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Edited Transcript of TRU.J earnings conference call or presentation 16-Aug-19 11:00am GMT

Full Year 2019 Truworths International Ltd Earnings Presentation

Cape Town Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Truworths International Ltd earnings conference call or presentation Friday, August 16, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Brian Pfaff

Truworths International Limited - CFO, COO & Executive Director

* Michael Samuel Mark

Truworths International Limited - CEO & Executive Director

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Conference Call Participants

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* Jeanine J. Womersley

HSBC, Research Division - Analyst, South African Retail

* Stephen J. Carrott

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

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Presentation

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Michael Samuel Mark, Truworths International Limited - CEO & Executive Director [1]

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Can everyone take a seat, please. First, I'd like to start. We are logging on to the webcast soon. Are you live on the webcast? We'll just wait a minute. Can we turn down the music?

Good afternoon, everybody, and welcome to our 2019 presentation. I'm going to get straight into it, and welcome to the webcast as well.

The period up until June, South Africa trading environment, difficult. I don't want to go into this in a lot of detail because I realized my audience knows this very well. South African economy contracted in the last quarter. There's significant unemployment problems, consumer spending is constrained. And we even have issues with lowered shipping in November and December and February and March this year. We monitor that. And it does make quite a big impact on the days where you have large shipping. Sometimes it can be from 4% to 6% or 7% sales loss.

In the U.K., we were lowered by Brexit. Very tough retail environment. The high street is under pressure. There is a massive decline in retail footfall. Nearly 1,000 stores affected with 27 retail failures just for 2019 alone, and the GDP contracted by 0.2% in quarter 2 of calendar '19 after a small growth in the previous quarter. And it's the lowest since the last quarter of 2012, which is in 7 years. And then there is unemployment rate is also not too good.

Our group numbers are overwhelmed, as you all know, by the Office impairment of GBP 97 million. I'm sure there are going to be lots of questions about that. But just as a quick summary, given our poorer 6 months January to June 2019, and given the situation that we see Office in at the moment, we took a view and we debated it with our auditors and our board that the business was looking like forecasts needed to be adjusted on the very conservative side, and that's why we got to the impairment of GBP 97 million. I'll talk about it later because there's lots of turnaround opportunities in Office, and we'll tell you what we do because we are hoping for an improvement in this financial year and in subsequent financial years. So the impairment value and forecast we hope is a very conservative one.

There was reasonable sales growth of 3.7% for the year in the group, especially the second half was encouraging and especially so in Truworths. The gross margin was down exclusively because Office's gross margin was down. And I'm not sure if I'll say it now, the Office gross margin is driven primarily -- and which it is the biggest problem top line and gross margin. The Office gross margin problem is driven by mix, primarily old stock. There's a lot of old stocking units that has been written down, but the trouble is when you sell it, it does substitute full-priced goods. Our expectation with Office is that round about October, because we've been working on cleaning out the old stock now for quite some time, we -- our expectation, and I don't say this as an assurance, it's just our plan and our expectation, is round about October, the gross margin should actually start to improve because by then, we believe we would have resolved some of the biggest problems that we've been dealing with over the last couple of months. In fact, even longer than that.

Should that happen, plus other initiatives, we feel more optimistic about Office in this coming financial year but conservatively so, and then the next 2 to 3 years thereafter. And because I know it's a hard -- it's a very big topic of conversation, and I was asked it in the room there, and I've been asked it in the -- by the press yesterday, we do have -- we don't have an issue with our bankers. That is going to be resolved. I'll talk about the data in a few minutes. When it comes to the problem of Office, it's really top line, but mainly gross margin and real estate because of the move to e-commerce from bricks and mortar and the fact that Office has unfortunately long leases, unlike Truworths, which never signs a 5 -- anything longer than a 5-year lease, Office has many legacy leases which are much longer than that.

In that context, our biggest challenge, of course, is to make sure the ranges are great, which should then clean out the old stock. That should fix the margin problem or at least make a difference. Top line, we think that should start to improve. But the long leases is a problem and the costs thereof. There are about 20 or so stores that are problematic or in that regard and another 4 or 5 concessions. The concessions have been dealt with very recently. Most of them, I think, there's 1 left that we've got a problem with.

When it comes to the bricks and mortar stores, only a couple will be dealt with in this financial year because of the leases. But in next financial year, in other words, up to '21, we should be able to deal with quite a large number of lossmaking real estate in Office, which, of course, is a major, major driver for us right now because the e-commerce side of Office is actually doing quite well. It grew by 10%, and it has been growing all along. The 33% sales to total is e-commerce. Just picture that. About 7 years ago, I think it was 4% now, it's 33%, with long leases. So it's all moving from bricks and mortar to e-commerce. You have an inevitable problem, and the long leases are not a good thing. So that has been the challenge. But we think we'll make really big inroads in the next 2 years. So that was a bit of a distraction, but I needed to bring that out upfront.

There has been a 6% growth in net asset value per share, but it excludes impairment. A lot of my presentation here shows with impairment and excluding the impairment for obvious reason. The balance sheet is strong. We generate a lot of cash, as we always do, as a group and, of course, as Truworths. The negotiation with the bankers are ongoing, but we expect them to be concluded satisfactorily. Just for interest, our borrowings was -- our borrowing facility is about GBP 42.5 million. At any point in time, we own net because we've got cash, so we own net. In fact, the last 2 weeks, I think, it's about GBP 10 million. At worst, it's about GBP 15 million. So a lot of the facility is not used or we've got cash to compensate.

So there isn't a major debt problem certainly in Office, that's why we are restructuring. Advisers have told us, other than realigning our arrangements with our banks, is not an enormous amount to do. And of course, the group has no cash flow problems. So the net debt of Office is not significant. At most, we think it's about GBP 20 million to GBP 25 million in peak times.

The group bought back 3.8 million shares at the cost of ZAR 266 million. Look, we buy back every year, so it's not an aggressive campaign. It's a planned, agreed strategy with our main Board. We agree the quantum each year. And depending on price and value, we take a view on it. And I expect that every year, that amount up to a couple of 100 million, we would probably buy back our shares, especially at the moment. But headline earnings were down by 7%, and again I am ignoring the impairment. And the dividend cover was maintained at 1.5x.

