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Edited Transcript of SPP.J earnings conference call or presentation 13-Nov-19 10:00am GMT

Full Year 2019 SPAR Group Ltd Earnings Call

Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of SPAR Group Ltd earnings conference call or presentation Wednesday, November 13, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Graham Owen O’Connor

The SPAR Group Ltd - Group CEO & Executive Director

* Mark Wayne Godfrey

The SPAR Group Ltd - Group Financial Director & Executive Director

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Conference Call Participants

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* Jeanine J. Womersley

HSBC, Research Division - Analyst, South African Retail

* Paul Henri Antoine Steegers

BofA Merrill Lynch, Research Division - Head of the EMEA General Retail Research and Director

* Andrew Kenny

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Presentation

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [1]

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Good afternoon, everybody. Sorry for starting a couple of minutes late, but there's quite a few people who haven't arrived yet. But we will kick on regardless.

So welcome to our results presentation for the 2019 year-end. Just first of all, what we'll cover is I'll cover the introduction. Mark will go over the financial overview. I'll get into the operational overview and update on Poland, and then I'll talk about the prospects, and then we'll have questions at the end of that.

I just wanted to highlight again our purpose, which we changed last year, you may recall, where [I challenge you] to inspire people to do and be more. Now our old purpose used to be to provide expert leadership so retailers could run profitable retail stores. And we thought that was just too bland and too focused, and this has really made a massive impact in the business, with people actually wanting to make a difference with each other, with our customers, with our retailers and with our community. So really positive -- positively received in the business.

So I'll deal with the introduction, as I said. First of all, on the SPAR International side. As some of you know, I sit on the SPAR International Board and I chair that body, and SPAR International is in a really good place. This was from our last year's report, 48 countries. We've just now, last week, opened the 50th country, which is in South America, in Paraguay. So really very excited about that. And there are some 246 distribution centers around the world; over 13,000 stores; 13.5 million customers are served every single day; EUR 35.8 billion business on the international front and an exceptional 5.4% growth.

So really strong in emerging markets, strong in Russia, strong in China. In fact, we had our International Board meeting in Durban 2 weeks ago. And it won't surprise many of you Joburg, but the people in the International Board, they'd obviously heard about Cape Town, they heard about Durban -- I mean heard about Joburg. But none of them ever heard about Durban. When they came to Durban, they realized the best city in the country is actually Durban. And they stayed at The Oyster Box. We had 2 magnificent days and then moved up to [Pinetown]. And the Norwegian lady at lunch said to me, "You know, there's only one other country in the world I could live in other than Norway." I said, "Really? Where is that?" She said, "I could come and live in South Africa." So that was quite a refreshing thought, when you -- we have all the doom and gloom and rubbish that goes on in the country.

And then in just the ranks of the countries, we in South Africa are second. And I was just talking to [Kim] earlier, and she was telling me about Austria and that's the #1 country worldwide, really strong country. And Ireland, 10th; Switzerland, 17th; Poland, 19th; and Sri Lanka, we've just opened 3 stores. So -- and there's the footprint of SPAR around the world. The green elements: obviously, Russia, really strong, growing strongly; China, growing strongly; but ourselves, a big player; Ireland and southwest of England; Poland, which we'll -- I'll cover a little bit later; and then Sri Lanka. So really making big inroads worldwide.

So moving on to our results. And really, just to give a bit of scale. It's in your presentation, I'm not going to run through all that. Just to say the trading environment, as you all know, is constrained here in South Africa. Things are very tough, low economic growth, the downgrade of -- or semi downgrade of Moody's last week, and hope that we can get that right going forward.

Ireland, of course, the Poms really buggered up in Ireland with their Brexit. They don't know what the hell they're doing. One week, they vote this way. The next week, they vote the other way. And of course, our Irish friends are so irritated, because they're going to be impacted the most, because 2/3 of their stock or their produce and goods come through the U.K. and so that's a major issue. So it's certainly going to impact them for 2 to 6 months should that come about. So they've seen that really [months ago].

In terms of Switzerland, low inflationary environment. I'll cover some of that detail a little bit later, but that's just to give a bit of perspective of where we are.

And of course, the main event, turnover up 8.4%, which we're obviously delighted with in this environment, at ZAR 109.5 billion. Fantastic team effort, and I'd just like to acknowledge some of our people at the back, distribution center, managing directors, financial directors and the like. It has really been a fantastic team effort. So really, if you could put your hands together for them. So thank you very much.

Operating profit up 7.2%, just shy of ZAR 3 billion. Very exciting for us. That normalized diluted headline earnings per share, 9.9%, and dividend per share growing at 9.7%. Mark will uncover more of that later, but really, excellent results in a really tough environment. So we're really pleased with that.

So just a review of the year, what took place. I've mentioned strong overall performance with 8.4% growth, continued capital investment in wholesale capabilities and the retail offering, a lot of store upgrades, which I'll cover a little bit later. And then something I've been asked quite a lot about, senior management changes. We've had 9 people at senior level either retire, a couple of guys went into retail. So we've had quite a lot of change at the top level, and that's proved pretty seamless. We've got really strong succession. All the changes were internally placed people who got promoted, bar 2. We've got an IT Director, who came from Game, we got Mark Huxtable. Some of you may know him. And we got [Paul Mindry], with one of our suppliers, who's taken our SPAR brand and private-label business. But otherwise, all internal.

As far as South Africa goes, turnover growth of 8% despite a tough environment. Solid performance in TOPS at SPAR, exceptional at 17.6% turnover, but you've seen that already.

As far as Ireland is concerned, it continues to bump along, and I know a number of you here thought we'd bought a bunch of fish and chips and sandwich shops in Ireland, but that's proved very different to that and produced exceptional results year after year, fifth year in a row, outstanding results from Ireland, so we're delighted with that.

And Build It continues to grow despite a tough trading environment, growing at 6.9% in a very tough environment.

Switzerland, first half of the year was really poor. As you know, we struggled to get to breakeven. Fortunately, we've turned that around in the second half and made some reasonable profit, not to turn the whole year around, but we're looking forward to the year ahead, strong growth and strong performance from them as well.

So if I can hand over to Mike on the financial -- I mean to Mark on the financial review. Mark, over to you.

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Mark Wayne Godfrey, The SPAR Group Ltd - Group Financial Director & Executive Director [2]

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Sure. Before I start, do you want to find a chair? Are you sure? It's a long presentation. You sure? Okay. Right. Good afternoon, ladies and gentlemen. Graham has set the scene as far as the performance goes. So let me unpack it for you in a little bit more detail.

Our salient features for 2019. Our turnover growing by 8.4% to 104 point -- or ZAR 109.47 billion. Operating profit, just under the ZAR 3 billion, ZAR 2.978 billion, growing by 7.2%. Again, Graham has shared that with you. Profit after tax growing by 18.4%. And in fact, the next 3 rows were greatly debated by our Board as to whether we shouldn't have just made those the salient features on the press release and left it at that. But in truth, as we've had to explain before, we have some very unusual financial liability accounting, particularly for the purchase of the minority interests in both Switzerland and in Ireland. So the more realistic number for us, and we recognize that is what we have over the years introduced you to, and the definition of normalized headline earnings. We are adjusting out of headline earnings the accounting consequences of the financial liabilities and also certain acquisition costs. And if we do that, I think it's more reflective of the business to talk about headline earnings growing at 9.7% and in fact, diluted headline earnings growing by 9.9%. There is a small change in the dilutionary shares on the basis of the CSP measures.

Dividend per share, Graham has already shared that highlight, at 800 cents or ZAR 8 a share, increasing by 9.7%. And then closing it out, net asset value growing by some 5.1% for the year. But let's unpack those in a little bit more detail.

The first thing I want to do, and this is going to become a tradition, and I think I have a great deal of sympathy for the CFOs out there, because most of these presentations nowadays have to start with an explanation of all the restatements that you've done and why you had to have done them. So let's get that out of the way quickly. Fortunately, this isn't H1. Just so that you can follow the -- those of you that have got 2018 as we released it and you're trying to understand why it now differs to the one that you've got in your current comparatives, we've had to make certain minor changes or reclassifications for the IFRS 15 standard. We introduced those to you already at H1, at the end of the first half. But as you can see, basically, we are just reclassifying certain other income into a new line item called revenue other. And there are some small reclassifications out of operating expenses where certain income was offset or net against certain of the expenses, so effectively just grossing it up.

We've also introduced for you the new IFRS definition, and there was great debate as to whether we were legally allowed to speak to you -- talk to you today about whether our turnover grew or whether we had to try and swallow that mouthful of revenue from the sales of merchandise. So just to cover ourselves, the definition of turnover is now revenue from the sale of merchandise, and we will revert to calling it turnover.

