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

Ladies and gentlemen, thank you for standing by, and welcome to the Dairy Farm International Holdings 2021 Annual Results Briefing Conference Call. [Operator Instructions] I would now like to hand the conference over to your host today, Mr. Ian McLeod, Group Chief Executive of DFI Retail Group; and Mr. Clem Constantine, Chief Financial Officer and Property Director of DFI Retail Group. Thank you. Please go ahead, gentlemen.

Okay. Thank you, Anna, and welcome, everyone, and thank you for joining us this morning for our full year results presentation on our 2021 performance. Go through the usual disclaimer. And then looking at the agenda, I'll go through the key highlights in a moment. Clem will come in with a view on the financial results. Then I'll provide an update on where we are against our transformation strategy and then an outlook on what we expect to be coming in the future. So moving on to the overall highlights. I think actually it's been quite an encouraging underlying performance although sales were lower by 2%. That was largely due to group divestment with the biggest portfolio changes being from the divestment of Wellcome Taiwan at the back end of last year, Rose Pharmacy at around about the same time. And we pivoted away from giant brand in Indonesia as well. What was encouraging was the underlying net profit from our subsidiaries, which excluding subsidies, which was the benefit of last year, improved by 35% underlying year-on-year. Grocery retail, in particular, was a strong performance overall, and Health and Beauty had a good recovery in the second half. China, through our convenience performance had another challenging year due to the COVID lockdowns. But we did see a strong improvement coming through driven by Hong Kong. Our key investments in space continues to be strong, building for the future with 30 touch points now as against only 17 that we had in 2017. So good underlying subsidiary performance, but overall good performance was significantly impacted by Yonghui who had a really tough year. But as far as the transformation plan is concerned, our activity plans remain very much on track, and we're encouraged by the progress that we continue to make. Moving on to the financial results now I'd like to hand you over to Clem who will take you through that piece of the presentation.

Thank you, Ian, and good morning to everyone. Let me take you through a summary of the results for DFI Holdings Limited for the 12 months to December '21. If you look at our total sales, including those of our associates and JVs, we were at $27.7 billion, down 2%. Our subsidiary sales were just over $9 billion, down 12%. But most of this, nearly half actually was due to our divesting of the businesses that Ian mentioned earlier. Our subsidiaries net profit was at $145 million, down from $200 million. But if you exclude the net subsidies that we received in 2020, when our profit was 35%. In terms of our share of associates and JVs, that was negative $40 million in 2021, down from $76 million. And the major swing there was Yonghui's profit, a decline of $119 million, but it's also worth stating that Maxim's profit went forward by 42% in the year. Net nontrading items were negative $2 million. And here, really, what we saw was disposal gains from property sales offsetting our restructuring costs in Giant in Indonesia. Our reported profit attributable to shareholders was $103 million, down from $271 million, and our earnings per share was $7.73, down from $20.38. Our total dividend for the year is $9.5, down from $16.5. Now turning to sales. Our grocery retail sales were at $4.1 billion, down 22%. But as we said, portfolio optimization accounted for 50% of this decline. So exiting Indonesia Giant and disposing of Wellcome Taiwan were the main causes of the decline. The remaining drop in sales was predominantly due to the normalization of panic buying from 2020 to 2021. In terms of convenience store sales, we were at $2.2 billion, up 7%, and we saw strong LFL growth in Hong Kong, particularly in the second half and strong LFL growth in China, particularly in the first half. We also grew our store network in the year. We opened over 360 convenience stores. In terms of Health and Beauty, we were at $1.8 billion, down 9%. But again, if we exclude Rose Pharmacy, we're broadly flat on the year. And it's also worth saying with respect to Health and Beauty, that the restrictions in Southeast Asia from COVID were much more severe in 2021 than they were in 2020. In terms of IKEA, we were at $816 million, largely flat on the year, down 2%. We've seen double-digit e-commerce growth, but that was offset by COVID-related trading constraints, particularly in Indonesia and Taiwan. We still managed to open in excess of 40% space, new space in IKEA. So we're set well for the future with respect to IKEA. Turning to our key associates. Maxim's sales were $2.5 billion, up 19%, reflecting strong recoveries in both Hong Kong and China; and Southeast Asia for Maxim's gradually improved as restrictions eased in quarter 4. It's also worth saying that they had an encouraging level of moon cake sales in the year. Yonghui sales were at $13.1 billion, up 4%. And here, what we saw was strong e-commerce sales growth. But here, it was at the expense of margin. Robinsons Retail were at $3 billion sales, down 4% steady, showing