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Edited Transcript of PIK.J earnings conference call or presentation 22-Oct-19 6:30am GMT

Half Year 2020 Pick N Pay Stores Ltd Earnings Call

Kensington Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Pick N Pay Stores Ltd earnings conference call or presentation Tuesday, October 22, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gareth Mark Ackerman

Pick n Pay Stores Limited - Non-Executive Chairman

* Lerena Olivier

Pick n Pay Stores Limited - CFO & Executive Director

* Richard William Peter Brasher

Pick n Pay Stores Limited - CEO & Executive Director

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Conference Call Participants

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* Jeanine J. Womersley

HSBC, Research Division - Analyst, South African Retail

* Jiten Bechoo

Avior Capital Markets (Pty) Ltd. - Equities Research Analyst

* Shane Watkins;All Weather Capital;Chief Investment Officer

* Stephen J. Carrott

JP Morgan Chase & Co, Research Division - South African Retail Analyst

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Presentation

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Gareth Mark Ackerman, Pick n Pay Stores Limited - Non-Executive Chairman [1]

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Good morning, ladies and gentlemen. Welcome to our interim results presentation. It's great to see a good turnout this morning. And I'd like to start off by particularly welcoming our new CFO, Lerena Olivier, who's going to be presenting results for the first time. So Becker who's here somewhere says, "I'm here, please don't ask me questions. I know what the result is, but it's not my problem, talk to Lerena." So thank you very much for coming. It's been a really complicated results to repair -- to prepare.

This year, our team has had to wade its way through incredible accounting complexities of IFRS 16. We've had hyperinflation in Zimbabwe, and we've had a change in the way we report our airtime sales and our turnover. And our team has been working, I don't know, it must be, what, about 2 years to get the IFRS 16 stuff done. And we really to need to commend them for the huge amount of positive work they've done on that.

I've talked in the past about where the frequent complex changes in accounting rules aid transparency or do or they hinder it? I'll say no more about IFRS 16 other than to wager that the number of people asking the same question is growing. It's been amazing the amount of work and efforts that we've hedged in, and I'm still not sure what the benefit or the value is to us or to our shareholders or to the market as a whole.

And I really compliment our team, Lerena and [Roddy] and a whole lot for the amount of work they've done in navigating these complexities so skillfully. As a result, our stakeholders have a clear result and clear and accurate data to measure our performance. These accounting complexities have come on top of a difficult trading environment, both inside and outside South Africa. With low economic growth, some retailers have found it difficult to deliver sales growth and maintain profit margins. I'm very pleased that the Pick n Pay Group has succeeded in growing both its sales and its profits. And I want to congratulate our teams on this amazing achievement.

It's not difficult finding a pessimist in South Africa at the moment. I am weary at -- so I am weary at accepting dinner invitations because there are only so many times I can listen to people tell me, how depressed they are. How the economy is hanging by a thread, how we're on the verge of a crisis or are we already in a crisis. There's little point in going overseas to escape this depression. It's the same everywhere. Brexit, populist presidents, trade wars, a new global downturn, the climate emergency and populist demonstrations. Make no mistake, there are real challenges, both at home and across the world. It is a defining time for all of us, but I don't think we should give way to despair.

We must stand up against things that threaten us, economic stagnation, and we stand up against environmental damage, xenophobia and violence against women. We must stand up for the things that unite us, above all, the desire to give us our children a better life and better prospects than those we enjoyed. We have to do all of this as individuals. But it's more powerful when we come together through institutions and organizations that stand up for the right values and that strive for a better world. And that's why I am proud to be part of the Pick n Pay business.

I'm proud to be Chairman of a company that is committed to upholding the right values and doing good with those values. Despite all the doom and gloom, we are making positive changes. Modern retail stores exist to make people's lives better through better and healthier products, more exciting choices, new and more convenient services. Modern retail gives more and more people access to all the benefits that flow from the formal economy, lower prices, safer stores and safer products. Behind that dry technical term, formalization of the informal economy on millions of people fulfilling the dream of giving their children access to better lives than they could hope to enjoy for themselves.

When you listen to the presentations Lerena and Richard will give, I invite you to think about how each step that we're presenting today contributes to a better world. Getting more efficient means being able to offer lower prices. Growing sales means being able to bring more small suppliers into our business. Opening more stores means giving more customers access to the best of modern retailing.

Last week, our On Nicol store in Johannesburg, reopened after a major renovation. I believe this is the best, most modern and most customer-centric store in Southern Africa. It is also a greener store, with a huge emphasis on natural lighting, energy-efficient plant and machinery and renewable energy. As an example, the refrigerant is natural, powered by CO2 and uses about 40% less energy than our conventional plants. And these we're busy rolling out across our estate. We can achieve a lot by ourselves, but we can do even more in partnership with others.

We are working even harder with the Consumer Goods Council of South Africa and BUSA to work with government to bring positive change and economic opportunity for all South Africans. In one of the areas where partnership is vital is on reducing food waste. Tackling food waste is a global challenge, but it has added urgency in Africa, where so many people still go hungry. I have seen figures that about 1,400 kilocalories are wasted per capita per day in South Africa. We need to do something about reducing that.

Reducing food waste has been a priority of Pick n Pay for many years. We are getting more accurate in our planning and are steadily reducing the amount of food which goes to landfill. Through our partnership with Food Forward, we donate more than 1,600 tonnes of food every year to the needy. But we can achieve more through better partnerships across the industry. Late last night, Pick n Pay was 1 of 10 of the world's largest food retailers and food manufacturers to sign a new global Consumer Goods Forum initiative in the fight against food waste.

We are committing to act alongside companies such as Carrefour, Tesco, Walmart, Ahold and other global retailers. This private sector commitment is designed to be a significant advancement towards the United Nations sustainable development goal target, 12.3. This calls for a 50% reduction in food loss and waste by 2030 worldwide. The project is called 10x20x30. As part of our involvement, we have pledged to ask 20 of our largest suppliers to help us reduce food waste. And I'll be writing to them to elicit their support and commitment.

Partnership really is key. Better collaboration to align supply with demand will reduce waste at source, on farms and in factories. Cooperation in the supply chain will reduce waste in transport, handling and storage. This is an incredible opportunity for some of our country's largest companies to partner with us to help build a more sustainable world. Our target is to reduce food waste by 2030, and this is a very ambitious goal. So it's a genuine call to arm, we cannot do it alone. And at the same time, we believe we reduce the costs of the supply chain across the whole food chain.

A time of challenge is a time for leaders to step forward and drive positive change. We've been doing this at Pick n Pay for 52 years, and we'll continue this proud tradition. We continue to roll up our sleeves as we do every day in all our stores. My thanks as always go to Richard and his team for their hard work in the first half. It has really been a tough, tough couple of months. And my best wishes to them for the remainder of this year. Thanks again, go to our outgoing -- outgone CFO, Bakar Jakoet. Bakar, you've been fantastic, and thank you for joining the Board. Again, as a nonexecutive director, we look forward to working with you there. And thank you all for your support. And I'd like to now hand over to our new CFO, Lerena Olivier, who is going to present the results. Good Luck, Lerena.

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Lerena Olivier, Pick n Pay Stores Limited - CFO & Executive Director [2]

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Good morning, everybody. Thank you, Gareth, for the kind words. I am very proud to be here today. Firstly, because I am here representing the Pick n Pay finance team, and it's a real honor to be part of such a great team. But more importantly, I'm proud to present this specific result to you today. Our consistent execution of our long-term strategy has again delivered another strong result. Our sustainable progress in our customer offer, our new store and refurbishment program and cost discipline in our working capital and our overall operating model has resulted in turnover in -- and earnings contribution increases across our entire estate despite a very tight consumer environment.

