Clicks Group Limited (CLS) Earnings Call Transcript & Summary

Good afternoon, and welcome to the webcast of our annual results for the year ended August 2020. I'm Vikesh Ramsunder, the Chief Executive of the Clicks Group, and I'm joined here today by Michael Fleming, our Chief Financial Officer. Together, we will take you through today's presentation. This is the outline of the presentation. I will start with a review of the year. Michael will follow with an overview of our financial performance. I will then take you through the trading performance and close with the strategy and outlook for the group. [Operator Instructions] Sue Hemp from Investor Relations will read them out for Michael and I to answer. I will now begin with a review of the year. The Clicks Group has once again delivered a strong and resilient set of results, this is in context of a global humanitarian crisis and a deepening economic recession. The result was achieved through 3 main drivers: firstly, in health and beauty, our relentless focus on offering customers great everyday pricing, a differentiated product offer and a highly accessible store network; secondly, in distribution, the landing of new contracts and superior service levels contributed to market share gains; finally, expenses and cash were well managed. The combination of these factors contributed to diluted headlines earnings per share increasing by 13.7% and a dividend of ZAR 4.50 per share being declared for the full year. COVID-19 has been destructive to both lives and livelihoods and transformed the way we engage, behave and think. It has had a significant disruption to the business, particularly in half 2, during the various stages of national knockdown and restriction on the sale of certain categories. Customer buying patterns have changed with health care and homeware categories being the big winners. With restricted travel, lack of social interaction and the requirement to wear face mask pharmacy and beauty have seen lower sales growth. I will share more detail on this later in the presentation. There was a noted acceleration in online shopping and we've benefited from the investment made in e-commerce having established this capability over the past 4 years. Customers also chose to shop closer to home, supporting our convenience stores more than our larger destination stores. When the virus hit the country, our immediate priority was the protection of our staff and customers and employees were provided with personal protective equipment. We invested in protective screens and hand sanitizers for our entire store base whilst COVID-19 prevention protocols were introduced throughout the business. I would like to take this opportunity to thank our people for their tremendous dedication, commitment and courage that they continue to show in these very difficult times, without which these results would not have been possible. Considering the ever-changing trading and regulatory environment, cash preservation has been a high priority throughout the crisis. We took decisive measures to reduce our cost base and deferred our interim dividend to ensure balance sheet flexibility. It is also encouraging to note that the business sustained its strong cash flow generation, and Michael will give you more detail on this shortly. The COVID-19 challenges, however, did not impact our strategy. It's certainly not possible to drive performance over the long term by just finding efficiency. Growth is essential for business continuity. So we've continued to invest in new stores, pharmacy, supply chain and IT. I will now hand over to Michael to take you through the financial performance of the group.