an upward trend through the year. If we turn to subsidiaries operating profit, our grocery retail profits were at $143 million this year, down from $267 million last year. But last year was impacted severely by subsidies and, obviously, the panic buying. You've got to go back to 2019 where our grocery profit was actually $63 million. So what we really see is a healthy underlying growth in our grocery retail business. Convenience store profit was at $54 million, $3 million down on last year, a strong performance given that 2020 included net subsidies. And the same applies for Health and Beauty. Our Health and Beauty business had profits of $56 million, down $9 million on the year. And again, the $9 million -- actually the $56 million from last year includes a degree of subsidies. With respect to IKEA, our operating profit was $45 million, down from $71 million last year. And here, as I said, we had COVID constraints, particularly in Taiwan and Indonesia with stores working on below capacity. We had over 130 lost trading days, and IKEA had to deal with global supply chain issues, which actually impacted the whole of IKEA and, obviously impacted our availability. With respect to SG&A, we continue to control costs very tightly, both in terms of our [indiscernible] store costs and IT. So costs here have fallen from $120 million to $68 million but don't expect this to continue as we intend to continue to invest and invest more in IT and digital. So our operating profit overall was $314 million, down from $412 million last year. Now turning to cash flow. Net debt at the year-end was $844 million, broadly in line with last year, up $27 million. We kept a tight control on cash through the year. As you can see our income line, we -- our EBITDAR was $200 million down lower, but we've seen working capital improvements. Our key businesses have seen positive working capital movements despite earlier timing of Chinese New Year. And we continue to manage our CapEx in a prudent manner. In summary, it's been a challenging year. We've achieved a huge amount. We've got a strong balance sheet and a solid cash flow. I have no doubt 2022 will be tough, but we are well positioned to come out of this pandemic stronger. Thank you. I'll hand you back to Ian.

Okay. Thank you, Clem. I'll now work through the business updates with you in terms of where we are on progressing with the transformation plan. What's been clear is that the transformation plan we put in place and the way we're executing on it is proving critical. We've stuck to our focused strategic priorities of building capability, growing in China, maintaining our strength in Hong Kong, revitalizing Southeast Asia and driving digital innovation, underpinned and supported by our core improvement programs to drive efficiency and reduce costs and optimize our assortment. In relation to building capability, we now believe we have management strength in depth. And in fact, there were over 240 promotions last year, 95% have been locals within the markets. In terms of growing in China, our managed consolidation into Guangdong is now complete, and we're actually being able to grow stores again. In 7-Eleven, that continues despite COVID to grow its network, and we now have over 1,500 stores in place. And maintaining Hong Kong strength, we now have a very strong value proposition established in each of our key banners, and we've got good improving market share positions in both Wellcome and Mannings. In terms of revitalizing Southeast Asia, our key challenge has been food in Southeast Asia for a number of years. And we've seen a major improvement more recently, both in terms of sales and profit. Our space optimization plan is now complete. And sales productivity, as I said, is particularly strong. Health and Beauty, we continue to invest in Health and Beauty, especially in the key markets of Malaysia and Indonesia, and we now have over 1,000 Guardian stores across 6 markets. In terms of driving digital innovation, we've improved in our online capability year-on-year. We're recruiting specialty resource to build our strategy more effectively and deliver growth and improvement over time. And the start of that, the nucleus of it really is the yuu Rewards program with over 4 million members in place now. And given the age of our systems, we're now actively developing change programs to digitize our systems across the group. It will take time, but we're on our way. Moving on to improvement programs. These have been critical into driving efficiencies and lowering costs to provide us with headroom to invest in price and become more competitive. In terms of fresh supply chain, we've now got a consolidated supply base of 80% across all our food markets. And that's driving relationships more strongly with the suppliers. And it means we can drive quality, we can drive value, and we can drive access and flow of product through the supply chain end to end. In terms of labor productivity, we've built and developed efficiency improvement programs, and those programs are now landing, driving productivity improvement during the course of 2021, and that will continue to see benefits in 2022. The centralization of procurement means that we're buying all our goods not for resale in one source point, giving us leverage on economies of scale. The centralized structure is, therefore, working and is driving strong savings as a result. On