Clicks Group Ltd S/Adr

Good afternoon and a warm welcome to the webcast of our interim results for the six months which ended February of this year. I am Bettina Engelbrecht, the Chief Executive Officer of the CLICS Group. Joining me here today is Gordon Trail, a trusted colleague for over 16 years. This will be Gordon's first results presentation as our Chief Financial Officer. Gordon, I wish you well, especially with the questions after the conclusion of our presentation. Together, we will then take you through today's presentation. This is the outline of our presentation. I will start with a review of the past six months. Gordon will then follow with an overview of our financial results. Hereafter, I will take you through the trading performances of our two operating business units, starting with CLICS, then UPD. And I will close with the outlook for the group. Please submit any questions that you may have via the webcast platform during and after the conclusion of our presentation. Sue Hemp from our investor relations team will read out your questions to which Gordon and I will respond. And now for a review of our interim results. The group's sustained performance with adjusted diluted HEPs up by 10.2% proved the resilience of our business model, defensiveness of our core retail categories, the value of our club card loyalty program, unique capabilities of our people, and strengths of our partnerships. The increased load shedding in the second quarter disrupted chopper behavior and led to an increase in our costs as we sought to mitigate its impact on our customers and operations. The retail business delivered another strong performance with turnover excluding vaccinations up by 11.9%. fueled by the post-COVID recovery of our beauty, personal care, and impulse categories. Pharmacy also performed well, growing its turnover just under 10%. Retail profit was up 12.7% due to the double digit growths of higher margin categories, as well as the higher growth of our private label and exclusive brands. Pleasingly, we sustained market share gains in all of our retail categories and attracted over 300,000 new active Club Card members. The UPD performance was muted. The low SEP increase of 3.28% meant no pre-SEP buy-ins as the benefit would have been negligible. Expenses were higher due to short-term operational challenges related to each system's transition, as well as increased delivery costs and higher insurance premiums. Our pending acquisition of the Sorbet Group, a national beauty salon chain, is awaiting Competitions Commission approval. I now hand over to our Chief Financial Officer, Gordon Trail.