So moving on. I suppose it's more relevant to start unpacking the regional aspects of that, and that's where I'm sure a lot of you have got more of your own focuses. So on the right-hand side, I've just basically shared that slide, and then moving from right to left, the various geographies that we find ourselves. I've introduced the new kid on the block, Poland. There's some small activity in this period. Graham will talk to the rationale of the acquisition, but I'll come back to you just talking about the Polish numbers in this slide, but let me really start with the core South African business.

As you can see, ZAR 74.3 billion worth of sales. We had an exceptional year in South Africa, that turnover now representing some 67.8% of our total business. South Africa's gross profit just under 9%, 8.9%. And again, that's the gross profit as a consequence of the various IAS 2 and IFRS adjustments that have been made over the last 2 years.

Operating expenses, ZAR 5.3 billion; South African profit before tax, ZAR 2.1 billion -- or ZAR 2.15 billion; and our profit after tax at just over ZAR 1.5 billion. And then down at the bottom, just to give you a sense of how the various geographies stack up, a contribution of those various regions in arriving at both the earnings and the headline earnings per share.

Moving to the Irish column, the second column, a very strong performance by the Irish and I'll unpack the geographical performance on slides to follow, but ZAR 24.8 billion worth of sales. The gross margin increased to 13%, and that was really structural as a result of acquisitions made, that are very sensitive about price in Ireland, and they are -- we are definitely not profit-taking at a wholesale level. Operating expenses at just over ZAR 3 billion. The Irish profits contributed to the total group, as Graham said, 5 very successful years post that acquisition, at a profit after tax contribution of some ZAR 612 million.

Switzerland had a tough start to the year, had a very successful second half, stepped up against H2 of 2018, just over ZAR 10 billion worth of sales. Their margin declined by roughly 55 basis points. That's -- I beg your pardon -- 60 basis points, 17.55%. A year ago, it was over 18%. And that was the consequence of H1. H2 held up and it does start looking a little unusual at that point. And that is not a typo, I can assure you. The Swiss business did report a profit after tax of ZAR 2.8 million. To be fair to them, that is after a financial liability adjustment in-country of ZAR 60 million. So if our CEO of Switzerland was here right now, he'd say but he actually made ZAR 62 million. And to be fair to Rob, he did. But we obviously have to recognize the financial liability. The reason that the profit after tax has jumped is because -- and I will unpack it in a reconciliation of the tax charge. In the current year, the Swiss government have just passed a significant reduction in the federal and canton tax rates. They have now reduced them with effect January next year from 18% to 14.5%. That required us to revalue the deferred tax liabilities that exist in the business. So we were able to recognize that adjustment of 3.5% on the valuation of the deferred tax liabilities carried. So hence, the tax charge in Switzerland is almost positive. In fact, it is positive as a consequence. And hence, the profit after tax appears for its value to be a typo, but in fact, the profit is correct.

And then as I indicated, the new business, the Polish business, de facto, we have acquired. What that really represents is an investment holding company. There was some very, very small wholesale activity that took place between our investment holding company and the target, the Piotr i Pawel group of stores, which Graham will unpack further under the acquisition discussion. So a small amount of turnover. The expenses were really operating expenses and a fairly significant portion of that ZAR 30.6 million, in fact, is a ZAR 17.8 million in payment, an adjustment that we were required to make under IFRS 9, relating to the loan that was made into the Polish business. A great deal of debate, great deal of actuarial interest, but at the end of the day, an entry that we were required to make under the standards.

If we then move on and start getting into the detail of turnover. A slide that we've shared with you before. So let's really just start with unpacking the South African business. And if we compare or combine the SPAR and TOPS business as the top line, our combined business at the wholesale level increasing by 8.1%. As a subset of that is the liquor business, as Graham has alluded to, had a fantastic year, 17.6% increase in liquor. Last year, we thought they had a runaway performance of 13%, and that number just keeps -- just keeps on growing. And really, the consumers -- sorry, the consumers are really supporting that brand exceptionally well.

Build It growing by 6.9%, and that's off a backdrop of inflation in the building sector in our wholesale space measured at just over 4%. So still very, very strong real organic growth being achieved at a wholesale level in Build It.

So for a lot of you, that would be SPAR comparable, 8%. We announced a year ago that we bought a pharmaceutical wholesaler, S Buys. The S Buys business grew its performance in the year by 11.3%, very strong contribution within that business from their division, Scriptwise, which deals with specialty scripts, a very, very wide range of high-value scripts into both the hospitals, into doctors and into the medical care profession. And the wholesale element is, at this stage, growing very strongly. It is just under 25% of their total business. And that, in fact, enjoyed a growth in the period of some 11% as well. So in us, as Graham has already alluded to, wholesale support for our Pharmacy at SPAR retailers and definitely showing some solid growth as well.

Our Irish business in local -- in South African currency reported in ZAR terms growing by 10.4%. They did enjoy quite a substantial currency benefit as a result of the movements between the rand and the euro. In fact, the currency effect was roughly 4.2%. So in euro terms, that business grew by 6.2%. There were, as I've noted at the bottom, 2 significant acquisitions. We've spoken to both of them previously. Corrib Foods is a perishable, predominantly poultry wholesaler down in the Galway area. They acquired that business effectively November 2018. So we've enjoyed a really strong contribution from that business into our overall results, and that effectively added 2.1% of the 6.2%. And then last year, we spoke about the 4 Aces group of wholesalers, which we also acquired in Ireland, and that has continued to grow very strongly. That added a further 1.9%. And then the balance of the significant BWG group growing by some 2.2%. And a standout performance for us is the fact that all of the retail symbols in Ireland grew positively this year and also had positive like-for-like growth. So in a market that is, from an inflationary point of view, largely flat and an extremely competitive market, I believe that our Irish retail team have done a fantastic job.

Switzerland. Their sales, unfortunately, still remain negative, minus 1.5% in Swiss terms, Swiss franc terms, for the full year. There is definitely some positives to be taken out of that. A year ago, that number was minus 5.1% and we spoke extensively about the cross-border impact in Switzerland, about the market and about the downturn in the Swiss macro. Those factors are still very evident, and I think the positive for us is that we are no longer at minus 5%. We are at minus 1.5%. The Swiss team have done a great job over the last 18 months putting in a tremendous amount of strategy, implementing a lot of the strategy, and we've moved extensively from where that business was 2 years ago. Fundamentally for us is that the wholesale business in Switzerland is actually growing and reported positive growth of 0.4% against a market as well that is largely deflationary. So despite the fact that at high-level value, it appears as if the Swiss business is not performing, we've done exceptionally well over the period since acquisition.

Poland slips in at the bottom with a contribution. And as you can see, the ZAR 109.47 billion growing at 8.4%.

Looking at that just in a diagramatic format. Down the left-hand side, just an indication of how the various countries stack up and made contribution. The South African business, 67.8%. In fact, it's slightly diluted from a year ago, largely to the growth of the Irish business, who's now just under 23% of our total contribution. The Swiss declined slightly, 1 decimal point or 2. And then as you can see in the 2019 slide, we've slipped in the little sliver that currently is Poland, and all that I can say is watch this space going forward.

Gross margins. If we start unpacking those, and it's a very busy slide, and I'm sure a lot of you have got particular focuses. But if we start with South Africa, the South African gross margin, to coin the expression, decreased by 11 bps, I think that would be the correct term. And largely as a result of our liquor sales mix. Our liquor business doesn't trade at the same gross margin as the core wholesale business. So as liquor outperforms the dry and the perishable business, obviously, it will tend to dilute. The second thing that was evident this year was that our perishable business, in fact, slowed in value as a result of deflation, particularly in the frozens and the chilled commodity categories, and that also then has a mix play. I can assure you that there is no conscious effort to reduce margins. That is very much a mix outcome.

The S Buys business, slightly up on where it was as the consequence of some of the [SET] business and also the growth in the Scriptwise business. So the South African consolidated business apparently going backwards by 10 basis points, but more significantly a consequence of mix.

Our Irish business, growing strongly. And as I indicated at the outset, most definitely not the consequence of profit taking or any attempt to drive margins in that business up. That is fundamentally the consequence of the acquisitions that have been made, but clearly, the Corrib Food acquisition in a highly specialized commoditized area, where there is additional margin to be made. The corresponding consequence, obviously, is that there's an increase in cost because you are now distributing a perishable product. So that increase of 46 basis points coming through.

The Swiss business. That game was played in the first half. They had a very aggressive attempt at trying to change the market. They believed in the strategy. We needed to test that strategy. Unfortunately, we didn't see the related turnover follow. We paid for it in the gross margin in the first half. The second half, that was remedied. We held the gross margin strongly in the second half, but we're never ever able to regain it. I guess, to some extent, that's Eddie Jones' comment as well. And that allows us to report a group consolidated gross profit of 10.65%, a mere 3 basis point decrease on a year ago.

