DFI Retail Group Holdings Limited (D01) Earnings Call Transcript & Summary

Okay. Well, good morning, everyone. Thank you for joining us for the results presentation today, relative to our 2021 interim results for the first half. Here's the presentation disclaimer, which I know you've probably all read and seen before. Here's what we want to cover during the course of the session. I'll run through the key highlights in a moment. Clem will come in and talk about the financial results. I'd then like to touch on the market conditions that are currently prevailing. And then the usual business update, a brand update that we would like to introduce and then an outlook seeing where we might see prospects for the future. Okay. So moving on to the highlights. After 18 months of COVID, headwinds are still remaining strong. In Health and Beauty, North Asia has been heavily impacted by sustained border closures. And in Southeast Asia, lockdowns and movement restrictions have had a more significant effect this year compared to last. In IKEA, while there has been a beneficial transfer of sales into e-commerce and new space, profitability has been impacted by store closures, shipping constraints affecting availability and higher preopening costs. On a more positive note, 7-Eleven profits are recovering strongly and grocery profit trends are very encouraging indeed. In addition to that, our key improvement programs have built a strong, solid financial foundation, we believe, and we remain confident in our transformation plan. Moving on to the financial results. I'd now like to hand over to Clem.

Thank you, Ian. Good morning, everyone. Let me take you through a summary of our interim results to the end of June. In terms of total sales, our total sales, including sales of our associates and JVs are a touch under $14 billion at $13.95 billion, down 4% on the year. These, overall, have been impacted really by high panic buying from last year but compensated for by strong Maxim's sales in the first half. Our total subsidiary sales are up $4.5 billion, down 13% on the year. And here, if you exclude our divested businesses, Wellcome Taiwan and Rose Pharmacy in Philippines, then that minus 13% comes down by about half, but again, our sales here are impacted by the annualization of panic buying. In terms of our subsidiary operating profit, that's at $155 million, down 27% on last year. And profit, again, has been impacted by lower food sales this year, but also by subsidies received last year. So that -- those 2 are the main contributors to our reduction in profit for the half. Our share of associates, JV and underlying profit this year is negative $44 million, a swing of $48 million on last year, and this is primarily due to a change in the profitability of Yonghui. Yonghui has been impacted, obviously, by strong food sales from last year, but it's also been impacted by increased online competition this year. In terms of our underlying profit attributable to shareholders were therefore at $32 million. And as for nontrading items, this year, we've included a provision for pivoting our PT Hero business in Indonesia away from Giant and towards IKEA and our Hero brand as well as Guardian. That gives us a reported profit attributable to shareholders of $17 million, an underlying EPS of $2.38 and an interim dividend per share of $0.03 per share, down from $0.05 last year. Turning to sales of the subsidiaries. Overall, our total food sales were just under $3.3 billion, down 14%. And if we split those out into Grocery Retail and Convenience, our Grocery Retail sales were again a touch under $2.2 billion, down 22%. But if you factor out the divestment of Wellcome Taiwan, that comes down by about 1/3. And obviously, this is impacted by the annualization of strong panic buying last year, but we are encouraged by our 2-year LFL against 2019. In terms of Convenience, our sales are just under $1.1 billion, plus 7% on last year. And the improvement reflects the fact that movement restrictions have been eased. And it's clear here that latent demand is here, but it will take time for ourselves to recover properly. In terms of Health and Beauty, our 2021 half 1 sales are at $887 million, down 15% against last year, and 2/3 of this reduction against last year actually is contributed by the