Clicks Group Ltd S/Adr

Welcome to the webcast of our annual results for the year ended August 2022. I am Bettina Engelbrecht, the Chief Executive Officer of the CLICS Group. Joining me here today is Michael Fleming, our Chief Financial Officer. Together, we will take you through today's presentation. This is the outline of the presentation. I will start with a review of the past year. Michael will then follow with an overview of our financial results. Hereafter, I will take you through the trading performance for the CLICS business followed by UPD. I will then close with the outlook for the group. Please feel free to submit your questions via the webcast during and after the presentation. Suhem from our investor relations team will read out your questions to which Michael and I will respond. And now for the review of the year. The group, which celebrated its 54th birthday in early August, has once again delivered a strong performance with continuing adjusted diluted HEPs up 11.9%, which is comfortably at the upper end of our guidance of between 8 and 13%. This performance must be seen in the context of the continuing impacts of COVID-19, the July 2021 civil unrest, and the much higher levels of load shedding in the second half of the year. The group's strong performance despite these challenges demonstrates the resilience of our business model, capability of our people, defensiveness of our core retail categories and strengths of our partnerships. We were unwavering in our support of the national vaccination program and administered over 2.9 million vaccines this year, making us the largest private sector vaccinator in the country. Our beauty category recovered strongly post the lifting of the COVID-19 restrictions. This is positive given our strong and growing market shares supported by the contribution of our margin-enhancing private label and exclusive brands to this category. The growth in our UPD wholesale business was impacted by muted demand in the private hospitals channel relative to the prior year. Pleasingly though, UPD improved its total income margin by 50 basis points as it onboarded three new distribution clients. The group remains strongly cash generative with a healthy balance sheet and a track record of stringent cost control. These factors facilitate our investments for growth and innovation. In this year, we accelerated the expansion of our store and pharmacy network, and we continue to invest in our IT and supply chain capabilities to enable our growth aspirations and respond to changing consumer preferences. ESG is fully integrated into our strategic planning and operational processes. The validation hereof is our consistent inclusion in the FTSE for Good Index, our AA ESG rating from MSCI, and recognition as the top employer within the retail sector. At the interim, we advised that we would be investing in solar as a source of renewable energy. This project has been completed. I now hand over to Michael to take you through the group's financial results.

Thank you, Bettina. Good afternoon. By way of introduction, you will note both in this presentation and in the SENS announcement that we provide certain financial information adjusted for the significant financial impact related to the civil unrest last year, as well as the subsequent insurance recoveries. where any such once-off adjustments are made in respect to the civil unrest and insurance recoveries from SASRIA, we clearly note this in the presentation by means of an asterisk and a footnote in order to present a more normalized view of the underlying business performance. In light of what I've just said, if we consider the group financial highlights, group turnover increased by 6% for the year. Retail turnover grew strongly at 11.7%, which was supported by COVID-19 vaccinations contributing 3.5% to sales growth. On the other hand, UPD had a much tougher year, with turnover declining by 2.6% as the wholesale business experienced a reduction in sales to private hospitals and independent pharmacies. The group operating margin at 8.4% increased by 20 basis points due to the faster growth of retail as the economy recovered from the impact of COVID-19. Continuing diluted HEPs adjusted for the direct financial impact of the civil unrest and insurance proceeds was up 11.9%. Diluted headline earnings per share for the group increased to 10 rand 33 per share, up 33.5% on last year. Both of these diluted HEP figures are within the earnings guidance range we had provided to the market. The group's operations generated strong cash inflows of R4.3 billion. During the year, we returned over R1.7 billion to shareholders in dividends and share buybacks. The group's return on equity has increased to 48%, which is at the upper end of our targeted range. The dividend declared for the year has been increased by 30% to 637 cents per share. As you know, the group was insured against the risk of political violence and civil unrest through SASRIA. During this financial year, SASRA paid out further amounts to us, specifically $325 million in respect of the loss of inventory and other costs incurred, which is recorded in other income, and $167 million in respect of damaged fixed assets, which is recorded as proceeds received on capital items. And this is being utilized to restore the damaged stores so they can trade again. our claim has been fully settled. If one simply takes the 2022 and the 2021 reported figures and adjusts them by reversing the stock written off and other costs incurred, as well as the insurance proceeds received, you can see that diluted HEPs was up 11.9%. The significant reduction in the severity of COVID-19 cases in South Africa had a positive effect on retail trading as we progressed through the course of our 2022 year. The opposite was also true for UPD. Retail sales grew by 11.7%, the same stores growing 8.4%, which in turn was driven by providing COVID-19 vaccinations in many of our conveniently located pharmacies. New stores and pharmacies added 3.3% to the top line, while selling price inflation increased to 4% for the year. The distribution business experienced low selling price inflation of 1.5% and saw declining volumes in the wholesale business as the impact of COVID-19 began to wane in South Africa. In the prior year, sales to hospitals had increased by over 37%, driven by the supply of drugs required for patients fighting COVID-19. So the decline in UPD's turnover should primarily be viewed in that light. I'd also add that in half two, we saw retail turnover excluding vaccines increased by 9.4%, up from 7.1% in H1, as all COVID restrictions were lifted and the economy began to normalize. Bettina will elaborate on the detail of each business's performance later in the presentation. This slide reflects our total income earned, which has increased by 9.8% for the year. You can see the total income margin in retail was 30 basis points lower than last year. This was mainly due to the very low margin made on the 2.9 million COVID-19 vaccinations we administered this year compared to around 600,000 vaccinations we did last year. In addition, pharmacy sales also have a lower margin. Although we don't rejoice when people get sick, we were very pleased that the return of an extended cold and flu winter season in South Africa brought many customers to our CLICS pharmacies to purchase OTC and prescription medicines. This is the first time in three years we have experienced a normal cold and flu season now that COVID restrictions have been lifted. On the other hand, UPD's total margin was up 50 basis points to 9.1%. UPD has continued to benefit from the addition of bulk distribution contracts gained both during the previous year as well as in the current year, which has helped alleviate some of the pressure on UPD. Overall, the faster growth of the retail business at 10.5% has resulted in the group's total income margin being 90 basis points higher than last year. Our cost base in retail remains efficient, with retail expenditure as a proportion of sales reducing to 23.4%. The administration of COVID-19 vaccines added significant amounts to our employment and our other operating cost lines. These were, however, recovered through the fees paid to CLICS by the Department of Health and Medical Aid schemes. We have also reduced these variable costs as demand for COVID-19 vaccinations declined. Retail costs grew 10.5%, driven by the COVID-related costs I just mentioned, as well as new stores, pharmacies, and depreciation on capital expenditure. In this regard, we've added 58 click stores and 52 pharmacies to the chain during the year. Comparable retail cost growth, excluding new stores and COVID-19 vaccination costs, was up only 5%, reflecting the tight management of costs. UPD has continued to win a number of new wholesale and distribution clients, which has resulted in leasing additional warehouses that also come with additional variable labour, transport, insurance and other costs. Overall, UPD's total managed turnover was up 7.6%, while costs were up only 6.2% for the year. Retail grew operating profit by 10.3%, with the margin declining by 10 basis points to 9.4%. As I said earlier, this was as a consequence of the high number of COVID-19 vaccinations CLICS administered during the year, which equated to turnover of 1.1 billion Rand at a very low margin. UPD's operating profit declined by 1.2%, with the operating margin being in line with last year. This was due to ongoing cost pressure combined with lower wholesale sales, particularly in hospital and independent pharmacy channels.

Overall, the group's operating profit increased by 9.2% to over R3.3 billion for the year. Inventory levels for the group are higher at 72 days.