The group has delivered turnover growth of 6% for this half. Our solid performance in South Africa has mitigated the challenges that us and the rest of the environment is experiencing in the rest of Africa, specifically in Zambia and in Zimbabwe. As a result, we have delivered comparable earnings growth of 9.5% for the period. In preparing this result, to Gareth's point earlier, we had to navigate a number of accounting complexities. I would like to take a moment to thank the team for the effort and commitment that they've put in to ensure that we can create a result that is clear and comparable year-on-year.

All accounting changes results in challenges. We have endeavored to present to you today a result that is comparable year-on-year so that you can have a clear view of our underlying trade performance for the half. As most of you who might be aware, we have implemented IFRS 16 leases for this financial year. We have followed the full retrospective approach. And the crux of the statement is to make sure that if you've got a largely leasehold portfolio as we do, the accounting is now aligned with that of a freehold portfolio. We have restated all our historical information and have recalibrated all our performance metrics. This result is presented on a fully restated and comparable basis.

Secondly, during the period, we have taken a strategic move in the way that we offer data and airtime to our customers. Historically, we would offer the product either via a directly vended or agency basis platform or based on an inventory model, where we hold the articles and then sell it on to the customer. During the period, in order to improve our systems and our working capital management, we have changed over to a model that is only agency based. As a result, we are no longer allowed to record the sale of the articles, sale of the data and airtime that used to be related to the articles that we owned in turnover as we only now operate on an agency basis. This has resulted in a reported turnover growth of 4.8%. However, if we strip on the year-on-year comparability, we have reported a turnover on a group level of 6%.

This move has not changed the amount that we actually sell through our point-of-sale for data and airtime. It simply has changed where we are allowed to record it in terms of an IFRS perspective. Largely, this has been positive for the group with the benefits now in other income.

The last item that I would like to point us to is hyperinflation accounting in Zimbabwe. The Zimbabwean economy has now officially been classified as hyperinflation. And we, as a result, reported this result for our associate in Zimbabwe under IAS 29. IAS 29, the purpose of this statement is basically to ensure that there is comparable reporting when you look at the Zimbabwe results in its own entity. What the statement tries to do, it tries to ensure that you can see comparability and profitability year-on-year by reindexing the comparative and current year profits to reflect current buying power of the currency.

What does that mean for us as a group? For us, as a group, we will be recording a portion of the net monetary gain that our associate records as a result of hyperinflationary accounting. The net monetary gain is as a result of a fact that the associate needs to revalue its assets to reflect current buying power and, therefore, recording a noncash net monetary profits. This net monetary profit in terms of HIPS requirements are included in headline earnings per share. Once we have revalued all of TM's numbers, we have to test it for impairment to make sure that the reindexing of the profits and the assets still reflects what is actually the underlying value of the investment.

As a result, TM has also recorded impairment losses relating to the hyperinflation assets in the results. In terms of HIPS requirements, this is excluded from headline earnings per share. As a result, hyperinflationary accounting largely is beneficial for the profitability of a group that applies it. However, all the entries are noncash in nature. We have, therefore, presented a headline earnings per share on a comparable basis excluding the impacts of hyperinflation to ensure that we give you a clear view of our underlying trading performance. I had to work on that one. I had to explain it to the operating team in Africa that really wanted to book the profits.

Now that I've taken you through all the accounting challenges we had to face, let's focus on what is really important, the result for this period. As I've said, constant successful execution of our strategy has resulted in earnings growth. The group has delivered turnover of ZAR 43 billion, up 6% on the same period last year. Our stronger customer offer has driven earnings and sales improvements across all our formats, both owned stores and franchise. However, the increased relative participation of owned stores to the overall result has resulted in our gross profit and trading expenses increasing as a percentage of turnover. Our solid performance in South Africa has delivered a trading profit that is up 16.4%. Our comparable profit before tax is up 9.7% to 1.3% of turnover. As a result, our headline earnings per share on a comparable basis has increased by 9.5% for the half.

If I take a moment just to take us through the shape of all the metrics in this result, our reported basic earnings per share is up by 0.9%. That number reflects the current year impairment of ZAR 48 million relating to hyperinflation compared to capital profits in the prior year base of ZAR 19 million, the capital profits related to the sale of property and some profits on the conversions of franchise stores. If those capital items are stripped out, our reported headline earnings per share is up 17.5%. But as I've discussed, we are presenting a comparable headline earnings per share of 9.5%, excluding the noncash enhancements of IAS 29 hyperinflation accounting. Our dividend, therefore, increases in line with comparable headline earnings per share to 42.8%, in line with our recalibrated dividend cover for the full year of 1.3x.

On the next slide, we have some more details on our turnover growth performance. It's a solid performance of a strong base. The group turnover, as discussed, has increased 6%. Our South African business has grown by 6.5% with like-for-like at 3.5%. This has delivered volume growth of 1.3% in a difficult economy. This has been anchored by sustained improvements in our customer offer. Our estate has got 63 net new stores, 75 new ones, and we have closed 12 that we believe is not profit enhancing to the group. We have also converted 2 stores from Pick n Pay to Boxer. Our net new stores added 3.1% to the group's turnover growth for the period.

Our ongoing investment in the customer has restricted our selling price inflation to 2.2%. This has been made possible by our better buying, our greater efficiency through range optimization, less waste, an achievement that the team is specifically proud of and improving our supply chain efficiency. As a result, our internal selling price inflation of 2.2% is well below CPI at 4.4% for the same period and CPI food of 3.4%. Our consistent focus to invest in the customer has resulted in an improved performance across all our formats. Consistent execution of strategy means that both our own stores and our franchise model improves.

As you know, we've ran an operating model through both of those formats, with the franchise model running at a lower gross margin than that of the owned stores model. So as a result of the increased participation of our own stores earnings and sales relative to that of the franchise model, it has lifted the group gross profit margin to 19.8%. If we get to our other trading income, that has increased 4.9%, and at 1.2% of turnover, it's in line with last year. Our commissions and other income is up 5.1% and it includes all commissions and incentives that is not directly related to the sale of inventory.

These are items such as the advertising income in our fresh living magazine and annuity income from data and airtime sales. Our income from value-added services also included in the commissions and other income is up 16.1% year-on-year with growth across the platform. We will continue to focus to add value to our customers through this channel, while we are also ensuring that it remains profit enhancing for the group's operating model as a whole.

Our trading expenses. Greater efficiency has mitigated rising costs. However, our trading expenses is up 9.8%, 7.4% on a like-for-like basis. The biggest contributor is our employee costs, up 12.5%, 10.3% on a like-for-like basis. One of the largest contributors to this is, as I've discussed, the increased contribution from our owned stores. That has impacted both our trading expenses, but very specifically, our employee costs. We have also strengthened our management structures specifically to support store operations, and we have scheduled additional hours we're required to ensure that the customer gets the best shopping experience. Notwithstanding these cost drivers, our owned store employee costs was well controlled at 6.9% on a like-for-like basis. Our occupancy costs is up 8.8% driven by double digits growth in both rates and security. Operation costs increased by 7.2%, with operating efficiency and lower energy consumption, mitigating the higher increases in fuel, water and utilities.

Our merchandise and administration costs, which largely represents our advertising, was well controlled during the period. You would have recalled at the end of our last presentation, Richard added our 6 engines of growth, bearing down on costs. That remains very relevant for us as a team and a focus area for the second half of this year.

What has all these line items delivered for us? The group has gotten EBITDA, which is up 9.6% to ZAR 2.6 billion. This is a margin improvement of 0.3 percentage points of turnover to 6.1%. This was largely supported by our leading performance in South Africa, which has delivered an EBITDA up 11.8% and an EBIT up 16.4%, a margin improvement of 0.3% to 2.5 percentage points. Our net interest is up 3.4%, largely as a result of the increase in our IFRS 16 interest, which is up 4.6%. Our implied depreciation in terms of IFRS 16 as well as the implied interest in -- as a result of IFRS 16 collectively, is up 6.9%, largely in line with our increases in our rental costs. Our effective tax rate is at 28%, up from the 27% for the comparative period, impacted by the accounting of hyperinflation in this result.

