Results Presentation for year ended December 2015 The Environment - - PowerPoint PPT Presentation

Results Presentation

for year ended December 2015

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2016/17 likely to be much tougher

The Environment

South Africa:

• Overall consumer confidence weakest since 1994. Upper-income confidence sliding, now at

1998 levels

• CPI now above 6% and likely heading to 7% from drought-induced Food inflation
• Weak & jobless economic growth. If domestic recession avoided (likely), global economy

still a detractor

• Now in interest up-cycle (+100bps in FY16?)
• Consumer impact of renewed price pressure not to be underestimated

Africa:

• Apart from oil-dependent countries, most have stabilised at new lower economic levels
• Severe currency weakness in some countries. Devaluations seem likely in others
• US$ remains de facto currency
• Long-term potential intact but requires measured long-term approach

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Impact of South African drought

The Environment

• Likely severe shortages of yellow maize &

potatoes

• Seeing changes in customers’ shopping

behaviour – less travel, private label, smaller pack size

• Consumers will typically cut back on meat,

gravy, etc. before reducing carbohydrates

• Possible that rice & pasta remain relatively

more affordable

• El Nino effect – earlier & colder winter.

May impact crops planted late

• Import programme will pose serious supply

chain challenges & will be costly

• Any ZAR strength will assist (lower import

costs). International corn (wheat) price at five-year low

$ ZAR $ ZAR ZAR ZAR R 000

1 2 3 4 5 6 7 Indian rice Indian rice Thai rice Thai rice Yellow maize Wheat Oct '15 Jan '16

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Socio-economic pressure

The Environment

Consumer behaviour

• Keen value focus
• Movement to smaller pack sizes, less protein, etc.
• Less frequent travel to shopping precincts
• Spending time bound to pay-day periods (4 days)

Our response Focussed effort on:

• Right merchandise availability; and
• Keen pricing

to satisfy highly concentrated monthly shopper demand

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Trust our model. Superb execution. Be patient and measured.

Massmart Positioning

• Invest in growing market leadership in our major categories
• Due to high market shares and two mature businesses, we are very deliberate about our

South African new space growth. 16 new stores, 3.2% new space. Closed 10 stores, net space decline of -0.8%

• Measured African growth with Game and Builders Warehouse. Five new stores in four

countries in 2015, and most performing very well

• Focus on reducing operating costs as % of sales. Still high at 16.4%
• Maintain positive price-gap
• Closer supplier collaboration / focus on supply chain inefficiencies

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Financial Performance

Great sales & volume growth. Some inevitable margin pressure, but Group margin higher from portfolio mix. Good cost control in tough environment

Dec 2015 (Reviewed) % of sales Dec 2014 (Audited) % of sales % growth Comparable % sales growth Estimated % sales inflation

Sales 84,731.8 78,173.2 8.4 6.7 3.0 Massdiscounters 19,514.1 17,955.2 8.7 3.9 1.7 Masswarehouse 23,675.9 21,554.8 9.8 9.8 3.4 Massbuild 12,010.6 10,822.8 11.0 7.4 3.8 Masscash 29,531.2 27,840.4 6.1 5.8 2.9 Trading profit before interest and tax 2,349.8 2.8 2,061.7 2.6 14.0 Massdiscounters 235.4 1.2 180.7 1.0 30.3 Masswarehouse 1,198.7 5.1 1,044.3 4.8 14.8 Massbuild 693.6 5.8 537.6 5.0 29.0 Masscash 222.0 0.8 299.1 1.1 (25.8)

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Short-term:

• Improving SA performance. Better margin management.
• Food: 18 new / converted Fresh stores since December ’14, now 84
• stores. Food & Liquor sales growth 19%
• Non-SA countries’ economies have stabilised. Improved H2 (total Rand

sales +16.6% )