Thank you, Vikesh. Good afternoon. Group turnover was up 9.6% for the year. Our health and beauty business, which was up 8.4%, was driven by a good first half performance in Clicks and followed by a very tough second half operating under COVID-19 protocols, as Vikesh has just mentioned. UPD reported solid growth with turnover up 11.2% despite the absence of a flu season and has continued to take market share. The group operating margin lifted 10 basis points to 8.1% benefiting from focused cost management. Diluted headline earnings per share rose to ZAR 7.54 per share, up 13.7% on last year. This was particularly pleasing given the challenging year we've faced and is within the earnings guidance provided in the trading statement we released on SENS on the 12th of August. The group's operations generated strong cash inflows, and we ended the year with cash of ZAR 2.2 billion. Our strong balance sheet ensures the group remains well positioned to withstand the headwinds to be faced in the new financial year, which Vikesh will elaborate on later. During the year, we returned almost ZAR 1.5 billion to shareholders in dividends and share buybacks. The group's return on equity has increased by 80 basis points to 37.8%. The dividend declared for the year of ZAR 4.50 per share represents a payout ratio of 60%. This is in line with our undertaking made to shareholders when we released our interim results to review the total annual dividend at the end of the year once we had greater visibility of how the COVID-19 crisis would impact South Africa. We were satisfied with the group's turnover growth in light of the disruption of COVID-19. Retail sales grew 7.3% for the year. Our second half trading performance was obviously much tougher operating under COVID-19 lockdown restrictions with retail sales only growing 6% in half 2 compared to 8.6% in the first half. Musica's turnover was down 30% with stores having had to close for 2 months under lockdown restrictions. Health and beauty turnover grew 8.4%, and Vikesh will elaborate on this performance later in the presentation. Retail selling price inflation has remained very low at 2.2%. Same-store sales grew by 3.4% while new stores and pharmacies added a further 3.9% to retail sales. The distribution business showed double-digit sales growth for the year with the second half being slightly softer than the first half due to a lack of winter flu and elective surgery in hospitals. UPD selling price inflation was also low at 2.5%. However, we saw pleasing volume growth in the wholesale business, which ensured turnover rose 11.2%, as I mentioned previously. This slide reflects our total income earned for the year. You can see retail total income grew by 7.2%, and the retail margin was maintained at 33.3%, in line with last year. This was attributable to a higher mix of franchise product sales relative to pharmacy and an increase in various promotions, offset by a high proportion of private label sales. UPD's total income grew 15.9% and the margin benefited from the SEP increase, which was slightly higher than the prior year as well as the new wholesale contracts and 2 new distribution clients. Overall, the faster growth of the distribution business has resulted in the mix change with the group total income margin 30 basis points lower and the group total income growing 8.4% to almost ZAR 9.4 billion. We have continued to improve our efficiency within our cost base with retail expenditure as a proportion of sales reducing to 24.2%. This is evident, in particular, in occupancy, employment and other operating costs, which included the addition of new space. In that regard, we have added 39 Clicks stores and 40 pharmacies to the chain during the year. Retail costs grew only 6.5% despite us having incurred an additional ZAR 36 million in COVID-19-related costs. The impact of COVID-19 on the operations included changed customer shopping patterns, reduced mall and trading hours, social distancing requirements and restrictions on travel. We were able to offset the additional COVID-related costs by taking decisive cost containment actions across-the-board. We reduced labor costs by rescheduling variable and fixed labor productivity, placing certain employees on furlough when they could not work while we access government benefits on their behalf. And we reduced training-related costs while moving to e-learning modules where required. We also obtained rental relief of ZAR 10.9 million where our smaller brands were prohibited from trading. Finally, we leveraged our national infrastructure, including our head office, IT, distribution and operational support structures to focus on effective delivery and execution of service for customers. Comparable retail costs were therefore up only 3.8%, reflecting the tight management of costs. UPD has successfully won a number of new wholesale and distribution clients, which has resulted in higher labor and transport costs. UPD recently began renting a third-party distribution warehouse into Johannesburg, which has added to the overall cost base. As can be expected, this warehouse is not yet running at the same level of throughput as the other 5 existing warehouses. We do, however, expect this warehouse to become more efficient over time. Overall, UPD's costs were up 17.9% and included ZAR 8 million in additional COVID-19-related costs. Looking at operating profit which takes account of the adoption of IFRS 16 in 2020, along with the restatement of the comparatives I mentioned earlier, you can see the retail margin has improved by 20 basis points to 9.1% as a consequence of the various cost management measures I outlined with operating profit up 9.4%. UPD has increased operating profit by 13% and has surpassed ZAR 0.5 billion in operating profit while, at the same time, maintaining an operating margin of 3.3%. Overall, it's pleasing to see the group operating profit of almost ZAR 2.8 billion was up 10.4% for the year. Inventory levels for the group have improved by 4 days to 66 days. Both retail and distribution stock days are lower than last year as a result of focused effort to carefully manage inventory levels through the lockdown. We also commenced our traditional winter clearance sale earlier. This was to prevent any potential stock risk arising in the business as a result of the anticipated impact a lockdown will have on the economy and consumer spend. As you can see on the slide, overall inventory