From an integrated reporting standard point of view, I think it's well-known that South African companies are absolutely renowned for their high quality of integrated reporting. In a recent study by Oxford University business school, South Africa was ranked first for quality of integrated reporting. Within that context, Truworths' integrated report of 2018 won the JSE Top 40 category in the index. And in 2018 report, we were rated 10th overall of the JSE top 100 companies in the EY Excellence Award. And just out of interest, over the last 12 years, we are the only company besides Sasol that's been in the top 10 every 1 of those years. So from a governance point of view, we pride ourselves with a relatively small team of ensuring we are completely transparent with our shareholders, and we follow the highest level of governance.

Again, ignoring -- or, let's say making our data comparable by excluding impairment, we met all of our targets. Obviously, with impairment, because it all comes off in the 1 financial year, we missed a lot of our targets. But if you ignore the one-off impairment charge, we met each and every one of the targets that we set. Again, from now on, I'm going to talk about comparable, in other words, excluding impairments. I'm not going to keep on referring to it. But our graphs, which are on the web and which will be available, as is this presentation, for you afterwards, all I refer to with the -- excluding and fully ignoring impairment.

The trading profit was down 10%. The diluted HEPS was down 7%. And cash generated was down 15%, but that's because we paid off debt. Net asset value per share was up 6%. If you look at the dividends and headline earnings since we bought Office in 2016, it has been declining consistently, which is not a good thing. The number is still a high number, but the decline is not pleasing and similarly with return on equity and return on capital. So obviously, the Office acquisition has made an enormous impact to our returns because, so far, it has proved to be a poor investment.

Looking at return on assets and asset turnover, on the other hand, the return on assets has been pretty okay at around 24%, 25%. The asset turnover is actually quite good at 1.2. The only one I want to highlight here is the impairment charge, where you can see the difference on the right there with the square, where if you ignore impairment -- impairment all comes of goodwill and intangible assets. Inventories are really well controlled, only 2% up. Trade and other receivables, 3% down. So the working capital is under a really good control. The capital expenditure is under good control. The assets and expenditure is under good control. But the performance of the 2 businesses, on the top line especially, is a challenge.

Capital management. Truworths has a net debt. At June '19, The Truworths chain of ZAR 245 million, and Office had GBP 23.5 million. So the group had ZAR 663 million worth of debt. And as I've said before, ZAR 266 million share buyback more or less, you could say offsets the debt that Truworths has. So for all intents and purposes, by June '20, there will be no debt in our group or no net debt in our group.

Final dividend. You know already, we kept the dividend consistent as we have over the last couple of years. The financial position remains very strong. We've bought back, over the years, 99 million shares, and we'll keep on buying back shares every year. It's an obvious thing to do. Trading space. In Truworths, there was about a 2% trading space growth. In Office, there was a small decline.

Looking at social media and online presence. There's been a strong growth in Facebook followers in the Truworths business. That's like an indication of the youth of your customer and the youthful customer interest in your business. We're very aggressive on -- and active on social media. As I say, Facebook, 20% growth; Instagram, which is the up-and-coming young person's current social media platform, grew by 50%. We're still quite small there. I think we've got 500,000 followers, but it's a major initiative with us.

When it comes to Facebook, we've got 4 million followers, and I think we are the highest of all the retailers in the country at the moment. Identity has a large number of followers, and that actually increased by 20% in Facebook. And what has been surprising to us, you could say, is our Office London, and when I say Office London, I'm talking about Office only in South Africa, so we call it Office London. We call the other one Office U.K. or Office. But Office London in South Africa has had a massive growth in Facebook and Instagram and actually surprisingly high given that they only got a couple of -- 15 or 14 stores. So we're active in e-commerce, and we think we do nicely there.

When it comes to Office itself, the U.K. business, as you know, it's part of our -- it's a biggest part of our opportunity. When we bought the business, that was one of the appeals of it. And that hasn't let us down. That's been fantastic. The problem has been the compensation. We loss in revenue on the bricks and mortar stores, which has been a major problem for us. It's now 34% of total sales. So as I said before, 2/3 of our sales are on the bricks and mortar, 1/3 in e-commerce. So you can imagine the challenges there.

Down the track, as we move out of the bricks and mortar stores to only profitable ones, and on the e-commerce and get our margin right. In all respects, Office has a really good chance for the next 2 to 3 years of turning around in a very positive way. There is a lot of focus, so we do invest a lot in click & collect and various other initiatives with the e-commerce platform in Office. The customer in our database now has 6 million customers. And we do a lot of things to improve the website, the speed of delivery, the 1 day deliver or chosen date delivery.

Group cash flow, very good. ZAR 306 million on -- towards the right there, the third last block, net cash before borrowings. It actually generated the group ZAR 2.7 billion of cash repaid, ZAR 1.7 billion of dividends, paid back some debt. And so the group cash position is very strong. And as a group, even with Office included, the cash realization rate is as high as it gets. It's 93%. And I think it's the second highest we've ever had.

We've adopted all the appropriate legislation, IFRS 9, IFRS 15, IFRS 16 leases are new standard from 2020. So obviously, that applies in all our accounts. And again, we've tried to modify this presentation to make it as comparable because it is complicated.

When it comes to Truworths, I will focus only on Truworths and then we'll move on to Office. Truworths' retail sales increased by 3%. It grew more in the second quarter, which was positive. I know some of the analysts have said, yes, it's a low base. That's true. The base is low. But in the country, the base is low. But nevertheless, the sales in the second half of that year were good, and we can tell that to you in a lot of ways, one of which is the rate of sale of the new merchandise. The gross margin is consistent at 55.5%. It's hardly changed over many years.

Trading expense is under great control. Profit, unfortunately, decreased by 3%, purely because of the top line. Continued strong cash generation, a very high cash realization rate of 97%. And what is starting to -- I've spoken about it in the last 12 months, on both occasions, 12 months ago and 6 months ago, the active account growth of 3% is starting to look really promising because as I said before, the book has -- is looking healthy in this tough time, and we will see the implications of that in a few minutes.