Moving on to expenses. I think that the standout for me has been how well our costs have been controlled by the regions. I exclude that remark from any of the MDs in the room, and I will continue to [yield] to the contrary. But as you can see on the extreme right-hand side, the South African business grew its costs by 5.6%. And I think it's important to put that against the backdrop of the fact that our fuel cost, as you all -- I'm sorry, 5.6% -- no, that's the ratio, 7.1%. Our fuel costs for the period increased by 15%. You're all on the receiving end of similar increases. So obviously, with an increase in logistics a major driver, our logistics fuel ratio is roughly 9% of the total business. And our labor costs or our employment -- our total employment costs in the consolidated SPAR business was up double digits, just over 10%, but that was also the consequence of the 13 stores that we acquired. Stripping those out, we still had a labor cost increase of just on 8%. We settled union numbers at 6.5%. And obviously, there's volume growth activity attributed to that. So with both of those big components of our business reporting double-digit numbers, to finish as low as 7.1% as a ratio of sales, which would increase it by 5.6%, is a significant emphasis on the amount of work that's been done around managing the remaining costs in our business.

The S Buys business. Their costs, unfortunately, were an issue. They increased by 12% on the backdrop of that sales increase of 11%. They are at the moment struggling to get their hands around distribution as the Pharmacy at SPAR business rolls out nationwide. That wholesaler is based in Carletonville. It's a long way from Carletonville to Constantia. And they are, at the moment, still guaranteeing those Pharmacy at SPAR retailers 1-day turnaround deliveries. So they, at the moment, are dealing with the logistics of moving high-value product long distance, and that is something that team is definitely challenging themselves with at the moment to find better solutions. So that is fundamentally the cost issue that they face.

Our Irish business grew their costs by 12.2%. If you strip out the foreign exchange effect, in euro terms, that's an increase of some 7.4%. Now again, it appears to be a fairly significant increase. I'll just remind that, that number is also underpinned by the acquisitions that they made, a highly specialized perishable business driving up costs. And in fact, their overall costs exceptionally well-contained in an environment where labor rates are and have increased quite dramatically over the last 2 years.

The Swiss business, increasing their costs by some 4.9%. And in fact, that business is actually right now influencing or enjoying the benefit of some of those corporate wholesale stores that they have disposed of. So that is part of the contributing increase to that. But by the same token, that business has also very successfully managed to reduce the overall cost.

I would just point out that, that 4.9% is obviously all in rand currency. If you strip out the rand currency effect, the decrease the Swiss business in Swiss franc terms actually declined by 2.5%. So again, running very much in tandem with the top line performance.

I think this slide is just my response to the queries which I knew I was going to get, and that was to reconcile the effective tax rate. I'll preempt it. Against the reporting target or expectation of 28% in South Africa, at a consolidated group level, we will report an effective tax rate of some 22.2%. What I would like to do is pretty much work from the bottom up, because I think that's probably the easier way to explain it. Because of the geographies, both Ireland and Switzerland that have corporate tax rates far lower than South Africa, there is over the 2 comparable years, at least a 4.3% reduction to our 28%, just because of the lower rates that those 2 countries have as a tax cost. So what I would basically guide at is going forward, excluding any other movement, our corporate tax rate should de facto be in the region of 24% on average going forward. Obviously, as our geographies expand, that might change. But based on current geography and current mix, that would be our ratio.

Then jumping -- leapfrogging back up to the top. I mentioned earlier the effect of the Swiss deferred tax revaluation because of the reduction of the 3.5 basis points in Swiss legislative terms. If we take the effect of that into South Africa and the credit that came through in the consolidation, that allows us to reduce our tax charge by 1.9%. The effect of those financial liabilities, which are expenses on our income statement but have no tax consequence whatsoever, nor will they have a deferred tax consequence, they are purely accounting entries. As you can see, those tend to increase the tax charge and then the last standout reconciled item is that in the current year, we have recognized or revalued a deferred tax asset for the consequences of some share plan scheme arrangements that we have. We hadn't previously recognized that, so we recognize that. If you're looking for guidance, as I intimated, going forward, I would suggest that the 4.3% currency differential will probably be a relative constant. So my guidance would be in the region of 24.5% should be what you would expect, all things other than that being equal and the permanent and nondeductible amounts being not exceptional as they generally tend not to be in our business.

Another busy slide but one that I think does speak really well to the 2 halves that are our business. So if I focus on the left-hand side just to start with, just an indication of how our various regions have performed over the H1, H2 cycles. Interestingly enough, in South Africa, that number is relatively flat. It has to do with how we moved Easter out into H2 and then, obviously, enjoyed the benefit of Christmas in H1. But it's interesting, for me at least, that we've always managed to hold those 2 seasons despite the fact the second half always seems to be far longer with no events in it, but the turnover performance almost balances. But you can see the European markets, where their second half is largely what we in South Africa would regard as winter, in Europe, that's summer, and you can see how their businesses -- I beg your pardon, I was waiting for that to happen -- how you can see their businesses ratchet up, the Irish business jumping by almost ZAR 1 billion worth of improved or increased turnover because of the increased activity. And in fact, even in the Swiss business, it might not be so prominent, but increasing quite significantly in the second half.

And then just as a ledger, we've shared with you, by region, how those various growths have, in fact, played out. And just to highlight that the Irish business, that 13% reducing or apparently reducing to 8% in the second half is just the timing and how the 4 Aces business starts lapping itself in the comparative.

Moving to the right-hand side. From a profit perspective, as you can see, to Graham's point, the Swiss definitely came back and produced for us what we would have expected in the second half after their disappointing first half, so definitely, endorsing what we've said previously, that those mistakes were remedied and a more realistic or more representative second half performance. And then again, the turnover or operating profit contributions by region and the growth thereof reflected for you at the bottom.

Also, just to give a sense of currency impacts and how those have affected the 32.2% of our business that is non-South African, the top graph in red, the euro-ZAR comparison over the last 12 months. In fact, for the first time in many years, actually being relatively flat. I mean yes, I appreciate there are peaks and troughs, but over the year, relatively flat. In fact, even if you just look at the start and stop or start and ending spot rates, roughly flat. The Swiss franc had a little bit more activity in it, and you can clearly see there was a slump towards the middle of the half and resurgence in the second half, which came through in the measurements as well. And in fact, it's been interesting that we have benefited by, on average, improved currencies in both compared to where we were a year ago, CHF 15.18, increasing from CHF 14.44 and the Swiss franc almost increasing by a full rand.

Talking to a number of the analysts, particularly with reference to IFRS standard changes, it's been pointed out to me that this has now become the prominent statement. So we should really lead with this one, and then we will do income statement and balance sheet in that order.

So against that context, our cash flows from operations, there's one item on this entire schedule that I need to address. And I think once I've addressed it, we can wrap it up quite simply. And that is that line item called decrease in trade payables. That fundamentally explains the entire movement because that really talks to why the bottom line cash effect is a positive to a negative of ZAR 1.6 billion. And fundamentally, it has to do with the calendar. The 30th of September this year was a Monday, and last year, it was a Sunday. And the SPAR Group pay our creditors on due date, and last year, we would have paid them on the next business day. And that, ladies and gentlemen, is the be all and end all of the explanation, because there is no attempt from our business to mess with our suppliers. We have excellent trading relations with them. And one of the things that we don't interfere with is our payment arrangements when it comes to due settlement. And that explanation, I beg your pardon once again, that explanation of why last year, we showed an increase in payables is fundamentally because on the Sunday, some of those suppliers might have made arrangements to be paid on the Friday. In certain instances, you can actually release the electronic payments over the weekend, but those suppliers would have fundamentally been paid a day later last year. And this year, they would have been paid on due date. The rest of that model really just shows a very, very comparable and similar performance over the years.

Moving down the lines, comparable interest, tax, very much in line, short of the Swiss adjustments. Dividends and dividends paid to shareholders, we kept the -- the cover is very much the same. And then under the capital expenditure, if you take cognizance of the fact that in the current year, our Swiss business acquired a property for some ZAR 212 million, we acquired one of the properties that we occupy in one of our Cash & Carrys at a very, very reduced market price. Excluding that, our capital expenditure has remained at the ZAR 0.75 billion level across the group.