has increased by only 4.5%, which was much lower than the growth in turnover. This slide shows the movement of cash between the cash on the balance sheet at the end of 2019 and 2020. At the end of last year, we had cash of ZAR 2.6 billion, which is reflected in dark blue on the left-hand side, and we ended this year with ZAR 2.2 billion, also reflected in dark blue on the right-hand side of the slide. The group has generated cash of almost ZAR 3.9 billion highlighted in green before the repayment of lease liabilities amounting to ZAR 703 million, working capital changes of ZAR 821 million and tax payments of ZAR 634 million. As a reminder, last year I highlighted on my cash flow slide presentation that our year-end fell over a weekend, which meant accounts payable amounts had been settled during year-end -- after year-end. This, therefore, is the main reason for the timing of working capital outflows this year. ZAR 591 million was reinvested in capital expenditure across the group. Of this latter amount, ZAR 307 million was invested in new stores as well as 53 Clicks store refurbishments, ZAR 69 million was spent in distribution centers and ZAR 215 million was spent on IT and other retail infrastructure. As I mentioned earlier, we returned almost ZAR 1.5 billion to shareholders this year. This was in the form of dividends of ZAR 822 million and share buybacks of ZAR 653 million which overall has reduced cash by ZAR 461 million. A final cash dividend of just over ZAR 1.1 billion will be paid out to shareholders in January. CapEx of ZAR 745 million is planned for the year ahead, which includes ZAR 67 million carried forward from 2020 due to delays caused by the impact of COVID-19. ZAR 317 million will be invested in our store and pharmacy network. This will include 25 to 30 new Clicks stores and 30 to 35 new pharmacies, a further 45 retail store refurbishments in order to ensure our stores stay modern and relevant to our customers. ZAR 428 million will be spent on IT systems and infrastructure. ZAR 49 million of this amount will be invested on UPD IT and warehouse equipment, and we'll invest the balance of ZAR 379 million in retail IT systems and infrastructure. We are continuing to grow our retail footprint. We also plan to support the increased scale of the group by improving efficiency in our distribution centers and by implementing appropriate IT tools and systems some of which are expected to commence coming onstream during the second half of 2021. We also expect to spend approximately ZAR 670 million in CapEx in 2022 and ZAR 630 million in 2023. This slide reflects our medium-term financial targets. You will note we are in the range of most of our medium-term financial targets, the exceptions being return on equity and working capital days. Given the ongoing impact of COVID-19, we have revised our return on equity medium-term target down to between 40% and 50%. This, however, still represents a significant return to shareholders. We're confident over the medium term that we will be able to ensure our return on equity and working capital days all within our targeted range. We've also added a medium-term target for return on invested capital, which takes into account the lease liabilities that have now been put on the balance sheet. The distribution operating margin still remains above the medium-term target. However, in the medium term, we believe UPD can be expected to have a sustainable operating margin of between 2.5% to 3% due to the impact of genericization. Importantly, the group has continuing headroom for growth. In framing these medium-term targets, we continue to seek to optimize the balance sheet, improve working capital efficiency, enhanced cash returns to shareholders, maintain a dividend payout ratio between 60% and 65% and ultimately deliver a high-quality return on equity of between 40% and 50%. Over the last number of years, we have faced many difficult economic headwinds in South Africa and now continue to face a new and unprecedented global pandemic. Understanding the capability of a company to sustain its performance over time through various economic cycles is important to all stakeholders. This is particularly true for shareholders who objectively evaluate how our company performs. It's therefore important to take a few moments to reflect, which I'd like to do over the course of the next few slides in order to demonstrate the group's track record of shareholder value creation. This slide reflects the growth in turnover, operating profit and margin of the group over the past 5 years. Low selling price inflation has been a consistent characteristic during this period. Bear in mind, the group adopted IFRS 16 on a full retrospective basis in 2020 and has therefore restated the 2019 comparative. This has increased the EBIT margin in 2019 and 2020 by approximately 100 basis points as a portion of the lease costs are now showing as finance costs below the EBIT line. What is important to note regardless of the IFRS 16 restatement is how the group has been able to evolve the operating margin over the past 5 years. Likewise, this slide demonstrates how the group has sustained its financial performance over a decade. This is reflected in the 10-year compound annual growth rates achieved in diluted headline earnings per share of 13.6% per annum and dividend per share growth of 15.5% per annum. The compound annual total shareholder return over the past 10 years equates to 22.5% per annum. These excellent growth rates have been driven by strong organic growth, particularly in our health and beauty business, which has been supported by an efficient supply chain. This has, in turn, translated into strong cash returns, which have not only been reinvested in the business, but also allowed us to progressively increase our dividend payout ratio from 50% back in 2011 to our target payout ratio of between 60% and 65%. I would also emphasize that in the past 10 years, the group has returned over ZAR 8.3 billion to shareholders in the form of dividends and share buybacks. Finally, this graph illustrates the performance of The Clicks Group share price over the past 10 years. You can see very clearly how Clicks, with a compound annual growth rate of almost 20% per annum, has significantly outperformed its peers on the Food & Drug Retailers index and thereby creating enormous value for shareholders. I thank you for your attention, and I'll now hand back to Vikesh.