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 financial impact related to the insurance recoveries received last financial year and, where appropriate, excluding turnover that has been generated from vaccines. where any such once-off adjustments are made in respect of the insurance recoveries or vaccines revenue, we clearly note this in the presentation 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 6.8% for the period. Retail turnover excluding COVID-19 vaccinations grew strongly at 11.9%, which was supported by the normalization of trading. UPD continued to experience tougher trading with reported turnover declining by 1.8%. However, total managed turnover was up 7.8%. The group operating margin at 8.2% increased by 40 basis points due to the faster growth of retail as the economy continued to normalize and the fact that there were minimal sales from lower margin COVID-19 vaccines. Diluted HEPs adjusted for the receipt of SASRAE insurance proceeds in the prior period was up 10.2%. Diluted headline earnings per share for the group increased to 4.72 per share, up 1.1% on last period. The dividend declared for the period has been increased by 2.8% to 185 cents per share, growing in line with headline earnings. I remind you, in the prior year, the dividend was calculated, including the benefit of the insurance payment. During the period, we returned over 1.1 billion to shareholders and dividends. The group's return on equity at 41.2% remained within our targeted range. Return on equity is lower than prior year due to no share buybacks taking place and the insurance payment received in the prior year. I would like to remind you, as we have previously disclosed last year, we made certain adjustments to present normalised results. In this slide, we repeat the same adjustments to better present the underlying performance of the business. The group was insured against the risk of political violence and civil unrest through Sazria. During the previous financial period, Sazria paid out certain amounts to us specifically. 130 million in respect of the loss of inventory and other costs incurred, which is recorded in other income. And 87 million in respect of damage fixed assets, which is recorded as proceeds received on capital items. And this has been utilised to restore the damaged stores so they can trade again. If one simply takes the 2022 reported figure and adjusts them by the insurance proceeds received, you can see that diluted HEPs is up 10.2%. The normalisation of trade has had a positive impact on the retail business. The opposite was also true for UPD. However, we are seeing that trade is normalising as well for UPD. Retail sales, excluding COVID-19 vaccinations, grew by 11.9%, with same stores growing 8.3%, which was driven by the normalisation of trade with categories, including beauty, recovering strongly. New stores and pharmacies added 3.6% to the top line, while selling price inflation increased to 6.6% for the year. Inclusive of vaccines, sales were up 5.5%. The distribution business experienced low selling price inflation of 1.1% and was impacted by lost opportunities for sales between clicks and UPD during the new systems implementation. The impact of certain products moving from a reported turnover to being reported as part of managed turnover and lower demand from independents. However, we are seeing sales starting to normalize with sales to hospitals increasing by 6.3% and sales to clicks up 5%. Bettina will elaborate on the detail of each business's performance later in the presentation. This slide reflects our total income earned excluding the insurance proceeds received in the prior period, which is increased by 8.1% for the period. Total income, including the insurance proceeds in the prior year, increased by 5.6%. You can see the total income margin in retail was 120 basis points higher than last year due to the discontinuation of vaccines, which were at a low margin and the normalization of trading with a strong growth of higher margin categories. UPD's total income margin was up 10 basis points to 8.8%. This was impacted by the growth of bulk contracts offset by the low SEP increase granted in the current year and consequently the lack of opportunity to take advantage of any buy-in. Overall, the faster growth of the retail business at 9.4% has resulted in the group's total income margin being 160 basis points higher than last year. Our cost base in retail remains efficient with retail expenditure as a proportion of sales at 24.2%. Adjusting for the impact of vaccine sales in the prior period and related costs, retail expenditure is the same proportion as last period. Comparable retail cost growth, excluding new stores, was up only 5.6%, reflecting the tight management of costs. In total, retail costs grew 8.1% and remained well controlled despite the cost pressures from dealing with higher insurance premiums, the electrical waste levy introduced in the prior year and load shedding, as well as new stores, pharmacies and depreciation on capital expenditure. In this regard, we have added 63 stores, comprising of 61 click stores, one baby store and one body shop store, and 45 pharmacies to the chain during the last 12 months. UPD's costs have grown ahead of turnover due to adding additional employment costs to ensure customer service levels are met during the rollout of the ERP WMS systems and increased costs from load shedding, delivery costs and higher insurance costs. Overall, UPD's total managed turnover was up 7.8% while costs were up 13.3% for the period. Retail grew operating profit by 12.7% with the margin increasing by 60 basis points to 9.7%. This has been due to the normalization of trade and the recovery of higher margin categories together with the lower vaccine sales in the current period. UPD's operating profit declined by 28.5% with the operating margin declining by 80 basis points due to the lower SEP increase, additional employment costs during the ERP rollout, and increased costs relating to insurance delivery and load shedding. Overall, the group's operating profit increased by 7% to over 1.6 billion rand for the period driven by the strong performance in retail. Inventory levels for the group are higher at 81 days. Retail stock days are four days higher than last period due to additional stock being carried as a result of stock levels normalising from the previous period. Vaccine sales, which contributed significantly in sales but had low stock holding levels, contributed six days to the lower stock days in the previous period. Adjusting for this, stock days were lower by two days. UPD stock days at 48 days are one day lower than last year and remain well controlled. As the main channels of wholesale, namely hospitals and clinics, continue to recover, this is expected to improve further. This slide shows the movement of cash during the year. As you can see, we started the period with cash of 2 billion, reflected in the dark blue on the left-hand side and ended the period with 1.2 billion on the right-hand side of the slide. The group has generated cash of 2.3 billion highlighted in green before the repayment of lease liabilities amounting to 370 million, working capital outflows of 872 million and tax payments of 545 million. 351 million was reinvested in capital expenditure across the group. Of this amount, 206 million was invested in new stores, as well as 21 click store refurbishments. 66 million was spent on distribution centers and 79 million was spent on IT and other infrastructure. We returned over 1.1 billion to shareholders this period through dividends. CapEx of 958 million is planned for the year. This amount includes 32 million carried forward from 2022 due to delays caused by the impact of the civil unrest and COVID-19. 477 million will be invested in our store and pharmacy network. This will include 50 new click stores and 40 new pharmacies. 45 retail store refurbishments to ensure they remain modern and relevant to our customers. 481 million will be spent on IT systems and infrastructure. 210 million of this amount will be invested on UPD IT and warehouse equipment, including the rollout of the new ERP WMS systems to our last two distribution centres. and we will invest the balance of 271 million in retail IT systems and infrastructure. We will also be investing in battery storage at our legal end distribution facility, which will allow this DC to effectively be off grid. We will continue to grow our retail footprint and complete the rollout of the ERP and WMS systems in UPD.