divestment of Rose Pharmacy, which happened last year. Now what you've got here is you've got 10 markets. We're in 10 different markets. So there's a variety of changes and dynamics that are impacting year-on-year performance in each of these markets. So for example, if you look at North Asia, we're seeing improving trends from March. But in Southeast Asia, lockdowns have been much greater this year than they were last year, and that's impacted our Health and Beauty business. In terms of IKEA, IKEA sales are broadly flat on the year. And what we've got here is new space and strong e-commerce growth, as Ian mentioned, compensating for lockdowns. Through most of the first half, Indonesia was working at around 50% capacity; Taiwan have had some serious lockdowns in the last couple of months; and as we speak, our Indonesian IKEA stores are closed. In terms of sales of our associates, Maxim's just over $1 billion, up 15%. And as with Convenience here, what we're seeing is performance improved as lockdown restrictions have eased, particularly here in Hong Kong and China. Yonghui sales are slightly up at $6.8 billion. But really, Yonghui sales reflect a mix of things that are going on. There's this new space. There's annualization of strong panic buying from last year, and there's aggressive e-commerce competition. In terms of Robinsons, our sales are at $1.6 billion, 7% down on last year. And again, what we're seeing here is the impact of the recycling of a high base and movement restrictions. Turning to subsidiaries operating profit. Our Food profit is at $101 million, down $47 million from last year. Looking at the detail, Grocery Retail is at $83 million, down from $148 million last year. Whilst on the face of it, lower grocery profit here is disappointing, we are seeing strong growth on a 2-year basis. Profit of $83 million in 2021 compared with profit of $26 million of 2019. So a strong base here. In terms of Convenience Stores, our first half profit was at $19 million, up significantly from last year, up $18 million. But the profit improvement here in Convenience is encouraging -- most encouraging. We're still a way to go to get back to where we were in the first half of 2019. But we're moving -- we're certainly moving in the right direction. Our Health and Beauty profit is at $21 million, down from $42 million last year. And profit here continues to be impacted by border closures throughout Asia, particularly here in Hong Kong and China, but also restrictions on international travel around all our markets. Our IKEA profit is at $12 million, down from $25 million last year. And there are a number of things, as I've said, that are affecting IKEA's profit. The lockdown particularly -- lockdowns particularly in Taiwan and Indonesia, stores trading at below capacity, margin impact from stock availability issues caused by container problems, preopening costs are still relatively high. We're still expanding the business, particularly in Indonesia. So there are lots of issues, lots of things affecting our IKEA profit. In terms of our SG&A. Our SG&A costs are down at $29 million, an improvement of $18 million, and we're taking strong action to control our costs in these very difficult times. We've made people savings together with centralized procurement efficiency savings. So overall, our underlying operating profit for our subsidiaries is at $155 million, down 27% on the year. In terms of cash flow, as you can see at the bottom of this slide, our net debt is at $935 million this year compared to $1.1 billion last year. So we feel that we are continuing to manage our cash flow strongly. The key things here really are rent has come down significantly, half-on-half, and actually, even more significantly 2019 to 2021. We've got significant improvements in working capital due to better stock management as we turn our stock faster. Capital -- our CapEx, we still maintain a kind of prudent management of our CapEx. So overall, our cash flow position is relatively strong and significantly better than last year despite what's happened in the first half. In summary, it's been a tough first half and it will be a tough second half. But the fundamentals underpinning the business remains strong, and we are well positioned for a post-COVID world. I'll now hand you back to Ian.