So that's a summary of our data. But essentially, profit before tax shrunk by 3%. If you exclude foreign exchange transactions, then profit before tax decreased by 1%. In other words, it was roughly square, unfortunately. We would have loved to be positive. For the first time in 4 or 5 years, we had a small unit growth of 1% in comparable stores, second from top right. This is across through June '17, simply because it's not really comparable. There was a whole thing about 53rd week, and when we did sale and all that kind of thing. So it didn't make that year really comparable. But if you look at the numbers, the 1%, it was the first time we've been in positive territory for quite some time in units.

And part of our strategy for the last 18 months really, and you can see there from 2018 winter and 2017 summer, has been not to change our DNA despite what anyone might think we should do. That's our view, and that's why we won't do it. We -- our DNA stays intact. Our strategy stays intact. We try as best we can to adopt and adapt to local -- to circumstances. But our strategy is to keep our DNA intact to improve our product quality and yet keep our prices lower than our competitors in terms of inflation growth as opposed to absolute value. And we've managed to do that all the way from 2017 summer, even through the summer we've just had. So our prices are not going up.

That is going to change, I'm afraid, because you've seen what's happened. They've gone low, so I don't think it's much impact between now and December because we bought the merchandise already. But as you start moving to February and March next year, inflation is going to go up. If the rand stays at this ZAR 15.10, ZAR 15.20, then you -- then inflation will go for the year to about 3% or 3.5%, 4% I suspect. It's hard to tell. But the second half will be 7% or 8%, I suppose.

We are -- our buyers are working on a lot of different things to try and mitigate that. But nevertheless, that is the challenge. Even then though, our goal is to, without compromising our DNA and without compromising our brands, to nevertheless have better prices, increased prices or lower increased prices than our competitors.

Across the board, there's nothing that stood out other than the Truworths Kids emporium had a fantastic period. It's now ZAR 1,100 million from a relatively small business just 4 years ago. All 3 brands interestingly have started to do well. LTD, which is the biggest one, has been doing well for ages, and that's been our primary brand. But the 2 acquisitions, Earthchild and Naartjie. Earthchild has been good all along, but it has up and down, but generally has been good. Naartjie battled a bitter truth. The last 6- to 9-month, Naartjie has been fantastic. So what's really nice for us is all 3 Kids brands are all doing really well. And as you can see, we grew 19%, and that will continue in the new year.

And although Truworths ladies, mens and Identity were muted, I think our plans are more positive for the coming -- for the year -- financial year we're in. We'll talk about the first 6 weeks in a minute. I've seen some in the reports.

Trading space, you'll really know the change was about 1.5%. When we do this trading space, one of the things about having a 5-year lease maximum strategy, and we've had it forever. So all of our leases are 5 years or less. Every -- in other words, on average, every 2.5 years, the leases change, is although we don't necessarily close so many stores because they are making profits, we wouldn't need to, the reconfiguration of the stores happens quite aggressively, moving Identity into the space, consolidating Uzzi or consolidating the kids brands. So there's a lot of work that gets done every time we renovate the stores. And of course, at the moment, the economy is such that real estate is in favor of the buyer, which -- or the retailers.

So the number of stores, there were 813. It is now 806. In your own time, you can look through the departments, which are in-store versus the stand-alone. On the very left, when it says stores there, at the top, it says 350 stand-alone Truworths stores. Those are stand-alone stores. There's 350 Truworths, 258 Identity and there are 806 stores.

When you look to the middle column, to the right of that one, departments within stores, that shows you, for example, take Uzzi, they've got 44 stand-alone stores, but they've got 247 departments within store, would be therefore included in the same stores Truworths. That's how to read that.

So we do a lot -- that middle column really indicates the flexibility we've got with real estate because we take those brands in and out depending on how well they do every time we sign a new lease or when we renew our lease. It gives us enormous amount of flexibility from a cost and a productivity point of view.

In the year, we opened 23 new stores and we closed 30. And so we will continue, I'm sure, to close some of the lossmaking stores. Rest of Africa, we closed 1 store in Zambia, so you almost have to ignore that number, the third column. The net result of our African [adventures] was a negative of 5%, including, of course, the closing of the 1 Zambian store. Africa wasn't too bad. Namibia was a problem. That shrunk by 10%. I'm sure it's due with the South African and Namibian linked economy. Botswana, 6%. The old Swaziland, Eswatini, 6%. And Mauritius grew by 10%. But as you really know, it's ZAR 463 million. It's very small in our lives.

Sales density, pretty static. There is inflation but not much inflation. So kind of a small growth on last year. As an absolute number, Identity is one of the highest in the industry, but that's the top line opportunity, to grow top line and, therefore, the density.

Gross profit. Over the years, as our rand value follows sales, but as you can see, our gross margin has hardly changed. In fact, it's gone up a little bit. Trading expenses, under really good control, only grew by 3%. Trade receivable cost actually declined by 6%. If you look at depreciation and amortization, just going through a little bit more detail, if you exclude noncomparable stores, depreciation was only 2% up. Improvement costs were only 4% up, and occupancy costs were about 2% up. Trading space increased only by 1.5%. So we've been very aggressive on the real estate rental renewal, and it's been quite successful.

Trade receivable costs. Gross debt did increase -- decreased by 4%. Recoveries increased by 6%. Debt sold decreased quite a lot. So the net bad debt did increase by 6%. But when you look at all factors combined within trade receivable cost, the actual growth is about 4% in trade receivable costs. Other operating costs increased by around 2% if you exclude foreign exchange gains and losses. So all in all, our expenses are under really good control. As I said before, the gross margin is fine. It's just about top line. And that, of course, is the challenge, but, of course, also the opportunity.

Operating margins, therefore, as a result of all of that have declined a little bit. These again are comparable numbers, excluding all the noncomparable issues, one of which is the new funding restructure. Besides all the other, let's say, complications this year, we decided to restructure the way we borrow money because we had a lot of cash and net by borrowings, so we restructured, so our numbers take account of that. But from a financial point of view, we've made an enormous amount of savings because we made -- it saved us a lot of money by restructuring the way we have done. The net result of all that is that our EBITDA margin is round about 30%, and our operating margin about 27%, still one of the highest I'd suspect in the world. But again, it's not increasing because we are betting on the top line.