Thank you, Gordon. I will now take you through our trading performance. Starting with clicks. First, let me provide some context to our sales performance. Black Friday sales in the period set a new daily sales record, our highest single sales day to date. Sales in our front-shop health and pharmacy must be seen in the context of the higher base in the comparative period last year due to the prevalence of the Omicron variant and some supply constraints in the current period. The high levels of intermittent load shedding impacted nearly 60,000 trading hours, up from just under 10,000 trading hours in the prior comparative period. We partially mitigated this load shedding impact by fitting 94.7% of our stores with battery packs, inverters and generators. Consumers were and continue to be hard hit by rising inflation in staple foods, transport and lending costs. In the period, total turnover, which includes Clix and its international franchise brands, GNC and The Body Shop, grew by 11.9%, excluding vaccinations. To put this into perspective, Comparative retail sales growth excluding vaccines in half one of the prior year was 7.1% and 9.4% in half two of the prior year. Proof that we are gaining momentum. Our existing stores grew 8.3% with volume uplift of 1.7%. Selling inflation as referenced by Gordon was contained to 6.6%. Importantly, we strengthened our competitive positioning, which resonated strongly with consumers seeking for value. Pharmacy sales excluding vaccinations increased by 9.8% in value and 7.1% in volume. This performance was fueled by strong double digit growths in subcategories, such as stomach health, skin health, and diabetes. The convenience of our pharmacy network drove strong double-digit growth in our acute prescription sales. Friendship health grew by 5.8%, despite the high base of the prior year and some supplier out of stocks in the current period. The star performers were foot care, sports supplements, health foods, and sports and slimming. we achieved double digit sales growths in baby accessories and baby toiletries. Exceptional growth in baby hardware was driven by our clicks baby standalone stores and online offering. The beauty and personal care category delivered another superior performance up 18% with all sub departments recording very strong double digit growths Standout performances were recorded in dermal skincare, sun care, and luxury bath. The beauty and personal care category increased its contribution to our total retail sales from 29.6% last year to 32.1% in the current period. General merchandise also delivered a strong performance and increased its turnover in the period by 14.1%. Our snack deal benefited from the normalising of shopper activity post the lifting of the COVID-19 restrictions, with convenience categories such as beverages, impulse confectionery and snacks all recording strong double-digit growths. Whilst sales in small household appliances and electrical beauty products were more muted, up 6.2% and 6.4% respectively, convenience categories such as domestics and paperware performed very well. Turning to our market shares. We continue to build on our market share gains of prior years in all of our core retail categories. I will now take you through each of these categories, starting with health. We gained 30 basis points in retail pharmacy. Our accessible and convenient network enables us to grow and to extend our share of the schedule one and two market and of acute prescriptions. The percentage of chronic items enrolled on our repeat prescription service is increasing steadily. We increased our share of Friendship Health by 50 basis points, despite the high base in the prior year attributed to the Omicron variant. At the subcategory level, market share gains were recorded in all subcategories, such as food care, sports and slimming, medicinal, and vitamins and supplements. Our disciplined focus on executing our organic baby strategy has been rewarded by a 90 basis points market share gain in baby. we achieved particularly strong market share gain of 11.6% in baby hardware. This was facilitated by our conveniently located Click's Baby standalone stores and online baby offering. Share gains were also recorded in baby care creams, infant milk, and dry baby food. turning to beauty and personal care. In front of beauty and personal care, all categories likewise gained market share. Skincare gained 150 basis points, fueled by strong performances in face cleanses, face care, acne preparation, and lip care. Haircare gained 140 basis points, driven by sheer gains in hairspray, hair shampoo, conditioners, and hair colorants. And personal care gained 90 basis points with strong gains in luxury baths, sun care, sanitary protection, body freshness, and soaps. Finally, general merchandise. Standout performances came from our general merchandise categories in paperware, reading glasses, home accessories, and beverages. In our heritage category of small household appliances, we gained 160 basis points driven by share gains in food preparation and seasonal appliances. I will now provide greater detail on the key drivers that support our growth. Turning to how we maintain value. We have, as reflected on this slide, maintained great everyday prices and remain price competitive with all national retailers based on a volume weighted price index that excludes our renowned three for two promotions. To put this into perspective, you would have paid 6.2% less for your basket of overlapping products if you shopped at a click store rather than at retailer C, and 9% less if you shopped at clicks rather than at retailer A. And let me stress, this excludes our 3-for-2 promotions. We grew our promotional sales by 14.3% to 