Acquisitions of business, I'll unpack that it. There is the significant one in Ireland and in a couple of SPAR stores. And then loans and borrowings, really, all I want to highlight under that is -- and in fact, I will unpack the loans in a bit more detail, but there was one major significant borrowing raise during the year. We raised EUR 40 million out of London, and we injected that money into Poland. The holding company in Poland, in turn, unlinked that to the Piotr i Pawel group, a target group that we acquired in October. So at the end of the year, it was shown as a loan to an unconnected party, which was funded by way of, as I said, the EUR 40 million loan raised. So the effect there, those 2 amounts almost contra and one -- as a single transaction.

And again, just trying to illustrate to you -- illustrate that to you from a graphic perspective, you can see that significant increase in operating profit. Obviously, the decrease in working capital as a result of those payable outflows and in certain other dividends, taxation and that capital expenditure. And as I intimated, included in capital expenditure is the purchase of the Irish wholesaler, Corrib Foods, that we paid just under ZAR 190 million for and has been an exceptional acquisition for the group.

So without laboring capital expenditure in too much detail, I just want to point out that our investment activities and, in fact, included in that ZAR 685 million is that Swiss business of 214, the TopCC business at Winterthur. So removing that out, our base capital expenditure is almost flat. Our maintenance operation is roughly flat. Acquisitions of business, I've touched on Corrib Foods. So I guess, sometimes we do live up to that boring definition that we tend to get labeled with when it comes to our expansion views. But again, I'll let my CEO talk about Poland later.

Just from a regional perspective, very much in line with where it was a year ago. And just an indication for you as a sense of color as to how our regions are spending CapEx.

The balance sheet. Obviously, the core business, ZAR 7.2 billion worth of property, plant and equipment. The goodwill number, very much in line with where it was a year ago. We are very sensitive to the fact that we do carry a very high goodwill and intangible asset balance of just over ZAR 5 billion. Fundamentally, and the largest portion of that, as you would see, sits in the Irish business, a business that was built over many years by acquisition, and each of those acquisitions gave rise to goodwill. And then obviously, the acquisition of various brands subsequent to our involvement, the brands of Londis, the Gilletts group of stores in the Southwest of England, all giving rise to an increase in that goodwill number as well.

The Swiss number, again, certain acquisitions they have made. And in South Africa, certain of the corporate stores that we bought, and historically, there is a goodwill component in there relating to Nelspruit Wholesalers, the group that we bought out back in 2003. Current assets remain very much in line with the exception that in current liabilities, that number is obviously reduced this year because of the outflows. Generally, current assets and liabilities in the business match, so we would expect that to remain. And then long-term liabilities, roughly ZAR 8.4 billion worth of debt and exposure. I do just point out, and those of you that can find the little one, included in the South African business, at the end of the year was ZAR 643 million, being the long-term portion of the buyout obligation for the Irish promoters. And then the balance of that amount of some ZAR 683 million is actually included in the current liabilities. That transaction will take place in December, possibly early January as we start exiting the promoters in Ireland in terms of the shareholder agreement that they have with us. And then also included under long-term liabilities is the second financial liability relating to the buyout of the Swiss minority shareholders, and that amount at the end of the year, some ZAR 840 million that is still not yet current. That transaction should only start commencing in 2021.

And on the topic of financial liabilities, again, because I know it has been somewhat of a frustration to some folks to understand this, we've just given you the mechanics. The Irish at the top, the fair value measured financial liability. During the year, there were some finance costs recognized as we have discounted that at 8%, a small foreign exchange adjustment and very, very little, what in the past we would refer to as a future or fair value adjustment, now definition requires it to be termed an expected future profit adjustment. We took a large revaluation to that last year after the acquisitions, a much smaller one this year. And at the end of the year, value that the obligation to buy out the 20% in Ireland at some ZAR 1.3 billion, split, as I indicated, into a current portion for the first time. At the bottom, the liability for the Swiss promoters or the Swiss minority, that is not a fair value liability and a new standard definition that is now an amortized cost, fundamentally, because we have agreed a fixed price with the minorities in Switzerland, regardless of profit. With hindsight, yes, you might challenge that, but that was the deal that was done, and we are effectively simply discounting that at a rate of 1.3% and recognizing some exchange rate variances on that. And that reflected, as I mentioned earlier, some ZAR 840 million out.

And in the very last liability, is that owed to the minority shareholders in the pharmaceutical business, a very small sum. In fact, that has been adjusted. Because of their profit performance, there has been a fair value adjustment there, so reflecting some ZAR 37 million. And the total group's long- and medium-term or long- and short-term debt for those 3 amounts of some ZAR 2.2 billion.

Again, just to share some color on one of the line items that I know has also attracted some interest in the past, and that is that balance sheet asset called loans. We recognize that and have been -- well, we've always recognized it. But last year, we were required to recognize and disclose the fact that there were loans made to support our retailers. That number over the last year has remained actually flat. There has been movement in that. Obviously, those loans are being serviced. There have been additional loans made. So that number has been roughly flat at some ZAR 804 million, and that is the number that we are still very comfortable carrying on our balance sheet. Fundamentally, the largest underpin of that number is loans that we are making out of our funds to support black entrepreneurs buying SPAR stores. And we do that by way of a discounted interest rate. We generally discount the interest rate from prime by at least 4%. So they can look at an effective interest rate of some 6%, making those stores a lot more affordable to sell on into black entrepreneurs.

The second loan, which is fundamentally the reason for the big balance sheet jump, which I'm sure at face value might have caused some angst, is the loan that we made into, at this stage, at the 30th of September was an unrelated party, the group Piotr i Pawel, the Polish retail group that we acquired in the first week of October. The reason the loan was made was fundamental. We are in the process of settling the creditors in that business in terms of the acquisition arrangements, and we are actually going to discount, we're going to reach haircut settlements with the creditors. We needed to start putting money into Poland to start effectively making payments against their paper. Not that the creditors have actually received it. It's being held in trust, and predominantly, those payments were to banks. So we needed to secure the major liability creditors who had the major input -- or major influence in the voting. So we needed to route the funds in advance of the year-end, but is at year-end, an unrelated party. But basically, from the 1st of October, the Piotr i Pawel group consolidates up as a subsidiary. And the loan will then de facto disappear at this level because it will be intergroup.

And then there are 2 small amounts which have popped up in this definition of loans and other receivables, both of which were previously allocated on our balance sheet as either -- in the associates' case, they were under the associates' balance, or in the case of the Guild, they would have been under other receivables, under trade debtors. And the Guild, as you appreciate, is the umbrella entity that the SPAR retailers all belong to. Within that organization, which is a completely stand-alone balance sheet to ours, the retailers contribute to a fund which operates basically as a financial stock fill, if I could use that crude expression, and I can see a couple of the SPAR guys in the back cringe. But in layman's terms, it operates as a stock fill. They contribute to it, and they are entitled to draw against it for purposes of developing or upgrading their stores. So basically, they're assisting each other financially as part of that arrangement. We consolidate the Guild in terms of rules simply because of the structure, albeit that we don't manage or we manage the Guild, we don't own it. And one of the assets of the Guild is this fund. So the effect, to the extent that the Guild has made loans, we have to recognize it as a disclosable on our balance sheet as well. So I just want to assure any of you that in the past who have been somewhat concerned about the growth in the loans on our balance sheet. Not only are they managed, but they are managed very carefully.

Just to move in to some of the disclosures. To give you the numbers, this line item that we've introduced called normalized HEPS, just to show you that the various component adjustments that we make. We start with reported HEPS that we would all calculate the same way. We recognize those fair value and foreign exchange adjustments relating to those financial liabilities, we recognize some acquisition costs and the effect by adding this back, we are giving the shareholders the benefit of those acquisition costs, and we arrived at what we believe is a more realistic normalized number, which for the current year calculates at 9.7%.

And then rolling forward from that slide, we basically do the same entry. We arrive at a normalized headline earnings. And on that basis, maintaining the dividend cover, which our Board at this point in time have agreed to remain unchanged at 1.45 cover, which is the historical 1.5 adjusted for the change in the discount dividend tax rate, we have declared, based on shares in issue, some 800 cents and as we alluded to at the outset, an increase of 9.7%.

Just in graphic form, just a bit of a boast, if you would, some of our history over the last 6 years. On the left-hand side, you can see our net assets, and in fact, over a very short period of 6 years, net asset value has literally doubled. And on the right-hand side, just the progression of our headline earnings, there was a little bit of a slump back in 2017. We put that back on track again. And I think you would agree that a very healthy increase in normalized earnings over the last 6 years and something that, internally, we are very proud of.

