Edited Transcript of SHP.J earnings conference call or presentation 25-Feb-20 7:30am GMT

EBITDA, excluding, again, the hyperinflation then grew by 13% to ZAR 6.8 billion. We multiply that quickly by 2, we get to a very big number for the full year. And again, if we would have excluded the hyperinflation, then the earnings per share — diluted earnings per share would have grown by 15.7%. However, the official number is a negative 2.6%.

Just again on some very strong operational metrics, indicative of the strength — inherent strength of the business. These are very important numbers for a retailer. If you grow your customers by 2.1%. When you already have over 20 million customers, it is a significant number. We’re very happy that those customers that we disappointed in 2018 when we had the stock issues for various reasons that they’ve come back to us. And even we were able to gain additional customers. For our suppliers, our partners, a very critical number is the volume growth of 4.4%. In this environment, it’s not easy to grow volume. But in essence, it’s only volume growth, they can assist our suppliers to keep their costs down. 4.4% is a significant growth number. And that all resulted in a profitable market share gain of ZAR 2.4 billion.

In 2018, we said to you, we estimated that we lost about ZAR 1 billion in market share during that period. And we’ve now managed to gain ZAR 2.4 billion of that back. Just again, the number of customers versus 12 million of them, 4 billion products sold and we gained — as I said, profitable market share of 1.1% for the 6 months.

Now a lot of — and most of this very good performance came out of the core African business. That still is over 75% of our complete business. And we’ve seen accelerated growth. You can see that in H2, we were at 7.4% growth. We accelerated to 9.8% for the 6 months. What is very pleasing is the like-for-like sales of 6.6% on a very low internal inflation of 2.7%. Space growth only 1.2% and but it’s still — we still opened 102 stores. And then worth mentioning, you saw some results coming out, 1 of the large retailers, with a 4.5% growth in the liquor. Our business managed to grow 20.5% in the liquor stores. We now have 518 of them. If we add franchises, there’s 680 of them, we see still some midway in that area of the business. And all of these have been achieved while the rest of the market saw a slowdown of sales to just 4.5%. And December, in particular, was 1 of the worst retail months in 11 years. Okay. The 9.8%, let me just say, some of you will very quickly will say, yes, but your base is low. Over the 2 years, it still adds up to 6.6% year-on-year growth.

We’ve achieved a progressive market share growth. You can see in every single month of the 6 that we’ve managed to grow market share to end for the rolling 3 months at 31.6%. Did I say that correctly? Rolling, rolling 3 months, so current market share sits at 31.6%, although it peaked in December at 31.8%. Very important for us, especially in the Shoprite brand, is that for 20 consecutive months, 21 consecutive months, our price leadership has been uncontested. Checkers is leading the pack at the moment. You can see the index growth is the highest, but important to note that all of the brands have gained market share and there’s outgrowing the market in the last 6 months.

Okay. For a moment, we have to stand still at the non-RSA segment of the business. It’s important to us. I know it’s important to you. So just what happened also in the last 6 months and also then some actions that we’ve taken. Firstly, there is still some operational strength and highlights in the Non-RSA segment, we managed in constant currencies to grow by 4.8%. 10 of the 14 countries still managed to grow positively in local currency. There was a 5.4% volume growth. I’ve spoken about volume before and what that means. And 1 of our larger countries, Zambia, had quite a strong growth in 14.7% in local currency. And once we convert that to rands, that goes to a decline of 3.1%. And you can see that 1 of the biggest challenges remain the currencies. If we look there on your right, Angola, almost a flat number, minus 1.9% in constant currency. Once we bring it to rands, we’re down 27.5%.

In some of the countries where there is not local product or not a sufficient local product available, we saw some further restrictions. So the market brings these challenges as it’s always done. We deal with them as we go along. Our word adaptation. So we adapt as we go along. And it’s complex. It’s — the countries are complex. I want to make this point that sometimes I get the notion that people think that all the non-RSA operation as a single segment. And you just add water and then all is good. Each country, each 14 of them are completely unique in terms of their challenges and their complexity, legislative, et cetera. So it’s not the 1 solution for all. And we are working on those. I’ll — the next slide, I will tell you some immediate actions we’ve taken. And then with IFRS 16 which Anton will explain to you is that the non-RSA segment still made a profit, albeit only at 0.5% trading margin, which we’re not happy with. Believe me, we will work on that to improve.