Capital expenditure, slightly down on last year, actually, in store renovations side. We did some land and buildings to compensate because we bought and -- or renovated the Plein Street building just up the road, 75 Plein Street, for expansion purposes. But if you ignore that, CapEx was actually down. Part -- at least part of that is because our tail is -- hardly exists at the moment, our tail that we can impact on because we've renovated our stores very actively. There are some, but that's because there's lease issues, so lease negotiations underway. And then the other one is our big one. Fourways was delayed from March until the next year.

So next year, I think that the CapEx will go -- stay at this ZAR 410 million, ZAR 420 million figures, and that is ZAR 537 million, so that's -- what I forgot about is there's still more investment in land and buildings of the ZAR 150 million. The stores will go back to normal at ZAR 290 million to ZAR 300 million. And IT is going to be -- go up quite a lot in the current financial year.

Truworths' cash flow has been excellent. Borrowings were repaid, ZAR 300 million. So the net cash does hardly change, but the business generates a lot of cash, ZAR 2.7 billion, paid dividend of ZAR 1.7 billion. And that has been there for long and will continue. And you can see from the Truworths cash realization rate, it's almost 100% losses, 110%. So it's a very, very profitable cash flow business.

Office. I think you should read that quote. It means a lot to me, looking at it at this week's Sunday Times. I'm not going to read it other than 1 or 2 of the top sentence. That "Just about everything happening in Britain today seemed implausible just a few years ago ." Unfortunately, for us, of course, when it was implausible a few years ago was the time when we bought the business. So we've got our timing, let's say, unfortunately, very wrong. There was no or even a discussion about Brexit at that point in time. All the other things were in play but not Brexit and not recession. So times have changed. And as you know, it's very difficult in the U.K.

Retail sales for the Office business decreased by 1%. The second half retail sales actually grew a bit. Again, just so I can cut to the chase here, the issue with Office is actually not as complicated. It's what I said. It's top line growth, and it's getting out of real estate lossmaking stores. They are the main thing. So the e-commerce side is doing quite well. Offspring, which is a sort of brand owned by Office, but it's run separately, has been doing well for a few years. It's just small. It's -- but it's got -- so the potential is e-commerce, Offspring, which is doing well, and Lorenzo, the new CEO, is actually making big changes there. That's one of them.

So the -- if things can turn around in Office, if we can get that top line moving because the expenses are under great control. We've got complete control of the inventory now. We don't feel it is as good -- well controlled about 1 year ago and even 6 months ago as it is now. We've got really good control of the inventory. We think by December this year, our stock levels in Office will be what Truworths calls when it talks about stock levels, we call it what we call ideal. So we really have got on top of that. So all things are in play. It's just what I said, top line and real estate.

The debt, as I say to you, is, in our terms, not a significant issue. It is a problem for Office though because we run Office separately. It has to be and must be a stand-alone business. And it has to survive and prosper on its own. We don't want to be a long-term funding business for Office. So the Office management knows, and the Office Board knows, I'm one of them, that it is not going to be a unlimited funding from Truworths South Africa. It has to stand on its own 2 feet. And as a result of that, there's been a number of initiatives in Office, which I'll go through soon, which are dealt with as if Office is a stand-alone business, not that it's got a big mothership to fund it whenever it has problems. From a real estate point of view, most of the stuff happening in Office is in the United Kingdom. The German stores are small, and they're not that profitable. So it's -- this business is about the United Kingdom. Trading expenses in Office, only up 2%, and that's mainly because of occupancy costs again. So it always gets back to that.

Just going quickly through that depreciation and amortization has been -- we've kept CapEx low. So Office actually had a decrease of 14%. And as we close stores and close concessions and are more productive using Truworths methodology on how we hire and staff stores and head office, we've managed to decrease the employment costs by 5%.

Occupancy costs is the biggest one, and it's been a big increase, the 7%.

CapEx in Office was dramatically down as you'd expect from the year before. On store renovation, we spent GBP 800,000. That will be the case in this coming year as well. We'll spend a bit more, I think. We've got 1 or 2 things we are doing there or are the right things to do. But as you can see from our CapEx, our emphasis is on computer infrastructure. We do -- our focus is now to get the computer infrastructure working well, that is a little bit to do with merchandise, but a lot of it is e-commerce.

The debt restructure. We entered into a debt restructure negotiations with the lenders in June '19. We appointed A&M as -- and Deloitte as advisers on the matter to tell us how they think we should best restructure the loans. Remembering I said before when I started, GBP 42.5 million facilities, we -- at any point in time at the moment, we're using about GBP 10 million. We use more, but I mean, you got cash to compensate. So our net debt is about GBP 10 million, and maybe we'd go up to GBP 20 million. So the net debt is not anything significant. But for Office, it is significant, and it bothers us that it's in debt, and it's not doing well. So we approached the consultants to give us advice.

Unfortunately, this went wrong because there was a Sky News leak, we don't know from whom and why, which caused dramatically exaggerated claims to be made about our plans and intentions. And that has put us on the back foot, to be honest with you. But it's -- we've moved through that comfortably now, and I think we'll -- I'm hoping that soon, we and the banks will somehow come to terms on how we will structure going forward.

The business is solvent. It has no major liquidity problem, as I've shown you there. And we are really happy with the new management team with Lorenzo and his team. He's only been with us since end of last year, and there's a lot of initiatives that he is undertaking as a retailer would at base level that are quite impressive. In fact, when I go and visit there, which I do once a month, I always walk out of there, despite the numbers, feeling quite enthused to be honest. It is because there's so much going on. And I do say because I always get asked, I am arranging when we have the conference, which we go to in London in November, that those of the analyst that happened to be in London at the time can, on the Wednesday before the conference, come with us and meet the management who will talk about the business. That you can arrange with David. But if you take a 2- to 3-year view, we are actually quite positive about Office's prospects although the Brexit issue is a big worry and concern. I'll ask Lorenzo to give me a 1 sheet, 1 page to insert that he feels is the major strategic focus of the business. Knowing Lorenzo, he's given me 2. He doubled it. But this is one of the 2.

The first one is he's focusing on partnerships. It's his personal skill. He has a unique, positive way with people, which is making a massive difference to the morale in the business. The other thing is Lorenzo is really well-connected as is the business because our own team has always been well connected with the big brands. And I think there's been significant initiatives that will affect the merchandise coming in from about September, October from then on in terms of unique styles from the biggest brands, quantity of the modern styles range of view.