Thank you, Clem. So just in terms of market conditions, this is without doubt a very challenging external environment. And COVID continues to prevail 18 months after we had our initial shock wave. If you look at this chart, which shows the average daily COVID cases recorded each month in each of our markets, the red circle show where movement restrictions have been imposed, clearly impacting footfall, most notably in Indonesia and Malaysia. So in January, in Malaysia, it was around about 3,000 cases a day. Indonesia was around about 11,000. And you look at those accelerated in July to 9,000 and 39,000, respectively. In fact, more recent figures this week would indicate that Malaysia is around about 17,000 and Indonesia is 48,000 and both countries are imposing very heavy movement restrictions accordingly, which is clearly having an effect on our business. This is how it used to look when we were vibrant in Hong Kong and Singapore, and this is how it can frequently look in the last few months. So a significant change in airports and MTRs, and we obviously have presence in each of them. And these are the example markets. We have them in others, too. The mall operations, when we talk about movement restrictions and impact, we have supermarkets that are open and Health and Beauty stores that are open, but we need customers. So this is an indication of what it can look like, where you have very heavy movement restrictions despite the fact that malls are still open. What that's doing overall is having an impact on consumer confidence, which we're seeing coming through. In every market, we can see that consumer confidence has been falling. And we've done some modern research in relation to what concerns our customers in each of our markets. And the key 3 features are: they're concerned about the economy; they are concerned about their job security; and they're concerned about their health. So not surprisingly, up to 90% of consumers intend to save more and spend less and there's a very strong evidence of a flight-to-value with people looking to trade down where possible or save money wherever possible. We need to try and respond to that in terms of the way that we manage our business, which is part of our overall transformation strategy in any event. So it's demonstrating to us the transformation plan is not only working and on track, but actually is proving critical. The strategic priorities through the 5 strategic circles remain in place as to the improvement programs of labor productivity, procurement, assortment optimization and fresh supply chain efficiency. Looking into those in turn to give some indication of the progress that we've made, with regard to fresh supply chain efficiency, we now have collective cross-banner sourcing close to 80% of the group volume, which is enabling us to build partnerships with key suppliers to improve quality and availability. We've also looked downstream at our stores themselves and developed training programs and process change for over 5,000 team members on stock management and product care. And a consequence of that is as well as improving efficiency, we've also reduced food waste by over 50%. Coming to labor productivity. We're looking at developing system processes and ideas about how we can generate higher levels of operational efficiency and improve productivity. We've got better enhanced wage controls with better forecasting for managers and better predictive analysis on how many hours they need to use each week, and that's enabled us to drive higher levels of roster accuracy with the rollout of new team member programs during the course of this year. That will gradually roll out to more stores. And as a result of that, we'd anticipate having twice as much savings in 2021 on productivity than we landed in 2020. In terms of procurement, which is around goods not for resale, we centralized that process with a strong central team. We've got enhanced control with management in place, and we're even using e-sourcing reverse auction to try and improve costs from people that are bidding for particular parts of our business, particularly on utilities. We've had key savings benefits coming out of marketing, supply chain and store costs by reducing the number of suppliers and going with key supply partners. And indeed, in terms of our energy improvements that we're looking to put in place, we saved 30 million-kilowatt hours in the past year. In terms of assortment optimization, we put category planning training in place for over 200 team members. And that's meant that we've conducted over 6,000 individual supplier discussions to improve cost of goods negotiations and reduce our overall costs. And what we're, therefore, doing is ensuring that those costs are then look to invest in price campaigns to lower prices, save our customers' money, which is exactly what they're looking for. We've also used it to challenge cost price increases, particularly when we've got a better grip on management -- dynamics and change on commodity pricing in order to make sure we push back on what we regard as the legitimate price increases to further save our customers' money. Looking at the strategic priorities and delivering the changes required. We believe we've got a stronger senior and middle management team in place. We're enhancing expertise in digital and CRM as we push up our programs in that