So quickly, I’m just going to take 1 or 2 countries, the bigger ones, Angola being the largest, or 3 years ago, it was the largest contributor. Here, it’s affordability that has become the major issue. We had a 14% VAT increase in October, which consumers had to absorb. We really did not expect another almost 30% devaluation in the kwanza, and that has driven massive price inflation in that market. And once again, there on your right, almost a 200% currency devaluation in a country that is highly, highly dependent on importation. There is not a lot of local industry in that market. The good news out of that, we managed to maintain our gross margin percentages. And as I showed, in local currency, almost flat sales and maintaining the gross margin, which is — which, for me, was an important thing that we are not subsidizing unnecessarily in terms of trying to buy the buy turnover. In terms of restricted cash that a lot of you have alluded to before, there’s sufficient liquidity, sufficient liquidity in that country that our operations is now self-funding in terms of stock.

We have enough currency to replenish the stock ongoing. That, of course, have — have improved our stock availability. In the moment, we see that, especially on the basic product items, which are called Cesta Básica, we also see improved sales. And on top of that, in the last 6 months, we’ve been able to repatriate $34 million from Angola to sell in Mauritius.

Nigeria, big disappointment. This is customer numbers. We were tracking fairly well, very positive in the early part of the year, then came 5th of September, the retaliatory protest action after the xenophobia in South Africa. You can see we fell a cliff in terms of customer visits, and we have not recovered yet. We’re still had a minus 8% after the period. There’s still a lot of work to be done in Nigeria, not only by us, but also by government in terms of the diplomatic relationship with their country. We have a lot of work to do with our relationship with the Nigerian country and also such a big economy which we cannot ignore.

What have we done? Firstly, we’re still committed to the continent. But not at all costs. We are currently reviewing all our options, our long-term options. We have taken some immediate actions. We are reviewing alternate operating models. What I mean by that is, yes, we are looking at a possible joint venture, a franchise model, different formats. We are reviewing all of the options. Of course, not all of this can happen overnight. I said the last time we saw you was August. It’s like 4 months ago. A lot has happened in the 4 months, but certainly, we can’t change the world in 4 months, but we’re working at it. And I’ve mentioned before, it’s a country-by-country process. There is not 1 solution fits all. About 4, 5 years ago, there was some interest in our property portfolio, the non-RSA property portfolio. That dwindled a bit and of late in the last year, there’s renewed interest in that with funds that they are looking for a mixed portfolio across the continent that will include some South African property as well as some non-RSA property. So we are looking at all of these. And then we’ve also curbed the capital that we are allocating to this segment. So in the last 6 months, we have only infused just over $5 million into the non-RSA operation. So we really cutback on that number. The immediate actions that we’ve taken. Of course, the first thing that you try to do is to cut the costs, reduce the cost. So we can say today, so we successfully reduced 17 of store rentals. We have negotiated 16 more and awaiting final approvals on those. So we’re not banking it yet, but we feel quite positive about those. We’ve also successfully de -dollarized some of the rand into local currency. And with it also some of the borrowings to try and de-dollarize the risk in the non-RSA operations. A slight improvement in productivity. I know 2.4% doesn’t sound like a lot, but when you — in a depressed market, where sales is under pressure to still be able to improve profitability, say something good for our human resources and the management, thereof. We have reviewed the profitability or not, let me say, we have reviewed the viability of unprofitable stores. Why is that? Because we have to do a discounted cash flow. You’ve got lease obligations, et cetera. It’s not just as easy as close the door. We have obligations in these. And in that, we have closed 4 stores in the last few months. And that is an ongoing process that we will continue to evaluate these stores in the long-term viability thereof. I spoke about the capital that we have reduced. We also, last time, we were committed to 17 new stores. We renegotiated 4 of them not to open. So we are still committed in for 13 new supermarkets. And we’re fairly confident that these immediate operational actions will lead to an improved financial performance for this segment in the months to come.