And then the [NTL] range, which is our own brand, where the margin is higher, which has been an absolute nightmare and is one of the biggest reasons why the last 6 months business was so bad because it did so badly, and the markdown was so high. There's a lot of initiatives that the Office team are undertaking with some new people involved, and Sarah and her team, and Doug, David and I are involved in, which I believe over the next 18 months, are going to make a big positive difference to the NTL . If that works, and that is the if, then things will change quicker than I hope.

Offspring, I've mentioned, it grew by 32%. It is a small base. But if ever you're in London on a Saturday, go to Selfridges, Offspring mens and Offspring ladies, and you'll get a pleasant surprise because it's probably one of the busiest sections of that store. Their shoes and sneakers are the most expensive at market, and that store really flies, but there's quite a few Offspring stores. And Lorenzo and his team are very positive about Offspring and see it as an opportunity to separate from Office and run separately. And the other opportunity is the Oxford Street biggest store has been renovated quite recently, and it's doing quite nicely. In fact, we're really pleased with it. It's a beautiful store. And if that carries on, there's going to be some more testing. We will, slowly, because of cash flow reasons and turnaround reasons, open new stores. In that way, we will perhaps renovate successful old stores.

Getting back to the credit environment, in the South African context, it has worsened because anything below 50 means it's worsening. Anything above 50 means it's improving. This is what's called the TransUnion Consumer Credit Index. 48, it started at 52. In other words, in quarter 2 '18, it was improving slightly. It got to 48, meaning it's getting worse. And 49, it is still getting worse, but not at as bad a rate. And it's kind of okay in other words.

We -- the strong demand for buying at Truworths is evidenced by our new account applications. Our volumes reached 2.8 million, which is the highest level of applications ever in Truworths' history in this last year, remembering that new accounts are a small proportion of total accounts. So the impact of new accounts on our total business, 70% is credit. But new accounts being so small, it takes a few years for it to falter through in the total number of accounts. So we'll talk about that in a minute. But still, it's a very, very positive sign having so many applications. The majority are under 30 years old, by the way. We have not, in any way, wavered on our credit granting criteria. In fact, we've made it more strict. But the quality of the book has actually improved. And for 2 years now, our new account growth has been in double digits. Lay-bys is going nicely, 1.5%, 2% of sales. Lay-bys are fine. And our omnichannel is going well.

If you look at us compared to the industry though, there's a thing called good and bad accounts, which is an industry norm. And we have industry reports. We all subscribe, all the retailers to the industry reports, and you'll see -- I'm just talking here about the health of the book. The good to bad ratio, which as I say is a standard -- in a way, it's a standard measure. The industry, as you can say -- see there is getting worse. It's deteriorating. And Truworths' book continues to actually improve.

And then looking at the bad accounts, the 4-plus cycle in arrear accounts, similarly there, the industry looks like it's getting worse, and these are our numbers from consultants that we will subscribe to, and the Truworths is continuing to improve. So what I'm saying is our book is in a very, very good state. And here, it shows you the new account applications. You can see there, it was the highest ever. Obviously, we're initiating that, but it's going really well. But you'll see from the approval, which is around 30%, it's actually a bit lower than normal, partly because of the nature of recruitment, but also partly because we've been very tough on our credit granting standards.

The difference between the 2, the higher one, which is 30%, and the 24% to 25% lower one, which is opened, are those customers that have applied. They've been granted credit, the 30%. But they actually only come in only 24%, 25%. 5% go through all the trouble, but they just don't come in. That has changed. As you can see, if you look back in time, since 2008, '09, '10, where the gap was quite low, most who applied came and opened. But after that act was implemented in 2015 when all the confusion happened in the industry, that gap widened. And only now in the last years, it's slowly starting to come together again. Because the issue was that, we would approve accounts under the legislation and then people were not allowed to open unless they brought all sorts of documents. That's gone away now. But nevertheless, it hasn't yet fully recovered. But again, it's improving.

The net result of all this is, nevertheless, we opened the highest number of new accounts we've ever opened in our business in this last year, and interestingly more than half are under 30 years. And just to get back to that aging thing, it's important to just look at this. I'm trying to show you how the pool of new accounts slowly influences the total pool of accounts.

If you look at 1 to 12 months on book, meaning they're new accounts, you can see there in June '17 we had a 24% reduction in new accounts. That is massive. And that was mainly, in fact, almost all due to the legislation. Then it went away. And the next year, we grew by 21%. And then this last year, 14%. So now then with ages, and you see from those areas how it flows through. That one of 24%, in the next year was still 24% negative and in June '19 was still 23% negative. That's how it works. What's nice though is then you get to 37 months plus, and that we call approval of total, which really means the economy. You tend to find after 3 years that the result is the average, which is 3%, 4% in bad times or one we've done in the past and 14% in good times.

So we feel next year, June '20, we're out of the bad part of bad year accounts and into good territory. And the big trick is can we keep on growing our new accounts so we don't have a dip in the future. So our strategy is therefore to keep this new account flowing.

Shoppable new accounts are slightly better than they have been last year, throughout the year. And our accounts statistics are -- nothing much has changed. The change in active accounts is up by 3%. Active accounts percentage of sales. Account sales as a percentage of total was 70%. Bear in mind, Truworths is about 75%. Identity is about 68% or something like that. So the net is 70%. We haven't changed any of our criteria. But the account opened to application has dropped to 25% to 22%, and I gave you the reasons earlier on.

I do think it's going to start changing that over the next year or 2. These statistics really are -- I'm not going to -- you can look at them in your own time. They essentially are saying that our book is in the same condition it was last year, which is that it's healthy, and we believe our book is as healthy as we would like it to be.

Last night, we saw a notice in the press that the President had signed the debt relief legislation signed into law. It still has to be drafted and circulated. Stakeholders can comment. It comes into effect whenever the President say so. I think most of you understand that the eligibility applies to customers who earn less than ZAR 7,500 a month, and they have unsecured debt of less than ZAR 50,000. And they have been found to be critically indebted by the National Credit Regulator. A lot of our customers certainly fall into the former part. The critically indebted part, I'm not sure of. But if you look -- if you think about it, in all likelihood, because it's a very big topic of conversation, in all likelihood, much of it would already have been written off or at least largely provided for.