area. And we've developed a stronger in-store training through a digitally advanced program to customer -- to team members mobile phones. In terms of China, we now have over 1,450 stores in 7-Eleven in China, opening a further 90 stores during the half. We've also seen them benefit from a significant systems upgrade, which has been badly needed, which has been put in place over the first half. And indeed, with Mannings, we've completed our consolidation plan of bringing our stores back into the Guangdong area, and we're seeing encouraging results in terms of sales performance year-on-year and profitability as a result of that. Moving on to Hong Kong. We've got strong underlying Grocery Retail performance I mentioned earlier in Hong Kong, and that's showing and demonstrating what we're delivering for our customers, more effectively now than perhaps we were in the past. 7-Eleven now has over 1,000 stores in Hong Kong for the first time, and we're focusing very much on the local customer in terms of Mannings and looking at price investments there to drive volume growth, which we're doing quite successfully. In terms of revitalization of Southeast Asia, which has been something we've been addressing for a number of years now, we're seeing some real benefits coming through. We've optimized the portfolio, divested where we've needed to and rationalized our store base where we had underperforming stores, to focus on the ones that we believe have a strong and positive future. We've invested far more heavily in capital through IKEA, which we saw as a really strong opportunity for us. And we've relaunched over 100 stores of Giant in a major relaunch plan that went through the back end of last year and into the first half of this year, across Singapore initially and now Malaysia. And we've recently introduced a price investment plan to lower prices on key products across the Guardian chain in each of our key markets. Digital is becoming increasingly important to us. We've launched Yuu Rewards last year and it's exceeding our expectations, both in terms of customer engagement and redemption number of members. And we've had significant year-on-year e-commerce growth in each of our key markets and sectors. We have a strong technology partnership now in place to help us advance our technical capability even further within our digital ambition. Looking at Yuu, and investing in the Yuu program, which was the rewards program that we launched in Hong Kong last year, we now have over 3.5 million members, an incredibly strong customer awareness of 99%. And what we're seeing is that customers engaging far more in the program -- with the new program than they were with prior programs that we had in place in each of our banners. They've actually earned 80 billion points collectively since the program was launched, and over 30 billion points have now been redeemed. That's a very important point because any loyalty program depends upon people continuing to utilize it and maintaining their engagement with the program. And with that level of redemption, the engagement is strong. We're now looking at developing more effective personalized CRM programs for individual customers to increase visit frequency in a more targeted way. And what we're also seeing is a combination of our investment campaigns, our operating standards and indeed, a more effective rewards program. We're seeing market share gains come through in both Food and Health and Beauty. That's also giving us the opportunity to grow our partner ecosystem. We've got strong partners already, particularly with Hang Seng, and we're looking to advance other similar partnerships in other complementary markets. Our e-commerce growth has been strong across the group. Our e-commerce has moved from about 8,000 orders a day in January 2020. to close to 30,000 a day now as we speak. So considerable growth in that particular area. We've got double-digit e-commerce growth in all our IKEA markets. And we've also increased our capability in e-commerce in grocery retail, both in North Asia and Southeast Asia. And we also continue to advance our capability in Health and Beauty in our key markets as well. So e-commerce is now the #1 store in Mannings, and it's actually also the #1 store in IKEA as well. So strong improvement, but a lot more to do in this particular area to make sure we've got a very strong and effective O2O offer for our customers in each of our markets. Price investment has been key. It's been part of our plan anyway and with the customer flight-to-value, it's become even more important. So we've launched strong price investment campaigns in Wellcome, in Giant, in Mannings, and more recently in Guardian. And through our price survey work, we believe we now have consistently lower prices than each of our key competition in each of these markets, and it's driving double-digit increases in customer value perception, but also quality and service as well. We've spoken before about our own brand changes. Meadows has been launched very successfully, and that also is a strong contributor to value as indeed is the relaunch of Yu Pin King, which is going extremely well in Hong Kong, and will also be introduced into the Singapore market. And we've also revamped and revitalized the Giant own brand range progressively in conjunction with the rebranding launch that we've done in the stores themselves. So