Clicks Group Ltd S/Adr

Good afternoon and a warm welcome to the webcast of our interim results for the six-month ended 29 February 2024. I am Bettina Engelbrecht, Chief Executive Officer of the Clicks Group. Joining me here today is Gordon Trail, our Chief Financial Officer. We will be taking you through the presentation of our interim results and respond to your questions after the conclusion of our presentations. This slide sets out the outline of our presentation. As usual, I will start with a review of our performance over the past six months. Boarding will follow with an overview of our financial results. I will then take you through the trading performances of our operating business units, starting with CLICS, followed by UPD. Hereafter, 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. Just before I take you through the review of the past six months, I'd like to share with you this joyous celebration of the opening of our 900th store in Barlow Park, Gauteng. and now for the review of the past six months. The constrained trading environment compelled us to assess how we continue to deliver sustained performance that delights all stakeholders. Our resilient business model and strong market shares in our core categories are underpinned by a loyal customer base, mutually beneficial partnerships, and unique organizational capabilities. Our results, which we will be sharing with you in more detail today, reflect our commitment to putting customers first, investing in our people, and respecting all of our stakeholders. We delivered strong diluted headline earnings per share, up 13%, in spite of the tough trading environment. We continue to invest in the expansion of our store and pharmacy network, increasing our store count to 902 and our pharmacy count to 718. Our early investment in launching our Club Card loyalty program in 1995 continues to yield positive outcomes and we increased our active Club Card members to 11 million, adding 100,000 new members each month. Our retail business continues to outperform and deliver strong turnover and profit growth. The retail sales growth was driven by promotional sales performance of 14%. Trading also benefited from lower levels of load shedding, good availability in key categories, and strong in-store execution supported by effective marketing campaigns during key trading events. Our retail IT investment is enabling us to improve forecasting and extract margin improvements. And in the period, our private label and exclusive brands grew ahead of the total business, which further supported margin growth. Our investment in Sorbet the largest professional beauty salon business in South Africa, and Emchem, our first 24-hour specialized pharmacy business, is performing ahead of expectations. The UPD business is improving and stable. We implemented the new systems in Eaglin, the largest DC in September, and stabilized operational performance by November. we signaled that this would be a recovery year for UPD. The team is on track to deliver the improvement plan with a notable improvement in quarter two, which has continued into March and April. In furtherance of our sustainability agenda, we rolled out battery storage at Lidl and our head office and added additional solar panels in Lidl. This investment in renewable energy will also reduce our electricity costs. I now hand you over to Gordon, who will take you through our financial results.

Thank you, Bettina. Good afternoon. If we consider the group financial highlights, group turnover increased by 9% for the period, with both businesses performing stronger post the trading update. Retail turnover grew strongly at 12.4%, which was supported by the growth of key high margin categories. UPD reported turnover increasing by 1.3%, continuing to improve and recovering well from the system's implementation at Lee Glen. The group operating margin at 8.5% increased by 30 basis points due to the faster growth of retail and the continued improvement at UPD. The diluted headline earnings per share for the group increased to 5.34 per share, up 13% from last period. The dividend declared for the period has been increased by 13.5% to 210 cents per share, and this is ahead of headline earnings. In the six-month period, we returned over 2 billion to shareholders in dividends and share buybacks. Groups' return on equity at 43.4% has increased from the prior period supported by share buybacks. Retail sales increased 12.4%, with same stores growing 8.8%, which was driven by key categories including beauty and personal care. New stores and pharmacies added 3.6% to the top line. while selling price inflation was 7.4%. The distribution business experienced low selling price inflation of 1.6%. In September, UPD went live with its last wholesale DC, and although this was well managed, it did impact sales during the implementation. Sales to clicks were up 4.7%, while hospitals were down 8.1% for the period. Bettina will elaborate on the detail of each business's performance later in the presentation. This slide reflects the group's total income, which has increased by 14.1% for the period. You can see the total income margin in retail