The other segment that we refer to is, of course, furniture and then what we call other operating segments. So furniture, almost the same scenario we’re constantly reviewing the profitability of that segment. And in the last year, we have closed 32 unprofitable stores. Sales fairly flat like-for-like, just positive, the promising sign or something positive in the numbers of furniture is a slight improvement in the credit participation by almost 1%. We have some plans in the segment. We’re not neglecting it, although it didn’t get its fair share of attention recently. The other operating segment, which includes OK Franchise Division, OK Foods, Mauritz, can you get up? Or is it. I just want to highlight Mauritz Alberts, he is the man in charge of OK Foods, OK Franchise Division. I think worth mentioning that they’ve added 22 stores. They also grew by 7.5%. Good profitability growth. Those of you that frequent the OK stores, the new revamped stores will realize that or will agree with me that the stores are really looking good. There’s a big change in the OK division. We’re giving them more attention. We’ve collapsed some of the distribution centers, they are now distributed from the same as what the mothership is being distributed from. We’re looking at their technology. So some good retention and then good performance from the division. Thanks, Mauritz.

Then we also have Transpharm and MediRite in here. Jaco Engelbrecht is the man running that. I don’t know if his name is helping him, but he really has turned the division quite positively after he had to endure a 6-week strike, still giving good, very good results in this segment. Also were ZAR 5.4 billion with a beautiful statistic of growing the profitability by 64%. So I’m now going to hand you to Anton with that IFRS 16 numbers for you. Thanks, Anton.

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Anton de Bruyn, Shoprite Holdings Limited – CFO & Executive Director [2]

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Thank you very much, Pieter. So yes, I don’t think the accountants around the world has received so much air time on accounting changes. But yes, there were 2 items or aspects that we have to take into account when analyzing our results. The first 1 is our hyperinflation. So during the 2019 financial year, Angola was assessed to be hyperinflationary and we accounted for the hyperinflation asset of around ZAR 2 billion, and we also brought into account our net monetary gain of around ZAR 458 million. So that is in our base. Going forward, if we compare them or I look at our results for December 2019, we will see that we will not account for hyperinflation. Now you recall that hyperinflation was applied when your average inflation rate was more than 100% over a 3-year period. And with the inflation coming back in Angola, that is not the case anymore. However, for our results going forward in the future, we will have to depreciate that hyperinflation asset, and that will be more or less around ZAR 96 million for the year. And we’ve adjusted or we’ve accounted for ZAR 48 million in the first 6 months. Then the second item that we need to take into account is IFRS 16 and adoption of that. On the 14th of February, we did issue a SENS to show the impact of IFRS 16 on the group results. We followed that up with a webcast on the 18th of February. So all the numbers are out in the market. I think what is important to understand that we did restate our 2019 results, and hence, the restatement of the 2018 first 6 months results. So in short, we’ve derecognized operating lease expense. We’ve accounted for depreciation and finance costs. So you’ll see that on our lines later in the presentation. And then there’s also an anomaly in the previous year with regards to ForEx that I will deal with when we talk about the ForEx. Then going forward, we will obviously apply IFRS 16. So hopefully, we will — I will still refer to IFRS 16 adoption in our final results for the full year. But after that, we are on an IFRS 16 basis. And we will not talk about in IAS 17 again.

So if we then turn to the income statement and just look at some of our key measures. Pieter has spoken a lot about sales. Our gross margin increased from 23.1% to 23.5% represents an 8.7% increase to ZAR 19 billion, and we also moved 40 basis points on our margin. If I compare that to the full year of 2019, we were also sitting at 23.5%. So we have maintained our margins. There are basically 3 reasons for the increase in the first 6 months. First, Pieter mentioned, the industrial action we had in our distribution centers. Last time, we reported that there were certain DC allowances that we didn’t account for or that we couldn’t recover of around ZAR 107 million. And there will also IFRS adjustments ones-off in the previous year of around ZAR 96 million that we had to account for. And then the non-RSA margins we’ve been maintained with regards to the — we didn’t move volume on unprofitable sales.

Total expenses increased by 7.7%. And again, if I just break it down on total — staff costs, we had a growth of 9.6%. Our base scenario on staff costs, we compare H2 of 2019, with our growth in the first year of our first half of the year. And if we look at the base of the second half that was in excess of 10%. And the 3 reasons for that was when we spoke to you last time was, obviously, the introduction of the minimum wage and the impact that, that had on our group, together with the sectoral increases and then also the youth employment scheme initiative by government to create more jobs that we adopted. Some other expenses that we’ve also — that I want to highlight is depreciation. Our depreciation charge increased by 3.2%. Excluding the impact of IFRS 16, we actually see a decline of 1.7%. And then the third expense, I would like to mention, was electricity costs that increased by 11.9% and the electricity cost increases on the back of the national increase of in excess of 13%. The net monetary again, we’ve spoken about, did not repeat in 2019. Trading profit and margin, excluding hyperinflation, you see that our margin is around 5%. With a growth of 7%.