again, that's showing very encouraging results in relation to customer steps into that particular brand. So we pushed strongly on own brand in the half and prior. Meadows is now #1 brand across Dairy Farm. Over 1,200 SKUs collectively across Meadows, Yu Pin King and Giant, and we entered some food quality awards for the first time internationally, with one selection in Taste International, and we're awarded by over 80 quality food awards, which we're now using to market both Meadows' brands more effectively and Yu Pin King. As a result of those awards, we give customers more confidence in the own brand offer that we have. We've seen a 40% growth in own brand penetration more recently, and we've got a strong pipeline of further own brand growth coming through as well, both in Food and indeed in Health and Beauty. Within Grocery Retail in a bit more detail, the price campaigns have driven double-digit volume growth in the items that have been featured. The Yuu Rewards program, as I mentioned, is going strongly. Daily e-commerce volumes are up 600%, which is really encouraging. And we've also looked at our new formats. So we have a number of new marketplace formats now within Hong Kong, and they are each driving double-digit sales growth and with a strong improvement in customer brand perception on the back of it as well. The market share outperformance is really encouraging, but also so our sales productivity of a standard store base -- a stable store base getting a 40% increase in sales productivity over 2019, which is leading to greater sales, but also strong underlying profit growth as well despite -- even outside of the COVID improvement in foot traffic we got last year. Similarly, in Southeast Asia, our performance there has been problematic for a number of years, but we're now seeing the green shoot success and light at the end of the tunnel in terms of our progress. We've got strong volume uplift coming through in the price investment campaign in each of the markets. We've relaunched over 100 Giant stores I mentioned. We've introduced new ranges, new products. We plan on redeveloping the upscale new format that I mentioned in North Asia, introducing that into 30 more stores through refits during the course of this year. And we also have the multi-banner e-commerce pilot launching as well, which will enable customers to buy across CS Fresh, Cold Storage, Giant and the Guardian brand in one order, in one place, in one invoice, in one delivery and that is going live shortly in Singapore in pilot. We're also looking at a 70% increase in sales productivity against our 2019 numbers, and that's also leading to a strong improvement in underlying profitability. So we're pretty encouraged by the progress that we've made in Southeast Asia Retail. Moving on to Mannings. I mentioned earlier about the significant impact the border closures have had with the Mainland tourists reduction that we've had, moving from about 2.5 million a month about 18 months ago to less than 4,000 now. So our strategic focus has shifted to what we can do to attract more local customers. We've invested in price in over 1,200 SKUs. That's driven a significant improvement in customer price perception and value and range, and we've got over 70% volume growth in the items featured and strong market share gains have been achieved as a result of the initiatives that we've made. Some encouraging signs in Macau where the border restrictions have eased more recently, and we've seen the benefit of that as very significant like-for-like sales growth in Macau as a result, which is giving us more encouragement that when the border does finally open again in China, the work that we've done already in terms of being better value for the customers will be equally attractive to those customers, which should give us disproportionate gain when they come back to Hong Kong. As a result of the changes that we've made and the increase in volume, that's given us significant growth in our cash flow to improvement. Moving on to Guardian. We talked earlier about the challenges that are facing there in terms of footfall traffic is actually more severe this year than it was last year. So that's impacting on the Guardian performance intermittently as it changes from country to country. We are seeing customers' purchase emphasis swinging towards health and personal care, which is not really surprising. So that's been the focus of where our price investment campaign has landed. And again, encouraging sales performance coming through post launch, with enhanced customer value perception in each of our markets as well the changes that we've made. We've seen double-digit growth in basket size coming through and improving like-for-like sales trends emerging throughout the first half. And we also plan advancing further on e-commerce, but also in bricks and mortar as well. There are strong opportunities to grow the store pipeline, both in Indonesia and in Malaysia, in particular. 