Gentlemen, ladies, for those of you that have attended these presentations, at this point, I end up doing the IFRS 16 lecture. I will attempt to keep it painless, because I'm sure you've all labored through it, those of you that have studied it in detail. But just to share with you effectively how it will affect SPAR. It is only effective for us for years commencing on or after the 1st of October. Well, in fact, it will relate to our October 2020 -- sorry, October '19, financial year 2020. We have not elected to early adopt. What we have elected to do -- well, let me just quickly deal with some of the background before I get ahead of myself. As you are well aware, the lessee is no longer required to account for the lease. Under the conventional operational expenditure terms, he's now required to recognize a right-of-use asset and, in terms of that right-of-use asset, also recognize that he has liabilities to pay, which for purposes of this, are valued at the present value of those future minimum rentals. On that right-of-use asset, he will then depreciate the asset over the remaining term of the lease, and he will recognize finance costs over the period of the lease liability, now all of which replaces the good old straight-line operating lease accounting that took place under IAS 17. I'll just make reference to the fact that it was straight line, so we weren't recognizing time value of money even under IAS 17.

What the SPAR Group have elected to do, as I stuttered my way through earlier, it is applicable to our financial year '20. Our interim results at March 2020 will be presented under IFRS. The group has adopted, at this stage in terms of the standard, a modified retrospective approach. Basically, what that means moving through the choices is that we have 2 options. We can either recognize each lease on a lease-by-lease basis, taking it back to its time of inception or point of inception and then rolling the lease forward. Or alternatively, we can recognize the right-of-use asset and the lease liability at the equal and opposite amounts at take-on.

What we've elected to do is actually apply option 1, which means that, effectively, what we will do is recognize the movement between lease inception and the 1st of October as an adjustment to retained earnings, and then effectively, we will not restate our comparatives under this approach. So just to be very clear, we are not early adopting. And secondly, we've elected not to restate our comparatives.

Just to complete that implementation note, and I think to a similar point where, in the past, in conversation that I've had with certain analysts that have attempted to estimate or to calculate what they believe the standard would do on our business, there has been a -- this is an omission to recognize or a failure to recognize that in South Africa, the leases that the SPAR Group hold are fundamentally back-to-back leases. So on the same terms and conditions that we've entered into leases with property landlords, we've on-let the property to SPAR retailers on exactly the same terms. That back-to-back matching allows us to then skip through recognizing it as a right-of-use asset. We will actually recognize it as a lease receivable and the lease receivable will be booked at the same and opposite value as the lease liability. So effectively, that back-to-backing arrangement that we have in play will mean that we will not have a right-of-use asset for every one of our leases. So we will actually have 2 classes of assets originating out of the implementation of the standard, and we will have a far reduced depreciation charge to what a number of you folks have calculated in the past. And then finally, we will recognize a deferred tax adjustment on the adoption.

Just very quickly as far as the other 2 countries go. In Ireland, they do have property leases as well. Most of those property leases are, in fact, sublet in terms of franchise arrangements. So because they are not clearly identified head and sublease or back-to-back lease arrangements, they will recognize right-of-use assets. And secondly, they also have a significant part, if not the exclusive motor vehicle fleet on lease. In South Africa, we own our entire fleet. So we've got, other than properties, no other asset components in South Africa to adjust for. And then thirdly, the Swiss business had both property, vehicle fleet and certain IT hardware, all of which they will recognize as right-of-use assets.

And then just to put all of this into perspective from a numbers point of view, the top portion of the slide represents what we approximate to be the expected take-on values on the 1st of October, so at inception. As I indicated, we would recognize 2 classes of assets, a right-of-use asset and a lease receivable. There is a small deferred tax entry arising out of that, the present value of the finance lease liabilities. And then as a result of recognizing those leases from inception, there is a retained earnings adjustment of some ZAR 650 million that we will do as well.

The second half of the slide represents what we, at this stage, calculate to be the approximate impact over the 2020 financial year. The numbers on the right all represent pluses to. We got into a bit of a brackets and minuses debate around how best to present this. So all that I'm leading you today is whatever the number is, you can go and add that to. So whether it's the expense, increase the expense. If it's an income, increase the income, if that follows the logic. So effectively, what we are doing is we're saying, our depreciation bill will increase next year by ZAR 780 million. Our profit before tax will increase by ZAR 180 million, because we effectively are moving those financing costs below the line. There are finance cost incomes now as well because of the lease receivable and the corresponding finance costs. And at the end of the day, after this entire exercise is done within our organization for close to 1,200 leases, we will adjust our profit before tax next year by some ZAR 10 million. We will take a tax adjustment on that of 28%, and we will have a reported estimated headline earnings adjustment in 2020 of ZAR 7 million. I'll say nothing further.

Gentlemen, ladies, just to wrap it up before, and I've been here for a long time, and I thank you for your time. In closing, our turnover, or more technically correct, our revenue from the sale of merchandise at ZAR 109.477 billion, growing by 8.4%; our operating profit growing by 7.2%. More realistically and more reflectively, our normalized headline earnings growing by 9.7%. We declared an ZAR 8 dividend at 9.7%. And I believe that we are tabling for you today, a very, very solid set of financial results for the 2019 financial year.

Before I hand back to Graham, I would just like to make one further comment, if you may. I would just like to recognize my finance teams, both in Ireland and in Switzerland, both of whom have got no interest in IFRS at all, but have spent an extensive amount of time learning what it was required to do in their businesses and reporting. But more fundamentally, I would like to recognize my finance team back in Pinetown. Before I do that, I do see I've got an FD at the back. So I better recognize the divisional FDs and finance teams in our organization, all of whom have put in extensive work to be able to allow me to stand here today and talk as if I put all these numbers together. To our finance teams around South Africa, for your efforts and contributions, my thanks. And fundamentally, to my team back in Pinetown, who have spent not hours, not weeks, but months, studying standards, adjusting for those standards, and over the last couple of days, they've put in a huge amount of time. To you back in Pinetown, my thanks and appreciation. Thanks to you all.

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [3]

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As Mark said, I mean having dealt with all the financials and all this IFRS nonsense, I've got to say that being an ex-accountant, and I say ex-accountant because in those days, we never foresaw any of that. So what you saw is what you got, and these, it's really complex. But really to Mark and his team, just to echo to what he said, both to him and the team, hell of an effort to get the results in a tight deadline. So Mark, thank you.

Moving on to operational stuff, much more exciting. Obviously, I mentioned earlier, strong leadership teams across all DCs. We operate a very decentralized business. MDs around the country and their teams, really positive. We've had ongoing investments to support growth. The inland consolidation center, which is a slow goods-moving warehouse at South Rand, we've moved the slow-moving goods from the South Rand main warehouse into that, the North Rand warehouse and the Lowveld warehouse, which will give us efficiencies going forward in distribution. So that's almost complete. We'll be fully operational in 2020. The number of cases through the DC up 5.3%. Our retailer loyalty remains really high, continued focus on load optimization in the DCs. And we've issued solar panels into all our DCs. The final ones are going in right now. The savings on electricity will flow through in the years ahead.

And of course, very importantly in SPAR, our ethos and our values that we have, we share with our suppliers, and that collaboration with our suppliers has held us in good stead over the years. Sometimes, we're accused of being too soft with our suppliers, but we believe very strongly in the relationships with them, and that gives us the best deals in the longer term. And so we really maintained our loyalty with our retailers through improved service, support and the common purpose that we have.

In terms of retail itself, we've grown the footprint really well. We see ourselves as a home of the independent retailer, and that's really the core fundamental of our business. Our independent retailers, supported by big daily sales. And I've got to just relay a story prior to the election, about 8 months prior, one of our retailers bought a ZAR 50 million store, spent another ZAR 50 million on it. One of our guys said to him, "You know, there's an election in the country." (inaudible) And he said, "Listen, I'm going to be here after the election. We need to go ahead. We need to maximize what's there." And that really epitomizes the independent retailers we have who drive our business forward, and one of the reasons for the results that you see today.

Moving forward in terms of the retail sales growth. Growth of 5.5% on the SPAR side, 4.6% like-for-like. Our TOPS grew 14.5% and 11.3% like-for-like. And even Build It, 5.7%, 3% like-for-like on a retail basis. Those are all retail numbers.

And the combined food and liquor business growing at 6.6%, with inflation for food, 3.1% in the current year, up on 1.4%, which surprised us, because the first half of the year, it had remained pretty steady at the 1.4% level. But really, really good retail performance in a tough market.

Moving forward on the retail side as well. What's actually contributed to the growth in retail? I've been asked that question a number of times. And really, it's our compelling advertising and promotional support that's crucially important, our rewards program that drives our marketing campaign, our staff training. We have retail academies. Retailers come to our Pinetown training academy to get additional training as we move forward. Our drive on customer service, with the guest program driven really strongly, and that's really one of the things that differentiates ourselves from our opposition, is the whole customer service element in the owner-managed store. And the in-store concepts that we have are sending traction. The Chikka Chicken concept, we now have 453 of those in our retail stores. Our Bean Tree offering, which is a coffee offering, has 325 of those. And a new introduction, our SPAR Natural, where we have 48 of those in the stores. Those have all contributed to a really positive independent retailer store growth.