EBITDA, I think, going forward as a more accurate measure of how the business is performing now that we’ve adopted IFRS 16 has grown by 5.3%. And excluding the impact, was a very strong result of 13%.

Our effective tax rate has also increased from 27.8% to 31.2%, and you’ll recall that our effective tax rate for the full year was in excess of 32%. The reason for the increase, again, adoption of IFRS 16, where you have timing differences between your lease payment and the accounting for the depreciation and the interest. Together with, you will see later on, we’ve sold various retail properties in our fleet. And that also gave rise to a capital gains tax that we will foresee in the first half. I have prepared a slide with some guidance to the end of the presentation that will talk to the effective tax rate a little bit more.

Our HEPS growth, excluding hyperinflation, increased by 15.7%. I’m not going to dwell too much on the sales, Pieter has unpacked the sales in quite a lot of detail. I think important also just for me from the net on a furniture on the like-for-like sales, 1 has to also take into account the power outages. The furniture business, some of the stores don’t, 236 of the stores do not have generator power. And obviously, with the outages, we saw that — the decline. I think that was the only thing I wanted to mention on that.

Our finance income earned and premiums earned is from our furniture business that showed a decline of 5% and 9.5%, and that’s based on the book. Pieter alluded that we’ve had a 1% increase in our credit participation. But obviously, going forward, we will have to see the impact of that happening. And I think that’s why we will see a increase in that going forward. Commission received and sundry income increased in line with our sales growth and in the investment income, the investment income had a decrease of 33.6%, and that was on the back of our investment income on our U.S. dollar-linked government bonds and treasury bills. All our treasury bills matured during the period and on those bills we received or earned an interest rate of around 19%. I will talk about our government bonds a little bit later and give you color on the movements that we’ve had.

So on the total, our other operating income decreased from ZAR 1.5 billion —

from ZAR 5.6 billion (sic) [ZAR 1.56 billion] to ZAR 1.52 billion.

Just breaking down the various trading segments, and the profits per segment. Our Supermarkets RSA segment increased or improved the trading profit by 9.5%, which is very much in line with our sales growth. And you also see that our trading margin has now increased to 6.1%. In the past, we were always around the 5.3% to 5.5% mark. But going forward, we expect that, that will be the margin that we will report on. Supermarkets non-RSA, although a decrease from ZAR 154 million to ZAR 58 million profit. Again was attributable to the investment income. Investment income forms part of trading profit. And as we see a decrease in our investment income on those U.S. dollar government bond and the treasury bills, we will see the impact on that segment.

Furniture was flat. And then the increase of 63.9% on the other segments. You will recall that I told you last time that we had some stock losses in our MediRite business in Angola and the recovery that we see in this segment is purely on the back of that.

Excluding the impact of hyperinflation, our profitability in our segments, then grew by 7%, and our margin is 5%.

Our ForEx grew from ZAR 141 million loss to a ZAR 232 million gain and ZAR 141 million loss is a result of the adoption of IFRS 16. We have 93 U.S. dollar leases, and those U.S. dollar leases has to get revalued every month from a dollar liability into a local currency. And due to the devaluations of the local currency against the U.S. dollar, we see that ForEx movement. What is important to note, and you will see that in the SENS that we issued is that there will be an impact for the full year in 2019. But going forward, we have applied hedge accounting. Which implies that it will form part of reserves in the future, and we will not see that ForEx impact in the income statement anymore. So if you look at the slide that I prepared, you’ll see a lease liability, ForEx loss, but you’ll also see the impact of the hedge accounting that we apply, which nets off.

Changes on short-term loans, we saw a loss of ZAR 581 million, and that, again, is a movement of the currencies against the dollar. And hence, to our point that we are in the process of looking how to de-dollarize our balance sheet or the non-RSA portion of our balance sheet. We have raised local funding in Kenya and in Botswana at very good financing rates, and we will continue to do that going forward. And then obviously, with the U.S. dollar-linked government bonds, we account for the ForEx movements on that.