• Merchandise renewal / assortment clarity – rationalise categories &

merchandise ranges

• Improving in-stock service levels. Game SA stock 5 days better than LY
• Positive price-gap in General Merchandise & Food
• SAP GK PoS implementation in 2016

Longer-term:

• Category renewal – younger, female, family
• Optimise supply chain utilisation
• SAP ERP in 2017

Pleased with Trading recovery. Longer-term business renewal

Perspective on Game

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Short-term:

• Commodities (25% participation) recently moved into inflation
• Margin pressure across entire wholesale market
• ARCH Enterprise IT system enabling regional buying & pricing
• Gained market share

Longer-term:

• Drive lower operating costs from fewer & larger stores, Shield B2B,

logistics & DCs

• Largest participant in SA formal Wholesale, and wholesale remains 20%-

25% of total SA FMCG

• A relationship business:
• need to be close to our customers
• be suppliers’ preferred distribution partner – an efficient & effective

route to market

• Great business model for growth into under-penetrated non-SA countries

Fluid market – consolidation opportunity. Transforming the business.

Perspective on Masscash Wholesale

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Builders Warehouse sales slowed in H2:

• Whilst some slowdown in Retail sales, 2% of the lower sales growth is from Trade

sales which slowed as contractors’ business from provincial & local government declined

• Put one large provincial Govt account on hold due to delayed payment (now fully

settled). Adverse impact: 3% sales growth

• Insignificant generator sales reduce sales growth by 1%
• Monthly growth in Residential building plans passed remains positive, suggesting
• rder books for early 2016 may still be robust

Looking ahead:

• Aggressive focus on offering / demonstrating great price & value
• Possibly some sales pressure from constrained SA housing market
• Will government capital spending pick-up soon?
• Builders Express sales remain steady
• Builders’ non-SA annualised sales fast-approaching R1bn

Perspective on Massbuild

Massbuild’s sales linked to well-being of domestic bonded housing market

Financial performance

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Positive gearing of 5.7% from Sales to Operating Profit.

Continued strong performance

8,4% 10,2% 14,1%

Growth in Sales Growth in Gross profit Growth in Operating profit before foreign exchange movements and interest Full year - 2015

+5.7%

+3.9% +1.8%

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Real comparable volume growth of 3.7% (December 2014: 2.7%).

Sales

Rm Dec 2015 (Reviewed) Dec 2014 (Audited) % growth Comparable % sales growth Estimated % sales inflation Real comparable volume growth

Total 84,731.8 78,173.2 8.4 6.7 3.0 3.7 Massdiscounters 19,514.2 17,955.2 8.7 3.9 1.7 2.2 Masswarehouse 23,675.9 21,554.8 9.8 9.8 3.4 6.4 Massbuild 12,010.6 10,822.8 11.0 7.4 3.8 3.6 Masscash 29,531.2 27,840.4 6.1 5.8 2.9 2.9

8,4% 91,6%

Rest of Africa sales SA sales

• Rest of Africa businesses’ sales growth:

Sales in ZAR grew by 12.6% / in constant local currencies grew by 13.8

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18,6% 18,6% 0,2% 0,1%

Dec 2014 Dec 2015

What is driving margin improvement?

Margin

• Improved margin

management in Game

• Highest margin

business grew the fastest

• Mix improvement

between businesses and categories

• Lowest margin

business slowing down

18.6% 18.9% +0.3% 2014 total Product and business mix Game margin management

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Comparable expenses as a percentage of sales decreasing year-on-year