We have had tough trading conditions outside South Africa. Our segmental revenue is down 1.8% for the period to ZAR 2.3 billion. On a constant currency, the increase is at 2.4%. The constrained trading environment in Zambia, characterized by low economic growth and low consumer confidence, has put strain on the business. Our segmental profit as a whole is down 79.8%, close on ZAR 100 million on last year. This was largely impacted by our performance in Zimbabwe due to currency devaluation. Our Zimbabwe profits in the base was ZAR 77.8 million. We have recorded a loss in this result in Zimbabwe of ZAR 1.7 million.

I will take us through the impact of hyperinflation on those numbers in the next slide. I'd like to stress that we are still making money in Africa. Our profit for the period is ZAR 27 million, and the team is focused to ensure that we build on that result for the second half of the year. As I've mentioned in my introduction, I'll get another opportunity to take you through some of the impacts of hyperinflation. The group share of the team's trading result for the period was ZAR 74.6 million. That is compared to the ZAR 77.8 million in the prior year. Included in the current year results, is ForEx losses of ZAR 58 million, which has resulted in a net trading profit of 16.6%.

The ZAR 58 million ForEx losses is on foreign exchange debt that TM supermarkets has. That debt is largely to Pick n Pay South Africa. Hyperinflation has resulted in a net monetary gain of ZAR 29 million being included in the result and an impairment of ZAR 48 million included in the result, which results in the net contribution of a loss of ZAR 1.7 million for the period. As discussed, both our net monitory gain and impairment is excluded from our comparable performance analysis. The trading conditions in Zimbabwe is tough. During this half, we have experienced negative volume growth. The team on the ground, however, is doing an exceptional job in very difficult circumstances, and they have our full support.

I just would like to also take a moment to take you through how TM is presented on our balance sheet. At the end of our February result, we had an investment of about ZAR 185 million in TM as an equity -- as our 49% equity share. As a result of the devaluation in the currency, we have recorded ZAR 132 million loss against that investment directly into equity. The amounts that TM owes us at the end of this period was just over ZAR 130 million. And we are happy to report that, that is now just under ZAR 100 million, as we continue to receive funds from our associate as and when liquidity is available. The team has assessed the carrying value of our investment of TM at ZAR 50 million and feel comfortable that, that is a fair reflection of the underlying value of the investment.

This has resulted in the group generating close on ZAR 1 billion over the half. Cash from operations of ZAR 1.5 billion were further supported by working capital inflows of another ZAR 1.5 billion. The working capital inflows is largely as a result of cutoff and the relativity of creditors and inventory balances between February and August. We have maintained the benefits that we have created in the previous financial year and we believe that there is more benefit through our range optimization process in the future. Our net funding costs has decreased by 8.4% from ZAR 58 million last year to ZAR 53 million this year, a testament of our continued focus on the group's net funding position.

Our capital investment reflects our strong new store and refurbishment programs, and we are focused on ensuring that all capital invested will bring sustainable returns for the group. We have added 75 new stores to the estate, 40 of which is company owned. We have also refurbed 25 stores during this period, close on 80% of our capital spend of approximately ZAR 800 million is customer-focused. We have spent ZAR 280 million on new stores and ZAR 332 million on improving our estate. Stringent capital control is very important to us as a group. We will always focus to optimize the return on capital for our stakeholders.

Our balance sheet remains strong. We have low debt and high liquidity. Our free cash flow is supported by our higher profitability, greater efficiency, our effective capital management program. We have ensured that we have no long-term funding. And we have ZAR 4.7 billion of unutilized facilities at our disposal. We always follow the cash, and it's never more important than in the current economic climate that, that is the focus. It has been a challenging 6 months, but as I said at the beginning of my presentation, I am proud of what the team has delivered.

I will now hand over to Richard to take us through the operational review of the result. Thank you.

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Richard William Peter Brasher, Pick n Pay Stores Limited - CEO & Executive Director [3]

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Lovely. Thank you, Lerena. I don't want to waste any more water. Thanks. Right. Good morning, ladies and gentlemen. Thank you to Lerena. I think it's quite clear from that, there's a new sheriff in town. I see that we've given her no pictures, only numbers. And they've given me only pictures and no numbers. So welcome, everyone. Thanks, Chairman. Thanks, Lerena. Welcome to our pensioners, Bakar. Have you ever seen a guy so relaxed? Offering advice at yesterday's board meeting, fantastic.

Anyway, subliminally, you've been subjected since you came in this morning to messaging about health and this delightful place of food, I'm not entirely sure what it is, but I know just looking at it, it must be good for me. And I think that's -- if any of you are expecting a bacon and egg butty when you go out after this, prepare for a new surprise. This is our campaign to ensure that we're going to make us all healthier, live longer and live happier lives. And so congratulations to the team that have been putting all of this together, and I'll touch on a couple of points.

I think that it's been a very interesting 6 months. It feels like a lifetime, I don't know about you, I was giving a presentation only yesterday, and I was thinking, wow, that was years ago, and they said, no, it was in April. So there is a degree of pace and energy and excitement, and some of that adrenaline is because it's exciting and some of that adrenaline is because it's slightly fearful. But it does feel that -- I feel that the team we're becoming better retailers. We can't always demonstrate it every day of every week, but I think we are becoming better retailers. And I would like to thank the team for their commitment.

The other thing that I notice is that it's news these days, it has to be either sort of sensational, salacious and, certainly, extreme, that seems to be the order of the day. So it's with some trepidation that I make this presentation today because this presentation doesn't fit that brief. It's positive, it's measured, it's sensible and it's reassuringly predictable. So when we go through our plan and our strategy, and the reason why we feel that we've got a -- this is a strong result at its core and it's consistency of approach.

So as I said, the interesting thing about life is that we willingly and knowingly allow the 24-hour news feeds to come into our living rooms most evenings. And the news is pretty much all of the above. And as the Chairman said that it's not just whether or not you go out and talk to your friends and they come and see you and they talk to you or you talk to people around the world, it's roughly the same. People -- Trump's sea of troubles deepen, and I even saw one that says that Democrats pray for the President's health, which I suspect is not a good prayer.

I look across it, where I came from and Brexit, where do we go now? House of fools was another headline, and therefore, I don't think -- sometimes, we think it's a homegrown problem in South Africa, and we've got the complete monopoly on terrible issues. And the truth is it's everywhere. And most of the issues are somewhat intractable, intangible and challenging. Global warming, World PBT debt sort of world debt, Eskom debt is about the same.

Droughts, recessions, hyperinflation, accounting changes. I will actually say one thing, I would like to thank our auditors. We're going to get together. Probably this is a illegal, so I probably shouldn't say. We're going to get together and start a company that anyone who's trying to do IFRS 16, we are now a preeminent world leader on this topic. And we want to sell our services to our competitors because we can help them through this journey so that we can get some of the money back for this cost associated to do it in the first place.

But what I do say to our teams is that we can only focus on what we can do in our company and what we have to do is to adapt to the changing mood of the nation. And what I do find in South Africa, it can move quite quickly. It can go from euphoria to despair, and that's just in a weekend. In fact, that could be in 80 minutes, actually. And this is this headline, I hope to see at some point in the next 2 weeks, South Africa play England in the world cup final, so I have the awkwardness of watching my 2 teams play.

So on to the results, consistency at the core. I think this is a strong result. It's not the best result we've ever presented in terms of numbers, but I think in the circumstance, it's -- you only have to win by a few points. You don't have to always win by 30 or 40 as the French found out. The turnover growth, I've been through these numbers, 6% for group, 6.5% for South Africa. And you can see that good strong trading profit growth in our South African business, complement to the Pick n Pay business, the franchise business and the Boxer business. And the headlines earning per share that we are going to deliver and record and pay a dividend against is the 9.5%, not the 17.5% because I think that, that is the more appropriate and prudent way to manage hyperinflation.