assortment optimization, we now have strategic category plans in place. We have far level -- greater levels of data analytics and tools ability and also the utilization of those 2 as for our buying teams. And we have a very strong grip in terms of movements and dynamics of commodity pricing so we can assess and monitor any price change increases that are muted by suppliers to see whether they're justified or not. In terms of the businesses themselves and taking a look at grocery in North Asia. In 2021, it was a good year for our food business, especially here in Hong Kong. We now have EDLP across 700 items and saving customers over $300 million a year. Our new formats are now beginning to land with marketplace with double-digit growth and improved fresh sales as well. We also have 2 new Wellcome Fresh stores. It's effectively a wet market within a supermarket with strong lifts in customer count and significant improvements in sales densities. Our own brand momentum continues to gather pace. Meadows is now the #1 brand in DFI. We have over 1,000 SKUs in the shelf with many more to come. We're now seeing strong shifts in customer perception on all our key metrics on price, on service, availability and trust, and that bodes well, not just now, but also for the future. There is also a strong underlying sales outperformance and profit growth emerging as a result and industry outperformance against the market. We're also building our e-commerce capability with e-commercial fulfillment center recently built and developed and capability to deliver full service within 24 hours and also quick commerce opportunities within 60 minutes across Hong Kong. In terms of grocery within Southeast Asia, there's been further encouraging results coming from Southeast Asia Food, similar story, different landscape. Low prices that Last [indiscernible] campaign is now in over 1,000 SKUs across Singapore, Malaysia, with strong volume coming through as a result. We're also seeing similar improvements in customer perception metrics as we're seeing in North Asia as we're saving our customers over SGD 70 million a year. Sales productivity is now 25% better than 2019. There's also been a substantial improvement in profitability against the same period. Giant has now relaunched in Singapore and Malaysia and 15 upscale stores have been converted with a clear brand strategy of Giant for mass, all now relaunched, Cold Storage for heartland, and CS Fresh or Mercato for upscale in Singapore and Malaysia, respectively. Improving brand perception metrics are happening here, too, and customer receptivity is universally positive, driving above-average sales growth with strong improvement in underlying sales productivity and profit with strong fresh food participations arresting previous year decline. We've also introduced the CART brand for a composite online delivery across our brands. All brands, 1 order, 1 voice, 1 delivery. It's early days, but it's very encouraging. In terms of upscale, half are now complete with more conversions in 2022, completing a full and much needed conversion of all our 3 stores in Singapore and Malaysia. We have e-commerce pilots in place under the CART brand as I mentioned earlier, and we're also piloting some mini store formats in both Malaysia and Cambodia. Here's an example of a few photographs of our upscale refresh stores in Market Place and CS Fresh, and we can see the emphasis on fresh food as you walk in the door. Also, Wellcome Fresh, the wet market within a supermarket, resonating really strong with the customers, as you can see, particularly in the picture of seafood on the right-hand side. That -- those stores continue to grow strongly. We want to produce more. Looking at own brands, the momentum there is gathering pace. There's over 2,000 SKUs since its launch. We relaunched Yu Pin King and the Giant brands, Meadows Essentials & Meadows Home ranges have been added and centers at the entry price point and home for general merchandise and household areas. Meadows is the #1 snack brand in Singapore, so is the #1 nut brand in Hong Kong. So we're now seeing double-digit own penetration emerge with strong growth in each of the key areas. This 1,200 SKU is expected to be launched in 2022 to add to the over 1,000 that we brought to the market so far. And Health and Beauty is not getting missed either. We've relaunched our own brand cotton & paper, as you can see in the picture. So we're seeing strong Health and Beauty Own brand launches, not just in cotton & paper, which is getting double-digit volume growth. We've also got an Essentials Guardian and Essentials Mannings brand at entry price point levels in some of the core commodity areas in hair care, for example. And we've also introduced a new range of beauty accessories with early sales being encouraging. We also have over 1,000 new health and beauty products planned in 2022. So we're seeing strong growth in Own Brands anticipated during the course of this year coming. In terms of Mannings, it was an encouraging year in the circumstances. We still have to contend with a 98% drop in tourist numbers. So the focus on delivering better value to customers is crucial to keep the big price drop campaign across [indiscernible] is driving improvements in value perception, customer transactions and volume growth, delivering consistent market share gains. Our Own brand launches, our yuu Rewards loyalty and