was 60 basis points higher than last year due to continued growth in high margin categories, private label, and the contribution from acquisitions in the prior year. UPD's total income margin was up 80 basis points to 9.6%, helped by the higher SEP increase this year and faster growth in wholesale since November. Overall, the faster growth of the retail business at 14.7% resulted in the group's total income margin being 130 basis points higher in the prior period. The cost base in retail increased in the period partially due to acquisitions, which added 3% to the cost growth, as these were only acquired in the second half of last year. Retail costs grew overall by 14.8%, with higher electricity, insurance, increased advertising and provisions for staff bonuses, as well as new stores, pharmacies and depreciation and capital expenditures. Over the last 12 months, we have added 41 click stores, one body shop, seven Sorbet and 27 pharmacies to the group. Investments in Sorbet and Enken are performing ahead of expectations. The IFRS 16 interest charge increased as a result of two factors, the increase in the number of renewals in the period and the higher discount rate as a result of higher interest rates. Comparable retail employment cost growth was up 8.5% and comparable retail cost growth overall, excluding new stores, was up 8.7%. UPD's costs have grown at 10.8% ahead of turnover due to completion of the systems rollout at Lee Glen. Additional employment costs were added to ensure customer service levels were met during the rollout of the ERP WMS systems. although we have seen these normalized post the implementation. Depreciation also increased as a result of the completion of the system. Operating costs overall were well controlled. Retail grew operating profit by 14.5%, with the margin increasing by 10 basis points to 9.8%. This growth has been driven by high margin categories and private labels. UP's operating profit increased by 11.2%, with the operating margin increasing by 20 basis points due to the SEP increase, improved sales, partially offset by additional employment costs during the ERP rollout, and increased depreciation related to the system. Overall, the group's operating profit increased by 13.5% to 1.9 billion for the period driven by the strong performance in retail. Inventory levels for the group were higher at 86 days. Retail stock days were three days lower than last period and growing well below sales growth. Systems implemented previously contributed to better stock quality and reducing lost sales. Retail networking capital days reduced by seven days due to better inventory management and improved trade creditor days. The trade creditor days resulted from an increase in supply chain financing with suppliers and better terms. UPD stock days, 61 days, were 13 days higher than last year. This is temporary as UPD increased stock to benefit from the higher SAP increase granted this year. Trade debtor days improved by three days and trade creditor days increased by eight days due to the inventory buy-in. Despite the higher inventory levels, net group working capital improved by three days. This slide shows the movement of cash during the period. As you can see, we started the period with cash of 2.5 billion reflected in dark blue on the left-hand side and ended the period with 0.9 billion on the right-hand side of the slide. The group generated cash of 2.7 billion highlighted in green before the repayment of lease liabilities amounted to 400 million, working capital outflows of 889 million and tax payments of 571 million. 314 million was reinvested in capital expenditure across the group. With this amount, 245 million was invested in new stores as well as 33 click store refurbishments. 30 million was spent in distribution centres and 39 million was spent in IT and other infrastructure. We returned over 2 billion to shareholders during the period through dividends and share buybacks. CapEx of 920 million is planned for the full year. 514 million will be invested in our store and pharmacy network. This will include 50 to 55 new click stores and 10 to 20 new pharmacies. 50 to 60 retail store refurbishments to ensure they remain modern and relevant for our customers. $406 million will be spent on IT systems and infrastructure. $76 million of this amount will be in UPD IT and warehouse equipment. And we will invest the balance of $330 million in retail IT systems and infrastructure. Expansion of our Centurion DC, now that planning permission has been received, We will also commence the rollout of our new pharmacy system. We will continue to grow our retail footprint, invest in the rollout of an up-to-date pharmacy system, and invest in further DC capacity in our retail business. This slide is coincidental, as both myself and Bettina joined the group in 2006. This was the commencement of the Share Buyback Program. The slide shows dividends paid and share buybacks over the last 19 years. And over this period, we have returned over 19 billion through dividends and share buybacks, which is good for our long-term shareholders. On that note, I will hand over to Bettina to finish the presentation.