Items of a capital nature. We have sold various of our retail properties during the financial year. And we realized a profit of ZAR 207 million on that. And then you have an anomaly on IFRS 16 going forward and where you cancel a lease, you can now also have a profit on the disposal of a right-of-use asset. So we canceled a lease in Angola that had that effect.

And then on a regular basis, so at each reporting period, we evaluate our impairment on assets. And I will talk to the — towards the — when I’ll talk about the asset slide, we will talk a little bit about non-RSA. But we have a thorough process where we evaluate our normal PPE and also now right-of-use assets. And during the period, we had various impairments on those. That was a ZAR 97 million and ZAR 157 million. And then just for comparison purposes, the insurance claims that we received last year, while that settlement of the Palanca fire that we had, where that full claim was settled.

Interest received has increased from ZAR 159 (sic) [ZAR 139] million to ZAR 187 million, and that is on the back of our improved cash flow position and our cash and cash equivalents. And I do foresee that also increasing in the next 6 months. Finance cost is our cost on borrowings as well as now our finance costs on our lease liability. If we exclude the lease liability in terms of IFRS 16, you will see that our net finance cost increased from ZAR 245 million to ZAR 312 million.

So let’s turn to the balance sheet.

If I look at the capital expenditure, we’ve managed to decrease our capital expenditure from ZAR 2.8 billion to ZAR 2 billion, a 30% decline. And that is on the back of various revamps we had in our Hypers business in the previous year, where we revamped 4 or 5 of the Hypers.

In the current year, we had around 26 revamps that we worked on. And then very important is that during the period or reporting period, we also sold our fleet. And in the past, we would spend between ZAR 350 million and ZAR 400 million on replacing our fleet. So that will not occur in the future.

We did, however, still spend ZAR 0.5 billion on capital expenditure and non-RSA, and that was to finish the projects in flight. We had 3 projects in Angola and then also our greenfield operations in Kenya that we spent.

I will give some guidance with regards to full year capital expenditure at the end. And then capital spend as a percentage of our sales over the last 12 months, we’ve seen a decrease from 1.9% to 1.3%. So in total, our group assets increased from ZAR 84 billion to ZAR 86 billion. That includes also a ZAR 19.7 billion right-of-use asset.

So we’ve had quite a lot of questions with regards to the — what does — what is the breakdown of the total asset value of our non-RSA operations and the risk for impairment. So I would just like to go through and give you indication of what makes up the ZAR 17.5 billion.

The government bonds and bills, we’ve managed to reduce from ZAR 3.5 billion to ZAR 2.5 billion. You’ll see in the cash flow that we moved around ZAR 460 million in the last 6 months. So there is now a constant flow of ForEx coming out of Angola. And we’re also converting these government bonds and T-bills into cash flow for kwanzas, enabling us to source product and inventory overseas.

So I foresee that as we require cash in the future in Angola, I expect to see that actually reducing. As a good thing for me on Angola as well as that they are totally self-funding. So it means that we also do not have to allocate more capital to that operation. So as and when they require funding, they are actually selling government bonds. Inventories sitting at ZAR 3.5 billion.

On the next slide, when we talk about inventory, you will see that inventory levels remain more or less in line. And then if I look at PPE and right-of-use assets

you must remember that we account for our properties at cost, which means that included in debt value is not a market adjustment. And as we’ve seen with the renewed interest in our properties, there is definitely a higher value from that we can realize from our property portfolio in non-RSA.

If I therefore look at other, the majority of the other relates to cash and cash equivalents. So in summary, if I look at breakdown of the various assets, you will see that there is no short-term risk for any impairments or additional impairments that we have to take on our non RSA operations.

Inventories increased by 3.9% to ZAR 22.5 billion, slower than our sales growth.

We had a positive inflow with regards to our working capital, albeit due to various cutoffs on creditors, but again, a positive number for us. If I look at where we were at the end of December and at the end of June. And then a new measure that we’ve introduced for ourselves on how we measure our inventory is to look at inventory as a percentage of sales that has seen a reduction of 14.9% to 14.5%. And if I look over the last 3 or 4 years, this is actually the base that it’s looked at the end of December. We normally see an increase in December. And that’s why you will see that our guidance is that we will get to a 12.4% at the end of June.