Operating expenses

16,2% 16,1% 16,4% 16,0%

2014 Total 2014 Comp 2015 Total 2015 Comp

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• December 2014: Operating profit before forex of R2,016m
• Total Group sales for the period increased by 8.4%
• Gross profit for the period increased by 10.2%
• Total increase of 11.1% / Comparable increase of 7.7%
• Increase in staff (Full-Time Equivalents) of 1.7% to +/- 48,000 FTE’s
• IFRS2 charge represents 1.6% of the increase
• Total increase of 7.0% / Comparable increase of 4.4%
• Property purchases in the last 24 months have contributed to this improvement
• 0.7% increase of net new trading space since Dec 2014 to a total of 1,550,719m²
• Electricity, rates and taxes increased by approximately 13.8%
• Depreciation growth of 11.8% / Comparable increase of 8.0%
• Increase in line with past property purchases
• Total increase of 7.0% / Comparable increase of 3.4%
• Increased investment in IT infrastructure across the Group
• December 2015: Operating profit before forex of R2,300 million
• R284m improvement / increase of 14.1%

Operating profit before forex and interest

0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 Dec-14 Sales-related gross margin Price-and-mix-related gross margin Employment costs Occupancy costs Depreciation, Amortisation and Impairment of Assets Other operating costs Dec-15

Rbn

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Good Operating profit growth impacted by forex and interest

Rm Dec 2015 (Reviewed) Dec 2014 (Audited) % change

Operating profit 2,300.2 2,015.9 14.1 Net finance costs (475.3) (345.3) Taxation (505.9) (483.4) Profit for the year before forex 1,319.2 1,187.2 11.1 Foreign exchange loss* (149.8) (49.8) Profit for the year 1,169.2 1,137.4 2.8 Headline EPS (cents) 516.3 509.7 1.3 Headline EPS before foreign exchange (taxed) (cents) 567.5 526.2 7.8

Profit for the year before forex growing by 11.1% improvement HEPS before forex grew by 7.8%

* majority is unrealised

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Interest

Rm Dec 2015 (Reviewed) Dec 2014 (Audited) % change

Finance costs (507.7) (386.8) Finance income 32.4 41.5 Net finance costs (475.3) (345.3) (37.6)

50 100 150 200 250 300 350 400 450 500

H1 2015 YTD 2015

Over the year finance costs were mainly incurred from funding for:

• property acquisitions;
• capex expansions;
• trading positions; and
• rate increases.

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Working Capital

Dec 2015 (Reviewed) Dec 2014 (Audited)

Inventories (Rm) 11,935 11,229 Inventory Days 63 64 Trade Debtors (Rm) 2,402 2,254 Debtors’ Days 9 9 Trade Creditors (Rm) 16,320 14,842 Creditors’ Days 76 74

• Good inventory management.

Growth of 6.3% is below sales growth

• Debtors’ days are calculated based
• n total Group sales
• Supply chain efficiency efforts

starting to yield results Net funding gap increased to 4 days (2014: 1 day)

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Dividend policy

• The Group has spent in excess of R1.9 billion on strategic real estate purchases, both

locally & in Africa

• We still see growth opportunities in Africa – we anticipate increasing space growth by

8.6% in 2016 & 2017 - but this often involves securing real estate

• With challenging economic conditions it is prudent to de-risk our capital structure in

favour of potential for business growth at the right moment

• The dividend cover will be amended to 2.00 x cover for 2015’s total dividend
• This is at a level similar to Massmart’s retail peers

Dividend cover amended to 2.00 x cover, in line with guidance provided in August 2015

In Interim results Presentation August 2015

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In summary

• Market share gains
• Strong sales in challenging H2
• Mix impacts improved gross margin
• Comp expenses as a % of sales going down
• Operating profit up 14.1% (before forex)
• Profit for the year up 11.1% (before forex)
• HEPS up by 7.8% (before forex)

In Interim results Presentation August 2015

21 21

Strategic priorities

Grow Builders and Retail Food in South Africa Improve Profitability Grow into Africa Grow Online

Improve profitability

Fast fact Massmart has the highest annual sales densities in SA retail at R201m/store and the lowest operating costs as a %

• f sales at 16.4%

Strategic Priority 1

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• Drive comparable sales with a clear and well executed

value proposition

• Existing & new stores – measured store roll-out, selected
• wnership, lower cost of construction
• Continue driving private label investment – Trojan,

CampMaster, LOGIK, Fired Earth, ECONO, Builders Pride, Marketside, Great Value, Equate, M, etc.