In addition, we knew about the pending legislation, so our doubtful debt allowance and the IFRS 9 does include a small provision for debt relief in case it came in, and now it has. Studies are being undertaken about what the implications are long term. And our National Clothing Retail Federation has been looking at this very actively with the hope of all the retailers and all its members of the last year, and it's considering with its advisers what it will do as a result if this legislation when it finally gets implemented.

So in summary. Strategic focus. Truworths leadership and succession, of course, critical. New store concepts, which we visited for merchandise and supply chain in order to keep our DNA intact, but at good prices. And digital has got to be a key focus for any retailer in the world today. Office turnaround strategy. Customer engagement from loyalty grow the e-commerce. I haven't got it here, but grow the Offspring. And then the supply chain has to be looked at carefully, and they do a lot of work there.

Group Board, in Truworths Board, we are committed to transformation with our medium-term target of 30% female representation. We're proud to announce that Cindy Hess has joined our Board as an independent nonexec on the 1 May. And we were really proud to announce that Sarah Proudfoot, who's sitting in the audience, was appointed Executive Director of the main Board on the 23rd of May. She's been with the company for 21 years. And she's been focused primarily on merchandise, but in many, many other aspects of the business. So we're very happy to have her on the Board. Following these appointments, female representation is now 31%.

We also made further moves on the strategic focus regarding leadership and succession. We appointed 4 new divisional directors, all of whom are here in the audience. Cathy Kirkman, Myles Apsey, Peter Shackleton and Zamira Mowzer. All of them have been with us for a number of years. They are critical parts and have been and still are and will in the future be even more critical part of this business's growth in the future.

We opened a new store concept called Context. The first one is at the Waterfront. It's a really interesting mix of merchandise. That particular store has done fantastically since its opened, growing by 30%, 40%, 50%. We are planning to open more. The one in the Waterfront, you can go look at. But the Fourways in Johannesburg is opening in '19 -- August '19. Brooklyn, Pretoria, Loch Logan and Sandton are going to follow. So that concept looks great. There's some pictures of it. It's a mixture of sophisticated designed clothing -- ladies clothing, and then there are cosmetics and some Loads of Living and homeware.

Then ID kids. ID is a great success in our lives, as you know. We have experimented with and piloted ID Kids now. And it will be rolled out to more stores. We have to refine the range, get bigger at it. You see how good our kids business is. We do ZAR 1 billion and more sales. ID Kids hasn't even -- ID has not even touched kids before, so we see that as a big opportunity over the next few years.

Our Office is doing great. Our Office stores, we do well over ZAR 100 million sales already, which our plan next year is from a tiny business, it's really good. I'm talking about Office London in South Africa. But we've decided to launch even a new concept, more upgraded, more sophisticated, more on modern trend, more digital. And that's in the Fourways Store. Although the Fourways store is opening in August, that one is actually only opening in February next year, the Office London superstore.

And then we've changed our emporium concept. And there's 4 or 5 up and running. Looking great. And then we've introduced the Loads of Living redesign array, and that's also looking exciting. And we have a new redesigned Identity concept and a redesigned YDE. So actually, we've redesigned all of our -- and upgraded all of our concepts.

There's lots of projects underway in Truworths. I'm not going to go through all of them. But some of the big ones are PLM, product life stage -- lifecycle management, meaning it manages the product from conceptualization stage all the way through to the time you place the order and it's integrated with suppliers internationally. And we've consolidated our fabric purchasing across all the departments, which deals with price.

Our merchandise management systems have been upgraded. Supply strategy has been upgraded. And we are developed -- we are advanced now in our development of our new distribution center over the next 3 years, which will enable us to much more park allocation. I'm not going to talk about digital because it's obvious.

Office turnaround strategy. We have -- I've told you about the opportunities before, but now when it comes to dealing with the turnaround, we call it the short-term crisis. What we're dealing with is there's a trading alignment process between Truworths run by Doug there and the Office team, is what we call short-term essentials, meaning prioritization of spending CapEx and expenses, only what's important. David runs that. And then marketing and brand alignment and product alignment. That is an alignment that Sarah Proudfoot runs with the Office team.

We are prioritizing closing of poor performing stores. We've, as I said, closed 3 of the 4 problematical concessions, and we hope to close lossmaking stores, probably about 10 to 15 over the next 2 years or so. Not many in this current year, but the following year. They are the lossmaking ones where the leases come up. There are about 135 stores, so I suppose we'll end up with 110 or so before we start getting going again.

So Office strategy, back to basics, focus on turnaround, even getting -- ensuring the people in this business are motivated, and then eventually grow the business but focus on the short term, on digital, on Offspring, on improving assortments and on improving supply chain. I'm going to skip through that.

Outlook. 1% growth for the first 6 weeks. That's still disappointing if you look at it from a superficial level. Bearing in mind though that we have spent much less on markdown in the first 6 weeks, and as always, for the analysts, the first 6 weeks you have to be careful about. The better question to ask is how are the new goods of the new season selling compared to last year? And in our case this year, it's better than last year, and we're pleasantly surprised, better even than we expected. That's more important than the 1%. So it started off the year well. I can't tell you we're going to have a good 6 months. I don't know. But it started well, and that's a nice sign.

Office, similarly very different. The new goods are selling okay. Average, same as last time. The growth has been 3% but -- for the first 6 weeks, but it's sale time, so you can't tell. And we've been aggressively on markdown. And that's why the margins are lower. So again, I'm optimistic more with Office round about September, October, November, and that's a big time for them with Black Friday coming in. And in Truworths, I'm hoping we can have a nice season this summer and even a better one next winter.

Thank you very much, everybody. I'll take questions now. I'm sorry it has taken so long, but there was a lot to talk about. And I will also take questions from the webcast. Thank you.

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Questions and Answers

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Stephen J. Carrott, JP Morgan Chase & Co, Research Division - South African Retail Analyst [1]

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It's Stephen from JPMorgan. The debt restructuring or your discussions with your bankers at Office, I don't actually understand what those are about. Is it -- are you trying to have the debt repay back period pushed out? I mean what -- exactly what is the problem with respect to that debt and why you need to have a -- why you need to have a discussion with your bankers? Is it the rate on the coupon? Or is it really the maturity profile? What is the precise problem there?