Thanks, Michael. I will now take you through the trading performance, starting with health and beauty. This is the breakdown of health and beauty sales by category. Overall, we had good sales growth with front shop health being the star performer. As I said at the start of the presentation, category mix was impacted by COVID-19 and the subsequent change in customer behavior. Health care, which is a defensive category, now makes up 55% of total sales. Pharmacy reported low growth of 3.2%. The performance was impacted by a low prevalence of cold and flu during the winter season. This was interrupted by the national lockdown, social distancing and restrictions on international travel. Value growth was further suppressed by our constant drive to switch patients to a generic medication. Front shop health growth of 19.7% was buoyed by a strong performance of the vitamins and supplements category, up 23% as customers focused on preventative health care to boost immunity levels. Baby sales also continued its outperformance with growth of just under 25% for the year. Beauty and personal care was impacted by the requirement to use face mask , people working from home and the restriction on sales during Stage 5 of the national lockdown. A standout performance was achieved in the soap category, up 58% due to the demand for hand sanitizers. The general merchandise category, which was also impacted by sales restrictions, showed pleasing growth of 8.8%. This was driven by 3 factors: firstly, people working from home created an increased demand for electrical goods with household appliances growing by 20%; secondly, we saw good growth of 13.5% in our basket-building categories of domestics and paperwork; and finally, our electrical beauty and technology categories continued to perform very well. Overall, this resulted in total health and beauty turnover growth of 8.4%. Existing stores grew by 4.1% with inflation of only 2%. As you can see, volume growth was 2.1% in same stores. The strong sales performance in health and beauty translated into market share gains across most of our core categories. Pharmacy market share declined slightly for the impacted by consumers staying away from shopping malls and opting for home delivery. This has made independent pharmacies more resilient over the short term. Clicks has a relatively small share of the courier pharmacy market. We will be offering deliveries from all our pharmacy stores from the beginning of November. Important to note is that almost 1 in every 4 medicines sold in the country today is through a Clicks outlet. Good share gains was seen In Front shop health up to 32%. We're now at 19.7% in baby. And beauty reflected a similar trend of market share gains. A strong promotional mechanic has allowed us to grow significant share in small electrical appliances. I will now go into detail on the key drivers that supported our growth. The first and most important driver was delivering value to customers. Considering the tough economic conditions, cost saving has become increasingly more important to consumers. Value is an inherent part of the brand's positioning and will remain a key focus area. We deliver savings to customers in several ways. Firstly, through great everyday pricing. The table on the slide reflects a snapshot of our price indices in August relative to all major national competitors. Also note, this excludes our renowned 3 for 2 promotions. As you can see, the brand remains highly price competitive. Prices are monitored daily and adjusted accordingly. Secondly, through promotions. Customer purchase behavior continues to drive the need for relevant and effective promotional activity. This trend is no different in health and beauty markets globally. Promotional sales grew by 14.7% and now makes up 40% of turnover. Thirdly, we offer value through South Africa's leading loyalty program, the Clicks ClubCard. ClubCard customers received awards in excess of ZAR 500 million during the reporting period. And finally, Clicks is dedicated to offering patients a generic alternative at our pharmacies. Generic medicine sales grew by 7.8% and makes up 68% of volume. The second driver of growth was the differentiation of our product offer. We have an extensive range of trusted quality, great value, private label and exclusive brands. These products are available across all of our major categories, allowing customers a significant alternative to branded products. Last year, we launched our top-tier of private label called Clicks Expert. This was expanded in the year with the hand sanitizer category being an obvious extension. Private label and exclusives now contribute 23% to total sales, made up of 29% in front shop and 8.6% in pharmacy. Our franchise brand, GNC delivered another pleasing performance, growing in excess of 18%. The Body Shop grew by 9.7% in Clicks. Stand-alone stores, however, declined by 