43.3% of sales with strong promotional sales growths in categories such as baby, skincare, confectionery, homeware, and branded supplements. In pharmacy, sales of generic medicines grew by 8.9% and now accounts for 59% of value and 70% of volume. Our value offering though extends beyond price. Our Clicks Clubcard loyalty program delivers great rewards that are relevant to our customers. The tiering of our extensive range of private label and exclusive products provides us with the opportunity to offer appropriately priced private label and exclusive products for customers who trade either up or down. The majority of our stores are in convenient locations close to where our customers live, work or play, saving them time and transport costs. By offering customers the choice of generic medicines, we actively assist them to extend their medical aid benefits. We recently partnered with Discovery Health on the launch of their FlexiCare medical insurance product and we are pleased with the early results. Our range of private label and exclusive brands is a key driver of growth based on differentiation. Private label and exclusive brands grew strongly up 15.1% and contributed 25.3% of total retail sales. It increased its contribution to 30.3% of friendship sales and 11.1% of pharmacy sales. The investment in our elevated beauty hall in 33% of our stores exceeded our expectations. Sales in fine fragrance in these concept stores grew strongly ahead of the chain in both volume and value. The teams will be focusing on specific initiatives to drive improved service and sales as we extend this concept to more of our stores. Our four standalone Clix baby showroom stores supported by our expanded online baby ranges are performing well. Private label and exclusive ranges enhance our baby offering and delivers value as well as a superior performance experience to the baby customer. We plan to open one more Clix baby showroom store in the second half. Customers are responding favorably to our new look Body Shop store format and relaunched Body Shop product ranges. This is driving growth in the Body Shop. The Clicks Club Card is an enabler of our personalization strategy and a key contributor to our sustained performance. We have grown our membership to 10 million active members who contributed just under 80% to sales. This is an increase of over 300,000 new active Club Card members in six months. The investment in digital enablement spurred the growth in our clicks app downloads, which has now reached 3.5 million customers, up from just 3 million six months ago. At our last full year results presentation, we advised that we would continue to invest in enhanced digital engagement. So let me now share with you some of what we have done. We have developed gamification campaigns which increased our app downloads and delivered significant increases in customer engagement. We introduced Salesforce Martech to trigger personalized shopping journeys for our customers. And we aligned our affinity partners to our customer needs in order to increase value perception and created opportunities for our members to earn more cashback and greater rewards. Our mantra is customer first. The 2022-23 Ask Africa Orange Index Award, which recognizes us as delivering the best pharmacy customer experience, is an indicator that we are winning the hearts and minds of our customers. Our iconic club card program is growing its membership base, worn out by being awarded as the most used loyalty program by the truth and brand map loyalty paper. and our generous Baby Club Card Program supports our overall baby strategy. Our sales and market share growths confirm that we are executing our organic baby strategy well. Still, we appreciate the Baby Yum Yum Award as having the best baby loyalty program. How do we extend convenience? At the full year results presentation, we committed to accelerate our store opening program by opening up between 40 to 50 new stores and 40 to 50 pharmacies each year. In this reporting period, we have already opened up 21 new stores and 18 pharmacies. We are confident that we will reach our published target. This will enable us to further extend our retail chain network across Southern Africa and improve our proximity to our customers. We are showing steady progress on our objective of a pharmacy in every click store. Currently, 88% of our South African stores have a pharmacy. Strategically, stores in our convenience format accounts for 75% of all stores. 209 of our convenience format stores are in low income areas and these accounted for 23.3% of our retail turnover. Effective the 1st of April, we acquired Emchem, a well-known, iconic 24-hour pharmacy in the Western Cape. As anticipated, the growth in online sales has stabilized, contributing 1.2% of front-shop sales. Our online-only ranges continues to outperform, driven by range extensions, new ranges, and enhanced marketing communication. Our online store remains our number one store by turnover and is profitable. That completes the review of the clicks business. I will now turn to UPD's trading performance. This slide sets out the breakdown of UPD's fine wholesale turnover, which excludes bulk distribution and preferred supplier contracts. The marginal increase in wholesale turnover up 1.6% is attributable to three factors. First, the continuing consolidation of independent pharmacy and the stricter application of credit terms by the UPD team. Secondly, reduced purchases by clicks from UPD due to the short-term impact of the transition to the new IT systems. And thirdly, the decline in exports due to slower demand from neighboring countries and the impact of import regulations in these territories. Although sales to private