If I just look at the breakdown in the various segments, we’re selling the Supermarkets RSA, where the majority of the stock of 16.7%, and then you will see the rest of the segments.

Our cash flow improved by ZAR 4.7 billion for the 6 months. It is important to remember that this is a 6-month number, and not a 12 month number. We achieved that by the slowdown of the capital expenditure from ZAR 2.8 billion to ZAR 2 billion. And we also realized the proceeds from the sale of the fleet, and some retail properties that equated to about ZAR 1.8 billion. And then also, the proceeds from our government bonds and T-bills that we sold and matured. I think it’s important to — for us to realize that we did manage to get $34 million out of Angola back to Mauritius, which caused very good cash flow for us in Mauritius. And I am going to mention the number again, and that’s the $5.3 million that we spent on our expansion in non-RSA. I think it’s important that we all realize that the non-RSA segment is now self-funding and that we do not have to allocate more capital from a group point of view to that segment.

I think this — when we talk about net debt and net borrowings, it gets very confusing. We look at net borrowings and if I look at our net borrowings, it improved from ZAR 8 billion to ZAR 3.3 billion. Net cash is our cash and cash equivalents less our bank overdrafts. And then, obviously, we take into account borrowings. So if I look at net borrowings, we’ve decreased by 58.9%. Net borrowings to EBITDA, and that is how we measure ourselves, we’re sitting at 0.3x. And if I include the IFRS 16 lease liability, we are sitting at 2.1x. So all 3 of those indicators have shown a positive trend during the first 6 months. We also managed to reduce our U.S. dollar debt from $550 million to $487 million with the positive cash flows that we’ve had from Angola and the rest of Africa. You will notice this morning that there was a SENS announcement with our transaction with Aequitas. And I just wanted to spend where’s that other slide. There’s a slide missing. Oh it’s taken, sorry. So the strategic rationale of why we’re doing property transaction. The whole discussion for us with regards to selling retail properties and our distribution center started with our declining return on invested capital over the last 10 years. And it was important for this management team to get our return on invested capital back to previous reporting percentages. And when we unpacked the various aspects or the components of return on invested capital, we see that our — we could see that our return on assets was lagging that of our peers. And that is why management took a conscious decision to either sell or reduce its exposure on some of the assets that did not, obviously yield or it gave us the proper internal rate of return yield. The purpose of selling the properties is not to reduce debt. We have ZAR 4.8 billion capital requirement for this year, and we’re spending that ZAR 4.8 billion on higher-yielding retail projects as well as technology projects. The structure that we’ve put in place also gives us the opportunity to improve our operational efficiencies and also capability on our capital allocation. So the purpose of this vehicle is not to be a passive vehicle, but it’s actually to be an active vehicle, and we’ve already identified additional projects that we want to do within this vehicle. And then we’ve also partnered with a best-in-breed or best-in-class logistics property company in South Africa. So if I, therefore, go and look at the various — the salient terms of this transaction, we’ve established a company where we still own 49.9%. The structure will yield for us a ZAR 1.2 billion cash injection on day 1. The yields on that transaction is around 7.5%. We have a tenure of 20 years with 3 times 10-year renewal options, and we have fixed the escalations at 5%.

So if I can just conclude then with my last slide, with the introduction of IFRS 16, we also had to go and relook at the measures that we have communicated to the market in terms of our remuneration policy. So both ROIC and diluted HEPS growth is now 1 of our long-term incentive scheme measures. So they — from a ROIC point of view, we are aiming to grow for the 2020 to 2022 year period between 9.6% and 11.6%. Our diluted HEPS is between 5% and 7%. The dividend, we kept at ZAR 1.56. You will recall that at the end of June last year, our dividend policy was — is a 2x cover. But because of the hyper noncash flow impact hyperinflation, noncash flow impact, we reduced our dividend by that amount. So if you take into account the growth now on the dividend, you will actually see or if you apply that policy to the December 2018 number, you will see that our dividend should have been lower, and it’s actually showing a growth of 15%, which is in line with our HEPS growth.

Our group CapEx guidance for the full year is around ZAR 4.8 billion. As I mentioned, our inventory target is sitting at 12.4%. And then we estimate our tax rates to be between 31% and 33% for the full year. Thank you. That’s all for me, and I hand you back to Pieter.