15.6%, having closed for a month due to lockdown restrictions and being predominantly located in destination malls. Another exciting launch was the Clicks My Earth eco-friendly range. Customers are becoming increasingly more selective in the products that they use and the impact it has on the environment. This range is of strategic importance to us and aligns to the group's sustainability focus. The next driver of performance was our personalization strategy. Despite the reduced footfall in stores, our teams recruited an additional 500,000 new ClubCard members for the year. We now have 8.6 million active members, making up 78% of sales. ClubCard was once again voted by customers as the #1 loyalty program. It's one of the most generous programs in the country and is simple to understand. Just swipe your card or scan your virtual ClubCard and save. Clicks was also voted as the coolest health and beauty retailer. Firstly, it's awesome to be cool. But more importantly, the survey reflects the choices of the next generation of shoppers and is encouraging for the future of the brand. In the year, new partnerships were launched with Engen and eBucks , which are both market leaders. 1.1 million customers have now downloaded the Clicks app. In an ever digitizing world, the app allows us to connect with customers in a more personal manner, ensuring we become even more relevant. In line with this strategy, we launched our personalized promotions via the app and are seeing encouraging engagement from our customers. Further investments are being made in technology to accelerate our personalization strategy. The final driver of performance was the expansion of our store network and online strategy. As Michael mentioned, we opened 39 new Clicks stores and 14 new pharmacies. This takes the brand to 743 stores with 585 pharmacies. The Clicks brand already has a presence in 97% of destination malls. So our strategy over several years has been to expand into convenient shopping centers. This plan is working well with 74% of our stores now in convenience locations. The expanding footprint supports our convenience strategy and makes our health care offer even more accessible. 50% of the population now live within 6 kilometers of a Clicks pharmacy. A structural shift driven by COVID-19 was the accelerated growth in online purchases. The online store is now our largest store in the chain with sales growing by almost 200%. Its contribution, however, remained small at 1% of front shop sales. Another behavioral change was that customers chose to visit stores less frequently, but encouragingly, their basket size grew by 11%. We've continued our work with the Department of Health and dispensed just under 1 million medicine parcels to state patients. Finally, as I mentioned earlier, to become even more convenient, we will be expanding our medicine delivery service from all pharmacy stores at the beginning of November 2020. That completes health and beauty. I will now move on to UPD. As Michael highlighted in the presentation, UPD has had a very good year, delivering a strong set of results. This is the breakdown of UPD's wholesale turnover excluding distribution and preferred supply contracts. Wholesale turnover grew 17% with hospital being the fastest growing channel. The performance was driven by winning 2 new wholesale contracts, including a large hospital group. As I said earlier, independent pharmacies have benefited from lockdown shopping trends. UPD's sales levels and stock availability have allowed the business to benefit from this shift with the independent pharmacy channel growing by 16.1%. Clicks remains the largest customer, making up 49% of wholesale turnover. The strong performance of UPD's core customer base has resulted in wholesale market share increasing to 29%. Total managed turnover, that's combining wholesale with the turnover managed on behalf of our bulk distribution clients, increased by almost 12% to ZAR 23.6 billion. Generic medicine sales grew by 16.3% and now makes up 70% of volume. The business was, however, impacted negatively in half 2 by the lack of a cold and flu season and patients preferring their elective procedures at private hospitals. Front shop sales was particularly strong for the year as customers bought more surgicals, hand sanitizers and vitamins and supplements. We took a strategic decision to divest our wholesale business in Botswana and sold Kalahari Medical Distributors. UPD has commenced its ERP system design and this project is expected to go live in the current fiscal year. The investment will allow us to simplify our operations, extract further efficiencies and provide world-class reporting to our distribution clients. The Clicks Group remains committed to transformation and sustainable environmental, social and governance practices. We have been investing in this arena for many years now and it continues to be