interim results presentation - massmart · interim results presentation for the 26 weeks ended june...

Interim ResultsPresentation

FOR THE 26 WEEKS ENDED JUNE 2019

01FINANCIAL

REVIEW02

OPERATIONAL REVIEW

03ADDITIONAL

INFORMATION

01Financial

review

Income StatementJune 2019 like-on-like

• Depreciation increased due to right-of-use (ROU) assets

• Occupancy costs decreased

• Finance costs increased due to the recognition of the lease liability

• Taxation – temporary differences relate to IFRS 16

Condensed Consolidated Income Statement26 WEEKS JUNE 2019 IFRS 16

26 WEEKS JUNE 2019

26 WEEKS JUNE 2018 ADJUSTED

Rm (REVIEWED) ADJUSTMENT (ADJUSTED) (REVIEWED) % CHANGE

Revenue 43,909.4 - 43,909.4 41,688.4 5.3

Sales 43,832.4 - 43,832.4 41,558.4 5.5

Cost of sales (35,403.5) - (35,403.5) (33,416.3) (5.9)

Gross profit 8,428.9 - 8,428.9 8,142.1 3.5

Other income 76.6 - 76.6 127.9 (40.1)

Depreciation and amortisation (1,548.4) 890.5 (657.9) (546.7) (20.3)

Employment costs (3,967.4) - (3,967.4) (3,653.8) (8.6)

Occupancy costs (644.6) (1,210.8) (1,855.4) (1,706.6) (8.7)

Other operating costs (2,026.2) - (2,026.2) (1,698.5) (19.3)Trading profit before interest and taxation 318.9 (320.3) (1.4) 664.4 (100.2)

Restructuring costs - - - (110.3) 100.0

Impairment of assets (46.9) - (46.9) (8.5) (451.8)

Insurance proceeds on items in PP&E 0.4 - 0.4 2.1 (81.0)

Operating profit/(loss) before foreign exchange movements and interest 272.4 (320.3) (47.9) 547.7 (108.7)

Foreign exchange loss (157.1) 75.2 (81.9) 23.4 (450.0)

Operating profit/(loss) before interest 115.3 (245.1) (129.8) 571.1 (122.7)

- Finance costs (921.9) 556.5 (365.4) (310.5) (17.7)

- Finance income 12.3 - 12.3 10.8 13.9

Net finance costs (909.6) 556.5 (353.1) (299.7) (17.8)

(Loss)/Profit before taxation (794.3) 311.4 (482.9) 271.4 (278.0)

Taxation (38.1) (64.8) (102.9) (81.4) (26.4)

(Loss)/Profit for the period (832.4) 246.6 (585.8) 190.0 (408.3)

(Loss)/Profit attributable to:

- Owners of the parent (836.1) 246.6 (589.5) 195.7 (401.2)

- Non-controlling interests 3.7 - 3.7 (5.7) 164.9

(Loss)/Profit for the period (832.4) 246.6 (585.8) 190.0 (408.3)

26 WEEKS JUNE 2019

26 WEEKS JUNE 2018

(ADJUSTED) (REVIEWED)

43,909.4 41,688.4

43,832.4 41,558.4

(35,403.5) (33,416.3)

8,428.9 8,142.1

76.6 127.9

(657.9) (546.7)

(3,967.4) (3,653.8)

(1,855.4) (1,706.6)

(2,026.2) (1,698.5)

(1.4) 664.4

- (110.3)

(46.9) (8.5)

0.4 2.1

(47.9) 547.7

(81.9) 23.4

(129.8) 571.1

(365.4) (310.5)

12.3 10.8

(353.1) (299.7)

(482.9) 271.4

(102.9) (81.4)

(585.8) 190.0

(589.5) 195.7

3.7 (5.7)

(585.8) 190.0

• ROU assets recognised due to IFRS 16 adoption entry

• Lease liability raised on a present value basis of future lease commitments

• Other non-current liabilities and provisions decreased to remove the full operating lease smoothing liability which is allocated against the ROU asset

Balance Sheet impactCondensed Consolidated Statement of Financial Position

DECEMBER 2018 IFRS 16 2019 JUNE 2019

Rm (AUDITED)AT ADOPTIONADJUSTMENT

OPENING BALANCE (ADJUSTED) (REVIEWED)