• Sales penetration now 9.5%
• Leverage SAP and RDC investments
• Reduce non-trading space
• And focus on higher growth non-SA markets, Retail Food

& Omni-channel A focus on Sales, Operating Margin and Expenses.

Improving Profitability

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A careful & scientific approach to new stores, with accretive sales from our new space

Improving Profitability

• 10 000

20 000 30 000 40 000 50 000 60 000

• 200 000

400 000 600 000 800 000 1 000 000 1 200 000 1 400 000 1 600 000 1 800 000 2 000 000

Sales per m² Trading Space m²

Massmart

Grow Builders and Retail Food in South Africa

Fast fact 2015 gross SA space growth of 4.7% and 5.6% in Massbuild and Masscash Retail respectively

Strategic Priority 2

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• Drive customer loyalty with authorative range and best-in-market pricing on KVIs.

Innovative Price Lock campaign

• Maintain relevance with our commercial & contractor customers through product range,

price, convenience & credit

• Private label now 18% of the total sales – offers exceptional innovation & value
• Supply Chain investments efficient and effective. Added a facility in Durban for import

and regional distribution

• Home Living category launch in Rivonia store in November ’15 saw positive customer
• response. To be introduced into our other big format stores
• Opened five new stores in South Africa (and our first in Zambia) / Closed four stores.

Gross Massbuild SA space growth of 4.7% Leverage our investment in this format.

Grow Builders’ formats in SA

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• Total Retail Food annualised sales now R15 billion across Group
• New Cambridge stores continue to perform well – opening 24 stores in

2016/17 representing 15% space growth

• Retail Food in Makro is increasing customer visits and growing the basket
• Game Food & Liquor sales grew at 19%. Clearer range & assortment
• Fruitspot supplies Cambridge, Makro and Game stores in Gauteng. Good price

& quality

• Our Marketside brand now across fresh produce, bakery and butchery in

Game, Makro and Cambridge Food Build a Retail Food proposition on the General Merchandise and Wholesale platforms.

Grow Retail Food in SA

Grow into Africa

Fast fact Builders’ Rest of Africa store sales are fast approaching R1 billion

• ut of 6 stores after

just 3 years

Strategic Priority 3

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• Currently 38 stores in Africa, representing R7.2bn sales (8.4% participation), in 13

countries

• New Game stores in Matola (Mozambique) and Abuja (Nigeria) in H2. And new Builders

Warehouse store in Lusaka (Zambia) in Q4. All performing well

• 20% of Masscash Wholesale sales are ex-SA, mainly Botswana. Continue to explore

further C&C sites in Mozambique and Zambia

• Anticipate opening five new stores in next two years in Ghana, Mozambique, Nigeria &

Zambia

• Currency devaluations and related consequences difficult to manage. Little affected by

Nigerian central bank foreign currency constraints due to high proportion of local purchases

• Bespoke African Retail study confirms significant potential of our formats across

key African countries – and need for measured & longer-term approach To leverage South African market leadership and operating strengths in sub-Saharan Africa. Large prize but measured roll-out.

Grow into Africa

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• There is an inflection point relative to GDP per capita

after which retail modernises and growth accelerates:

• Six countries in SSA at or above that inflection

point

• Two countries will reach this within 10 years
• And estimate another seven countries will reach

it in +10 years

• Some large cities reach this before their country
• Retail modernisation increases from 8% to 17% over

the period

• 15 SSA countries represent 88% of total retail

potential

• Massmart’s merchandise categories represent 50% of

potential African opportunity and are each forecast to grow at approximately 14% CAGR We commissioned Canback & Company to do a bespoke review of sub-Saharan Africa (SSA) main Retail categories‘ growth to 2024

Recent Africa study

Grow online

Fast fact Traffic on the Makro site grew by more than 65% and had 11 million unique visitors during 2015

Strategic Priority 4

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To build a profitable omni-channel presence synergistic with Massmart category & market leadership and customer needs.