I do want to congratulate my entire team around the country and around the continent. But I want to specifically mention our franchisees. I think sometimes, people know that we've got a franchise business. Obviously, sometimes talk to me about whether I'm going to do what Willis did and get rid of it, and the answer has always been no. And the reason is they make a huge and important and unique contribution to the Pick n Pay Brand, both in terms of their approach to community-minded retailing, their support of people within their community.

And especially in these tough times, they have creativity and unique ways of trading. And therefore, the spirits of the entrepreneur does have to live within larger corporates. And I think sometimes, people underestimate what larger corporates can do to encourage entrepreneurial and endeavor. And whether that's through our market stores that Richard works with us on, our franchise business or in terms of encouraging smaller suppliers to get their first step on the ladder.

As Lerena said, it's been tough outside of Africa, I think in spite of the tough trading conditions, I think we've done a good job for our customers. And as she said, we still make a return out of our African business and remain committed to it.

So onto the reassuringly predictable, boring, but it is the 6 engines of growth. And when tough times come, it's important that you've got more than 1 engine. I always find that when I'm flying comfortably in a plane that with 1 engine, there's only 1 chance. And at least with 6 engines, we've got more than 1 chance. South Africa retailing, as you know, with our Pick n Pay business, I can't support our Boxer team more than I fully commit to because they are doing outstanding job. And what they're demonstrating is that just because the economy is tough and just because money is tight, good retailing will prevail. And that's just a strong message to us in our corporate Pick n Pay business as much as it is to our colleagues who operate oversee -- not overseas but abroad.

Bearing down on cost, I think, it has been timely, crucial. And I think we will need to do more. The economy, I suspect, will take time to get going. And I -- we obviously all live in hope and support of that. But I think the costs are inexorably rising. You've seen some of that in our operating costs and, therefore, we need to continue to bear down on it. Added value services, growth outside South Africa, and a force for good. I'll just touch on each of those momentarily.

Value-conscious customers, that's the name of the game. And it doesn't matter whether they live in Santen, Kalixa, Constancia, Danone, the reality is everybody is cost conscious. And it is only us retailers that actually managed to present them with that combination of quality, service and price that will get their custom. They're very focused on making sure that their rand goes further, or the very few rands they've got is enough. And therefore, unlike any politician or election, we get voted on every day of the week.

We can see where we win, and we've got to do something about it because if we don't, we'll continue to lose trade. And when we get trade, we can only assume that someone will also then try and take it back off us. What I think is interesting as we develop our model, is that different folk need different promotions. I think that traditionally, the company has been sort of geographically organized. I think increasingly after 7 years of customer data through smart shopper and looking at our business, I think that people in -- I'll take some extreme examples, people in Santen and people in Constancia may have more in common than people in even Kenilworth or Kalixa will have in common with Danone or Constancia.

And therefore, as we start to organize our business around the customers we serve, it is opening up a real opportunity for us to be more personalized in what we do. We've managed to restrict -- we managed to restrict inflation to 2.2%, which I think has been a good effort. I mean there are many pressures in the slow economy. Despite it being a slow economy that pushed costs up, as you've just seen. And I've seen tremendous growth out of our clothing business, which we often talk about in our liquor business, and I still see big opportunities for us in that space.

We're undergoing what we call range optimization, and this is making sure that we've got the right range in the right store at the right time. Easy to say, hard to do when you're running shy of 2,000 stores. But Paula Disberry, our commercial director, and the space team are making good progress there. And as we separate some of our stores into being a value stores or core stores or select stores, it becomes even clearer that some people need more of something and some people need less of something, and it's really to tailor our business around the communities we serve, and I see it as a big opportunity for the future.

Our work on fresh foods as it goes from strength to strength then and I'll congratulate our fresh food operators in produce and meat and convenience foods and perishables, I mean especially, if you do have an opportunity to pop into the On Nicol store, it's a real joyous place to actually look and buy fresh foods. But equally, it's equally relevant that in Weinberg or Danone, we offer a relevant offer to the customers at a price that they can afford.

Our own brand is not just a conversation now. I know -- I apologize, it's taken 6.5 years, 7 years from the first time I spoke about it in this room but it really is a force in energy. We've added another 320 lines, it's 22% participation.

And to be honest, it's not about own brand or brand. It's about both. And quite a lot of our innovation and development in own brand now is taking place in things, like LiveWell, that you see in our stores, which is not something that has been developed in the market by the brands, let alone by the retailers. So I see that as an exciting change and, hopefully, one that everyone can win in.

Talking about the challenges of health, of rising obesity, of associated problems such as heart disease, stroke and especially diabetes, we're going to have big campaigns because we believe, I know this sounds a bit hackneyed, it isn't just for the rich and famous, it's not just for the Kardashians or whoever turns up on television, it's a ghastly program. But the reality is, is that when we go and poll our consumers, 80% of our consumers have got it very, very, very high on their agenda. And we've got to find ways of just nudging people in the right direction. We can't dictate to people, we can't stop them buying something that if consumed in excess will do them harm.

But I do think that we'll be seeing more of the health, whether it's in value stores or in select stores, and not everybody wants to have a bottle of Kombucha, which I thought was a place in Russia on the Bering Sea but, apparently, it's a slightly fermented low-sugar soft drink. So not only has it no alcohol in it, it doesn't have much sugar in it and, apparently, it's good for your digestive tract. So I'd recommend it. We've got a new product turning up in the stores in a few weeks.

When nations were more vanilla and when more people had less than more, no one realized how many allergies or symptoms that they had. But the truth is this, I'm not saying it's a middle-class thing because when people get in the hierarchy of needs from whether you've got enough in your stomach to actually feel full, you then find out that you would need gluten-free or lactose-free or you decide for all the right reasons to be vegetarian or vegan. And I think what we're seeing is people are making decisions in their own personal lives that retailers need to adapt to and support. And therefore, I'm delighted that this is starting to reflect itself because I think if you went back 7 or 8 years, we were fairly consistent across all our stores what we actually sold. And now I think you're going to see some marked changes in the way we run our business.

So look forward to seeing a slimmer Mr. Brasher the next time we present because my team or in my case, and I'm told that if I don't lose 5 kilos, then I will be categorized in a category I don't wish to be in.

Okay. Smart shoppers going from strength to strength. We're very pleased with the work that we did a couple of years ago. We've got over 7 -- apparently ZAR 7 million of active customers, that's a surprise. I think there's actually 7 million active customers. We monetize everything. That's the way it is. We invest well over ZAR 200 million in points to our smart shoppers every year. So if I was making a point, I'd have a card with a point when you shop.

And I think what's interesting is after 7 or 8 years of looking at data. I remember back in 1995/6, when I launched Club Card in the U.K., it takes quite a while before the data actually means anything other than making you to clever at the presentation. And actually, we're starting to shape the way in which we run our business. And that is part of our ambition to start to formulate our business around our customers and their different needs.

Personalized vouch is a great success for us, a 72% increase in redemption, which says we're getting something right. We've issued 10 billion smart shopper points with our partner in BP and we see further opportunity for us to have coalitions and arrangements with other parties. And not that it's important, but we were voted the best loyalty card.

That's a short of $0.05, to be honest, it looks a lot better inside than from outside, but at least it's got our sign up and it's in the right colors. So we like that. We were busy. We opened 40 owned customer -- owned stores, 33 franchise stores, and despite the hyperinflation and the challenges in Zimbabwe, we did open 2 stores there.

We continually update our estate and we closed 12 stores. It's always a shame. It's always difficult. But to be honest, we have a larger estate, and we need to refresh it and keep it up to date. Sometimes the market moves in the town. Sometimes, the store is not the right store and we seek to go and get another store, a better store closer by.