hospitals increased by 6.3% in value, the higher volume uplift was primarily driven by changes in the hospital's case and product mix. Importantly, UPD maintained its share of its existing private hospital customers and acquired new customers in the private hospital's channel. Clix remains UPD's largest customer, now accounting for 51.8% of its wholesale turnover. UPD's total managed turnover, which includes fine wholesale as well as turnover managed on behalf of its bulk distribution clients, increased by 7.8%. the bulk distribution business delivered sales growth of 8.7% despite subdued market activity. This was driven by strong growths due to new product launches, line extensions, and portfolio acquisitions by a number of its distribution principles. An additional distribution client has been onboarded in March. Although generic sales continues to increase up 4.3% and accounted for 73% of UPD's volume, originator medicines showed stronger value growth for the period up 6.9%. UPD faced significant cost pressures due to increased delivery and insurance costs, as well as the costs associated with mitigating the impact of load shedding. Employment costs were also higher in order to maintain service levels during the system's implementation. As regards the new UPD IT systems, we have completed the implementation in all three of the UPD coastal distribution centres, namely Durban, Geberge and Cape Town. The systems are stable. We are confident that the systems rollout in the two remaining DCs will land well. By the end of this financial year, we will invest in battery storage at our Lee Glen DC. This will materially reduce reliance on ESCOM in our largest DC and significantly reduce our energy costs for that DC. This completes the review of our trading performance for the year. The trading conditions have been challenging, exacerbated by the impact of load shedding and rising inflation. We have extraordinary people who are passionate brand ambassadors. The performance of our group is the sum total of the performances of individuals and teams in our company who exemplify resilience, integrity, and a commitment to service. The functional and business unit teams are collaborating to a greater extent. I commend Vikash Singh and the Clicks Health and Beauty team for their exceptional execution of our retail strategy. On behalf of our board and executive management, to all our people, thank you. I will now conclude this presentation with our outlook. We offer sustainable long-term growth prospects for equity investors seeking non-cyclical exposure to the retail and healthcare sectors in Southern Africa. The consumer environment is expected to remain extremely constrained due to the continued impact of load shedding and inflation. Our key drivers of sustained volume growth, namely value, convenience and differentiation, positions us well to respond to the needs of consumers, particularly in this constrained economic environment. The defensiveness of our core retail categories, strong market shares and loyal customer base, as well as our proven track record of sustained performance will deliver sustainable returns to shareholders. In accordance with our revised store opening target, we are on track to open net 50 new stores and an additional clicks baby store this year. The pending acquisition of the Sorbet Group, a national beauty salon chain, is awaiting approval by the Competitions Commission. And we are excited by the acquisition of Imchem, the first 24-hour pharmacy in our network. Our front shop private label and exclusive product ranges are performing well. We will extend our ranges and introduce more innovation. and we will continue to invest in digital engagement and improve customer care. The UPD systems implementation has created short-term operational challenges. I reiterate, the two systems are stable. We will, though, implement strict oversight in the UPD business to control costs and manage the change process. Sustainable ethical business practices and responsible corporate citizenship is at the heart of our business. We have integrated ESG into our strategic planning and management processes. Our increased investment in renewable energy and commitment to carbon neutrality reflects our view that we are stewards for future generations. The installation of solar panels at all of our own distribution centers has been completed, increasing our use of renewable energy sources and providing some mitigation against rising energy costs. By the end of this year, we will invest in battery storage for our Lee Glen DC, our largest pharmaceutical distribution center. Our social investments are focused on health care education, primary health care and support for programs aimed at eradicating gender-based violence. These social investments are facilitated through our New Clicks Foundation and our Clicks Helping Hands Trust. Turning to our earnings guidance. Our strength in our core retail markets, loyal Clubcard customer base, great value positioning, and extensive network, coupled with our proven capability to adapt to changing market dynamics, supports our growth aspirations. We expect the fine wholesale business to recover due to increasing occupancies in private hospitals, as well as the continued growth in the clicks business as it gears up for a more normalized colds and flu winter season. The bulk distribution business is stable and growing. I therefore remain confident in our group's ability to deliver on our earnings forecast of between 8% to 13% in adjusted diluted headline earnings per share for our full financial year. Thank you for listening. We will now take your questions. I'm therefore handing over to Sue Hemp to manage that process on our behalf.