a priority. Focusing on transformation and ESG isn't something that we do as [ additional draw in ] the business. It's integrated in the way we work and is a commercial imperative. The impact of COVID-19 has further elevated the importance of strong ESG practices and highlighted a symbiotic relationship between business, society and the economy. The group has once again been included in the FTSE4Good index, acknowledging our commitment to ESG. We are one of the founding signatories to the SA Plastic Pact and are devoted to reducing the negative impact of plastic on the environment. Board demographic representation is now 56% black and 33% female. Our workforce comprises 93% black staff and 64% female employees. Even in a year where training was extremely difficult due to social distancing, ZAR 140 million was invested in employee training and development. The group was once again recognized as a top employer in the retail sector for the fourth consecutive year. 112 bursaries were awarded to pharmacy students with no work-back agreement in recognition of the need to build the skill base for the industry. And ZAR 19 million was invested in community upliftment projects to support the most vulnerable. This is most certainly not an exhaustive list, but gives you a flavor of the work that the group does as part of our commitment to improving the environment in which we trade. That completes the review of the business. I will now conclude the presentation with our strategy and outlook for the year. The Clicks Group has market-leading positions in both health and beauty retail and pharmaceutical wholesale. We have the potential for sustained organic growth. The long-term market dynamics are favorable for health and beauty. As these results highlight, the group's strategy is working. There are 3 strategic themes, which we believe will be crucial to delivering long-term growth. Number one, convenience. Urbanization and aging population, digitization and the growth in online will lead to a greater demand for convenience shopping. Considering the polarized market in which we trade, brick-and-mortar stores are still essential. I believe it is highly achievable for Clicks to get to 900 stores in South Africa with a pharmacy in every store. Number two, differentiation. One in every three front shop product sold in a Clicks store is a private level or exclusive brand. We will continue to invest in updating them in line with market trends. Number three, personalization. Leveraging customer loyalty through digitization and personalized engagement is essential to support long-term growth. Our strategic advantage is the ClubCard database, which provides the platform on which to build our customer engagement strategy. Now distribution. UPD is the country's leading pharmaceutical wholesaler and a significant service provider to the distribution agency business. This offers us scale and the ability to be efficient. Although UPD is a relatively mature business, its scale and world-class service levels give it a competitive advantage. This allows for continued market share growth. Lastly, as Michael mentioned earlier, we will continue to make investments to support the growth of the business, particularly in supply chain, IT and in the development of our people. Now the outlook for 2021. COVID-19 restrictions socioeconomic challenges and the drag on the economy from significant job losses will continue to affect consumer behavior and trading in this year. The first half is expected to be more challenging. We had a very disruptive start to the new financial year impacted by purchase action across the Clicks store network during the second week of September. This was triggered by an offensive TRESemmé advert published on our website. It's too early to quantify any reputational damage from the incident, customer trading patterns have returned to normal during the month of October. It's important to note that we have been trading well in tough economic conditions for several years now. However, nothing prepares you for a global pandemic. These results have highlighted that we have adapted to the current market dynamics and have settled into new ways of working. The consumer environment will be extremely constrained. So executing with excellence will be a high priority, particularly during Black Friday and the festive trading period. Conditions will remain fluid and unpredictable for the foreseeable future, but we have the ability to trade our way through these and sustain volume growth. Our results have demonstrated that our core health and beauty markets and our business model are both resilient. Significant supply chain and IT projects will go live in half 2, creating a more efficient organization for the future. I therefore remain confident of the group's ability to continue delivering. Thank you for listening, and we are now happy to take your questions.