And of course, private label increasingly important. Not only the SPAR-branded products themselves, but SaveMor, Freshline, Tender & Tasty on the meat, our Good Living range, Chikka Chicken, I touched on earlier. And our strategy is really simple: as good as the best for less. I can remember in the '90s, when we launched our SPAR brand, and we went with that logo then. And our opposition went with real cheap and nasties and we were being compared to them with baked beans and the like. We said, "No, no, we're going with the quality product." And our retailers came to us and said, "You guys don't know how to negotiate. What the hell are you doing? The price is so different." But the strategy has proved right, that people want a good quality product. That's what we've done with the SPAR brand and it's driven us forward with the growth that has taken place. So really important in terms of that.

Our house brands grew by 10.1% year-on-year to ZAR 13.4 billion. That's on a wholesale number; that's some ZAR 16.8 billion at a retail number. That's 23.3% of our store ratio, which is crucially important and some of them have been doing really well. And we've also gone into the whole environmentally friendly packaging, making a difference in the [milk] category and some of the other categories. So really making sure we drive value to our customers, and our customers have reacted really well. And for the last 10 years, at least, for even more than that, certainly, our growth in SPAR brands and our house brands has been greater than our core growth, which is really positive. Because obviously, for us, we make more money out of it. And for our retailers, they make more money out of it as well. So it's a big plus all the way around.

And then there was a mention, Monteagle, Marshall Monteagle issued a statement saying that they're disposing of 50% of their business called Monteagle Africa. That's the conduit that we use instead of getting it in our private label business. So that's the rationale, it's actually to make sure we protect our supply chain, which has become such an important part of our business here, the whole SPAR private label and other elements of the private label as well. So that's really what's happened. We bought 50% of it. The other shareholder who runs the business will remain in place, and we're very confident about the additional revenue and profit that comes via that. But more importantly, securing our supply chain, that's really the rationale for that. And as that's now subject to Competition Commission approval, we're hoping to get that done in December.

And of course, TOPS is SPAR's star performer, it's our largest liquor business, grew by 48 stores. And as I mentioned earlier, we've allowed our retailers to buy -- to have more than 1 TOPS per SPAR store. Bear in mind, to own a TOPS, you have to own a SPAR store. And I think one of our retailers has got 5 TOPS stores registered to his SPAR store, a very profitable leg of our business and worked really well for us. That's contributed to the growth, some 2% to the growth of extra stores. But really, the core business is really being a fun friend and marketing campaigns of the Glass Of Not So Serious, and certainly the quality of our stores, a lot of upgrades taking place, and those upgrades mainly around the extra refrigeration and having beer and wine that's refrigerated in the store. So that's worked really well for us.

Moving forward into Build It, the new image of Build It really impressive, and that's one of our new Build It stores, which continues to lead the market. Our internally measured inflation, as Mark mentioned, 4.4%. We had 14 new Build It stores branded like this and 66 upgrades, really making a big impact and one of the reasons for the nice increase with it.

And again, management changes. Some of you remember Wayne Hook, the previous CEO of the group. He's been running Build It for the last 2.5 years, done a fantastic job. He retires at the end of the year. And we'll have some changes there with a new MD of our Build It operation. But as I said earlier, on the succession side, really smooth transition taking place.

Now of course, Ireland, our star performer in the group, excellent performance. And as you know, they have a multi-brand strategy. So the XL, MACE, Londis and SPAR retail turnover, all of those brands grew by above 3.6% for the year, really phenomenal. Mark touched on that, the 2.2% real growth in their business, so very positive.

And of course, also Mark mentioned, the acquisition of 4 Aces Wholesale and Corrib Food. They've gone down the route of these small bolt-on acquisitions, and they're really good at adding elements to the business, whether it's on the retail side or the food service element, which they're focused on in the last couple of years. They've had award-winning stores. This is Millennium Walkway in Dublin, magnificent new store, latest to the brands. And a survey was done last year in July relating to convenience stores worldwide, the #1 country in the world was Ireland, and SPAR in Ireland are the leading operators by a long way in Ireland. So really fantastic store operation, but really world-class convenience and excellent retail execution. And as we mentioned earlier, a strong management team over in Ireland driving that business ahead with our promoters driving that.

Moving on to Switzerland. Probably the biggest element in Switzerland is improved retailer loyalty. When we went in there, the largest retailer are just over CHF 4 million, and the stores were really struggling. We're happy to have managed to give additional gross profit to those retailers. That particular retailer is nowhere in the overdue list. Its account's all up to date. And the big opportunity in Switzerland was the store upgrades and the new offering of home meal replacements and food on-the-go, and that's made a massive difference. Where we've done that, those stores' turnovers have increased really nicely. So if you go to Switzerland now compared to when we first went in there, the improvement of the image of SPAR is really first class. So that's really, really positive. And we had 23 store upgrades, as I say, and 7 new stores. And we're now getting some of our opposition retailers, Denner and the like, approaching us to join us. And that's probably the biggest success which we have, that opposition sees fit that we're actually the guys who look after independent retailers. We still play in a very small space, but we see us growing very nicely.

We've gotten into some really good concepts of Meat & More butchery; Fresh to go, as I say; Bean Tree, as I say, coffee concept in South Africa; SPAR Natural; and Trinkgenuss, which is a liquor offering in the stores. So really top class and very exciting, PAM stores, we've been delivering them on a contract basis. There were 53 stores in that stable. The first one is going to convert in February, and there are another 27 stores on the -- with Edelweiss joining them. So we can see some really nice traction coming forward.

So we're really positive. In fact, I was asked this morning by one of the reporters. He said, "Well, when are you going to bail out of Switzerland?" We said, "No, we're not. We're actually on the right track. We're looking forward to a really strong result in the year going forward." And hopefully, I can stand here next year and say that's one of our star performers from a growth point of view.

And of course, Sri Lanka. I was fortunate enough to go and, in fact, forced to go to Japan to go and watch rugby, which was really difficult. So -- and of course, that great win was fantastic. But on the way back, popped into Sri Lanka. We had a Board meeting there and really see how the 3 stores we've launched there really are iconic on the island. Thalawathugoda, the first store that we went into, is profitable already. And despite the heavy capital expenditure costs, a magnificent store. Kalubowila, likewise, and Union Street (sic) [Union Place] also. So really -- and we're about to move into the independent space, so we're going to ratchet that up really well. We have a really good joint venture partner. Remember that's a 50-50 joint venture with Ceylon Biscuits. So really good operation there and looking forward to good results going forward.

Before I get into the update on Poland, I just want to talk about the Giannacopoulos family. You would have seen it all covered in the press. They're our largest retailers in South Africa. They own 23 stores, 18 TOPS stores. There have been lots in the media about that we've been the big bully, we chucked them out, and we went and clandestinely held a meeting to throw them out. The facts of the matter are they were bringing the brand into disrepute. We were -- it was unacceptable, the treatment of our suppliers, the treatment of labor and dealing with expired goods and the like. And we took the decision as a Guild. And remember, the Guild consists of 10 independent retailers and 10 of us wholesalers, and the combined body of 20 voted unanimously to get them to take their signs down. So that's what we've done. Okay. They've now, the court actions and all that moving forward. We're in the process of negotiating a divorce settlement, because that's all it is. We've told them we don't want them to be part of the group. We don't want them bringing the brand into disrepute. It stands right against the values that we hold dear to us. So that's crucially important. And where we stand now, we hope to finalize in the next 2 weeks with the divorce settlement, and they will part -- go in their own way doing whatever they want to do, but certainly not in SPAR. So that's where it stands. I'll pick up some questions later, but I just want to share that with you.

All right. Moving forward to Poland, and really, that's some pictures of the -- on the left-hand side, the 2 pictures on the left are Piotr i Pawel stores, and they've been quite the same. They're really delicatessens and supermarkets. They really are supermarkets, and the ones that we mean to visit, the bulk of them are top class stores. On the right-hand side, the distribution center, it's operational in Poznan.

As Mark mentioned earlier, the Piotr i Pawel acquisition took place on the 1st of October, got a retail footprint of 66 supermarkets. Down at their peak, I think they had 130 or 140, and that was really the problem. They were putting their supermarkets everywhere that they could find them. There's a very nice distribution center in Poznan on dry goods and perishable goods. They were in business rescue. The terms of the acquisition is that we acquired 80% of the business for EUR 1. 20% will be purchased by a partner of ours in Poland for EUR 4 million. We're really operating and sending stock out to the stores and the like, and that's going really nicely and a market that's growing very well, 4% to 5% GDP growth, as you know, a market where 50% of the market is informal. Bear in mind, when we went into Switzerland -- or to Ireland first, we knew 100% of the market was formal, 0 informal market. Switzerland on a likewise basis. As far as Poland goes, 50% formal, 50% informal. Some 13,500 independent retailers, most who don't have a home. So the opportunity for us is really top class, and we're excited about going in there.