7-Eleven, we're seeing good improving like-for-like sales trends from 7-Eleven, particularly in China, which was very severely impacted by heavy lockdowns last year. And as a result of that, we're seeing some strong profit recovery coming through. We've launched over 500 own brand SKUs in the period, and we've got the 1,000-store milestone achieved in Hong Kong for the first time and over 90 stores opened in Guangdong. The IT systems has been long overdue and is now underway, and I think there's about 200 stores to go before that's complete. But as well as the bricks and mortar changes and the system changes, that's also helping our digital emphasis, and we've tripled our daily O2O volumes in our Chinese 7-Eleven stores and invested further in pricing in Singapore due to previous competitiveness in that particular market. IKEA, we had a double-digit e-commerce growth in IKEA. E-commerce is now 2x the average store sales and is the biggest store that we have in IKEA. But again, we believe there's great opportunity to continue to grow and develop in IKEA, and we've continued to advance that in the half, as we have been in previous years, and there's more to come. We owned our third Indonesian store, and we also opened a larger replacement store in Taiwan, both stores of which are doing well when restrictions are not providing difficulties. We've got home planning service launch in Hong Kong, which allows sort of full end-to-end service to customers for their kitchens and bedrooms and bathrooms. We'll go to their home, we'll measure things for them and advise them and then place orders in place, so we get a full end-to-end service for them to get the best requirements for their needs. And we continue to advance with 5 new locations, a combination of stores and pickup points emerging in the second half. So there's a lot going on within the brands, a lot going on within the banners. So what else are we doing in thinking about the Dairy Farm corporate brand itself. So we're looking to refresh our brands and also refresh our image. If you look at Giant, it was like this since more recently and since 1982. We've had Cold Storage since 1998. Marketplace since 2007 with no real changes taking place until recently, in Dairy Farm itself since 1983. So Giant, we've moved it from this to a more contemporary design, which has been very well received by our customers. Uniforms have changed as well to add a bit more vibrance and personality. Cold Storage is moving and advancing to a more contemporary fresh food emphasis through CS Fresh. Marketplace is moving as well to reinforce fresh food as a core reason to shop as well and rebranding there, and indeed getting rebranding in uniform also. So 7-Eleven also from the older style uniforms and move into a far more contemporary uniform as well with a greater level of personality and customer engagement. So refreshing our retail brands, what are we doing about refreshing our corporate brand? Well, the Dairy Farm brand has been around for over 160 years. In its current form, it's been in place for -- since the early 1980s, as I mentioned. And it's a long time since we had Dairy Farm, long time serving our capital. And so we want to try and recognize that the branding that we convey reflects who we are now, which is a Pan-Asian international retailer, and we want to reflect that in terms of the way the corporate brand is represented and bringing up to date at the same time with a bit more of a contemporary image. So moving away from the earlier logo Dairy Farm to the DFI Retail Group, which is the new corporate brand, which we are launching now and how we're going to reference ourselves going forward. We believe it's bright, it's contemporary. It has [ intonations ] there in relation to not just offline, but online as well and recognizes what we are, a strong Pan-Asian retail group with thousands of outlets across 10 different markets. Moving on to looking forward through our business outlook. Clearly, it's been very challenging times, and it will continue to be challenging as Clem mentioned earlier on. But we do have strong plans in place, both online and offline. And we've now built a very solid financial foundation to use the springboard for future growth. We've relaunched the brand -- Giant brand in Singapore and Malaysia. We've optimized our portfolio to ensure we focus on stores and markets where we believe there's opportunities for growth. We've optimized our space within our stores. We've reinvented and redesigned our upscale, which is going extremely well, and that will roll out across all our upscale stores in the next year or 2. 7-Eleven continues to advance with over 1,000 stores now in Hong Kong, and close to 1,500 stores in China, and that will continue to grow over the next 2 to 3 years also. IKEA, we've invested heavily in IKEA over the last 2 or 3 years, and we expect that to strong -- bear strong fruit, both in terms of sales, market share and profitability in the coming years. Despite the difficulties we got in Health and Beauty, we are seeing a gain in market share, notably in Hong Kong. And the same is true in Food as well as strong underlying profit growth. So there's strong changes that have been made in advancing of where we are in the future, significant strides in own brand, step change in digital. And therefore, the transformation continues. So we believe that despite all the challenges that we're currently facing and have done over the last 2 years now, the business is far more effective than it had been in the past. And therefore, will prove itself to be far more resilient. And therefore, we intend to emerge from the COVID crisis stronger, not weaker, and we continue to build on the background of a transformation that continue to remain on track. Thank you.