As you saw from Lerena, we are putting energy into refurbishments. And when we do that, we are trying to make them brighter, lighter, easier to shop, lower fixtures so that you can see across the store. And also that stops all of the storekeepers actually getting too much stock in the store, and energy-efficient lighting and increasing use of photovoltaic cells and the like so that we can keep our energy costs down and make a contribution to the planet.

We've accelerated our Boxer business. I think it's a strong showing despite the economic headwinds. And as I said, it shows that great retailing can count even with the least affluent in society. I think that the Boxer team are delivering unbeatable value in a fairly unique way for those of you who come to visit our latest stores. And this baker seems very happy. I was also quite encouraged that they're obviously very careful on their CapEx as well because those tins have been used quite a bit, which means that the bread that comes out of them can be sold for less. So that's the Boxer spirit.

And he obviously borrowed that plastic apron from one of the suppliers. I did have them check that, that brand wasn't inappropriate. But I love it when I talk to usually an American -- America, anyway, I won't go into that.

Anyway, it's not just a limited range discounter, it also believes in fresh foods, which in fairness, the [audis and little] only got 2 after a few decades and Boxer started with it.

Our bread volumes and our butchery volumes are up 30% year-on-year, which is dramatic. And the thing that's very interesting is, we started off with the Boxer brand, i.e., it's the name on the door, it's a name on the packet. But actually, increasingly, we're creating brands. This is one for you, Mr. Ackerman, Golden Ray. I think it was an award that you used to hand out. Well, anyway, it's alive and well, and it's on mayonnaise and cornflakes.

But Golden Ray is a brand, which actually has got quite a high market share in Boxer. Shibobo, I think has got 20% or 30% market share and it's their brand. And this latest brand that they have developed is called BeST Cook.

So I think all of these things that we're seeing, innovation in our group, whether it's domestically or internationally, and it is something that we share. And they also can sign people up for TymeBank, which we've talked about previously, but it's an additional income stream for Boxer and also it allows access across the full demographic profile of the country for our partner in Tyme.

The usual, we've relentless focus on simplicity. And obviously, some of that we keep on rubbing Pick n Pay up against Boxer. Before it used to just create fire and now it actually creates some improvements in our performance. We need to be simpler as a company, we need to run tighter ranges, we need to want the maximum market coverage for the fewest lines sold. That's the dream. You can cut a range to a few lines and then lose half your customer base but the real magic for the commercial team is to be able to achieve both.

We opened 14 stores in the first half. We plan to open another 10 in the second half. 80% of our Boxer supermarkets have been modernized to our next generation. That's how unique Boxer are. We called it next generation in the Pick n Pay business, but theirs is a new generation so that's for the mods of you from yesterday.

Anyway, strong progress in centralization. We're about to -- I mean this is how quick they're moving because in the time it took us to sort of build one depot over 6 or 7 years, they're now having to move from their last depot and cater into their new depot, actually in the next week or so. So good progress there, and it's always a delight to go around the stores with them.

Greater efficiencies. We're up to 80% now in the centralization of our perishable and nonedible is over 90%. The next focus is for efficiency and productivity. So working with our suppliers and working with our supply chain team, we've seen good control of shrink and waste. In tough times, people tend to be a bit more liberal in the way in which they want to borrow a product without paying for it and the team have done a good job on that.

And obviously, when you push harder on your fresh foods, you need to make sure that all of your stock systems are in place so you don't put anything in the bin.

We have mitigated against rental expenses by renegotiating with our landlords when appropriate, making sure that we only have got enough space rather than too much space. And if we have got too much space, making sure that we utilize that by maybe putting our liquor store into the same place or our pharmacy or on occasions, our clothing business. And as I said, we are making progress on natural energy in terms of solar PV, natural light domes in our stores, where appropriate. And doors on fridges, which I think will be a commonplace around the world rather than just in the developed parts of the world. And I think that they look and work so much better than the first versions that we came up with a few years ago.

On services, we continue to make progress. Income from added value services were up 16.1%. TymeBank, 850,000 customers. It's a remarkable achievement by all concerned. They were opened in Pick n Pay and Boxer stores. I don't know what this actually means, it's usually for the investors, one of the fastest-growing digital banks in the world, I'm told.

The important thing is, is that people like what that's being proposed, they can take part in our business. And the broader thing I want to leave you with is, I see our stores not necessarily purely as grocery shops but places where you can come and do some of your basic need, financial services. So we have -- we can accept account deposits from many, but we've got 4 banks already. So we can actually -- we're open longer than most people, certainly most banks, all of our tills end up being compliant.

And there's more, I think we can do in that space, and that's ably led by Richard van Rensburg. And we are exploring other partnerships, and one of them is Hollard and on our online business, which is a Labor of Love and a Lifetime's Work, both 2 million visits to our online shop and we're 24% up year-on-year. So whatever the future is, as I always say, we want to be first to find out what it is and we've got a good, strong team working on that as we speak.

We probably talked enough about Africa. I want to talk about the positive part. I've recently visited the countries and it's quite humbling. When we're getting a bit scratchy because the power went off for an hour. I think in Zimbabwe, it goes off for 17 hours and currently in Zambia, because there's very little water in the Kariba Dam, it goes off for 6 or 7 hours. It's a real nightmare for retail operators or anybody, to be honest. Let's be honest. Because obviously generators, power surges impact on lighting, cost of diesel, bloody, bloody, blah.

But the thing that I'm always struck by is the resilience of people to find another way to actually find a way of still making a life when all of us in this room would probably give up and go somewhere else. When people can't give up and go anywhere, they get on with it. And I have to say, I think we're going to come out of this situation stronger, both as executives and as retailers, and I would encourage anybody who is going to Zimbabwe. A, when you're there, it doesn't -- they never make you feel like it's the worst place in the world, you still think it's very good. And there is a real sense of ingenuity and creativity, much of which I want to bring back to our business here in South Africa.

We do have dedicated teams. I think if you stripped everything out, it's like always, if it wasn't, if my uncle was a woman, he'd be my aunty. But there is this sort of feeling of -- if you stripped away hyperinflation, and you just looked at it really on a candid like-for-like basis, the Zimbabwe business made roughly the same amount of money as it did last year. It's more customers with product in a pretty hostile environment to ensure that we've got product on the shelf and lights on and chillers going.

But there is -- I do feel that in some of these areas, we will hibernate rather than retreat. And I think that if we hibernate and we continue to ply our trade, do a good job for our customers. It's not necessarily the most profitable thing we're going to do, but I think in keeping with the values of the company, I have to say, it is one of the things that inspires me when I go to see them.

As I say, we're stronger not weaker for participation alongside our other franchise partners in Namibia, Eswatini, Botswana and Lesotho. And I personally remain committed to the challenge of Africa, but we've never bet the farm. And we have to continue to have belief in it and we will continue to make sensible investments where appropriate.

Okay. Just a very quick comment, and I tend not to talk too much about this. It's just so everybody understands. We're creating thousands of leaders in Pick n Pay. We're a big organization. Along with our partners, we employ about 85,000 people. We've increased the amount of training that we're doing. We've got over 100 managers completing formal management development programs at university. We offer 330 training programs and we can bring people into our business with very modest educational background.

What we require is the will and the determination and the work ethic, and we can provide much of what else is required, right the way up to people doing MBAs, a university with our support.

What I promise people is a job that they can enjoy, a manager there to help them and an opportunity to get on. After that, it's up to them. We have promoted 1,200 people in the last year. I'm delighted that we've come to terms with our labor partners for another 3-year wage deal, so that will be the third on our watch. And we have submitted our new employment equity plans for the future.

So my thanks to the HR team, who rarely get a call out at results time. But they're an important part of what we do, and I thank them for their achievement.

Obviously, having an impact on community, I think the Chairman touched on this, so I won't dwell on it. It is an important part of what we do, whether it's a significant drive on the environment in terms of plastic, saving energy, water, the community mindedness of our franchisees and our corporate business in establishing food gardens and supporting learners in school club. And there's passion to ensure that we waste nothing, which is the 1,600 tonnes of food every year that actually doesn't go to landfill, it ends up going to Food Forward. And you know that a proportion of that we collect on Mandela Day every year, which is a really well supported and joyful day.