The funding arrangements, Mark talked about the EUR 40 million loan that we put in there. That's what it is. It's a loan which will be repaid over time, obviously, not in the short term. But in due course, that will be repaid. And we're busy finalizing just to operate EUR 20 million facility to drive the business ahead.

As far as SPAR Poland is concerned, unfortunately, we had a deal 2 years ago and -- went into due diligence, there were certain liabilities which were there from a tax point of view, we weren't given cover. So we walked away from it. Cut a long story short, we went back into Poland to try and acquire the license. And by that time, they weren't supplying into the stores, although their 250 stores wore the sign outside the door. They haven't had a case of delivery from SPAR Poland in the last 14 months. I'm happy to tell you that we went into a mediation process to try and put all those legal elements aside. We agreed terms, the lawyers should finally finalize it tomorrow. So -- and then we'll move forward quite strongly.

And as I say, we've identified 130 stores which constitutes some 80% of the -- what was the SPAR Poland turnover, to go into it. And the stores range in size, the small Express stores at 120 square meters and very nice EUROSPARs at 800 stores (sic) [square meters], and there are a couple over 1,000 square meters. Okay. That's a picture of a EUROSPAR in Poland. So really top class.

And just moving forward and probably the most important element of the whole lot is the prospects, and most important, we remain a South African business. Our core business is here. We're going to drive our retail business. As I've said, our drive on purpose, which I mentioned at the start, our drive on values, the signs we've taken off the Giannacopouloses, our store upgrade focus, because we believe that we need to upgrade stores every 5 years, and that's helped our retail growth. Our ongoing investments in distribution. And the ICC, I talked about earlier, the slow-moving goods, making that more efficient from our point of view, making sure the retailers get the better pricing on that basis as well. Our focus on fresh remains, especially in the home meal replacement, where 10 years ago, our average ratio there was 4%. That average ratio is now up at 10% and a massive difference with the change in lifestyles and the like. And then, as I mentioned before also, our focus on customer service, because that's where we believe we can make a massive difference, with our independent retailers driving their business supported by us. So very strongly and very positive prospects for the year ahead.

As far as Ireland goes, still opportunity to grow. They've been remarkable and surpassed our expectations. Let me remind you that 5 years ago when we entered there, their profit were in the region of EUR 8 million. That number is now EUR 35 million, a remarkable achievement over the period. And despite the Brexit uncertainty, and they're tired of talking about it and as I said earlier, no one knows what stance they want to take now, whether they want to vote for or against, and it's just a real mess. But the Irish, they'll bed down with the Brexit scenario and acquisitions, they'll bed down those as well.

As far as Switzerland talk is concerned, I talked about that earlier, we continue to drive the store upgrades. And if you went to visit the DC in Switzerland, you'd say, "My goodness, this is a top-class facility." And the retail stores now, those have been upgraded likewise, massive difference from what they had before. And obviously, that efficiency in distribution, we're concentrating on that, firstly, and retailer profitability, absolutely crucial.

And then Poland, I talked enough about that really previously. But obviously, the objective there is to stabilize the footprint, to finalize the Piotr i Pawel, which we -- 95% complete in terms of doing that. We should complete that in the next 6 weeks. Finalizing the mediation process, that should happen in a couple of weeks on the SPAR side. And then making sure that the distribution we have with the one warehouse in Poznan, we've really identified 3 different sites outside Warsaw to go into one of them in terms of the distribution in Poland. So we're pretty excited about the aggressive opportunity that exists on that front.

And so really, from my side, just to say, again, I was asked this morning do I see things improving. Well, obviously, after the World Cup win, I see things have improved like hell. So that's the main thing. Thank goodness the Poms never won the rugby as well as the cricket, because that would have been insufferable. But I'm positive, and certainly the sentiment is really positive. I was at the presidential investment summit last week, and it was really positive to hear the comments that came out. Last year, ZAR 300 billion, as some of you may have seen in the press, was committed to investment. Already ZAR 265 billion of that has been spent. In the current year, they're hoping for another ZAR 300 billion. In fact, ZAR 363 billion has been committed. That's really positive stuff for us. And that's -- we see ourselves well-poised here in South Africa to drive forward as well as Ireland, Switzerland, Sri Lanka and of course, Poland.

So thanks very much for your time.

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Questions and Answers

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [1]

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We'll open to questions first from the floor and then we'll take on the caller side. Anybody, if you just put your hand up and [Yann] will -- the mic is coming.

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Unidentified Analyst, [2]

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Mr. O'Connor, the notes to your commentary state that you acquired the 80% of the Pawel group on the 1st of October. However, the documentation shows that you had already lent 450-odd million prior to that date.

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [3]

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Yes.

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Unidentified Analyst, [4]

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Who is it that you lent the money to? (inaudible) on a very legal platform?

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [5]

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Do you want to deal with that, Mark?

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Mark Wayne Godfrey, The SPAR Group Ltd - Group Financial Director & Executive Director [6]

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We -- on the 1st of October, we acquired 80% in the Piotr i Pawel group of stores. Their holding company is Piotr i Pawel Grupa. We loaned the money to Piotr i Pawel Grupa on the basis of a loan agreement in terms of which they pledged their shares as security. Two days later, we took transfer of the shares. So on the 30th of September, it was an unrelated party secured by a pledge of shares.

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Unidentified Analyst, [7]

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Does that not suggest that you were at some risk until such time as the 80% purchase had gone through?

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Mark Wayne Godfrey, The SPAR Group Ltd - Group Financial Director & Executive Director [8]

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We were at risk. The only condition precedent outstanding on the purchase transaction was the South African Reserve Bank approval, and that had already been assured to us. It was formally granted to us on the 1st of October. So yes. We were at risk for 48 hours.

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Unidentified Analyst, [9]

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However, that's now past.

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Mark Wayne Godfrey, The SPAR Group Ltd - Group Financial Director & Executive Director [10]

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Correct, sir.

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Unidentified Analyst, [11]

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Does this therefore suggest that, that loan was in fact lent to yourselves for the 80%?

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Mark Wayne Godfrey, The SPAR Group Ltd - Group Financial Director & Executive Director [12]

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Well, subsequent to the 1st of October, it will be an intergroup loan, yes.

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Unidentified Analyst, [13]

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Okay. Now regarding the additional 20%, it states that that's to be acquired at a future date and paid for by minority partner. Has the minority partner been identified?

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [14]

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Yes.

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Unidentified Analyst, [15]

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And who gets that -- the purchase price for the remaining 20%? Does that now go into the Pawel group, meaning they're paying the SPAR Group South Africa?

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [16]

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I don't want to go through all the detail, but I will. I mean going back, there's a [crowd] Capital Partners who are a private equity business, who when we did the deal with SPAR Poland, they came and piggybacked that with a deal for Piotr i Pawel, all right? They are the 20% shareholders currently in Piotr i Pawel, and they will be paid out the EUR 4 million for their 20% stake.

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Unidentified Analyst, [17]

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Okay. And then finally, on that -- on the same topic -- a moment, please. In consideration of the 80% purchase, did the SPAR Group take on any liabilities?

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [18]

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Yes.

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Unidentified Analyst, [19]

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All the liabilities at the time?

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [20]

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Yes.

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Unidentified Analyst, [21]

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And those amount to?

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [22]

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And subject -- so what happened, for example, the banks, we took on some EUR 40 million of debt from the banks, and we negotiated them to pay them EUR 10 million, okay? So they took a 75% haircut, and we're in the throes of doing that with the other creditors now, and we've maneuvered ourselves as we control the voting that goes with it.

[Yann] up front, yes?

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Andrew Kenny, [23]

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Andrew Kenny, Institute of Race Relations. When you were showing us this slide here on prospects, your comment was we're a South African company with international interests, words to that effect. Looking at the pie chart, which shows the various contributions in volumes, and it shows what seems to be a faster rate of growth in outside South Africa operations. Can you see yourself moving towards a European company with South African interest instead of the way it's structured at the moment? Because if you look at consumers and spending ability, consumer spending in South Africa is just not growing at all, if not shrinking, whereas here, you're showing that it is improving, albeit at a slow rate.