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Pieter C. Engelbrecht, Shoprite Holdings Limited – CEO & Executive Director [3]

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Thanks, Anton. I just want to say it’s President Trump who copied the Shoprite uniform the other way around. We were the first with this red tie. With the red blood in our veins.

Last time we took you through what we call our 9 strategic drivers. I’m not going to go through all 9 again. We’ve grouped them in 3 lots now: Creating a smarter Shoprite; closing the gap in some key segments; and then winning in the long run. So in that, it’s going to be very short. But just to emphasize to you that we haven’t forgotten or haven’t changed. This is our plan. It was a busy couple of months for us, not only on the non-RSA segment, but also in RSA. Quickly, we launched the Xtra Savings in Checkers, very successful, well received by customers. We pioneered 1-hour food delivery service. We closed the opportunity on some of the key segments. Checkers leading the market share gains. We told you that we’re going to try and close that gap on the premium food segment market, 2 flagship stores I mentioned it particularly because it’s probably where most of you shop, Constantia and Sandton. Very important, uninterrupted share gains for us in Liquor, Fresh and Convenience. That’s the goal we set ourselves, we can report that we are — and I’ll show you some numbers on that. And we further increased our penetration in private label segment. We launched now recently, 423 new brands and 22 of our brands now are worth more than ZAR 100 million a year in turnover.

The extra savings with Dynamo, launched in October. We have up to now 3.8 million registered customers. At the time of the launch, it came at 250 sign-ups per second all paperless. And during this period, Checkers achieved a record market share gains. But what is important for me here is not — yes, great, successful launch is, but it’s what it enables us, the long-term benefits that will come out of here.

In our precision marketing, the fact that we’re going to go into personalization now and we will be able to save significant on the spillage that we have on marketing spend. That’s the more exciting part for me. When 3 years ago, when I started talking about precision retailing, I had a lot of misquotes. But hopefully, you now start to see what we mean by that. The 1-hour and Sixty60 is a beta. We’re just showing you that we are not ignoring what’s happening in the world. We’re not an island. These trends are happening all over. And if you’re going to be left behind you probably will just slowly die or die a slow death. So our beta version was in 8 stores. And our results up to now shows average delivery time of 50 minutes and 10 seconds. Very positive by customers. Of course, they want it quicker, faster, but it’s a steep learning curve for us. Our stores, our processes have not been designed from day 0 as a e-platform solution. Therefore, we have a lot to learn, but we’re learning fast.

There is short video clip. I’ll just give you an idea of what it’s about.

(presentation)

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Pieter C. Engelbrecht, Shoprite Holdings Limited – CEO & Executive Director [4]

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It’s not — e-commerce is not unique, but fast delivery in fresh food is unique, and it’s all app based. It’s not a web — another website, where you click and click, and that makes it a bit different. I did say that it’s for — I think 3 years ago, we said we’re going to make an assault on the premium food sector of the market. And that is gathering pace for us. We have achieved a market share gain in Fresh, equal to about ZAR 350 million in the last 6 months. And the Checkers growth has been 2.7x that of its peers. You can see it clearly on that index. I put the banana up there just because it makes us feel a little bit — makes us feel good that for once, somebody objectively realize that our investment in the core chain, in our technology in terms of this banana ripening is paying off and that we also, sometimes, our food and veg also last longer. So of course nice for us to see.

I mentioned the Constantia and Sandton flagship stores. What is interesting about it, I think it is world-class stores or is that in that segment of the market, we see that customers the up — as we define an upmarket customer is 3.5x that of our average Checkers brand customer, and they spend 1.5x more, very, very lucrative market. I wasn’t sure if you thought that the discounters from Brackenfell can play in that market. I think we have shown that we can actually play very successfully. I mentioned that earlier, very quickly again, is this has become a meaningful part and contributed to the business. It’s clear in the growth of 20.6% and the market share growth of 1.9%, that we’re doing something right in this segment, and we do believe there’s still a lot of growth. If one thinks that we’re just under 20% market share in the liquor segment, whereas the group in groceries total now at 31.6%.