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Michael Samuel Mark, Truworths International Limited - CEO & Executive Director [2]

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David, do you want to answer that? I mean do you have a spare microphone? Or can we take that one back?

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David Brian Pfaff, Truworths International Limited - CFO, COO & Executive Director [3]

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Thank you. Yes. So we are trying to restructure the debt to suit us more in terms of our payment terms as well as in terms of the interest rates we get charged by the debt holders. So we're trying to renegotiate it in our favor in terms of where we are at the moment.

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Stephen J. Carrott, JP Morgan Chase & Co, Research Division - South African Retail Analyst [4]

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So both the interest rates and maturities were [apart]?

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David Brian Pfaff, Truworths International Limited - CFO, COO & Executive Director [5]

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No. We're looking at everything in terms of where are we going through this negotiation with them. Absolutely.

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Michael Samuel Mark, Truworths International Limited - CEO & Executive Director [6]

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And remembering, the issue was the bullet payment in December 2020, where I think it was GBP 30 million. Admittedly, we've got cash, and things have actually changed since we started the discussions with the banks for the better because our cash flow has been so good. But we took a view that let's start planning along ahead of time. Next year, it's GBP 30 million. We thought we would be able to extend that and change it by, maybe, some of it before then and the rest after. But then as I said, we had the leak. The discussions would have been -- the discussions with bankers that I'm sure we would have come to terms as we are. But the problem was the leak created across us, and the leak, therefore, the press releases started to make some of the bankers nervous, started to make some of the suppliers nervous. That's why we came in the back foot. But our intentions actually were just really to renegotiate the terms of our bullet payment and our terms of our loans. So unfortunately, it didn't -- the process didn't go the way we would've expected. But the debt situation is what I've just described. Other questions?

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Unidentified Analyst, [7]

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It's [Brian Thomas] from [Lorium]. You made a comment around inflation in Truworths South Africa into the second half of the year. I think you said a 7%-ish but then said that you wanted to raise prices less than the competitors. Do I read into that, that you're going to reduce margin? Or how are you going to achieve the inflation coming through and raising prices less than the competitors? Maybe I misunderstood you.

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Michael Samuel Mark, Truworths International Limited - CEO & Executive Director [8]

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Yes. I hear what you're saying. But actually, my assumption is that they'll raise the prices by more than I'm forced to. So I'm saying if the rand is ZAR 15.10, everybody is going to raise their prices. Our goal is not to be negatively [quaint] all the time. We wanted to, but we will be 3%, 4% average for the year up, I assume, if the rand carries on like this. But our intention and justification given -- or the strategies we've adopted the last 3 years is that our competitors will themselves put up their prices by more. We, as I always told you, much to the displeasure of many of the analysts, we will not drop down margin. There is no sense to us in doing so. It doesn't work. So our strategy is not to lower our prices through margin growth. It's to be cleverer about how we buy. And we have been successful at that, the last 3 or 4 years. Are you okay with that? You -- good.

There is a question I'll try and answer. Just by the way, I said it the last time to the webcast. It's very difficult to answer all the questions that we get on the webcast. So anybody in the room, but also on the webcast, if you've got questions that I don't address, you're very welcome to send e-mails to David and, of course, see him because we always do see the shareholders and analysts, and then we will respond as well if we don't address all.

But this one is a question what do you estimate is the impact of IFRS 16 on your earnings per share? Do you want to answer that? So do you want to take the microphone again? Michelle, focus on the matter at hand.

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David Brian Pfaff, Truworths International Limited - CFO, COO & Executive Director [9]

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So IFRS 16 is the new accounting standard on leases, which will have a dramatic change on our balance sheet in terms of raising assets and the liability and will also change from having rentals through your income statement to having interest and depreciation. So we'll have quite material effects in terms of the constitution or the construction of the existing balance sheet. In terms of the profit figures, we're still finalizing our models in terms of this year, so it's too early for us to give you an indication of that.

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Jeanine J. Womersley, HSBC, Research Division - Analyst, South African Retail [10]

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Jeanine from HSBC. Michael, you've always spoken publicly about 3% GDP growth as being somewhat of a threshold for Truworths. And presumably, that looks like a stretch in the current environment in which we find ourselves. At the same time, you've also been particularly proactive on containing cost over the last 3 years. And I presume, there's not much fact, if any. So given all of that, what can you do to stop earnings continuing to decline? Or should we assume that this is just the new reality of the environment in which we find ourselves?

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Michael Samuel Mark, Truworths International Limited - CEO & Executive Director [11]

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Yes. That's an excellent question because that's our biggest dilemma. And it almost goes to the same question just now, do we drop our margin to make our sales grow? But you see, there's no evidence we would do this. I mean of course, we just want to make more profits and we want our sales and profits to grow. Everyone does. But if we thought it would work, we would adopt that strategy. Cost containment is more to do with productivity improvement than cost containment in a normal sense. Because we try and look after the business well. We've renovated all our stores, for example. But it's all about productivity improvement and getting better each year at what you do. So I think that can continue.

We were hoping that the e-commerce and the lay-bys would add a bit to the top line, and they probably did, but the net result wasn't good enough. And then, of course, you see all the things we're busy trying to do. So it's not like we're putting up a hand and say, well, we don't know what to do. We just expect things to keep on declining. In fact, our budgets next year are positive. We are trying to improve our profits and start to turn it around. And if we achieve our budgets, we will. And our budgets, supposedly, are conservative, interestingly enough. Because when we look at the budget, it's sales we put in and all the cost that we are likely to do because we're good at that, and I'm leading at the Office now because this -- that's more difficult. And our gross margin which we know is pretty kind of consistent. If we manage to do the sales plan, which is not too hard to achieve, we should improve the profits next year. And if we get our merchandise sales plan, which is more optimistic than our budget to the expense orientated sales plan, our sale -- our profits will be pretty good. So it's all about, can we get that top line going? And in the store, I think, as I always say, I think it's about merchandise. Environmentally, I agree with you, there's no chance of 3% growth in this economy over the next couple of years. So we can't depend on that, and we can't just put up our hands and say, well, there's nothing to do and it's going to keep on declining. Of course not.