e-commerce growth are all making positive contributions to the Mannings performance. So we are positive about the future when the border finally does reopen. Speaking of China. Our strategic consolidation to South China is now complete. We'll begin to open more stores as well, and we're beginning to see growth -- and we begin to see growth from our e-commerce business there too. Moving over to Southeast Asia and the Guardian performance. Unfortunately, lockdown restrictions were more severe in 2021 than they were in 2020. But over 100 new stores are opened despite these COVID restrictions. Locked Low Prices were introduced on a total of 2,000 SKUs across 6 markets, driving material improvements in customer perception of value and trust. We've seen strong volume growth in key SKUs as a result. Range optimization programs are also now in place using data to cluster stores demographically and improve customer relevance to those particular catchments. And we were delighted to find that Guardian was revoted #1 store in Malaysia by a group of customers in the national poll. As movement restrictions ease, we have seen like-for-like growth return both online and offline. E-commerce order volumes are up 90%, and Guardian remains a strong and trusted brand in Southeast Asia, and we have a strong pipeline of new store growth plan to support them. Moving on to 7-Eleven. We've seen like-for-like sales recovery as restrictions have eased. The Chinese experienced another rollercoaster year with significant sales swing, which has a lot of times [indiscernible]. But over 350 new stores have been opened across 7-Eleven and 200 of those have been in China. Over 1,300 new products have been launched with a strong emphasis on [indiscernible], which you see is a core differentiator in each of our markets. Despite their trading difficulties, 7-Eleven in China has stuck to their strategy, the digital system transformation in China, which is a major task across 1,500 stores is now complete. And O2O orders have quadrupled in Guangdong as we move to a more digital operation. And O2O offering has also been launched in Hong Kong, and we are seeing strong market share growth and profit improvement coming from Hong Kong also. We have confidence in our 7-Eleven business, and another year of strong store growth is expected for 2022 in each of the markets. Moving on to IKEA. IKEA has been impacted probably more than any other brand in terms of trading constraints during the year, particularly in Indonesia, where over 130 store trading days were lost as a result of severe lockdowns that were imposed by the government. We also had to endure capacity constraints within each of the stores that were imposed even when the stores were open. Global supply chain constraints are further conspired to impact availability with shipping delays in each of the markets that we operate at year end. Despite this, sales were only marginally down year-on-year, supported by another strong year of e-commerce growth. But despite current trading challenges, there we cannot -- we continue to invest and be here for the long term. Trading space has more than doubled in Indonesia and it has almost doubled across all our markets since 2017. We are the first IKEA store open in Bali, which is a converted Giant store that opened in November. And innovative smaller formats have been trialed across markets as well. IKEA is a brand with a strong future in our markets and continued touch point expansion can be expected in 2022. You can see some of the changes that we've made and a number of these are global pop-up stores in Causeway Bay in Hong Kong. Store-in-store in Discovery Bay in Hong Kong, mobile formats converted shipping containers in Taiwan and other small stock format in Hong Kong, and converted RT-Mart in Taiwan together with a number of larger Blue Boxes that we opened in Indonesia. So this is a strong dynamic year for IKEA in terms of building for the future. We're trying to look past the current challenges that we have and think about how we're going to make this brand even stronger once the COVID crisis finally leaves us. yuu has been a really strong initiative for us, is the sort of cornerstone of our digital strategy. We've now got almost 4 million new members with a 99% brand awareness. It's actually very difficult to find anybody in Hong Kong who's not heard of the yuu program. We've got very strong membership retention by global standards. Over 130 billion points have been issued, but as importantly, over $70 billion have been redeemed, which is another reason why we've got strong retention. Over 50% increase in customer shopping cross banners. What that basically means is that we are trying to drive more customers into a broad portfolio of our banners, and it's clearly working as a result of the yuu program being a common currency across each of our brands. There are now over 30 additional reward banner partners, the majority coming from Maxim's, but we also have yuu Insure, which launched as a financial services operation in November 2021 and, more recently, Shell joined as a fuel partner in February. The yuu-to-me in-app e-commerce has been launched and will be more progressively introduced into Hong Kong during the course of this year. But again, it's made an encouraging start. So digital initiatives now remain a key focus, driving digital innovation as part of our strategic priorities. And