Grow online

• Total online sales are R183 million
• Visits to DionWired site are up 13%, average basket size is up 12%
• Makro online sales growing rapidly. Sales in Q4 double those for the same period LY
• Pick-up lockers extended to include sites in Cape & KZN. 30 lockers available by end

April 2016

• Commercial functionality (B2B) went live during November. Great response
• Masscash trialling store-based online ordering capability
• Initiated SAP online project in Builders Warehouse to improve our offering to trade
• customers. Go live in late 2016

In Interim results Presentation August 2015

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Sustainability Fast Facts

the lowest reported energy intensity in the South African Retail Sector

212 kW kWh/m h/m2

estimated electricity produced by grid tied solar energy plants to be installed at stores in 2016

2.4 2.4 million lion kW kWh

e-emissions avoided through the sale

• f energy efficient light bulbs in 2015

40,315 tCO2

number of meals prepared in Massmart funded mobile kitchens annually

40 40 million lion

volume of water donated to drought impacted communities in Kwa-Zulu Natal and the Free State

50,000 litr tres es

the number of Builders and Makro stores that have implemented rainwater and condensate harvesting initiatives

81 81

proportion of Massmart stores actively involved in separating and recycling secondary paper plastic and board

83% 83%

number of tons of e-waste collected and recycled through the Makro- Samsung e-waste take back program

143 143

Prospects

• For the 8 weeks to 21 February 2016,

total sales increased by 8.9% and comparable sales by 6.9%

• We are confident about delivering our

strategic priorities, but the economic environment may be a constraining factor in FY16

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

• f 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.

For further details, go to www.massmart.co.za/results2015

Additional information

• Condensed Consolidated Income

Statement

• Tax Rate Reconciliation
• Cash Flow Statement
• Capital Expansion
• Capex Per Category
• Store Portfolio
• Forecast Stores: Jan 2016 – Dec 2017
• Number of shares`

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Rm Dec 2015 (Reviewed) Dec 2014 (Audited) % growth

Revenue 84,857.4 78,319.0 8.3 Sales 84,731.8 78,173.2 8.4 Cost of sales (68,689.6) (63,610.8) (8.0) Gross Profit 16,042,2 14,562.4 10.2 Other income 125.6 145.8 (13.9) Depreciation and amortisation (946.2) (846.6) (11.8) Impairment of assets (25.7) (24.6) (4.5) Employment costs (6,784.3) (6,109.0) (11.1) Occupancy costs (2,865.6) (2,678.8) (7.0) Other operating costs (3,245,8) (3,033.3) (7.0) Operating profit before foreign exchange movements and interest 2,300.2 2,015.9 14.1 Foreign exchange loss (149.8) (49.8) Operating profit before interest 2,150.4 1,966.1 9.4 Net finance costs (475.3) (345.3) (37.6) Profit before taxation 1,675.1 1,620.8 3.4 Taxation (505.9) (483.4) (4.7) Profit for the year 1,169.2 1,137.4 2.8

Condensed Consolidated Income Statement

for the year ended December 2015

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% Dec 2015 (Reviewed) Dec 2014 (Audited)

Standard tax rate 28.0 28.0 Non-taxable income and disallowable expenses 0.3 2.8 Allowances on lease premiums and improvements (0.2) (0.4) Assessed loss not utilised 2.6 2.0 Other - including foreign tax adjustments (0.5) (2.6) Group tax rate 30.2 29.8

Tax Rate Reconciliation

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Cash Flow Statement

Rm December 2015 (Reviewed) December 2014 (Audited)