Good afternoon, everyone. A question from Brian Thomas at Lauriam Capital. Thank you for your presentation and thank you for providing guidance on full year earnings. In an environment where cost inflation is running at high single digits, 8.1% in half one in retail and 13.3% in UPD, and the customer, as you point out, is under considerable pressure, what gives you confidence that you will be able to attain the 8% to 13% growth for the full year? You mentioned that there is normalization of trade in UPD. Is this expected to be part of this EPS growth assumptions?

Thank you, Sue. We've considered our trading up to the end of February and post the end of the year, and we are seeing trading continuing in line with how we've traded up to the end of February. And that's one of the reasons that's given us confidence for attaining the 8 to 13% growth for the year. We are also addressing the operational issues that we've had in UPD, which is going to contribute to the profitability.

And maybe if I can just add to that, the point that I was trying to make, if you look at the growth in retail on an adjusted basis, if you looked at half one of 2022, 7.1%, half two, 9.4%, and this first half of this financial year, 11.9% great momentum actually in the retail business. So that's the first one. The second one is the continued growth in our Clicks Clubcard program. When you've got a loyal customer base with 80% of your sales coming from that loyal Clubcard customer base, I think that's what also provides us with the confidence. And finally, I would just say it's the value positioning. You'd have seen that we remain price competitive. And that, of course, is of critical importance to the consumers in this very, very constrained economic environment.

I have a number of questions here on Unicorn. and we'll read out some of them. Some of them are a bit repetitive. Jeremy Gauvin from Stonehenge-Plemming asks, can you give us an idea of the potential sanctions that clicks may face? What is the impact to revenue and profitability from discontinuing the unicorn brand? Foneka Maseko from JP Morgan has also asked for clarification percentage of revenues and what profit is at risk as a worst case. And we've had questions from Paul Stegers at Nedbank, Mbuso Zulu at Centio Capital, Alec Abraham at Sassman Wealth, Brian Thomas at Lauriam, and Emmanuel at Adewani.

So let me just take that question perhaps, and let me just refer to, because I think there's been quite a bit of that, but let's just talk to what the Constitutional Court judgment has said. The first is it has placed no restriction on the sale of private label products within our dispensaries. Secondly, what it has done in terms of the ruling, it has directed the Director General in the Department of Health to make a decision on this particular matter. So what we have done is we are engaging very proactively with the Department of Health and with its DG in order for us to seek a resolution. We do not believe, given that there's no restriction placed on the sale of our private label medicines in our dispensaries, that there will be any impact going forward. Secondly, of course, all of the licenses that will enable us to achieve our target in terms of our pharmacy rollout program is already in hand for this financial year.

Question from Michael at Avial Capital Markets. Good day, thank you for the presentation. What was the diesel cost paid during the year for load shedding in the click stores?

Okay, there's a couple of different parts. So there's direct diesel costs and indirect diesel costs from landlords. So if we just look at both of those together, so on the retail side, there was an increase of about 14 million in the prior year. And you've got to remember on the UPD side, they also have had to run generators and incur diesel costs. That was an increase of about 7 million year on year.