each of the brands above you can see have been developed in terms of pilots in our e-commerce areas, whether it be yuu-to-me as I mentioned, Marketplace plus, Wellcome now within 60 minutes and 7-Eleven now within 60 minutes also. And then the CART brand, which has been introduced, as I mentioned earlier, in Southeast Asia. We have had a 160% increase in our sales of the e-commerce orders across the group. Our fulfillment across the combination of the dark store, I mentioned earlier and local stores will give us the ability to compete even more strongly. And we're also developing additional digital CRM capabilities as well as introducing both tools and people that have real skill and expertise in this particular digital era. Double-digit e-commerce penetration is strong for IKEA and continues to grow and our digital capability is very much part of our current and future plans. So we stuck to our transformation task and making strides to improve the proposition to our customers, but we also recognize we have broader responsibilities to our communities and the environment itself. This is why we're introducing our CSR framework designed to buy structure to our direction over time and the improvements we wish to make. We want to provide communities we serve the benefits to help them and help the environment, too. We want to build change that matters, harness our team's passion and strive to make a difference. There are 3 key areas of focus for us: One is serving our communities; the other one is sustaining the planet; and the other one is sourcing responsibility (sic) [ sourcing responsibly ]. And there are substrategies and sub-focus areas, among each of them aligned to the United Nations sustainability goals. There's much talk and focus around sustainability. But our view is we want to think more broadly, not just about the environmental challenges, but also making sure serving our communities, we give back as well and seeing what we can do about improving the efficacy of the way in which we source. Here's an example of one of the initiatives that we introduced last year where we partnered with FoodLink to create a Sik Jor Fan Mei foundation. Sik Jor Fan Mei is a local term for "have you eaten yet? " and it's resonating here with over 1.6 million people in Hong Kong at or below the poverty line. We want to give back. We are giving back $0.50 per kilo of our Yu Pin King rice, is donated to the Sik Jor Fan Me Foundation, and we aim to raise over HKD 5 million this year through Donation program, but also community benefits by volunteer programs that we have internally. So moving on to the business outlook. Firstly, we are reshaping the DFI Retail Group. You've heard that from some of the comments I made and Clem made earlier. We're optimizing our portfolio and focusing in the areas where we believe we can continue to be strong and grow further. We're building a strong base. We're delivering consistently well, the 2 phases of our -- first 2 phases of our transformation plan are largely complete. We now want to move on to driving the DFI difference. It's been tough. It continues to be tough, but we're sticking to our plans. In conclusion, it's undeniable that 2011 (sic) [ 2021 ] was another tough year and '22 -- 2022 will also be challenging as much, if not more so, especially when you see circumstances that are currently occurring in Hong Kong. But the one thing I will say is all transformations take time and are tough to execute and executing them in a global pandemic environment makes you that more and more challenging, too. Despite all that's been thrown at us and given Hong Kong's volatile COVID situation, we still remain confident that we are on the right path. We have confidence in our new retail formats, we have confidence in our [indiscernible] approach towards quality and value perception. We have confidence in our teams to continue the ability to execute. We're trying to look past the short-term impacts of the pandemic, respond to, yes, but not be governed by them and take confidence in the strength of improvement in the underlying business. We are confident that when conditions normalize in DFI, we're well placed to take advantage of it. We're still going to find it challenging during the course of this year and while pandemic is with us. But we are determined that we will continue to make improvements going forward. Okay. Well, thank you for attending the session today and listening to our update. And thank you also for the insightful questions that in case [indiscernible] questions are answered subsequently. There's no denying that it's a tough time, and it's been a tough time for over 2 years. I think from our point of view, we always have to look beyond the present and look to the future. And we believe that the activities that were taking place, the actions that we put in place, the efforts have been made by our teams across the region are going to stand us in good stead for the future. And certainly, the programs that we're putting in place now are already helping support and underpin our profitability in very challenging times. But we'll continue to work hard, and we're confident the business will be in a much stronger position coming out of the pandemic than it was in 2 to 3 years prior to emerging. So thank you for your time today, and I look forward to presenting to you and talking to you at the half year. Thank you very much.