So nearly in conclusion, a good plan is worth repeating. So there it is. Six things: clarity of purpose, clarity of leadership, complete execution and continuous monitoring. And when one engine looks like it can't be pushed that hard, then we go and put our efforts to push on another one.

And then I'd just like to briefly finish on being positive. I think it's really interesting at the moment. I mean it's either the worst time for people in their lives or the best time, depending on how they get out of bed in the morning.

Roughly, the day will go the way the day was going and either they're going to end up going to bed happy or they'll go back to bed depressed because they got up depressed. But the reality is, is that we can't stop the change. The market's evolving, customers are changing, politics is moving and, therefore, out of that, I think that there's going to become new opportunities for people who want to seize them. So if you look at demographic, urbanization will increase. Obviously, given we've got a very young population, there is a rising working age population.

Now currently, they don't have enough jobs. So all companies, including ours, have a role to play. There is the likelihood of some further investment in the infrastructure, and that will create new jobs, and that will result in formalization, new shopping notes appearing, smaller stores, close to where people live. And therefore, we can either ignore it or we can actually ensure that we benefit from it. Price and value is central and, therefore, discount retailing is becoming more of a norm. But people do want convenience. They want -- they haven't got enough time for all of the gadgets we all carry, no one got any more time back. Healthier foods and products requires innovation. It has to taste good, it has to feel good, but it also has to help you live longer, and that requires innovation.

If you look at financial services, Internet penetration, people wanting to have a -- we're seeing a youth population coming through, which is slightly more militant, slightly more determined to push it in our face, not always armed with entirely the full set of facts, but then that's -- you want the wisdom of age and the energy of youth. So -- but greener living will come up with greener products and better ways to do things. And if you look at the economics, I think that we -- companies, including ours, must adopt some change. Looking back isn't an option. It's quite romantic. It's quite nice. It's like listening to a greatest hits album. But looking forward, is our only option.

And interestingly, if you look at this country, actually, looking forward, isn't such a bad thing. There's very few grocery markets that I can think of in developed countries, where the likelihood of retail growth is high. I believe that if you take a look just at the maps, GDP growth hopefully, over 1%. So that will feel like a win. But if it ever got to 2% or 3%, that would be a party. CPI has been fairly reasonably controlled recently, somewhere between 5 in the normal market and sort of 2 or 1 in our market.

Population growth is likely to be 1.5% a year. We have got a young population, urbanization will continue. And the grocery market, I think, therefore, would grow by circa ZAR 300 billion. Don't hold me to the odd ZAR 1 billion, but ZAR 300 billion in the next 5 years. And if you're in the grocery business, that's quite encouraging because I can't think of a developed European country where it's going to grow at all.

And, therefore, in closing, I think that we've got a dynamic and flexible plan. I think we've got a dynamic and flexible group. I think if you look at where the market is in terms of 75% of house or 60% of spend, I think you've seen improvements in the way that Pick N Pay has turned up in that sector of the market, and there's more progress to do. And a special thank you to Gustave Möller, who's been leading that charge with [venteron]. And our Boxer business, which I've mentioned. I think that we do have to make sure that our core business and our select business is more tailored so people need more of something or less of something as it goes through the different demographic profiles.

I think that we have the brands that we need. We've got two and I think that's plenty. We've got a corporate and franchise business, and I think that's good. We certainly got all the formats to welcome all South Africans. I think we have a clear plan. I think we've demonstrated that over the years, I think we've got a strong team that's getting stronger. And we know that performance matters and points count. Performance matters and points count. So I'll be taking that with me on Saturday to the match.

No, I won't actually be going that far. I'll just be sitting in my telly. Unless, of course, there's a load shedding. But the reality is, is that I wish all the South Africans a very best for the semi final. I'd rather be playing yours than ours. And if we don't prevail at the weekend, we'll certainly soften them up for you. So hopefully, you can finish them off in the final.

Good. Thank you very much, and I think we'll turn it over to questions.

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Questions and Answers

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Richard William Peter Brasher, Pick n Pay Stores Limited - CEO & Executive Director [1]

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Tamra?

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Unidentified Participant, [2]

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Question from Paul Steegers of BoA. How much of our private-label sales are sourced locally versus imported.

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Richard William Peter Brasher, Pick n Pay Stores Limited - CEO & Executive Director [3]

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Almost all of them. I can't afford to import them. I think if the rand was a little less volatile, there may be other opportunities to trial things, but the reality is that the majority of our own brand would be domestically sourced.

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Jeanine J. Womersley, HSBC, Research Division - Analyst, South African Retail [4]

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Richard, Jeanine Womersley from HSBC. In the slide prior, you speak about the growth outlook for the grocery retail market being unevenly distributed across the LSM groups. Given that, could you talk about how the Board is thinking about capital allocation or the mix of capital allocation between your Pick n Pay versus Boxer format and how we should think about the evolution of that impacting the overall returns profile for the group?

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Richard William Peter Brasher, Pick n Pay Stores Limited - CEO & Executive Director [5]

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Yes, thank you. Well, as Lerena said, we have no structured long-term debt. We have a bit of overnight borrowing. And therefore, effectively, we try and live within our means. So the more cash we generate, we obviously have a good dividend policy for shareholders, so the balance between our dividend, our capital and any retained funds. I think that we'll have the capacity to invest more if we feel like that there's an opportunity to get a return. We still have interest payable on our overnight money. And to be honest, I'd rather not do that either.

So the reality is, is that we have to build a capability and capacity in the new emerging areas of the economy that can cope with more capital. Because capital, in its own right, thrown at it won't actually deliver. So at the moment, I feel that we've been spending probably a bit more in the less affluent market recently. But again, the way in which you expand there is not the same as where you expand in the middle and the upper middle markets because it tends not to be structured landlord investment.

They might be stand-alone properties. They may be conversions of existing buildings. So those things take a little bit more time. But you can see from the emphasis there, if you look at our Boxer business and our Pick N Pay value store operation, including our franchisees within there, that is an area where we believe that we have more potential. That doesn't mean I don't think we've got potential in the middle and the top. But the reality is that's an area where, historically, Pick N Pay has been stronger. And I think it still has an opportunity to be stronger in that larger sector, where our market share is pretty modest.

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Stephen J. Carrott, JP Morgan Chase & Co, Research Division - South African Retail Analyst [6]

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Stephen from JPMorgan. The most surprising part of your result to me, I'd say, is this 1% increase in gross margin. And you mentioned that -- in the results that it's -- that it seems to be largely due to an increased contribution from company-owned versus franchise stores, but it is a big swing. I'm not sure -- just if I kind of think about the math in my mind, I'm not sure that, that could 100% explain that in and of itself. Could you provide us with a little more color there around that gross margin uptick?

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Richard William Peter Brasher, Pick n Pay Stores Limited - CEO & Executive Director [7]

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Yes. It's not the entirety of it, but it is a good chunk of it. And it's a high-quality problem because in any other previous presentation, I would have spent it, because I do believe that we should keep the pressure on reducing prices and making more effective promotions. Partly the reason that actually some of it's come through is just math, which is the point about the corporate stores. Part of it is because we -- if we have a slightly higher participation of own brand in our business then that can be margin accretive. And there is some evidence that if we push a bit hard, especially on service counters in store, you can end up with a higher GP.

So there's a combination of things that you can do that, actually, in my mind, gives a feeling of sustainability to it as opposed to it just looked like we put our prices up, which we didn't, by the way, which has played out in the inflation figure. I knew it was coming, but I was slightly surprised by the scale of it. And some of that is something to do with math in terms of where you do or don't put your distribution allowances versus the cost of distribution, some of it's to do with where you have to account for your advertising income, which sometimes historically was netted off in the advertising line rather than actually had to appear in gross profit.