Thank you, Gordon. 2006 was clearly a fantastic year. I will now take you through our trading performance, starting with clicks. than you believe. This is the review of the clicks business. The retail pharmacy business delivered another strong set of results as reflected on this slide with growth in total turnover up 12.4%. Existing stores grew sales by 8.8% with inflation up 7.4% and pleasing volume growth of 1.4%. Despite a subdued level of sinusitis and other respiratory conditions, pharmacy sales grew by 8.7%. Job card customers now constitute over 85% of pharmacy sales. The strong growth in our pharmacy sales is driven by our investment in improving service, the attractiveness of our value offering, and convenience of our retail pharmacy network. Our clinics delivered sales growth of 13%, buoyed by the introduction of new clinic services and our partnerships with medical aid schemes. Friendship Health is regaining momentum, up 9.5%. Strong growth was achieved in the supplements category, with branded supplements up 18.4% and homeopathy up 10.8%. The star sub-department was external health. of 21.5% fueled by double digit sales growth in continents of 21.2%. The baby category is a highly contested category, especially baby foods and diapers. We are directing our investment into our clicks made for baby diaper, where we grew private level contribution to 38.4% of diaper sales in our stores. In baby foods, we delivered sales growth of 13.9%, driven by innovation in snacks and our private label, Made for Tots Noodles range. The performance of our standalone baby showroom stores, up 13.5%, coupled with a higher realized margin in these stores and the exceptional performance of our new baby store-in-store execution, up over 35%, is providing assurance that our integrated baby strategy is on point. Our beauty and personal care department delivered another complete performance of 17% with every sub-department achieving exceptional growth. The investment in service, elevated beauty halls, private label and exclusive offering, and customer marketing campaigns such as our sold-out beauty playground events are driving brand affiliation and positioning us as the beauty destination. General merchandise also delivered a strong result, up 14%, despite the impact of our higher share of air fryer sales in the prior period. Our snack deal remains a key driver, with beverages up 25%, impulse confectionery up 14.3%, and snacks up 17.5%. The convenience category performance was exceptional and delivered another standout result, up 26.9%. Despite an increasingly competitive environment, we are continuing to extend our market shares. Let me take you through these, starting with health. The constraint in opening up new pharmacies as we work on resolving the unicorn matter has sharpened our focus on enhancing service. The success of our customer first approach has enabled us to grow market share in retail pharmacy by 80 basis points to 24.3% and to extend the contribution of our Clubcard members to over 85% of pharmacy sales. As always, The accessibility and convenience of our healthcare network remains a key driver of growth. In the period, we increased the number of retail pharmacies to 718, the number of registered National Department of Health patient pickup points to 530, and the number of primary care clinics to 204. Friendship Health also gained market share up 50 basis points. Although the vitamins and supplements market share was flat at 39%, strong market share gains were recorded in all other categories, particularly in first aid up 160 basis points and foot care up 140 basis points. Our comprehensive baby strategy, which integrates our private level offering, convenient locations, differentiated formats, competitive pricing, baby club card benefits, and online strategy is driving performance, and we expect to see a gain at the full year. Turning to beauty and personal care. Skincare gained 120 basis points, fueled by strong gains in facial, care up to 150 basis points, as well as gains in eye skincare and moist wipes. Haircare gained 40 basis points with strong gains in hair treatments of 80 basis points and hairspray up a whopping 340 basis points. Personal care is continuing its momentum, recording market share gains of 120 basis points with strong market share gains across all categories within personal care. Finally, general merchandise. Our market share in our legacy category of small household appliances declined by 40 basis points due to the relatively higher contribution of air fryer sales in the prior period. I will now turn to the key drivers that support our growth. We remain true to our heritage and brand position of feel good, pay less, This resonates strongly with all consumers, especially in a constrained economic environment. We maintain great everyday pricing and remain the cheapest retailer against all other major retailers for any overlapping basket items. Promotional sales accounted for 44.7% of turnover, up 14%, as we achieved exceptionally strong promotional sales growths across all of our franchise categories. Our mantra is that value extends beyond price. Customers value the convenient locations of our stores, clinics, and pharmacies, the ease of