ASSETS

Non-current assets 14,165.8 8,530.0 22,695.8 22,086.7

Property, plant and equipment 9,109.5 - 9,109.5 8,820.5

Right-of-use asset 537.7 8,530.0 9,067.7 8,571.6

Goodwill and other intangible assets 3,656.3 - 3,656.3 3,745.8

Investments and other financial assets 119.2 - 119.2 143.6

Deferred taxation 743.1 - 743.1 805.2

Current assets 20,605.2 (118.1) 20,487.1 17,353.9

Non-current assets classified as held for sale 11.6 - 11.6 166.7

Total assets 34,782.6 8,411.9 43,194.5 39,607.3

EQUITY AND LIABILITIES

Total equity 6,528.6 (227.1) 6,301.5 5,280.3

Non-current liabilities 3,694.5 8,784.3 12,478.8 11,502.5

Interest-bearing borrowings 1,606.0 - 1,606.0 2,267.6

Lease liability 648.1 10,060.6 10,708.7 9,056.6

Deferred taxation 76.7 - 76.7 86.5

Other non-current liabilities and provisions 1,363.7 (1,276.3) 87.4 91.8

Current liabilities 24,559.5 (145.3) 24,414.2 22,814.5

Total equity and liabilities 34,782.6 8,411.9 43,194.5 39,607.3

Like-on-like basis excluding IFRS 16 impact in both periods

Sales

R43.8bn2018: R41.6 billion

Gross profit margin

19.2%2018: 19.6%

Trading loss before interest and tax

(excl restructure costs)

-R1.4m2018: R664.4 million profit

Headline loss(excl restructure costs)

-R550.0m2018: R283.5 million earnings

Like-on-likeFinancial summary

26-week basis

Our poor performance in summary

Weaker sales growth:

• Continued consumer pressure:• GDP -3.2% Q1• Unemployment 29%

• Low food inflation• 2nd quarter slow-down, despite

Easter

Margin pressure (down 36bps*, approx. R160m)

• Greater participation of lower-margin Food & Liquor sales

• Increased customer-led promotional sales mix

• Slower than expected recovery in our margin-management in Game and Masscash

Expenses (up 110bps*, approx. R900m)

• People, property & depreciation within expectations (75% of total) apart from employee insourcing

• Some pressure from 3.1% new space• Other expenses higher than

expected: security, generators’ diesel and maintenance, bad debts, credit card usage, new store pre-opening costs, IT support costs

* As a percentage of sales


26-week like-on-like basis excluding IFRS 16 impact in both periods

SA Sales

91.1%h 4.9%

Ex-SA Sales

8.9%h 11.8% h 6.4%

Food & Liquor

56%h 7.9%

Durables

44%h 1.3%

Group Durables sales h 2.7%Group Food &

Liquor sales h 8.2%Total Group: R43.8 bn

ConstantCurrency

Durables

48%h 8.8%

Food & Liquor

52%h 14.6%

Sales by geography and categoryContinued tough trading environment

• Lower sales participation of higher-margin Durable Goods products

• Increased lower-margin promotional sales participation

• Weak margin management in Game and Masscash

• Stock aging in Game

Gross profit margin

Jun 18

19.6%R8.1 billion

Jun 19

19.2%R8.4 billion

Depreciation

h20.3%h 15.4% COMPARABLE

• Re-assessment of useful lives (IFRS) in 2018. Excluding this increase is 9.3%

• Completion of SAP Hybris in Makro

• Net 16 stores opened since June ’18 with space growth of 3.1%

Employment costs


• 46,500 FTEs (8% growth) due to in-sourced temporary contractors to permanent staff: increase to benefits costs

• Impact of new stores

Occupancy costs


• Net 3.1% trading space increase since June ‘18

• Pressure from increased municipal & electricity tariffs including costs of generators (load-shedding)

Other operating expenses


• Increased credit card expenses and security costs (weak economy) R50m

• IT system implementations in change management mode: costs expensed no longer capitalisedR50m

• Pre-opening expenses R53.5m (2018: R18.6m): 7 new stores opened (June 2018: 5 new stores)

Cost pressuresTotal expenses grew at 11.8%, comparable expenses at 9.2%


• Currency weaknesses in Zambia & Nigeria

• Increased average levels of borrowing

• Impairment of deferred tax assets and limited recognition of further deferred tax assets

Forex, interest and tax

Rm JUN 2019 JUN 2018 MOVEMENT

Foreign exchange loss/(gain) 81.9 (23.4) 105.3

Net finance costs 353.1 299.7 53.4

Tax expense 102.9 81.4 21.5


• Product inflation of 0.8%• Good Food growth in Game (9%):

contributes 20% of total sales• Ex-SA sales grew 5.8% in Rands

and was relatively flat in constant currencies

• Game SA sales up 3.5% and customer count up 5.5%

• Product inflation of 2.9%• Good sales growth in Liquor

(11.9%)• Durable sales impacted by

deflation• New Makro store opened in

Cornubia in March ‘19

• Product inflation of 2.8%• Slow sales growth in SA stores:

negative construction growth in 3 consecutive quarters

• Good ex-SA growth of 25.5%,and 19.2% in constant currencies (new stores)