So there are some sort of anomalies, which we could take off-line, the sort of -- but there are more rats than mice. I think that -- I think it's just -- it worked out well. I mean if NSR look to our expense line. Our expense line -- and if I have managed to keep the expenses down, then this would have been and either just send you a note and not turned up because it would be brilliant. But the reality is, is that we have got to bear down on the cost. If we can afford to spend any of the gross profit over and above what you expect as investors and market commentators, I would definitely give it to customers.

But at the moment, I don't think it's a market where you can kind of go and spend your way out of trouble. Sort of like, I'm going to throw the kitchen sink at it, and I'm going to get the uplift, because I don't think the market is that elastic and, therefore, when you live with the kind of margins that us retailers live with, you're careful with what you give away, because you've got to make sure that you're going to get something back for it. And where we think we can, we are putting more and more efforts.

And the other thing I would say is that obviously the economics of a Boxer P&L is different to a traditional corporate store, and it's definitely different to franchise. And therefore, that requires some sensitivity in the way in which actually you bring that whole mix together. That doesn't lead me to tell you that I'm now going to segmentally report everything down to the toothpicks, but it is a way of us making sure that when we're managing a group of companies that we can come up with the result that I think is in line with both expectations and our ambitions, and the rest of it, we want to plow back into our business for the future. Tamra?

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Unidentified Participant, [8]

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So question -- two questions from Nick Webster at HSBC. The first question is, you talked about growing your health and wellness offerings through the LiveWell own brand. Do you see the branded producers increasingly offering alongside us? Or is this a category that we want to drive primarily with own brand products?

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Richard William Peter Brasher, Pick n Pay Stores Limited - CEO & Executive Director [9]

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No, not really. I mean if they've got a great product, we'll stock it. I think Diet Coke actually moved the whole sugar consumption forward pretty well. I don't think we are suddenly thinking that we're going to knock them off their perch or Coke Light or Coke Zero, whatever they're calling it now. But the reality is everyone is welcome. I mean look, we stock 25,000 lines. I don't think there's a product in South Africa that's worth selling that we haven't got. But either -- it's not a competition. It's more a call to arms. If people want to innovate and create, then come to see us. If they've got a brand that already people like, great, will stock that. And if there isn't one, we'll have to go and make it.

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Unidentified Participant, [10]

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He had a second question, Richard. We're at 22% of own brand. Do we have a view of what the optimal level is for this in the South African market, given your U.K. experience?

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Richard William Peter Brasher, Pick n Pay Stores Limited - CEO & Executive Director [11]

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100%. No, no. I don't know. I mean if you'd asked me 7 years ago, I thought I'd be further on. But the reality is, is that -- look, 22% is pretty good because it doesn't include me throwing all of my meat business in there or all of our fruit and veg business in there. So actually, you don't want to get to a point -- and it happened in the U.K., where, in fairness, one of my arch nemeses, Sainsbury's, they got to a point where they knew best and they gave people what they wanted, which is pretty much the Sainsbury's brand.

And I was working for a lesser retailer, called Tesco and we decided to also support the brands and do own brand. And therefore, our own brand participation was less, but our performance was better. So I don't think -- I think that you should only ever do own brand if it actually improves something. You can sell it for less, you can make more. But the idea of duplication, I think when people really look hard at working capital complexity of SKUs in store, you really, really don't want to be duplicating stuff. And that would be an observation for the South African retail scene is we all duplicate far too much.

Probably Willis because of their approach, is more Marks & Spencers. They end up duplicating less because they've got less, but the rest of us, we just duplicate too much and pretend that, that's a really good idea and the truth is, it's not. Now that's why our own brand is a great opportunity for manufacturers who have got brands, but they're not particularly strong. They're not particularly supportive and they're not particularly differentiated. And therefore, if they join with us, we can come up with a good partnership.

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Shane Watkins;All Weather Capital;Chief Investment Officer, [12]

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Richard, Shane Watkins, All Weather Capital. I just wanted to follow up on Stephen's question on the gross margin, because I think it is a very high-quality problem to have is. It's, in my mind, the best quality growth you can have. So do you think that this 1% step up in gross margin is sustainable? And would you expect to see the gross margin gently drift upwards? And what do you think the upper limit of your gross margin could be without changing your pricing architecture? Can you give us some sense of where you think this might end up over the next 5 years? I'm just conscious that your largest competitor still has a gross margin about 4% higher but obviously they have much less franchise. So it's not a like-for-like comparison.

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Richard William Peter Brasher, Pick n Pay Stores Limited - CEO & Executive Director [13]

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Look, I think that there's a reasonable chunk of what we've presented here because I wouldn't have presented it if I didn't think it was in some way sustainable. Obviously, it depends on the inexorable rise in costs in the country and how do we keep the balance. So obviously, if we can push our costs down, then we don't need to push our margin up. I'd always prefer a lower margin and a more elegant P&L. Look, it's too hard to try and predict anything. 5 weeks is a long time. 5 years is a lifetime. So I think that we're -- I think we're demonstrating that the work that we've done over the last few years is that, actually, it's put us in a position where, actually, I could release this.

I think this is the first time apart from 0.1 or 0.2, that we've actually seen any material increase in our margin. I wouldn't be expecting another percent anytime soon. But I -- what I would always want to do is to make sure that we can deliver a level of profitability which I think is appropriate, whilst pushing quite hard to give people things for as little as we can afford, not as much as we can get away with. And I think given that we've got good competition, and a bit like playing against people in the semifinal. They wouldn't let us get away with it anyway, I doubt.

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Shane Watkins;All Weather Capital;Chief Investment Officer, [14]

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I just want -- if you don't mind if I follow up with a second question on margin. In your operating margin, do you think there's maybe some upside there in the medium term as well because, clearly, you've got some corporate stores, like you said, Boxer, that are doing terrifically well. And you've got some corporate stores like, let's say, the hypers, for various reasons, including the economic cycle, that are doing less well. So it sort of feels to me like there's upside in both your gross margin gently from you and your operating margin, it could be still some decent opportunity for you?

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Richard William Peter Brasher, Pick n Pay Stores Limited - CEO & Executive Director [15]

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Well, I always wake thinking there's opportunity. I mean the reality is that we're quite a large complicated organization and with that comes a degree of inefficiency. I mean I think what we have done recently or over the number of years is our hypermarkets are more modern. They're more rightsized. We've put some capital into them. And we give people a pretty decent shopping trip. And I think we give our competitors quite a good game now. So I sort of -- I'm proud of what they've done in Asia and Nordea, who's led that for the last couple of years.

There has to be opportunity for more improvements, in efficiency and productivity because, actually, it's not like we're flush with margin. Today, it sounds like a good day, but the reality is it's still pretty tight. So I think that the truth is that, of course, I think we can do more, I always would say this, even we had done even more than we've done. But it has to be with the people. It has to be with our partners. It has to be thought through. It has to be productive.

And also if I manage to take costs or expenses out of the organization, I want to reflect it in what I invested in the organization to grow it. So I always say to our partners is, I want to have fewer people doing the same thing and more people doing better things. So in aggregate, we are a net positive employer, but to be honest because of history and because of the change in certain economic circumstances, like hypers or large supermarkets, you do have to reengineer them so that you've got a longer-term future.

I mean we're just about to open a store -- reopen a store in Witbank, which is quite a large store, and we're turning it now into a compact hyper. So it's something that actually has got more reasons to go and shop in that store rather than when I visited a couple of years ago, it just looked like a all slightly tired store, which -- or why would you, when there's another smaller, more convenient store next door to you. So I think all of those things are in the mix.

And I imagine that the full year results, I'll talk a little bit more broadly about the overall shape of our property portfolio because some of it was designed 50 years ago and some of it was designed 5 minutes ago. And therefore, that continual reengineering of your business. That's why we closed, sadly, 12 stores because they were past their sell by date. So yes, is the answer. Can I give you a number? Maybe. Will I give you a number? Definitely not. But I'm sure you'll still ask me when we have a coffee later. Thank you.