Jeremy from Stonehenge Fleming has asked on the distribution business, are the DC inefficiencies still impacting the business? Do you see operating margins recovering to the 3.3% level from 2.2%? And what is the time level for that?

We are addressing these and we've seen improvements and we're continuing to work on these. And our median term guidance is the 2.8 to 3.3%.

As it's always been.

Yeah. He's asked a couple of questions on the competitive environment and the trading environment. In terms of trading, has trading deteriorated further in H2 thus far? Are consumers forgoing dispensary or front shop products due to pressures on interest rates, fuel, food, and inflation? And in terms of the competitive environment, does SCIM announce that it is looking to replicate its 30% carting market share in the rest of the country where its share is lower? Are you seeing a pickup in competition? And is this impacting trading?

In short, we've continued trading well post the end of February. The second point is, if you look at the growth in all of our core categories, we've grown in every single one.

Yes, I was also just going to say, I mean, we have a huge advantage just in terms of the extensive nature of our retail network. I mean, given the number of stores that we already have, that's a massive advantage. The second one is actually the advantage around our Clubcard customers. And then I think I will make the point. Because of our locations, we've got a higher share of schedule one and two. And so for those customers that don't have a medical insurance product or a medical aid, it means that there'll be a lot of self-medication and our locational advantage positions us to take advantage of that. And then, of course, I think the importance of partnering with Discovery on their FlexiCare product means that we have also positioned ourselves very well once again in terms of those customers who will be buying into the Discovery FlexiCare product. And then the final one, perhaps, that I would just have said is Once again, our locational advantage means that we are excellently positioned to further grow. And you've seen that, that our acute prescriptions actually outgrew. So I think in all respects, we always say competition is great because what competition does, it compels all of us to improve our game. And I must say, when you look at the performance, a clear indication that we are winning the hearts and minds of all customers, not only our pharmacy customers.

That may have answered the next question, but I'll ask it anyway from Yash Patel at SBG Securities. Thank you for the presentation. Was there any noticeable benefit in pharmacy as your major competitor reported a loss in chronic scripts since the end of 2022? What is the average length of a chronic script?

Well, I mean, they're a real advantage, and that's why I reference the steady increase in the enrollment of chronic scripts on a repeat prescription service. A chronic script generally lasts for six refills. And really what you try and do is to ensure that you are managing the patient for their own health. so that they actually fulfill each one of those scripts. So, you know, it's really getting the customer to be more disciplined in terms of the fulfillment of their chronic scripts.

I have a number of questions here from Victor Sini at Benguela Global Fund Managers. What was the contribution to profit from COVID vaccines in the first half of last year and the first half of this year? What were GP margin and EBIT margins excluding COVID vaccines in both periods?

So if we just start with the sales, first half and second half. So the first half sales were 800 million. The second half sales were lower at circa 300 million. The margin, the GP margin you make in that is probably similar to the margin that you would make on scheduled medicines. and the profit contribution was minimal.

He's asked what were the reasons for each of the eight store closures during the period?

Some of these would have been underperforming stores and we assess these on an ongoing basis.

I mean, that's part and parcel of running a retail operation. I mean, that's the great reason why retailers generally don't own the stores where they are at. We lease it. And so that, you know, customer patterns change, how people live, where they travel to, whether or not a road's being built. that bypasses that centre, all of these are factors that you take into account, as well as whether or not the landlord continues to invest in maintaining the centre. The landlord doesn't do that and the foot traffic decreases, then the best thing that you can do for yourself and for your shareholders is to exit that particular location. So that's just part and parcel of retail operations.

He's asked how much of UPD's EBIT decline was from low SEP increases versus the system's difficulties, and what is driving lower demand from independent pharmacies?

The system's operational difficulties came from the ways of working in the DC. So, you know, I feel like affected employment side. There is difficult to say what is impacting the lower independent sales. Some of it is processes we put in place on our side to reduce or to put certain credit lines on hold with pharmacies. It would be difficult to say how much is transitioning to local choice.

He's asked the proportion of FY23 capex that is going on backup power, batteries, etc.