• Product inflation of 3.6%• Good Wholesale sales growth

13.3%, benefitted from inflation• Retail sales growth 2.9% in very

competitive environment• Good ex-SA growth 14.6% and

10.4% in constant currencies

R9.4bn2018: R9.1bn

R13.4bn2018: R12.9bn

R6.7bn2018: R6.4bn

R14.3bn2018: R13.1bn

Sales performanceTotal sales h5.5%. Comparable sales h3.6%

h3.0% SALES h3.7% SALES h5.0% SALES h9.1% SALES

Massdiscounters Masswarehouse Massbuild Masscash

• Increased inventory provisions• Gen Merch sales pressure with

higher Food participation

• Lower sales participation in Gen Merch

• Stabilising Massfresh trading taking longer than anticipated

• Higher retail contribution driving higher margin

• Lower collection of rebates and margin support

• Competitive Retail market

R2.2bn2018: R2.2bn

R2.4bn2018: R2.3bn

R2.1bn2018: R2.0bn

R1.7bn2018: R1.6bn

Gross marginGross margin % down 36bps

23.3% i20bps


17.5% i19bps 31.1% h23bps 12.0% i33bps

• Net new stores: 8 7 Game: 2 ex-SA, 5 peri-urban SA(1.3% space growth)

• Employment costs impacted by in-sourcing temporary staff

• Occupancy costs due to rates and utilities increases and self generated power costs

• SAP IT project costs, supply chain & logistics

• Net new stores: 1(6.5% space growth)

• Pre-opening costs R13.8m (June 2018: R0m)

• Security contractors• Credit card costs

• Net new stores: 7(1.8% space growth)

• Pre-opening costs R32.1m (June 2018: R17.3m)

• Re-assessment of useful lives (IFRS) in 2018

• Other costs relating to bad debts, equipment and credit card costs

• Employment costs impacted by in-sourcing temporary staff

R2.6bn2018: R2.3bn

R2.0bn2018: R1.8bn

R1.8bn2018: R1.7bn

R1.9bn2018: R1.7bn

SG&A expensesTotal SG&A expenses h11.8%. Comparable expenses h9.2%

h11.1% EXPENSES h9.0% EXPENSES h9.4% EXPENSES h14.4% EXPENSES



-R396.1m2018: -R95.3 million

R336.4m2018: R484.7 million

R250.2m2018: R280.5 million

-R190.4m2018: -R4.1 million

Like-on-like basis, excluding IFRS 16 impact in both periodsThe 'trading profit before interest and tax' above is the amount per the condensed consolidated income statement less the BEE transaction IFRS 2 charge and excludes restructure costs.

Divisional performanceTrading profit before interest and taxation i100%


R11.1

bn

2019

R11.0

bn

2018

R12.6

bn2019

R12.7

bn2018

R2.4b

n

2019

R2.4b

n

2018

• Actively driving lower stock levels despite 16 new stores

• Mix change with higher Food purchases (with lower funding days)

Inventory days57

Creditor days56

Debtor days10

• Monitoring trade debt carefully

Working capital

i3 days i4 days no change

• EBITDA down 22.7%

• Net debt below last year

• Improved cash utilised in operations despite lower profitability

Management discipline in a tough environment

Rm JUN 2019 JUN 2018

EBITDA 12-month rolling 2,648.9 3,429.6

Net debt 7,036.3 7,157.2

Total equity 5,280.3 6,021.8

Gearing ratio 0.61 0.58

Cash utilised in operations (3,711.0) (3,891.5)


02Operational

review

Household consumptionConsumer spending on Durables decreasing as at March 2019 (year-on-year Q1)

Source: South African Reserve BankReal figures from Q1 2019

h1.0%NON-DURABLES

h0.8%SERVICES

i1.5%DURABLES

h1.8%SEMI-DURABLES

Consumer prioritising Food over Durables

Consumer delaying spend for promotions and prioritising value

Improve profitability of Massdiscounters & Masscash

Drive structurally lower operating costs

Implement a Group DC-services & -network function: reduce cost-to-serve by 1%

Invest in online sales and grow Africa

Drive VAS customer offerings

Responsible business

Strategic priorities

Fixing our controllables

Game• Weak margin management• SAP implementation delay

• New leadership, incl. Merchandise Director

• Rebuilding capacity & processes post-2018 restructure for better margin management & control

