have been showing initial signs of encouraging performance so far. We saw steady performance in Hong Kong, although the social unrest did impact performance in the second half.

In terms of our key associates, Maxim sales were at $2.7 billion, up 4% on last year, driven by the acquisition of Starbucks Thailand, adding a further 300 stores in May 2019. But like IKEA, Maxim’s was negatively impacted by the social unrest in Hong Kong. Sales in Yonghui were at $10.9 billion, up 47% on last year, reflecting 12 months for 2019 versus 9 months for 2018. Yonghui also continued to grow adding over 600 stores since the end of 2018. For the first time, we’ve included 11 months of Robinsons sales at $2.8 billion.

Now turning to Slide 8, our subsidiary underlying profit. This was $437 million. As I said, operating profit from grocery retail was at $63 million, up from $22 million last year. The improvement in performance was driven by Southeast Asia as we continue to execute our multiyear transformation plan with the space optimization plan also yielding benefits. We were pleased with the underlying performance of our convenience business. Headline profit was mainly impacted by our continued investment in 7-Eleven Guangdong. Health and Beauty profit was $296 million, down $34 million from last year, impacted by the social unrest in Hong Kong in the second half, but partially offset by strong performances in Southeast Asia. Overall, 2019 was still the second best year for Health and Beauty.

IKEA profit was $43 million, down from $68 million last year, due to reasons we outlined at the half: margin compression caused by higher price — cost prices in September 2018; and our continued investment in our new store program that should see the number of stores we trade across the region grow from 10 at the beginning of 2019 to 17 within the next 2 years. SG&A costs were $143 million due to a number of reasons: the annualization of new capability; growth in IT and digital capability; and increased centralization. In the second half, SG&A costs increased by $13 million, which was mainly IT-related.

Now turning to Slide 9, cash flow. Our overall net debt is at $821 million, up $77 million on last year, but in line with the numbers at June. Working capital was $77 million negative, mainly due to the timing shift of Chinese New Year, and CapEx went up slightly, mainly due to our ongoing investments in IKEA.

This concludes the financial presentation. Let me hand you back to Ian.

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Ian James Winward McLeod, Dairy Farm International Holdings Limited – Group Chief Executive & Director [4]

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Okay. Thank you, Clem. So if I continue to Slide 11, I’d now like to talk you through our progress on our business strategy. While we’ve had much to contend with during the year, we have still continued to push hard on delivering our transformation program. We still believe our strategy is the right one and is now beginning to bear fruit through a combination of implementing our 5 strategic priorities: of building capability, growing in China, maintaining our strength in Hong Kong, revitalize in Southeast Asia, as well as driving digital innovation. And the initial delivery of our 4 key improvement programs as well: improving our fresh supply chain, optimizing our assortments, centralizing procurement, and improving our in-store efficiency.

Let me take you through each of our strategic priorities in turn and provide some more detail. So moving on to Slide 12, there are 3 aspects of grow in China: building the Dairy Farm-led businesses of Mannings and 7-Eleven; and also supporting our investment in Yonghui. We now have around 1,300 7-Eleven stores in Guangdong, following a further 270 additions during the course of the year. As well as growing total sales, we’ve also benefited from strong like-for-like sales, driven by a revitalized Own Brand offer and enhanced meal offer at key times of the day in addition to a focus on improving service.

In Mannings, we have also seen an improving like-for-like trend as we focus our attention on optimizing space in Guangdong as opposed to spreading ourselves too thin across the rest of the country. We’re also looking to leverage productivity between 7-Eleven and Mannings for shared services and have also introduced Mannings product into 450 Yonghui stores. Yonghui has seen both strong sales and profit growth in the year, driven by an aggressive store-opening plan and a structural change facilitating stronger profit conversion.

Turning to Slide 13, our heartland remains Hong Kong, and unsurprisingly our business has been impacted by the social unrest that has prevailed. While some businesses have weathered the storm well, others have been less fortunate, notably Mannings and Maxim’s, as Clem indicated. Nonetheless, the former still recorded its second best year ever and the latter is strategically reducing its dependency in Hong Kong for its future growth. As an example, Maxim’s acquired the Starbucks franchise for Thailand in May of 2019 and is already seeing the benefits of this investment.

With regard to our other North Asian businesses, Wellcome Taiwan saw a strong second half performance following a very effective price investment (sic) [reinvestment] campaign. And as Clem mentioned, IKEA opened a new store in Taipei in May. Another Taiwan IKEA is planned for later this year and a further IKEA store opening will also take place in Macau.

I’d now like to comment on the Southeast Asia performance outlined in Slide 14. As well as enjoying good growth from Health and Beauty businesses in Southeast Asia through a combination of both existing and new space, we’ve also seen a strong turnaround in profitability of our Food businesses in the region as our transformation efforts begin to pay dividends. We still have considerable work to do, but progress to-date has proved encouraging.

Our IKEA business in Indonesia continues to go from strength-to-strength delivering another year of double-digit growth as well as landing the first-ever IKEA conversion of a hypermarket, which opened in Sentul in November, a project from start to finish in only 5 months. Another 2 new IKEAs are planned within the next 12 months in Indonesia, and the website has also been relaunched and well received by customers as a result.