accessing our clicks online offering, and our simplified repeat prescription service. Our three for two promotional mechanics understood and valued by consumers and this serves as a great footfall traffic driver. Our Club Card program delivered 387 million Rand in cash back to our loyal customers, an increase of 11% in value relative to the same period last year. Our differentiation strategy is premised on responding to changes in consumer demographics preferences, and shopping behaviors within the context of the trading environment we face. Our private label and exclusive ranges increase the options available to customers who may choose to trade up or down. Private label and exclusives continued each strong low up 14.3%, increasing its contribution to 26.1% of total retail sales. Our private label and exclusive ranges now account for 13.9% of friendship sales and 11.7% of retail pharmacy sales. Our new look beauty walls provide customers with extended tiered product ranges and an elevated in-store experience. These walls are value accretive and recorded strong growths in premium skincare and fine fragrance. which is why we are embarking on a similar elevation of our Friendshop Healthcare aisle. Our standalone baby showroom stores have been designed with a customer in mind. They enable us to showcase our extended range and elevate our in-store service. We have further refined our baby strategy to include baby store-in-stores and are pleased with the early results. our Clicks Made for Baby range is performing exceptionally well across a number of product categories, such as baby foods and diapers, which we credit to our investment in innovation, quality, and price. Sorbet, the preeminent professional salon business in South Africa, delivered strong sales growth of 14.9% with Sorbet Man and Sorbet Hybrid formats, performing well ahead of expectations. There has been some anxiety about the Body Shop after Aurelius, the new shareholders, placed their corporate retail stores in the USA, UK and Canada under administration. Aurelius has reassured us that the Body Shop franchise business is a significant contributor to the overall business profitability and future growth. Our franchise agreement has been extended to 2022, and we are investing in the new workshop format as it drives sales. The Clicks Clubcard loyalty program is a phenomenal asset and highly valued by our customers. We are still growing our Clubcard membership and added 600,000 active members over the past six months, taking our account of active members to 11 million. The contribution of our Clubcard members to total sales has increased and accounted for 82% of total retail sales. When we launched the Clubcard loyalty program in 1995, the objective was to reward loyal customers. We are extending our Clubcard-only deals and investing in our affinity partners to ensure that our value proposition remains relevant. In April, we launched our new Clix app, which will enhance our capabilities to drive personalization. The pilot phase of our new pharmacy management system is complete, and we are planning to roll this out to 50 pharmacies by the end of this year. Finally, I'll turn to convenience. The expansion of our store and pharmacy footprint is progressing well. We ended the period with 902 click stores and 718 pharmacies. We remain committed to delivering affordable, accessible healthcare. 223 of our stores are located in low-income areas and contributed 22% of our retail turnover. And 51% of the South African population now reside within a five-kilometer radius of a clinic's pharmacy. Mr. Malik and his team at mChem, a 24-hour specialized pharmacy with a superb diabetic clinic, travel clinic, and wounds management practice, have been fully onboarded, and the business is performing well. The new specialized pharmacy format has been fully developed with support from external consultants, and we are gearing up for the rollout of more of these in-chem type formats. We continue to invest in enhancing our e-commerce capabilities, including Salesforce and data analytics. We have successfully rolled out our new dark store in Cape Town to enhance customer experience and have added in-store stock availability on our online site. 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 performance of fine wholesale, down 2.3%, must be seen in the context of the go-live of our ERP WMS systems implementation in lead lending in September. which accounts for 60% of UPD's buying wholesale sales. The systems have stabilized and the business is improving. In the second quarter, buying wholesale turnover was up 5.7% with clicks up 13% and hospitals up 0.4% as purchasing compliance improved. In our January update, trading update, we reported that wholesale turnover had increased by 6.9%. From November to the end of February, wholesale turnover was up 7.7%. To support the recovery of our sales performance, we implemented a key account management team to improve customer service and communication to drive improved purchasing compliance. I will briefly turn now to the core customers in this channel. Clicks remains UPD's largest wholesale customer, increasing its contribution to 55.6% of turnover. The decline in sales to private hospitals