I have a number of questions here from Jiten Bechoo at Avior. Well done on a good set of results. Could you provide some information as to what channels you will look to grow UPD sales [ presuming ] we're going forward?

We certainly -- I mean, UPD has 2 large business unit, effectively the agency distribution business and the wholesale business. Now although UPD has 29% market share in the wholesale business, we think it's possible to get back to 35%. So UPD will be targeting market share growth in both distribution and wholesale to try and get to 35% market share into the future.

Is there a target for further inventory days reduction? If so, what assets can be optimized?

Certainly, we have an internal target. We'd like to get it below 65 days, so somewhere between 60 and 65 over the medium to longer term. The key to that is improving our ability to do the line forecasting through the space planning distribution structure and the stores. And that's part of the IT project that we're rolling out in the second half of next year. So that will be a key enabler for us. And I guess once we've embedded that down, I think we can certainly see improved retail stock days. And there is some scope for UPD to still be more efficient on stock, but marginally so.

In respect of online sales, does Clicks internalize its last-mile delivery, especially considering the wide store network, which can be used for performance?

We externalized that at the moment, but we manage the customer engagement on the online piece. So the IT and engagement around online is managed by ourselves, but we outsource the logistics to a third-party service provider.

The group's balance sheet is healthy. Why was there no catch-up of the missed interim dividend such that the payout ratio would have been maintained at 65%?

Yes. I think we're just being conservative. So you're right, the balance sheet is healthy. We've come through a very difficult 6 months and certainly are more comfortable than where we were in April. That's why we've restored the dividend. We did indicate that clearly in our trading statement update that we would be targeting a normal payout ratio of 60% to 65%. So we've gotten at the bottom end of that. I think one has to still understand that the year ahead, COVID hasn't disappeared. There could be second wave of infections. But from our perspective, we are an essential services provider. We fully expect to be able to trade the largest 2 divisions in our business being Clicks and UPD, and we certainly wouldn't want to do rights issues or anything like that in the future as some other companies had to do. So we prefer to keep a conservative, strong balance sheet. And I think our shareholders will be pleased with the ZAR 4.50 that we declared as a dividend.

Has there been any conclusion in the court case with the Independent Pharmacy Association (sic) [ Independent Community Pharmacy Association ] regarding Unicorn products?

Certainly, we've been granted leave to appeal. So that case will continue. Obviously, the previous judgment has been set aside because we have been granted leave to appeal . And we're expecting that to be heard probably in the first quarter in the new calendar year.

Are there any regulatory hurdles in South Africa constraining the sale of medicines online? If not, is the threat from pure-play e-commerce entrants such as the PillPack case study, what will be your competitive edge in home delivery to fend off such threats?

Well, certainly, I mean, regulation requires you to see a pharmacist when you're handing in your script. Your repeat prescriptions can then be delivered to your home from a chronic perspective. We already do that today. So we offer that service to customers. And from the beginning of November, we will offer that service to all our customers for free. So we are improving actually our service levels to consumers around pharmacy moving forward, which doesn't necessarily give a gap to a pure-play pharmaceutical or [ mind ] player to come into the market.

A question from Paul Steegers at Bank of America. Can you highlight what retail growth you are seeing at the moment? And was there a big negative impact from the unfortunate TRESemmé hair advert?

Most certainly. I mean, the month of September was very disruptive, as you can understand, particularly in the second week where the disruption did take place. What's encouraging for us is the month of October, the trading patterns have actually returned to normal. They have returned to the patterns previously the event. So I certainly, at the moment, we -- obviously, you can never take a short bet on this, we still have to do customer research, et cetera, but the current trading patterns have normalized.

A question from Alan Nesbit at Aikya Investment Management. Does the ClubCard and app give you data mining opportunities? Can you give examples of how you leverage that?

It most certainly does. And the launch of the personalized promotions is a very good example of that. So we have an AI engine that runs in the background, looking at customers' purchasing patterns, what they purchase, what type of products they purchase. And we are becoming probably more targeted in the promotion that will now allow customers to select on the app that is beneficial to just that customer. That's obviously, as I always say, it's still in infancy. There's always new technology that has to be brought in, which we are bringing in and will potentially go live within a year or 2. But certainly, we are leveraging the data that we have available to us.

Question from Shaun Bruyns of Mazi Asset Management. Which categories do you feel Clicks indexes in, in terms of private label or provides the biggest opportunities?

I would say it's in personal care because that's probably the most competed area. Brands are exceptionally strong in personal care. So it's very difficult to penetrate. But over time, we have moved that penetration and contribution in personal care up every single year. So I remain convinced that we can continue to penetrate that category with private label.