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Unidentified Analyst, [16]

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Richard, my name is Jeremy Gorman from Systemic Flemming. Just on the issue of costs. Obviously, cost growth has been fairly high so far this year, which areas do you think you might have more of an opportunity to bear down on them and which are more structurally growing?

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Richard William Peter Brasher, Pick n Pay Stores Limited - CEO & Executive Director [17]

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Well, look, we're committed to a labor agreement in our stores, and we're happy with that. So that's -- that we know exactly where that's going. I think the tough areas is obviously where escalations and rentals end up being higher than your underlying sales. Of course, that's quite pernicious in terms of its impact. Therefore, you have to restructure your estate, which you can't do overnight. But I often say it in my team is, look, you can't do everything overnight and you overestimate what you think you can do quickly, but you underestimate what you can do if you just got going and started doing it.

So actually, if I look at the estate today compared to 7 years ago, we are in a far better shape. He's actually there, he runs our property business very well. We are continually reengineering our space when it comes up for rent renewal or a point in the transition with landlords, we will want to either bring somebody into our store or put a liquor store in our store rather than in the mall or any number of things that actually makes us more effective and efficient. And sometimes, if it works, we give space back to the landlord and then they can sublet it to somebody else.

So there is that sort of a continuous thing. One of the big challenges, and people don't keep an eye on it is things like rates, rates have been double-digit increases in recent years, and everyone will argue, it's for a good reason, but nobody actually controls it centrally. It's a local thing. So that's a challenge. Obviously, electricity is not going to get cheaper anytime soon. So we are very active in terms of trying to find ways, putting doors on fridges, being more efficient, putting in LED lighting.

So if it can be measured and it can be managed, we've got a plan. We feel a bit like King Canute so you have to -- that's how we have to keep on structuring our business, and we also have to look for new opportunities, services and other areas where we can actually make -- we can make a positive contribution to our P&L without having to go and change the way in which we run our core business. And we do that successfully in Boxer as increasingly successful in Pick n Pay.

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Jiten Bechoo, Avior Capital Markets (Pty) Ltd. - Equities Research Analyst [18]

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Richard, Jiten from Avior Capital. In my mind, a lot of your good results over the last few years, even longer, have really been driven by a particular powerful team, range optimization. And I feel that one of the powerful pillars driving that certainly is your early implementation of combination of ERP data. It's a very complex topic. So I'll just zone in on one aspect on data analytics. I just wondered if you could give us a feel as to what your opinion is of how far along that particular continuum of AI the group is at the moment and whether there are any particular major projects that will transition you into a next phase or a paradigm shift towards that AI journey, whether it entails further enhancements in your loyalty program, something about the supply chain infrastructure that needs to be done that will enable you to take a next step forward. So generally, that journey and where you are in data analytics and AI.

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Richard William Peter Brasher, Pick n Pay Stores Limited - CEO & Executive Director [19]

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Yes. Okay. Well, that's a sort of broad question. Look, the reality is, is that in fairness, forgive me, if they're in the room, but people give things names, artificial intelligence, machine learning. But the reality is this has been a continuous process. I mean in the old days, when I was a buyer, we had an Abacus. We had no computer. We had a pencil behind our ear and a lot up front. So the reality, things have come a long, long way. And given that we're fighting for 0.1s and 0.2s, the reality is, as you point out, is machine learning, artificial intelligence, whatever the logo is on the packet, has been developing over the years.

We have got a big analytics team in our business. We've got a very capable IT operation. As you've heard, we've got a very numerate Finance Director. I'm not saying that Bakar wasn't, but a very numerate Finance Director. And therefore, I think the power of analysis is crucial in retail. And in fairness, to your point, probably, in the past, slightly overlooked because the people who are growing up in the business came out of a different line of work than if they joined Amazon or Facebook or Google.

So we do have younger people than me, thank God, in the business and we do have brighter people than me, which is equally important. And therefore, I think that anything that is measured in points of percent, analysis has to be close to it. And given in fairness, we're ordering and sending stock on 20,000 SKUs, with maybe 1,000 things on promotion and with no control of the weather and certainly no control of the impact on customers from changes in social behavior or what have you, that is a really crucial part of our business.

So I can't give you a specific code name to make you sound like there's sort of a Martian ray gun being produced in our business. But I tell you, it is very close to our thoughts and our minds and, in fairness, we've actually got quite a number of projects. I think some people give it a name, and it makes it sound more exciting. But I haven't got the name. So I'll remember for the next presentation to have the name, but it's an important part of what we do. And I think -- I don't think anybody is going to suddenly come up with something so dramatic in a computer that a couple of thousand smart people running retail shops all their lives couldn't come up with.

But what they can do is they can replicate it. And I think that's the challenge in terms of if we can actually let the machines do more of the heavy lifting and then the humans make an impact after the data is being refined rather than people wasting too much time producing the form, the outcome and not having enough time to actually implement it. We must be -- let's move on. Yes, Tamra.

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Unidentified Participant, [20]

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Richard, a question from a private investor, asking where we are in Nigeria and whether we would have any thoughts about opening in East Africa, more specifically, Kenya?

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Richard William Peter Brasher, Pick n Pay Stores Limited - CEO & Executive Director [21]

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Yes, I know exactly where we are in Nigeria. We're in Lagos and we'll open the store later this year. And it's -- as we say, we haven't bet the farm. We haven't even bet a cow, it might be a small cat. But I think the reality is, is that Dallas Langman, who has the joy and the excitement and the adrenaline of running our African business, we've been looking now for a number of years. And I'm a great believer of learn by doing. So enough talking. Let's go open one. Let's go and see how it goes. It's a great-looking shop. It's going to be a bit different. It's going to be quite tight. It's going to be a bit smaller than...

So one of our beliefs, actually, in terms of our African strategy is we want to serve everybody in those countries. And I think historically, there was a tendency to want to go and plant some sort of flagship moments of the best that South Africa had to offer in a location to support the expat communities in some of those major cities. And I think the -- one of the exciting things that's coming out of sort of depressed economies is that why don't you just go in and try and service all the people who actually live there, grew up there, close to where they live. So our store will be 1,000 square meters, and it will have a tight range. It will be very competitive. It will be very low cost. And if it works, we'll do some more. And if it doesn't work, we'll presumably go to Kenya, I don't know.

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Unidentified Analyst, [22]

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Richard, Craig [Felka, Ussa] Capital. On that same African theme, did you experience any backlash to the recent xenophobic attacks in any of the other African operations?

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Richard William Peter Brasher, Pick n Pay Stores Limited - CEO & Executive Director [23]

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Yes. Fortunately, no one was hurt. We didn't have a loss of property. But unfortunately that was a gain that nobody wanted and in South Africa, it was a terrible situation, disrupted people's lives and people's businesses. And I think in South Africa, sadly, some people lost their lives. I think there was a reaction in Nigeria, [but it didn't] impact us. It was a reaction in Zambia. And we had to shut our stores for a day. So I think it's just one of those -- nobody wins on that. Nobody wins on that.

Fortunately, I don't think the majority of people don't hold with that any view with regard to that. And sometimes, when looting happens, it tends to be a criminal element that steps in rather than it's people genuinely angry about something in particular. So it's probably as much as I can comment on it. I'm not a politician and I'm a guest here. So -- but it was a tough couple of days but we get through it and then we open our shop and we do what we do. And then if we do it well enough, they come back and shop with us. And the first priority is look after the people. Second priority is look after the stock. And those -- I've never gone too far wrong with that. And nobody got harmed in our process.

Okay. That's probably enough for me. Good luck on Saturday. I know you don't like problems, but wish us a bit of luck, I mean it's going to be hard. But anyway, have a good week. Thank you very much.