has, as referenced earlier, improved in quarter two as we stabilized our lead-link systems transition. Whilst sales in the independent pharmacy channel is continuing to decline due to market consolidations, the export sales channel is returning to strong growth, up over 40% in quarter two. The decline of 90 basis points in UPD's final wholesale market share is due to the operational challenges faced during its IT systems transition, which resulted in buyaways by clinics and private hospital groups. This trend is reversing. Purchasing compliance is improving, and we are confident that UPD is on track to achieve a recovery in this year. UPD's total managed turnover combining fine wholesale turnover and turnover managed on behalf of its bulk distribution clients decreased by 6.4%. In the previous slide, I provided more detail on our fine wholesale sales and its improvement in quarter two. The strength is continuing. Let me look at some of the others. Bulk sales had a very strong performance, up 14% for the period and up over 30% for quarter two. Turning to notional sales, at our full year results presentation, we indicated that we had embarked on a process to rationalize our distribution portfolio with the objective to sharpen focus on profitable bulk distribution contracts and to ensure that we have available capacity to support portfolio acquisitions and line extensions by such clients. We elected to not renew two distribution contracts with a combined annual turnover of 3 billion rand. This will have negative impact on our notional sales, but a positive impact on our expense line and enable us to exit some of our existing rented DC facilities as leases expire. In accordance with our phased IT systems implementation plan, we went live with Leaglen in September. The Leaglen implementation was completed by the end of quarter one and the systems are stable. Our focus in this year is on improving customer service levels, extracting further operational efficiencies. The recovery initiatives we implemented are yielding positive results. Purchasing compliance levels of clicks has already improved from 93% in half one 2023 to 96%, and we are on track to achieve our internal purchasing compliance target of 98%. And purchasing compliance in the private hospital channel is also improving. This completes the review of our trading performance for the year. The retail business under the leadership of Vikash Singh and his team is maintaining good momentum as reflected in the turnover and profit performance. The growth in our pharmacy market share ahead of the market and strong sales contribution of our Clubcard customers indicate that we are winning the hearts and minds of customers. Trevor McCoy, and the UBD team continue to display incredible resilience. The organizational restructure has been completed and operational performance has stabilized. Purchasing compliance from the core wholesale customers is improving, with quarter two showing a marked improvement. And UBD is poised to be a key beneficiary of the stronger Clix Pharmacy growth. As an executive, we have benefited from robust engagement at board level and appreciate the support and guidance provided to us by our chairman, David Nurick, and our board members. Our people have shown extraordinary commitment to deliver our performance metrics and are proud brand ambassadors. On behalf of our board and executive teams, to all of our people and their families, thank you. I will now conclude our presentation with the outlook. Consumer spending will remain constrained due to inflationary cost pressures. Potential disruption ahead of the general election in May and the resumption of low sharing pose risks to the trading environment. Such a constrained consumer environment favors retailers with a strong value position, convenient locations, and broad appeal to a loyal customer base such as Clicks. We are on track to further accelerate the opening of our Clicks stores and plan to open between 50 to 55 new stores this year. This is ahead of our guidance on store openings. We are encouraged by the constructive engagements with the Department of Health and its legal teams in respect of the restructure of our unicorn private label medicine business and expect a resolution to be imminent. This will pave the way for the issuance of our outstanding and future pharmacy licenses. The UBD business is on track to deliver on its post systems recovery plan and will further benefit from the SEP increase. As a responsible corporate citizen, We embrace our role as an environmental steward for future generations, hence our increased production and use of renewable energy. Our sustained performance on turnover, profit, customer, sustainability, and operational metrics affirm the resilience of our business model, defensiveness of our categories, and our organizational ability to adapt to changing market dynamics and consumer preferences. It is our proven resilience and quality of our people, products and services that inspires my confidence in the group's ability to deliver on our earnings forecast of between 10 to 15% for this financial year. Thank you so very much for listening. I will now hand over to Suhim would assist us with taking your questions.