• SAP implementation delayed to Q2 2020 due to concerns at 3rd party System Integrator. Engaged constructively, with SAP support

Masscash• Weak margin management

• New leadership

• Improving capacity & processes post-2018 restructure for better margin management & control

• Strong supplier support

Massfresh• Slower than expected sales

& margin recovery

• New leadership

• SAP system redesigned with improved business rules

• Improved focus on trading disciplines

Leveraging Group scale for efficiency

Group–wide transport, logistics, planning & storage

Making good progress in establishing multi-tenanted group Distribution Centre Network, which will enable cost effective availability by leveraging group scale

Savings achieved particularly through focus on Final Mile deliveries to customers

Supplier onboarding through Massmart Distribution Network grew by 5%, with further growth planned for H2

Objective to reduce cost to serve by 1%

Builders Click & Collect delivery expanded into Africa (2 in Botswana) and all Builders stores in major metros (21,300 articles available)

Online sales represents 0.8% sales participation

Online sales down 14%

• SAP Hybris implementation issues in Makro causing system downtime

• Builders Warehouse:

• Decreased sales on water harvesting equipment post 2018 Western Cape drought

• Positive sales growth in every other category

316Unique customer collection points

h 36%Online traffic growth

h 20%Articles available

online

h 20%Basket size

Focus on omnichannel

Group online highlights

SA Retail’s first Whatsappchatbot/virtual assistant in Makro

242,678m2 of retail space

R3.9bnSales

48Stores

12Countries

17%of total space is ex-SA

Africa footprint

BotswanaNamibia

Zambia

Mozambique

Uganda

Nigeria

Tanzania

Malawi

Ghana

Lesotho

Kenya

Builders

Game

Masscash

NEW

VAS growth

A competitive range of Financial Services are now

available across all divisions

h 12%growth in sales

h 16%RCS loans business

h 322%Increase in

electricity sales

h293%Bill payments

(excl. SABC & RCS)

h 22%RCS credit business

h 50%Total money

collected

• New Builders branded products & increased brand exposure sales up 9% and margin up 22%

• Growth in sport continues: new range of Trojan health equipment sales up 27.1% and margin up 36.1%

GEN MERCHFOOD HOME IMPROVEMENT

Private LabelContinued focus on Group collaboration and sourcing of Private Label products to offer customers good quality products at low price points

Group collaboration focused on reducing product costs to save customers money

21Brands in portfolio

6.6%Sales penetration

2018: 6.1%



2018: 19.7%



2018: 11.8%

Good liquor growth

h13.6%Increased liquor

participation

Durables demand soft, strong market share

40%Market shares in Large Domestic Appliances*

Click-and-collect in Botswana

+2 storesFocus on

omnichannel

Cross collaboration

R100 dealsGame & Makro

Key performances

* Source: GFK SA (June 2019)

ENERGYSAVING

Responsible business

Achieved R1bn milestone from small manufacturers participating in our SDP

• Import substitution focus improves on shelf availability e.g. toilet seats, nails and chefware

Almost 8 million kWh of renewable energy generated

• Anticipated energy savings of R20 million as a result of renewable energy interventions over the next five years

Only retailer in South Africa to partner with the United Nations Development Programme(UNDP) to promote energy efficient appliances

• Major appliances sales growth of 72.1% at full margin during promotion

Exceptionally strong consumer awareness

Category

Black Friday deals 50%

TVs & electronics 72%

Large appliances 72%

Outdoor & camping 66%

Small appliances 64%

Health & fitness 58%

Patio & garden 54%

% of consumers who intend to shop at Massmart

Consumer 1st choice

Consumer 2nd choice

Consumer 2nd choice

Metropolitan consumer intent to shop poll

Outlook• Sales growth for the period subsequent to June 2019

on a like-on-like basis for the 33 weeks to 18 August 2019 were R55.8bn, representing total sales growth of 5.0% and comparable sales growth of 3.2%. Estimated product inflation of 2.6%.