In fact, during 2019, IKEA successfully relaunched their websites in Hong Kong and Taiwan as well. We’re also pleased with our investment in Robinsons Retail Holdings in the Philippines, together with integration of our Rustan stores into that business, a strategic investment that has proved financially beneficial even in its first year.

Moving on to Slide 15. Dairy Farm has lagged in digital development for some time and is a position we are seeking to address. Here in IKEA, we completed the integration of SAP into Singapore superseding a significant number of legacy systems. And as mentioned, all IKEA websites have also been upgraded. We have also invested in e-commerce infrastructure behind our Health and Beauty business, which included the relaunch of cross-border e-commerce between Hong Kong and China and also the relaunch of our Guardian Singapore e-commerce site, providing a much better experience for our customers. Overall, though, we have much to do in this area, particularly regarding our CRM capability, but we’re again beginning to make constructive progress.

Turning to Slide 16. However good your strategy, it is only effective if it’s well executed. And to do so, you need both skill and experience. It has, therefore, been a key priority for us to build a strong blend of international retail expertise and essential local knowledge. While there’s been significant change in the senior team, we have also built strength in-depth with over 80% of our key managers either new to the company, in expanded roles or having changed the positions with a fresh challenge. We also continue to evolve development programs for high potential managers to ensure we build a stronger pipeline of talent and succession for the future.

Moving on to Slide 17. It’s a repeat of an earlier slide and is intended as a reminder that as well as executing on our 5 strategic priorities, we are also seeking to underpin them by delivering a series of key enablers to support our need for improvements in our underlying business efficiency. We’re now beginning to see some progress. Collective negotiation across the group has begun to establish win-win partnerships with key suppliers, both within customer-facing and nontrade supplier relationships. The collective sourcing at 60% of our produce volume provides more consistent quality fresh food across the group from a from a base of zero 18 months ago. And the introduction of a new quality Own Brand range across the company under the Meadows brand has had a very positive initial response from customers on the 150 products landed so far, and we have many more SKUs to come.

Within the stores themselves, we have worked hard to develop store-based programs designed to enhance operational consistency, improve freshness and reduce waste of fresh food products. We have also launched pilots to improve in-store productivity without compromising customer service. These programs have combined effect of unlocking several million dollars of financial benefit, which can then be reinvested improving quality, service and value to our customers over time.

Moving on to the outlook in Slide 19, highlights 3 phases of key elements of our transformation plan. While it has been anything but plain sailing, we are seeing clear progress emerging. And while we are still focusing on sustainably building a strong base, as I’ve hopefully outlined during this presentation, we are now setting our sights on our Phase 2 challenge of delivering consistently well. Sustainable change requires effort, determination, patience and most of all time.

So in conclusion, on Slide 20, it is clear that 2019 has been a particularly challenging year. Given the degree of social unrest that occurred in the second half, it would be surprising if any Hong Kong-based business had not been affected as a result. And Dairy Farm is no exception. That said, what has worked in our favor is the breadth of our business and the underlying business change that we are pursuing and delivering. Our efforts over the past 2 years to enhance capability, change the way in which we operate, to address underlying business challenges previously neglected, and to focus on consistently improving retail basics across our business, are all combined to start paying dividends and enhance Dairy Farm’s prospects for the future.

This cultural change to drive standardization, synergy and scale is now integrated into our ways of working. But work will still be required to embed such a change as a way of life. In no small part, we also benefit from the diversity of our portfolio, not only in terms of retail sector, format and geographical spread, but also in the balance between Dairy Farm managed businesses and Dairy Farm invested businesses. While we have seen some businesses with a Hong Kong bias adversely impacted in their 2019 performance, others have seen performance improve, most notably in Southeast Asia, where our turnaround plans for Dairy Farm’s managed assets are beginning to bear fruit and the integration of our Rustan’s business into Robinsons has proved to be a successful financial investment decision in its first year.

So when facing the extraordinary events of 2019 and the current COVID-19 challenges of 2020, while we would not claim to be impervious to these events, we do believe we are more resilient given our business diversity. This does not mean that the recent short-term challenges can be ignored, and indeed, they have not been. While we have been proactive in adapting to environmental change, seeking to optimize our current trading position in difficult circumstances, we have nonetheless retained a strong hand on the turnaround pillar.

I would like to make special mention to our Hong Kong team members in Wellcome, in 7-Eleven, in Mannings and in IKEA. In such difficult circumstances over several months, they have turned up time and again to be there for our customers, often at considerable inconvenience to themselves. I cannot thank them enough. As a leadership team, we retain our belief in our strategic plan. Despite current challenges at Dairy Farm, transformation remains on track. As examples, we are beginning to see green shoots emerge in Southeast Asia performance, particularly in our Food businesses with more to come.

We also have retained strong businesses in Hong Kong, comparatively able to withstand the short-term impacts of environmental challenge, supported by a diverse portfolio in our heartland. It’s important to remind ourselves that all sustainable business transformations take time to execute, and we are still in the early stages of this transformation. Nonetheless, we are encouraged by our underlying progress to-date, remain resolute in our confidence in our turnaround plan and are grateful for the determination effort of all our team members across Dairy Farm and their personal hard work to make a sustainable performance difference over time, both for our shareholders and, most importantly, our customers. Thank you.

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