A question from Carlos de Leon at Lombard Odier. What is management thinking on digitalization and development of online capabilities in the light of rising online sales? And how much CapEx is being allocated?

So I mean it's important to note here that we already have an online strategy. We've been investing in it for several years now. We have an online store, we have a website, we have the app. And we are continuously enhancing the, what's the right word, we're enhancing what we offer our customers via the digital channels. So that will continue to grow over time. And as we see new trends, we will adapt accordingly. But I think we're quite well positioned in servicing our customer today without massive CapEx investments moving forward.

Question from [ Stuart Pretorius ]. Will the delivery service pharmacy only be for RPS? Or can the patients add OTCs to their delivery order?

It will only be for RPS because it's illegal requirement when you come to a pharmacy that you provide your details and so that the pharmacists can give you consultation. So it's not legal to just pass on schedule 1 or 2 products to a customer.

Some more questions from Jiten Bechoo. What was the major catalyst for Clicks's baby category sales in the period?

Well, I don't think baby cares that it's COVID-19. So baby will need to eat, they still need nappies, et cetera. And I guess our strong value offers have continued to drive the baby category.

Another question from him. Does Clicks intend to increase in-store services such as telemedicine?

We've already begun that. We've got 10 in-store virtual clinics. Doctor engagements are already up and running and we certainly will expand that in the year, coming in the year thereafter. So we've already begun.

Can you guide on the SEP price increase for 2021? Will that impact for more into H2 of '21?

Again, we can't talk on behalf of government, but there is a formula. The formula is 70% of South African CPI, and the period that it looks at is from October last year to September this year. And then the rand exchange rate relative to the euro and the dollar is the other 30% in equal proportion. And then -- 2 are added together and then the Minister applies his mind as to what the SEP increase will be and when it will be announced, which is typically around January, effective February or March next year. So it's retrospective from that perspective. In theory, it should give you around 6%, but who knows what the Minister may do. In terms of the benefit that accrues to UPD, it's likely to be in half 2 like it traditionally has been.

Are you concerned that there are insufficient new property developments to support your 25 to 30 new store targets? Is the answer that you will accelerate acquisitions of brownfield locations?

Certainly not. We're not concerned about spacing available for expansion. In fact, more space is becoming available for expansion in the existing shopping centers where we would ideally want to be putting our stores in because it's certainly more defensive. It has an existing tenant mix and customers. It's always a higher risk to go into a new shopping center. So I certainly think we'll be able to achieve our target for the year.

A question from [ Alex Singh ] at Kempen. Please expand on the practical reasons for lowering the ROE target?

As I said in the presentation that if you look at the lockdown impact of COVID-19, we've coped with the initial 6 months, but the economic devastation or fallout of that is still ahead of us from a country perspective. We've already seen 2 million-plus jobs in trouble. There may be more to come. It's going to take -- if you look at different economists at least around 3 years, maybe 5 years to recover from this to get us back where we were. And so in light of that, primarily, that we think a target of 40% to 50% is a more realistic target. And we always have the ability to continue to provide additional returns to shareholders by buying back our shares as well, which would also support that. So it's a combination of those 2 factors.

Another question from Paul Steegers of Bank of America. When would the UPD bulk contracts annualize? Are there any more in the pipeline?

So they're annualizing the current -- the new one is obviously annualizing the current year or the current fiscal year. And we're always engaging with the manufacturers as their contracts come up with other service providers. So we're always engaging and hoping to land a few more.

Question from [indiscernible], Prudential Investment Managers. Can you talk to why you continued with the share buybacks yet lowered the dividend payout ratio?

Just to be clear, we bought back shares in March. So that was basically, if you like, pre-COVID lockdowns and then suspended the interim dividend as a response to COVID arriving in South Africa, which was the April event as well as the liquidity challenge that the Reserve Bank was having at that point in time. So I think you should see them as separate. But nevertheless, we are happy with the buyback we did. And it was important for us to restore the dividends payment, which is what we said to shareholders in April. We've done that. And if there's opportunities to buy back share, we will. We'll continue to look at those as and when the Board feels fit.

Okay. So there appears to be no more questions. Thank you for Michael and myself, and goodbye to everyone. Thank you very much for listening.