I showed you this 3 years ago, to say what are we busy with and memory is short, we sometimes forget that only a year ago, January, a year ago that the last distribution center went live on the new ERP system. And that only from that point in time, we could create new and add-ons on to that platform with that core information system that we now have. That is what we’ve done. We wouldn’t have been able to do this Xtra Savings and the Sixy60 if we didn’t go through the pain at the time. We believe we’re now in the optimization phase that we can really now bed down, especially customer data and information and what we can do with it as part of our precision retailing, line item profitability, management of margin, et cetera, things that we previously didn’t have to that level of detail and that we can now move into an area what we call IGNITE to start releasing what we call additional revenue streams. So I’m just giving you this picture again. This is where we were 3 years ago. And this is how we’ve progressed on this path now.

Basically, I’m going to just quickly go on the outlook. Before I go on to this after yesterday, what is a nightmare, Jones crashed, 4.6%, I hear, on the back of the coronavirus. So our analysis on that is that we stand to of — we’ve got the risk of losing ZAR 100 million in turnover of product that we have to reallocate products that we had to cancel because they won’t be shipped in time. You can understand, things like winter goods, heaters, et cetera. But in that, we also have been able to switch our source of supply to places like Bangladesh, Ukraine, India. So we made plans, but of course, some of the winter goods is just not going to be able to be replaced. So our estimate is about ZAR 100 million. At the current state of affairs, we — I don’t know anybody that knows exactly where we’re going to go.

Inflation, that’s always a question. We came out of a 2.7% inflation in January, hit 3.9%. I think that’s probably where we’re going to see the 6-month pan out. The first 6 weeks of this year, the calendar year going out of H1, we’ve maintained the momentum. But of course, I immediately caution this, we are up against a higher base, especially quarter 4. If we go to the first graph, that’s the time when we really started to gain market share. Don’t expect a lot different in the non-RSA segment, other than the improved liquidity in Angola is assisting the stock flow in there. And then I did take you through the short-term actions we’ve taken, we do believe that will improve or help improve our financial performance in the 4 months left of the year. We’re still expanding. We are committed to open 40 new supermarkets in the remaining 4 months, albeit 28 of them, Usaves. And then I just want to end on, say, we love low prices. I hope you do. But that is what Shoprite is going to do. We’re going to continue to do what we do best, and that is to bring low prices to the consumers of South Africa at the time when they need it the most. We’ve got a 0.7% economic growth. Our customers are desperate for affordability. And I think nobody is better positioned than Shoprite to give it to them.

Lastly, I want to — with the deepest or from the deepest of my heart that I can thank the people of Shoprite. You have to work here to understand what these people are about. This is not just a company. This is an amazing place. And I need to thank each and every one, the management, the board, every single packer, cashier, it’s you that makes this business great. So I think we’ll take questions.

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Questions and Answers

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Anton de Bruyn, Shoprite Holdings Limited – CFO & Executive Director [1]

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So there’s been a few questions. Jiten. I can see that Pieter has answered you now on inflation. Pieter, can you maybe talk about productivity on — for the second half? What do you expect on wage increases or staff cost increases?

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Pieter C. Engelbrecht, Shoprite Holdings Limited – CEO & Executive Director [2]

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We are negotiating now. So it’s a twofold answer, unfortunately. Our 2-year wage agreement comes to an end. We’re currently in negotiations. We started off very good and then we drifted apart a bit. On productivity so that’s the 1 side. So I can’t really comment that where it will go. On productivity, we’ve seen a great improvement. We have a 10% productivity drive, and we are tracking very well on that.

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Anton de Bruyn, Shoprite Holdings Limited – CFO & Executive Director [3]

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So okay, great. I don’t know if there’s any questions from the floor. So I think, Pieter, [Warren,] I see you’ve got quite a few questions, but I will answer you in writing. I think that’s

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Pieter C. Engelbrecht, Shoprite Holdings Limited – CEO & Executive Director [4]

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Exactly 1 hour.

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Anton de Bruyn, Shoprite Holdings Limited – CFO & Executive Director [5]

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In an hour.

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Pieter C. Engelbrecht, Shoprite Holdings Limited – CEO & Executive Director [6]

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Voila.

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Anton de Bruyn, Shoprite Holdings Limited – CFO & Executive Director [7]

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Thank you very much.

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Pieter C. Engelbrecht, Shoprite Holdings Limited – CEO & Executive Director [8]

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Thank you.