For some time now, that's been part of our ongoing capex when we open new stores. So it's relatively low as part of the overall capex in stores. If I reference the investment we're doing at our DC in Leigh Glen, that is 17 million for that facility to have battery backups. All our owned DCs currently have solar in place, but it doesn't allow them to trade during load shedding. So we've made the decision for backup reasons to include battery storage. And that will also benefit, give some comfort to our customers as well, that we'll have a mixture of generators and battery storage and effectively means that that DC comes off grid.

Question from Salome Maruma at Perpetua. What is driving the acceleration in the store rollout at 50 stores a year from your previous circa 35 stores? What opportunities are you seeing that maybe were not visible five years ago?

Well, maybe if I can take that one. I was just referencing earlier today in response to a question from one of the media houses that we had one store in Lesotho And it was doing phenomenally well. And one of our regional managers came to us and said, we think that there is an opportunity to open up a second store. And we looked at that. And we were wondering, you know, is this going to work? This is the reality. The customers that shop at the first store that we open in Lesotho are also shopping at the second store. And overall, turnover in Lesotho with two stores is actually up well above 30%. Now, where are the opportunities? The opportunities are for the brave and the courageous. You'd have seen that we referenced the fact that 75% of our stores are in convenience formats. When you reflect on what happened with restricted movements during COVID, you saw how that benefited us. Secondly, even now, during the time of load shedding, convenience for shoppers during their midweek and week is incredibly important. In the weekends, Our locations in destination malls are also benefiting us. So there are really opportunities all across. We are still underrepresented in the Gauteng area. And there are many other areas where we can see that there are great opportunities for us to open up more stores. And then the final one that I'll perhaps just say, when you look at more established mature markets, Independent pharmacy coexists with corporate pharmacies, but there the share of independent pharmacy is anywhere between 20 to 30%, if I give a broad range. In this country, there is still therefore probably around about a 20% market share in pharmacy that is still available for the corporate pharmacy chains to take. And that's where the opportunity is.

Tia Bardo from Avio has also asked about the increased total store target to 1,200 and where we see the opportunities where we're underrepresented and hopefully that answers her question. Then Damon Buss from M&G Investments asks, can you give us some insight into the profitability of promotional sales in retail relative to non-promotional sales? Yash Patel from SBG asks, can we expect another SEP increase into the second half of this year, considering the lower than expected increase earlier this year?

Well, that's not so much a matter for ourselves, of course. It's really a matter for the pharma industry. And what I can tell you is that the pricing task group has been engaging the Ministry of Health because, of course, no one can quite understand how that final SEP price increase was arrived at. It certainly is not in accordance with the formula that has been published.

So Pilar Marconioni from HSBC says, should we expect the group strategy to change given the recent acquisitions, medical insurance and recent management departures?

Now, I think in terms of the strategy, we've always been quite clear. We've got a proven strategy and that strategy works and we are on track and we are maintaining our particular strategy because the strategy is not dependent on any changes in our leadership. On the second part of the question, which was around... Are we seeing... Sorry, I...

Are there likely to be any changes in strategy due to the insurance partnership?

Well, the insurance actually is quite specific. I mean, a departure would have been for us to pursue a medical insurance product ourselves. We do not believe that that's where our core capability lies. And that is the reason why we stressed right at the beginning, we pursue strategic partnerships and the strengths of those partnerships, such as, for example, with Discovery Health, is the reason precisely because that's where their capability lies. We partner with them and really our capability is how do we then provide medicines within a retail pharmacy location. That's how we will be partnering with Discovery Health. Insofar as the more recent acquisition, It makes complete sense that for a retail pharmacy chain that says one of its key drivers is convenience to begin to explore a 24 hour pharmacy, because that is all about responding to the needs of the consumer for greater convenience and a 24 hour pharmacy most certainly supports that particular driver of growth. So yes, We are excited. Anybody in the Western Cape that's ever had a child or a grandchild is very familiar with Mr. M and MChem. And we have found such great alignment in terms of our value. So we are excited by the prospect. This will be the first of our 24-hour retail pharmacies. There appears then to be no further questions. Thank you very much for joining us today.