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [24]

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Look, certainly, for the foreseeable future, we'll remain a South African company with international interest. That will remain our focus. But the opportunity for us to grow exists in the European market, which we like much more than the African market. I've been quoted -- well, I've made this statement before, about our move into Africa. And personally, and our Board and our executive committee share that view, that we'd much rather go into operations where we see opportunity and we know what we're dealing with. So we've tended to steer clear of the countries outside of the Southern African element. So we're obviously strong in Namibia. We're strong in Botswana, and we're strong in Swaziland. We're strong in Mozambique. We bailed out of Zimbabwe about 3 years ago. We're still in Zambia, but we're struggling there.

Anybody else? Okay. Can we go on to the -- yes.

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Unidentified Company Representative, [25]

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Listeners on the conference call, do you have any questions?

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Operator [26]

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We have a question from Paul Steegers of the Bank of America.

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Paul Henri Antoine Steegers, BofA Merrill Lynch, Research Division - Head of the EMEA General Retail Research and Director [27]

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Yes. It's Paul from Bank of America Merrill Lynch. Well done on the numbers. On Piotr i Pawel and the Polish operation, can you give us a sense of the strategy there and what the targets are for revenue and margin targets perhaps in the medium term? Because I'm just struggling in terms of what this means for growth and profitability for SPAR.

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [28]

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Yes. We don't have them here, but we can certainly share that with you in due course, Paul. And we'll do that. Mark and I are actually going just to put some final touches on what the plans are next week in Poland. And after that, we will come out to the market and just disclose all those numbers.

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Paul Henri Antoine Steegers, BofA Merrill Lynch, Research Division - Head of the EMEA General Retail Research and Director [29]

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Do you think Piotr i Pawel will be loss-making in the current financial year? Or do you think it will make some money?

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [30]

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It will be touch and go. I think that if we're lucky, we'll be slightly positive. If we're not, we'll be slightly negative. But we've certainly got some scale there, and we'll get to that sort of territory. But certainly not going to be massively profit-making in the first year and not massively profit -- or loss-making either.

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Paul Henri Antoine Steegers, BofA Merrill Lynch, Research Division - Head of the EMEA General Retail Research and Director [31]

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Okay. And maybe one follow-up question on inflation then for you guys. It's obviously picking up. Can you give us a sense of your run rate, internal price inflation and where you see your best guess for the current financial year, please?

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [32]

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Paul, as I said earlier, I mean we were surprised it had risen to 4% for the year, bearing in mind that it lurked around for 18 months, at the 1, 1.3 level. I think we can see it going probably to 5% and steadying out at that level going forward.

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Operator [33]

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(Operator Instructions)

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Unidentified Company Representative, [34]

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We have a few listeners on the webcast. Questions from Tyron Green at Granate.

Would you please provide some further color on the competitive environment in Switzerland? Number one. It appears that Lidl and Denner are opening further stores. Are Lidl and Denner currently operating in the same areas that SPAR are? Or are they entering into the area?

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [35]

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Lidl and Denner both operate where we operate. Lidl is coming through strongly, but we're getting a few Denner retailers who want to come and join us, which is a positive sign in terms of -- and bear in mind, we are in the convenience space in Switzerland. So the discounters don't impact us as much as the big players of Coop and Migros.

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Unidentified Company Representative, [36]

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Second question, what has been happening to the margins of the retailers that SPAR has been supplying to and the competitors?

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [37]

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Which territory?

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Unidentified Company Representative, [38]

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Switzerland.

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [39]

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The margins, obviously, increased. As I said earlier, we managed to get an extra 1% on their margins. That made a big difference to them. As well as sharing information with other retailers, where previously, they hadn't had that whole element of sharing. One of the big strengths we have here is sharing successful stories of retailers with other retailers, whether it's sales, whether it's gross profit, whether it's expense control, and all 3 of those have been done really well in Switzerland. Now that whole interaction with the retailers has improved enormously in Switzerland, so much so, as I said earlier, the biggest retailer that owed us money is now -- is not on our overdue list at all, and he's certainly leading the charge on the Guild over in Switzerland.

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Unidentified Company Representative, [40]

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Third question on Switzerland. Can you elaborate on what is meant by SPAR being approached by the opposition to join SPAR?

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [41]

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As I said earlier, I mean, PAM and Denner, they're both -- retailers from both of those have approached to change their stores to SPAR stores.

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Unidentified Company Representative, [42]

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Okay. We have a question from Jiten Bechoo at Avior. What guidance can you give on the Monteagle profit after tax contribution for next year?

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [43]

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Do we want to tell it? Sorry. I just had to ask the question, "Can I disclose it?" We obviously know what it is. So maybe what we should do in due course is to put something out as opposed to disclosing it here. All right. But we will do this.

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Unidentified Company Representative, [44]

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Question from Warren at Bateleur Capital. Speaking hypothetically, how do you see the Poland opportunity evolving? And what does the 3-year view look like if you are successful?

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [45]

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The 3-year view looks fantastic, okay? Yes, the opportunity is really just so great because the GDP there is 1.5x the size of South Africa. It's a growing market, 4% to 5% GDP growth on an annual basis. There are a lot of retailers there who need a home. We've got the SPAR retailers waiting for us to arrive so they can come and join the party as well. So a really positive outlook in 3 years and, in fact, longer than that, moving forward, 3, 5 and 10 years.

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Unidentified Company Representative, [46]

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Another question from Jiten. Please provide a little more color on the strong growth in revenue other as well as the other income lines.

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [47]

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I'll pass it on to our Financial Director and accounting person.

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Mark Wayne Godfrey, The SPAR Group Ltd - Group Financial Director & Executive Director [48]

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Jiten, the revenue other is, on the new classification, effectively, marketing income that isn't specifically rebate or volume-related. And secondly, there is franchise income in that line from the Irish and the Swiss organizations. So really, it's now how the marketing folks are negotiating in revenue. The other income is a catchall for anything that's really not marketing-related. The only fundamental aspect in there is some sub-rental of property that takes place in Ireland and it is [base]. So it's really just a composite of that.

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Unidentified Company Representative, [49]

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Question from Shamil Ismail at Primaresearch. What will the impact of the Giannacopoulos store closures be on the turnover and profit? Do SPAR have head leases on the site?

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [50]

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Well, we have head leases and options on all the stores, okay? But the divorce settlement that we're negotiating will cause some of that to go. We'll actually make some concessions on that front. So we don't see -- it may be a 2% impact on a turnover basis.

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Unidentified Company Representative, [51]

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We have no further questions on the webcast. Are there any other further questions on the conference call?

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Operator [52]

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Yes. We have a question from Jeanine Womersley from HSBC.

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Jeanine J. Womersley, HSBC, Research Division - Analyst, South African Retail [53]

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Mark, just a question, please, from our side. Am I correct that there's no IAS 19 adjustment on the pension fund liability in Switzerland this year?

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Mark Wayne Godfrey, The SPAR Group Ltd - Group Financial Director & Executive Director [54]

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Jeanine, unfortunately, there is. It's included in OpEx. We don't strip it out.

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Jeanine J. Womersley, HSBC, Research Division - Analyst, South African Retail [55]

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Could you disclose it, please?

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Mark Wayne Godfrey, The SPAR Group Ltd - Group Financial Director & Executive Director [56]

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It's an unusual disclosure request, but I'm sure I can let you have it.

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Jeanine J. Womersley, HSBC, Research Division - Analyst, South African Retail [57]

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I only ask because I think you disclosed it in every results previously.

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Mark Wayne Godfrey, The SPAR Group Ltd - Group Financial Director & Executive Director [58]

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It's in the statutory accounts, but I'll send you a note.

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Unidentified Company Representative, [59]

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Okay. We have no further questions.

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [60]

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Okay. So Mark just wants to say a few things.

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Mark Wayne Godfrey, The SPAR Group Ltd - Group Financial Director & Executive Director [61]

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So gentlemen and ladies, the one thing my organization prides itself on when it comes to reporting is the accuracy thereof. The SENS announcement that was released this morning, we have a very embarrassing correction that we need to make, and unfortunately, we cannot explain it. And the reason that we cannot explain it is because you can't add commentary on a SENS adjustment. The booklets that you have in your hands I'm hoping will become collector's items, because on Page 35, you will note that we updated the report or the commentary signed by the Chairman and the CEO as November 2018. Our sincerest apologies. Unfortunately, because that is a SENS document, the only way that we can correct it is withdraw this morning's SENS and reissue it with 2019 as the date. So please, if you do see the SPAR Group issuing a revised SENS, please, there's no need to panic. The numbers remain unchanged. All that we are correcting is the date. My apologies.

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Graham Owen O’Connor, The SPAR Group Ltd - Group CEO & Executive Director [62]

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Mark, thank you. Thank you, everybody, for attending. I think there are drinks and little snacks outside. Thank you very much.