So our expectation every year are constantly different from last year, and the truth is I would've said the same last year. But the goods have started to sell really nicely this summer, and I'm hoping that this year, our sales growth is much better. And if that is the case, then our profit growth will come right back again. And what we do is the new account growth. I mean that's -- we're driving it through credit. Because the cash sales are, in this economy, are really a hard thing to do. We're trying all the things we can think of, but really we're driving it through credit.

There is a question here that -- oh God. This thing has run off. Let me see if I can get it back. I did get it back. Okay. So there's a question is a person from across -- "Can you elaborate on the implication of your business." I think I've answered that question. It's about this legislation.

There's another one. This one, I almost -- it's a very good question, but I don't think I can answer it or we have the ability to. It says "Why did occupancy costs at Office increase to -- by 7%? It seems out of line with inflation in the space growth" But -- I'm going to try and answer this because it's a good question. Why did Office grow up where there's not any in space growth? Unfortunately, that's part of that process in the real estate in the U.K. David and I, together with our Board of Directors on Office, sign every single lease renewal. And unfortunately, the way it works is every time you get to a lease renewal period, it can go in terms of how the contracts are designed. It can go nowhere but up. There's no room for it to go down. It just doesn't. It only goes up. So your only ammunition is to say I'm allowed now to close the store, and then you close it if you want to. But at the moment, most of the leases are ones that are on renewal periods, where we don't have the right to close, and they only can go up. They can't go down even in an environment, say, that particular store in its particular environment and market rate is 20% lower than the rental we're paying. For whatever reason, and David, if you want to clarify, it can only go up, which is very frustrating, if you can just imagine to ask that question. David, do you want to...

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David Brian Pfaff, Truworths International Limited - CFO, COO & Executive Director [12]

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Sure. Just to add, obviously Mike was absolutely right. But also there's -- in financial accounting things, you have to provide for owners is leases, where leases that are making losses you have to provide for. So a reasonable portion of that increase was an increase in owners lease provision.

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Michael Samuel Mark, Truworths International Limited - CEO & Executive Director [13]

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Okay. And then the next question here that I will go through is "What proportion of our debt of book consumers earn less than ZAR 7,500 per month? And what is a typical [open to buyers] in percentage of salary?"

Look, we don't disclose that. I mean that's strategic. I wouldn't like my competitors, some of whom will be listening to this now, to know those kind of things. Obviously, though ZAR 7,500 is not a lot of money, and it's a smaller proportion of our book. And as I said before, the impact on us is likely not to be significant in the short term because we will have provided and written off, I'm sure, a lot of the distressed book.

The problem is more the psychology of what happens in the country when there's a perception that at some point, you won't have to pay back the money. Yes, I think that's the sort of concern philosophically, we, as retailers, all have. Because it is quite a thing to say every couple of years that your debt is now relieved. So -- and also, the bureaucratic process on how that bureaucratic person decides whether or not that person is entitled to debt relief bothers us.

So our objection is not so much to the fear of how much we're going to write off, but more to do with the philosophy of the principle of how does that work in a free enterprise economy where people are meant to be responsible for their own decisions. So that is our debate.

There's another question here. Can you -- all right, you first.

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Unidentified Analyst, [14]

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[Niku McDonald, HJK]. I just want to ask. Your company is very cash generative and you got -- on a group level, you don't have a lot of debt. Looking at where you started buying back shares and where your share price is currently, don't you think it's now an opportunity to be a bit more aggressive on the share buyback side to get more value for your buck, so to speak?

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Michael Samuel Mark, Truworths International Limited - CEO & Executive Director [15]

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It's -- again, so yesterday, we had our Board meeting, and that was a very important topic of debate, why don't we just aggressively buy back shares at the ZAR 55, ZAR 56? That's -- we've been close to consider how much we're entitled we should buy. We, as a management team, as you've seen in the past, always buy back shares, but we've tended to do it on a steady annual basis instead of a dramatic one. So we are contemplating that, and we'll make our mind up shortly. We've been given parameters in which to work and quantums. We think there's plenty of room there. And so we, David and I and the team, Sarah, Doug and the management team, are looking at that. It could well be an opportunity.

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Jeanine J. Womersley, HSBC, Research Division - Analyst, South African Retail [16]

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Just thinking about your scorecard, would you potentially take a blanket approach to all new credit applicants from here that you wouldn't lend to them if they fit the criteria in the new?

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Michael Samuel Mark, Truworths International Limited - CEO & Executive Director [17]

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You see, the thing is, the way it works, you shouldn't lend to them in the first place, so you'd never take a blanket approach. If you earn ZAR 7,500 or less, you can't have credit. No, we would never do that. That is a form of -- it would be foolhardy because I can assure you, plenty of them are great account customers, so we would never do that. And also, we're very cautious upfront. We are known to be the most cautious. So we give the least amount of credit to a new account in that way. And also by law, you have to. Affordability legislation is very tough in South Africa. So you can't give a poor person more credit than they can afford to repay.

So our system is really -- must decide on risk and the quantum we can give. And of course, as you get poorer and earn less, so the creditworthiness will decline, and your score will get worse, and you won't get it. But we wouldn't suddenly take a blanket approach. That's not how we work. Our scorecard will sort of drive it.

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Jeanine J. Womersley, HSBC, Research Division - Analyst, South African Retail [18]

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I guess the challenge here, and you mentioned it or to your point earlier, is that this could potentially encourage psychological shift in behavior.

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Michael Samuel Mark, Truworths International Limited - CEO & Executive Director [19]

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It could. That's exactly -- I can't answer that because it's exactly the point. The only thing I can tell you is because of the long-established processes and systems we've got, we have something like 55 scorecards. Those scorecards with tons of champion and challenger strategies going on all the time, would, in all likelihood, pick up a change in sentiment and behavior very quickly. And because we got champion and challenger tests running all the time, our scorecards would drive behavior of our reaction quite quickly because that's historically what's happened. So if that -- I don't think in any way it's going to be a sudden event that everybody's going to suddenly not pay. I'm sure that's not the case. It's just a trend that will -- could change. And if that does, in all likelihood, our scorecards will pick it up and deal with it.

Any other questions? Okay. It seems like no more questions. I dealt with those few that we'd had there. If there are any more, please don't hesitate. Thank you for talking to and being with us and joining us. My management team are all around the room if you want to talk to us on your own pleasure. Thank you very much.