• Assuming no further deterioration in the SA consumer economy for 2019, Massmart expects basic earnings per share for Dec 2019 to be at least 50% below last year’s of 410.6 cents excl. IFRS 16 and at least 100% below incl. IFRS 16

• On the same basis, Massmart expects headline earnings per share for Dec 2019 to be at least 50% below last year’s of 416.5 cents excl. IFRS 16 and at least 100% below incl. IFRS 16

Any reference to future financial performance included in this document has not been reviewed or reported on by the Group’s external auditors. The auditor’s report does not necessarily report on all of the information contained in this announcement/financial results. Shareholders are therefore advised that in order to obtain a full understanding of the nature of the auditor’s engagement they should obtain a copy of the auditor’s report together with the accompanying financial information from the issuer’s registered office.

www.massmart.co.za/interimresults2019

03Additional

information

Condensed Consolidated Income StatementTax rate reconciliationCash flow statementCapex per categoryCapital expansion

Store portfolioForecast stores: Jul 2019 – Dec 2022

Number of shares

Condensed Consolidated

Income Statement

Extract from Reviewed Consolidated Results for the period ended 30 June 2019

RMJUN 2019

(REVIEWED)JUN 2018

(REVIEWED)

Standard tax rate 28.0 28.0Non-taxable income and disallowable expenses (0.3) (0.5)Assessed losses not utilised (28.7) 1.9Other - including foreign tax adjustments (3.8) 0.5Group tax rate (4.8) 29.9

Tax rate reconciliation


RMJUN 2019

(ADJUSTED)JUN 2018

(REVIEWED)

Operating cash before working capital movements 659.1 1,256.2Working capital movements (4,370.1) (5,147.7)Cash generated in operations (3,711.0) (3,891.5)Net interest and tax paid (684.2) (532.8)Net investment to maintain operations (318.8) (274.0)Free cash flow (4,714.0) (4,698.3)Dividends paid (129.7) (603.0)Dividends received - 14.0Investment to expand operations and other net investing activities (354.5) (347.2)Cash outflow before financing activities (5,198.2) (5,634.5)

Cash flow statement


RMJUN 2019

(REVIEWED)JUN 2018

(REVIEWED)

Land and buildings/leasehold improvements 68.4 92.7

Vehicles 0.4 39.9

Fixtures, fittings, plant and equipment 72.3 97.1

Computer hardware 71.8 8.6

Computer software 164.0 120.6

Investment to expand operations 376.9 358.9

Land and buildings/leasehold improvements 56.2 54.1

Vehicles 33.9 16.9Fixtures, fittings, plant and equipment 157.0 94.8

Computer hardware 44.2 46.9

Computer software 27.5 61.3Investment to maintain operations 318.8 274.0

18.1%

0.1%

19.2%

19.1%

43.5%

Land & buildings/leasehold improvementsVehiclesFixtures, fittings, plant & equipmentComputer hardwareComputer software

Expansionary investment

Capex per categoryTotal capex 1.6% of total sales (2018: 1.5%)

Capital expansion

R 0

R 100

R 200

R 300

R 400

R 500

R 600

R 700

R 800

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

Businesses acquired

Property acquisitions

Investment to expand operations

Investment to maintain operations

Total capex as a % of sales

Total capex as a % of sales excludingbusiness and property acquisitions

Cape

x as

a %

of s

ales

JUNE 2014

JUNE 2015

JUNE 2016

JUNE 2017

JUNE 2018

JUNE 2019

Store portfolio

Total Massdiscounters Masswarehouse Massbuild Masscash

441 172 22 117 130Up from 436 in Dec 2018

Up from 171 in Dec 2018

Up from 21 in Dec 2018

Up from 114 In Dec 2018

130 in Dec 2018

+5Net opened

+3

-2

Game+2 in South Africa+1 in Namibia

DionWired-2 in South Africa

+1 Makro+1 in South Africa

+2

+1

Builders Superstore+2 in South Africa

Builders Express+1 in South Africa

Forecast stores

Total Massdiscounters Massbuild Masscash

+27 +6 +8 +13Up from 441 to 468 Up from 174 to 182 Up from 117 to 125 Up from 130 to 143

+20South Africa

+7Ex-SA

+6 Game+1 in South Africa+1 in Kenya+2 in Botswana+1 in Namibia+1 in Zambia

+2

+2

+3

Builders Warehouse+1 in South Africa+1 in Kenya

Builders Express+2 in South Africa

Builders Superstore+3 in South Africa

+12

+1

Retail+12 in South Africa

Wholesale+1 in Kenya

+5.6%Up from 1,679,524m2

to 1,773,886m2

+3.2%Up from 567,103m2

to 585,103m2

+1 Builders Trade Depot+1 in South Africa

+8.1%Up from 476,582m2

to 514,961m2

+9.8%Up from 388,714m2

to 426,698m2

Jul 2019 – Dec 2022

This 5.6% increase includes a 10.1% increase in our ex-SA trading space

‘000

At Dec 2018 217,179.1

Shares issued 1,959.7

At Jun 2019 219,138.8

Weighted-average at Jun 2019 218,400.1

Diluted weighted-average at Jun 2019 221,006.5

Number of shares

interim results presentation - massmart · interim results presentation for the 26 weeks ended june...

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