Operating cash before working capital movements 3,384.4 2,983.4 Working capital movements 372.0 (295.1) Cash generated by operations 3,756.4 2,688.3 Net interest and tax paid (1,027.7) (1,028.7) Net investment to maintain operations (983.7) (857.4) Free cash flow 1,745.0 802.2 Dividends paid (958.3) (914.0) Investment to expand operations and other net investing activities (661.9) (1,289.1) Cash inflow/(outflow) before financing activities 124.8 (1,400.9)

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Capital Expansion

0,0 500,0 1 000,0 1 500,0 2 000,0 2 500,0 0,0% 0,5% 1,0% 1,5% 2,0% 2,5% 3,0% 3,5% 4,0%

Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015

Investment to maintain

• perations

Investment to expand

• perations

Businesses acquired Property acquisitions Total capex as a % of sales Total capex as a % of sales excluding business and property acquisitions

Capex as a % of sales Rm

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Capex Per Category

Rm December 2015 (Reviewed) December 2014 (Audited)

Land and buildings/leasehold improvements 281.8 948.9 Vehicles 14.2 11.0 Fixtures, fittings, plant and equipment 353.6 341.7 Computer hardware 31.3 12.6 Computer software 29.7 7.9 Investment to expand operations 710.7 1,322.1 Land and buildings/leasehold improvements 134.6 104.8 Vehicles 64.7 92.1 Fixtures, fittings, plant and equipment 586.3 427.2 Computer hardware 105.0 108.1 Computer software 92.8 123.6 Other 0.2 1.6 Investment to maintain operations 983.7 857.4

24,6% 4,7% 55,5% 8,1% 7,2%

Land & buildings/leasehold improvements Vehicles Fixtures, fittings, plant & equipment Computer hardware Computer software

Total Capex as a % of sales

(December 2014: 2.7%)

1.9%

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Store Portfolio

Massdiscounters Masswarehouse Massbuild Masscash

161

Up from 153 in 2014

19 19

Unchanged

+10 10 +8 Game

+4 in South Africa +1 in Kenya +1 in Mozambique +1 in Nigeria +1 in Zambia +2 DionWired +2 in South Africa

–2

–1 Game –1 DionWired There were no changes in the Masswarehouse store portfolio

+6 +6 Builders Warehouse

+3 in South Africa +1 in Zambia Builders Express +2 in South Africa

–4 Builders Express

–2 in South Africa Builders Trade Depot –2 in South Africa

+5 +5 Retail –4 –3 Wholesale

–1 Retail

102 02

Up from 100 in 2014

121

Up from 120 in 2014

Total

+21 Opened –10 10 Closed

403 03

Up from 392 in 2014

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Forecast Stores: Jan 2016 – Dec 2017

Massdiscounters Masswarehouse Massbuild Masscash

+9 +9

Up from 161 to 170

+2 +2

Up from 19 to 21

+6 +6

Game +3 in South Africa +1 in Ghana +1 in Nigeria +1 in Zambia

+3 +3

DionWired +3 in South Africa

+3 +3 Builders Warehouse

+1 in South Africa +1 in Mozambique +1 in Zambia

+3 +3 Builders Express

+3 in South Africa

+7 +7 Builders Superstore

+7 in South Africa

+13

Up from 102 to 115

+25 25

Up from 121 to 146

Total

+44 +44 South Africa +5 +5 Africa

+49 49

Up from 403 to 452

+2 +2

Makro +2 in South Africa

+24 Retail +1 +1 Wholesale +8.6%

Up from 1,550,719m2 to 1,684,465m2 This 8.6% increase includes a 9.1% increase in our Rest of Africa trading space

+5.0%

Up from 533,078m2 to 559,574m2

+12.3%

Up from 195,794m2 to 219,794m2

+6.1%

Up from 449,133m2 to 476,633m2

+15.0%

Up from 372,714m2 to 428,464m2

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Number of shares

‘000

At December 2014 217,118 Shares issued 18 At December 2015 217,136 Weighted-average at December 2015 216,689 Diluted weighted-average at December 2015 219,893